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The Snag Of Selling To Private Equity

Sherry Deutschmann got the money to start LetterLogic Inc. – a company that printed and mailed patient statements for hospitals – by having a yard sale. She made her first desk out of an old door.

From these humble beginnings Deutschmann built LetterLogic into a $40 million juggernaut which she recently sold for more than seven times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA).

Deutschmann credits her success to the culture she built based on empathy, transparency and a juicy profit-sharing plan which is why she was so surprised when her acquirer decided to shut it down.

In this episode, you’ll discover:

  • The downside of selling to a private equity group
  • How to create a positive cash flow cycle using your customer’s money
  • Why Deutschmann paid her profit-sharing plan monthly
  • The definition of “Major in the majors” and why Deutschmann credits this philosophy for helping her sell
  • How your Trailing Twelve Months (TTM) financials impact your value

Listen now

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If you’re interested in improving the value of your business, take our questionnaire or contact Colonial Business Brokerage today at 443-982-7332.

Ownership Has Its Privileges

Walk down Nashville’s Lower Broadway any night of the week, and you can hear aspiring artists belting out cover tunes from Elton John to Garth Brooks.

In many cases, these musicians come to Nashville to be discovered but pay their rent using the tips they get by playing other people’s songs. Most are lucky to eke out a modest living while the stars they impersonate run thriving empires.

Forbes estimates[1] that Luke Bryan, country music’s highest-paid star last year, earned 52 million dollars on the back of his stadium tour and duties as an American Idol judge and Chevy spokesperson.

What’s going on here? Is Bryan that much more talented than the dozens of artists playing his songs in Nashville every night?

Probably not.

The difference comes down to who controls the product. In Bryan’s case, he owns the music and the personal brand he has created to perform it. The cover artist is just reselling his stuff.

The Value Of Your Brand

The music business can be a helpful analogy in explaining why creating a unique brand is such a big contributor to the value of your company. Acquirers want what they could not easily copy. If you’re reselling other people’s products and services, an acquirer will likely argue that there are probably dozens of competitors driving down your margin next to nothing. Further, they may even conclude that they too could earn a license to resell whatever you’re distributing and will, therefore, place little value in the company you’ve built.

However, if you have something exclusive – a unique product or brand that makes people believe what you do is different – an acquirer will pay more, arguing it is difficult to reproduce what you have created.

If you find yourself reselling other people’s products or services, you can still drive up the value of your business by creating a brand around the way you do it. You could argue that Peloton is just selling a stationary bike. Still, it is the unique company they have created around the bike –including the community of riders that subscribe – that has recently driven Peloton’s value north of $7 billion (almost eight times trailing twelve months revenue at the time of their recent Initial Public Offering).

To drive up the value of your company, own the stuff you sell. If that’s not possible, create a unique brand that makes consumers feel as if you do.

[1]  http://www.nashcountrydaily.com/2018/08/14/forbes-list-of-the-highest-paid-country-stars-of-2018-includes-luke-bryan-garth-brooks-kenny-chesney-more/

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If you’re interested in improving the value of your business, take our questionnaire or contact Colonial Business Brokerage today at 443-982-7332.

 

When Disaster Strikes A Founder

Tom Pisello built Alinean, a consulting company which offered a set of tools to help salespeople express the value of picking their solution. The business was cruising with about half of its revenue coming from recurring licensing fees and the other half from consulting when disaster struck the Pisello’s family.

Pisello’s wife succumbed to a seven-year battle with cancer. Pisello knew he needed to focus on his family and decided to sell quickly and picked an existing partner as a new home for Alinean.

In the episode, you’ll discover:

  • How life events can change your motivation in an instant
  • How to value consulting compared to recurring revenue
  • How to evaluate a potential acquirer
  • Why your best acquirer may be an existing partner
  • How to vet the likelihood you’ll hit your earn out
  • Pisello’s biggest regret and what he might do differently if he could sell Alinean all over again
  • The definition of “Evolved Selling” and how it applies to B2B companies

Listen now

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If you’re interested in improving the value of your business, take our questionnaire or contact Colonial Business Brokerage today at 443-982-7332.

Understanding M&A Purchasing Agreements

M&A purchasing agreements can have a lot of moving parts.  A recent article from Meghan Daniels entitled, “The Makings of the M&A Purchase Agreement” serves to outline a range of facts including that every M&A deal is different.  The article, which serves as a general overview, raises a range of good points.

Components of the Deal

It should come as no surprise that M&A purchase agreements have various components.  Everything from definitions and executive provisions to representatives, warranties and schedules, indemnifications and interim and post-closing covenants are all covered in these purchase agreements.  Other key factors included in M&A purchase agreements are closing conditions and break-up fees.

Advice for Sellers

In her article, Daniels includes a range of tips for sellers.  She correctly points out that negotiating a purchase agreement (as well as the different stages involved in finalizing that agreement) can be both time consuming and stressful. 

As any good business broker will tell you, business owners have to be careful not to let their businesses suffer while they are going through the complex process of selling.  Selling a business is hard work, and this fact underscores the importance of working with a proven broker.

Likewise, Daniels observes that any serious buyer is likely to look quite closely at your business’s financials, which is yet another reason to work with key professionals during the process.  Additionally, you don’t want to wait until the last moment to get your “financial house in order.” 

You can be completely certain that prospective buyers will want to examine your finances closely before making an offer.  The sooner you begin working on getting your finances together, the better off you’ll be.

Use Trusted Pros

Another key point Daniels makes is that there will be tension, as every party is looking to protect their own best interests.  Having an experienced negotiator in your corner is a must.  Make sure your negotiator has bought and sold businesses in the past, and he or she will understand what pitfalls and potential problems may be lurking on the horizon.  Daniel’s view is that the sale price isn’t the only variable of importance.  Factors such as the terms of the deal must be taken into consideration.

The bottom line is that there are many reasons to work with a business broker.  A business broker understands the diverse complexities of an M&A purchase agreement.  They also have experience helping business owners organize their financial information and can prove invaluable during negotiations.  For most business owners, selling their business is the single most important business decision they will ever make.  Find someone who understands the process and can act as a guide through the process.

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.

Copyright: Business Brokerage Press, Inc.

Dmytro Sidelnikov/BigStock.com

The post Understanding M&A Purchasing Agreements appeared first on Deal Studio – Automate, accelerate and elevate your deal making.

The Hidden Secret That Made This Company Worth A Ton

Ian Silverberg wanted to get into the health club business and approached a former employer about buying his gym.

As Silverberg did his due diligence, he realized the club was sitting on a real estate goldmine that would all but guarantee his exit would be lucrative. Silverberg went on to separate the health club from the real estate it was sitting on and sold the gym for almost five times EBITDA and then negotiated a lease that would pay him another $25,000 a month for the next ten years.

In the episode, you’ll learn:

  • The definition of a “ground lease” and when they can be valuable
  • A unique way to finance an acquisition with the help of something called an “RDC”
  • The techniques Silverberg used to triple the value of his operating business in less than a decade

Listen now

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If you’re interested in improving the value of your business, take our questionnaire or contact Colonial Business Brokerage today at 443-982-7332.

 

Key Mistakes that Could Impact Your Sale

The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business.  The bottom line is that every business owner has to transition out of ownership at some point.  In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Saleability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.

No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.”  The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes. 

Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.”  Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.

Mistake #1 Poor Record Keeping

For House, poor record-keeping tops the list of big mistakes that business owners need to address.  As House points out, both potential buyers and brokers will want to examine your books for the last few years.  The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs. 

Mistake #2 Failure to Innovate

The next potential mistake that business owners need to avoid is a failure to innovate.  House notes that a lack of tech-savviness could make your business less attractive to prospective buyers.  The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether. 

For House, a failure to maintain an active online presence could be associated with a failure to innovate.  Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.

Mistake #3 Unstable Workforce

House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its saleability.  Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover.  In general, new business owners crave stability.  Attracting and keeping great employees could make all the difference when it comes time to sell your business.

Mistake #4 Delayed Investments

The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements.  House states that it is important for owners to continue to invest even if they know they are going to sell.  Investing in your business can help it expand, grow and showcase its potential future growth.

Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker.  A top-notch broker knows what mistakes you should avoid.  This experience will not only save you countless headaches but also help you preserve the value of your business.

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.

Copyright: Business Brokerage Press, Inc.

World Image/BigStock.com

The post Key Mistakes that Could Impact Your Sale appeared first on Deal Studio – Automate, accelerate and elevate your deal making.

What You May Get Wrong About Business Valuations

Business valuations are important to successful planning. They tell you what your business is worth to a potential buyer. Though business valuations seem simple on the surface, even the smartest and most successful business owners can misinterpret their importance.

Business valuations generally tell you two things. First, they tell you whether you can sell or transfer your ownership, right now, and achieve financial independence. Second, and more importantly, they tell you how much more work you must do to build your business’ value to achieve that financial independence.

Financial independence is the most important goal of planning for your business’ future. Other goals are important. But by definition, an Exit Plan must give you financial independence to be successful. It’s likely that your business is the most valuable asset you hold and thus will play a huge role in achieving financial independence. Knowing what it’s worth and what you must do to build its value is commonly the bedrock of a successful plan for the future, whether you intend to exit or keep your business forever.

Consider the story of Luca Montez, a business owner who made some common mistakes about business valuations, and how his mistakes affected his planning.

Luca Montez had owned his widget company, MontezCo, for 35 years. He was an integral part of the company’s success. When his acquaintance and friendly competitor, Julia Deming, told him that she was selling her business, Luca started thinking about his own retirement. He was very excited to learn that Julia received $6 million for her business. He saw their businesses as similar and figured he could get that much, too.

Julia offered to put him in touch with some of the advisors that had helped her, but Luca politely declined.

“No, that’s too expensive I bet. I know what my business is worth now. I think I can handle it.”

Luca decided to put his business on the market. The highest offer he received was for $2 million, much lower than what Julia had been offered. He became frustrated and asked Julia to put him in touch with some of her advisors.

When Luca met with the Advisor Team, he vented his frustrations.

“My company is bigger than Julia’s. I work with some really well-known customers. I put a lot of work into making this business successful. Why am I not getting the same $6 million as Julia, if not more?”

After a few meetings and a lot of questions, Luca grudgingly agreed to get a proper business valuation. He had resisted for quite some time because he was convinced that his company was as valuable as Julia’s, and he didn’t want to pay for a formal “opinion of value” at top dollar. His advisors instead suggested that he get a less expensive “calculation of value” from a business valuation specialist.

Using a calculation of value process, Luca’s business valuation specialist said that Luca’s business was currently worth $2 million, just as he had been offered. She explained that the company had three glaring weaknesses.

  1. It was too reliant on Luca for its cash flow.
  2. It worked with three well-known customers, but those companies represented 80% of MontezCo’s annual sales.
  3. It didn’t have a management team that could run the company without Luca, so a buyer would be stuck with Luca for several years or provide their own management team.

Once Luca learned these facts, he and his Advisor Team knew they needed to get to work. They began to install next-level management. This made the company less reliant on Luca. The management team also knew how to diversify MontezCo’s customer base. As the company grew, Luca created incentive plans to keep his best managers tethered to the company, with help from his advisors. It took several years, but Luca managed to build his company’s value and get the $6 million he wanted and needed.

Business valuations can guide you toward several answers about the future of your business. Perhaps most importantly, they can tell you where you are financially, which can guide you toward what you must do to get to where you want to be.

If you’d like to talk about strategies to position yourself to achieve financial independence through your business, please contact us today.

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.

Exploring the Offering Memorandum

Are you a business owner who is interested in selling?  If so, there are some strategies you should undoubtedly use.  At the top of the list is the all-important offering memorandum.  The offering memorandum, often referred to as a selling memorandum, is a straightforward but highly effective way to help you obtain the highest possible selling price.

Shaping the Executive Summary

The offering memorandum must be factual.  However, at the same time, this memorandum allows for a bit of business promotion and selling, which can be included in the executive summary portion of the document.  After all, potential buyers will want to know more about your business and why buying it would be a savvy decision. 

In short, the executive summary section of the offering memorandum goes over the highlights of your company.  It should include an outline of several key factors.  Everything from an outline of the ownership and management structure, description of the business and financial highlights to a general review of your company’s products and/or services should all be covered.  Additional points to include would be variables, such as information about your market, and the reason that the business is for sale.

Your executive summary, simply stated, is extremely important.  A coherent and compelling executive summary will motivate prospective buyers to learn more.  In short, you want the executive summary of your offering memorandum to shine.  It should capture the attention and the imagination of anyone that reads it.

Other Essential Elements to Include

Some elements are absolutely a must to have in your offering memorandum.  An overview of your company and its history as well as its markets and products are all good places to begin your offering memorandum.  Other key elements ranging from distribution, customers or clients and the competition should also be included. 

Factors such as management, financials and growth strategies should not be overlooked, as many prospective investors may flip to those sections first.  Finally, be sure to include any competitive advantages you may have as well as a well-written conclusion and exhibits.  The more polished and professional your offering memorandum, the better off you’ll be.

An easy way to improve the overall quality of your offering memorandum is to work with a seasoned business broker.  A professional business broker knows what information should be included in your offering memorandum.  He or she will also know what not to include.  Remember that your offering memorandum may be the first point of contact between you and many prospective buyers.  You’ll only get one chance to make a first impression.

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.

Copyright: Business Brokerage Press, Inc.

Rido81/BigStock.com

The post Exploring the Offering Memorandum appeared first on Deal Studio – Automate, accelerate and elevate your deal making.

Finding Your Subscription Model

John MacInnes ran Print Audit, a printer and photocopier management software, for 20 years.

In 2012, the company suffered a rude awakening when its biggest client – who made up more than two thirds of their revenue – dropped their monthly spend by 90%.

MacInnes had to pivot… quickly. He evolved Print Audit to a subscription-based model, focusing on a diverse client base with 80% of expenses ear marked for customer retention. That one move helped MacInnes sell Print Audit for a healthy multiple in 2019.

In this episode, you’ll learn:

  • The importance of customer diversification
  • Why a subscription revenue with just $1 of profit will keep your company running infinitely
  • MacInnes’s 80-20 rule for maintaining revenue
  • How Print Audit’s strategic value attracted a buyer
  • What it was like to deliver checks to McInnes’ initial investors after he’d sold the company

Listen Now

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If you’re interested in improving the value of your business, take our questionnaire or contact Colonial Business Brokerage today at 443-982-7332.

Shaping Your Plans for a Successful Future

Shaping Your Plans for a Successful Future

When we talk about planning for the future, we often talk creating a plan. The idea of creating something as big as a plan for the future can imply a ton of from-scratch work (as is often the case), which can cause you to want to put that ton of work off to another day. As a successful (and likely busy) owner, you may not think you have time to create a plan. However, there’s good news, because when it comes to planning for a successful future, it’s more a matter of shaping than creating.

Shaping a Plan vs. Creating a Plan

You understand how much work creation requires. You created your business, its processes, and most of the aspects that make the business successful. As you age and approach the next stage in your business life, you may not want to put that kind of work into a plan for the future. How, then, can you avoid the feeling of helplessness that can come from knowing you have something big to do and either no drive or guide to pursue it?

The key is to re-frame creating as shaping.

This isn’t merely a semantic trick. You likely have a general idea for what you want your future to look like, even if you don’t have a formal plan. For example, you may have an idea for when you want to be out of your business. You might have a preference for who will take over once you exit. You might have desires for what you will do with all the money you’ll have from successfully selling or transferring your business. The ideas are there. They simply don’t have any shape.

How can you give these nebulous but high-potential ideas shape? It all starts by collecting data and setting strategy.

Collecting Data and Setting Strategy: Step 1 in Shaping a Plan

Planning cannot truly begin unless you know what you want and need. For example, can you confidently say exactly how much money you’d need to one day exit your business with financial security? Do you know what it would take for your family to continue living their current lifestyles if you chose to never exit your business or, worse, were forced from your business (by death, incapacitation, or otherwise)? These are big, introspective questions that have real, often negative consequences if left unanswered. How can you approach them and still successfully run your business?

A good way to begin shaping your plans is to collect data and set a strategy. To do this, you should start by establishing a few objectives.

Establishing Objectives

Though there are many facets to a successful plan, there are three overarching objectives that you should establish. Without knowing these three objectives, it’s nearly impossible to shape a successful plan for the future.

  1. The Foundational Goal – Financial Security: Absolutely no plan for the future can ever be considered successful unless it achieves financial security for you and your family members. Your financial security goal is unique, so avoid temptations to compare what would make you financially secure with what makes others financially secure. You should determine what it takes to achieve financial security first and foremost.
  2. Universal Goals – When, for How Much, and to Whom: Given all the work you’ve put into building your business, you’ll likely want a say in when you eventually leave or transfer your business, how much you get for your business, and to whom you leave your business. Once you begin to think about these wants, you may find that you want solutions to the questions these wants create, such as “How can I get the money I need?” and “Why do I want to transfer my business to this person?” Determining universal goals takes your nebulous ideas and shapes them into actionable goals.
  3. Values-Based Goals – Keeping Principles Intact: A common stumbling block for owners is uncovering their values-based goals. These goals are basically living principles. For example, you might want your company to remain in your community after you sell or transfer it. For many owners, this desire can be so strong that they’ll gladly take less than top dollar (but still achieve financial security) to see it through. Unfortunately, many owners don’t realize how important their values are until the moment it’s time to exit, at which point, it’s often too late to do anything about it without throwing the entire plan into chaos. Though this part of data collection is equal parts art and science, it’s important for you to uncover and address your values-based goals early.

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, value your business, or are personally interested in owning or building value in your own company or franchise, Colonial Business Brokerage offers the professional services that successfully bring buyers and sellers together.