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Buying? Selling? Seven Key Points to Consider

Buying or selling a business is one of the most important decisions that most people ever make. Before jumping in, there are several points that should be taken into consideration. Let’s take a moment to examine some of the key points involved in buying or selling a business.

Factor #1 – What are You Selling?

Whether buying or selling a business it is important to ask a few simple questions. What is for sale? What is not included with the buyer’s investment? Does the sale price include any real estate? Are vital assets, such as machinery, included in the sale price?

Factor # 2 – What are the Range of Assets?

It is very important to understand the range of assets that are included with a business. What is proprietary? Are there formulations, patents and software involved? These types of assets are often the core of the business and will be essential for its long-term success.

Factor # 3 – Evaluating Assets for Profitability

Not all assets are created equally. If assets are not earning money or are too expensive to maintain, then they should probably be sold. Determining which assets are a “drag” on a business’s bottom line takes due diligence and a degree of focus, but it is an important step and one that shouldn’t be overlooked.

Factor # 4 – Determining Competitive Advantage

What gives a business a competitive advantage? And for those looking to sell a business, if your business doesn’t have a competitive advantage, what can you do to give it an advantage? Buyers should understand where a business’s competitive advantage lies and how they can best exploit that advantage moving forward.

Factor # 5 – How Can the Business Be Grown?

Both buyers and sellers alike should strive to determine how a business can be grown. Sellers don’t necessarily need to have implemented business growth strategies upon placing a business up for sale, but they should be prepared to provide prospective buyers with ideas and potential strategies. If a business can’t be grown this is, of course, a factor that should be weighed very carefully.

Factor # 6 – Working Capital

Some businesses are far more capital intensive than others. Understand how much working capital you’ll need to run any prospective business.

Factor # 7 – Management Depth

Businesses are only as good as their people. It is important to ask just how deep your management team is, how experienced that team is and what you can expect from that team. How dependent is the business on the owner or manager? If the business may fall apart upon the leaving of the owner or a manager, then this is a fact you need to know.

Buying or selling a business is often more complex than people initially believe. There are many variables that must be taken into consideration, including a range of other factors not discussed in this article ranging from how financial reporting is undertaken to barriers of entry, labor relationships and more. Due diligence, asking the right questions and patience are all key in making your business a more attractive asset to buyers or for finding the right business for you.

Copyright: Business Brokerage Press, Inc.

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Who Exactly Owns Personal Goodwill and Why Does it Matter?

Personal goodwill can have a profound impact on both small and medium-sized businesses. In fact, it can even impact the sales of larger companies. Ultimately, understanding how personal goodwill is cultivated is of great value for any company.

During the process of building a business, a founder builds one or more of the following: a positive personal reputation, a personal relationship with key players such as large customers and suppliers and the founder’s reputation associated with the creation of products, inventions, designs and more.

What Creates Personal Goodwill?

Personal goodwill can be established in many ways, for example, professionals such as doctors, dentists and lawyers can all build personal goodwill with their clients, especially over extended periods of time. One of the most interesting aspects of building personal goodwill is that it is essentially non-transferable, as it is invariably attached to and associated with, a particular key figure, such as the founder of a company. Simply stated, personal goodwill can be a powerful force, but it does have one substantial drawback. This is as the saying goes, “the goodwill goes home at night.”

How Does It Impact Buying or Selling a Business?

Buying a business where personal goodwill has been a cornerstone of a business’s success and growth presents some obvious risks. Likewise, it can be difficult to sell a business where personal goodwill plays a key role in the business, as a buyer must take this important factor into consideration. Certain businesses such as medical, accounting or legal practices, for example, depend heavily on existing clients. If those clients don’t like the new owner, they simply may go elsewhere.

Now, with all of this stated, it is, of course, possible to sell a business built partially or mostly around personal goodwill. Oftentimes, buyers will want some protection in the event that the business faces serious problems if the seller departs.

Solutions that Work for Both Parties

One approach is to require the seller to stay with the business and remain a key public face for a period of time. An effective transition period can be pivotal for businesses built around personal goodwill. A second approach is to have some form of “earn-out.” In this model, at the end of the year lost business is factored in, and a percentage is then subtracted from monies owed to the seller. Another option is that the funds from the down payment are placed in escrow and adjustments are made to those funds. It is important to note that the courts have decided that a business does not own the goodwill, the owner of the business does.

No doubt, businesses in which personal goodwill plays a major role, present their own unique challenge. Working with an experienced professional, such as a business broker, is an exceptional way to proceed in buying or selling this type of business.

Copyright: Business Brokers Press, Inc.

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Around the Web: A Month in Summary

A recent article posted on PR Newswire entitled “Business owners’ love of work may hinder succession planning” explains the parallels between the number of business owners with no plans to retire and the lack of succession planning. In a recent poll, over 70% of business owners said they are not planning to retire, don’t know when they will retire, or do not plan to retire for at least 11 years. The survey also reported that 2 out of 3 business owners do not have a succession plan or a clear understanding of the importance of one.

Even if there are no immediate plans for retiring, business owners should have a succession plan in place to protect the business, partners, employees and customers. If something were to suddenly happen to the business owner such as serious illness or an untimely death, a succession plan would help make sure everything goes smooth with the transition of the business.

To get started with creating an exit plan, business owners can take 5 simple steps:

  1. Set goals & objectives
  2. Determine the value of your business
  3. Consider options for the business in the case of disability, retirement or death
  4. Develop a plan and documentation with an advisor, attorney and accountant
  5. Fund the plan

You never know when something unexpected could occur, so it’s never too early to start creating a succession plan.

Click here to read the full article.

A recent article posted by Forbes entitled “Baby boomers are selling their businesses to millennial entrepreneurs, and it’s a brilliant idea” highlights the fact that many baby boomers will soon be looking to sell their businesses and this creates excellent business opportunities for millennials. Many of these baby boomer businesses are well established having no debt, loyal customers and proven business models which make them a great opportunity for young entrepreneurs to take over instead of letting the businesses close down.

Here are 7 places to start looking for these baby boomer businesses:

  1. Local chamber of commerce
  2. Local CPAs
  3. Local real estate brokers
  4. Local community bankers
  5. Business brokers
  6. Go directly to the business owner
  7. Craigslist or eBay

Overall, staying connected with local professionals in your area as well as being proactive in searching out businesses for sale will help you to find a great business opportunity. Once you find a legitimate business, find out if it’s making a profit. If so, ask why the owner wants to sell and if not, find out why.

Click here to read the full article.

A recent article from Forbes entitled “Selling your business in 3 to 5 years? Buy another company now” explains how acquiring another company can significantly increase the value of your business before you decide to sell. The first thing to understand is that the multiple of earnings paid for a company increases at an accelerating rate with size. Larger EBITDA means larger multiples, and larger companies are generally less risky so a buyer is willing to pay more.

Acquiring another business may also amount to cost savings and operational improvements when the companies are integrated. Combine these savings with organic revenue growth and a larger multiplier when the companies are combined, and this can add up to a huge increase in your company’s value. So if you’re thinking of selling within 3-5 years, this could be a good strategy to consider.

Click here to read the full article.

A recent article from the Denver Post entitled “Selling your business? Focus on the key business drivers so buyers pay top dollar” explains how focusing on certain key factors of your business can help you get the highest possible price when selling your business. Although many key business drivers vary among industries, there are four drivers that apply across the board:

  1. History of increasing revenues and profits over the past 3-5 years
  2. Strategic business plan that shows strong growth, competitive advantage, and products or services that can be sold across multiple industries
  3. Future cash flow including expected EBITDA performance, expected working capital investment requirements, and expected fixed-asset investment requirements
  4. Strong management team and strong operating systems in place

Business owners should get a detailed business audit and analysis from a business consultant so they can see where their business’s strengths and weaknesses are. This will show the owner what business drivers to focus on improving in order to get the highest price for their business.

Click here to read the full article.

A recent article posted on Divestopedia entitled “What Is Your Company Actually Worth?” explores how buyers and sellers often perceive a company’s worth differently and how business owners misjudge their company’s value. Private company valuation is a complex process and most owners have difficulty staying objective when it comes to a business in which they have put their life’s work into. On the other hand, to a buyer, the company is an asset to be acquired at the lowest possible price, which often leads to a large difference in perception between a buyer and seller.

An experience advisor can help negate these problems and make the sale process better for the owner for the following reasons:

  1. The business owner can focus on factors of the business which will increase the valuation such as EBITDA, sales, gross profit margins, customer growth and employee skills.
  2. The owner will get an extensive look at the financial health of their business from an advisor along with recommendations for improvement.
  3. An advisor will also be an experienced negotiator, helping the owner get the best sale price for the business.

The key to avoiding mistakes in selling a business starts off by getting an accurate valuation of the business and making sure everything is analyzed effectively to prepare for a profitable sale.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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When Selling Your Business, Play to Win

If you are an independent business owner, you are most likely also an independent business seller – if not now, you will be somewhere down the road. The Small Business Administration reports that three to five years is a long enough stretch for many business owners and that one in every three plans to sell, many of them right from the outset. With fewer cases of a business being passed on to future generations, selling has become a fact of independent business life. No matter at what stage your own business life may be, prepare now to stay ahead in the selling your business game.

Perhaps one of the most important rules of the selling game is learning how not to “sell.” An apt anecdote from Cary Reich’s The Life of Nelson Rockefeller shows a pro at work doing (or not doing) just that:

When the indomitable J.P. Morgan was seeking the Rockefeller’s Mesabi iron ore properties to complete his assemblage of what was to become U.S. Steel, it was Junior [John D. Rockefeller, Jr.] who went head-to-head with the financier. “Well, what’s your price?” Morgan demanded, to which Junior coolly replied, “I think there must be some mistake. I did not come here to sell. I understand you wished to buy.” Morgan ended up with the properties, but at a steep cost.

As this anecdote shows, the best approach to succeeding at the selling game is to be less of a “seller” and more of a “player.” Take a look at these tips for keeping the score in your favor:

Let Others Do the Heavy Pitching

Selling a business is an intense emotional drain; at best, a distraction. Let professional advisors do the yeoman’s duty when selling a business. A business intermediary represents the seller and is experienced in completing the transaction in a timely manner and at a price and terms acceptable to the seller. Your business broker will also present and assess offers, and help in structuring the transaction itself. If you plan to use an attorney, engage one who is seasoned in the business selling process. A former Harvard Business Review associate editor once said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know what’s reasonable.”

Stay in the Game

With the right advisors on your side, you can do the all-important work of tending to the daily life of the business. There is a tendency for sellers to let things slip once the business is officially for sale. Keeping normal operating hours, maintaining inventory at constant levels, and attention to the appearance and general good repair of the premises are ways to make the right impression on prospective buyers. Most important of all, tending to the daily running of the business will help ward off the deterioration of sales and earnings.

Keep Pricing and Evaluation in the Ballpark

Like all sellers, you will want the best possible price for your business. You have probably spent years building it and have dreamed about its worth, based on your “sweat equity.” You’ll need to keep in mind that the marketplace will determine the value of the business. Ignoring that standard by asking too high a price will drive prospective buyers away, or will at the least slow the process, and perhaps to a standstill.

Play Fair with Confidentiality

Your business broker will constantly stress confidentiality to the prospects to whom he or she shows your business. They will use nonspecific descriptions of the business, require signatures on strict confidentiality agreements, screen all prospects, and sometimes phase the release of information to match the growing evidence of buyer sincerity. As the seller you must also maintain confidentiality in your day-to-day business activities, never forgetting that a breach of confidentiality can wreck the deal.

Sell Before Striking Out

Don’t wait until you are forced to sell for any reason, whether financial or personal. Instead of selling impulsively, you should plan ahead carefully by cleaning up the balance sheet, settling any litigation, providing a list of loans against the business with amounts and payment schedule, tackling any environmental problems, and by gathering in one place all pertinent paperwork, such as franchise agreement (if applicable), the lease and any lease-related documents, and an approximation of inventory on-hand. In addition, you could increase the value of your business by up to 20 percent by providing audited financial statements for one or two years in advance of selling.

Think Twice Before Retiring Your “Number”

The trend is for sellers to assume they will retire after selling the business. But consider this: agreeing to stay on in some capacity can actually help you get a better price for your business. Many buyers will pay more to have the seller stay aboard, thus helping to reduce their risk.

Keep the Ball Rolling

You need to keep the negotiation ball rolling once an offer has been presented. Even if you don’t get your asking price, the offer may have other points that will offset that disappointment, such as higher payments or interest, a consulting agreement, more cash than you anticipated, or a buyer who seems “just right.” The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. In many cases, the structure of the deal is more important than the price. And when the ball is rolling, allow it to pick up speed. Deals that drag are too often deals that fail to close.

By following these tips, and by working closely with your business broker, you can have confidence in being a seller who, like John D. Rockefeller, Jr., doesn’t “come here to sell.” You will play the selling game–and be a winner.

Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now

 

Copyright: Business Brokerage Press, Inc.

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How To Lure A Giant Like Facebook Into Buying Your Company

A great business is bought, not sold, so, if you look too eager to sell your business, you’ll be negotiating on the back foot and look desperate—a recipe for a bad exit.  But, what if you really want to sell? Maybe you’ve got a new idea for a business you want to start or your health is suffering. Then what?

As with many things in life, the secret may be a simple tweak in your vocabulary.  Instead of approaching an acquirer to see if they would be interested in buying your business, approach the same company with an offer to partner with them.

Entering into a partnership discussion with a would-be acquirer is a great way for them to discover your strategic assets because most partnership discussions start with a summary of each company’s strengths and future objectives.  As you reveal your aspirations to one another, a savvy buyer will often realize there is more to be gained from simply buying your business than partnering with it.

Facebook Buys Ozlo

For example, look at how Charles Jolley played the sale of Ozlo, the company he created to make a better digital assistant. The market for digital assistants is booming.  Apple has Siri, Amazon has Alexa and the Google Home device now has Google Assistant built right in.

Jolley started Ozlo with the vision of building a better digital assistant. By 2016, he believed Ozlo had technology superior to that of Apple, Amazon or Google.  Realizing his technology needed a big company to distribute it, he started to think about potential acquirers. He developed a long list, but instead of approaching them to buy Ozlo, he suggested they consider partnering with him to distribute Ozlo.

He met with many of the brand-name technology companies in Silicon Valley, including Facebook, which wanted a better digital assistant embedded within its messaging platform.  They took a meeting with Jolley under the guise of a potential partnership, but the conversation quickly moved from “partnering with” to “acquiring” Ozlo.

Jolley then approached his other potential partners indicating his conversations with Facebook had moved in a different direction and that he would be entering acquisition talks with Facebook.  Hearing Facebook wanted the technology for themselves, some of Jolley’s other potential “partners” also joined the bidding war to acquire Ozlo.

After a competitive process, Facebook offered Jolley a deal he couldn’t refuse, and they closed on a deal in July 2017.  Jolley got the deal he wanted in part because he was negotiating from the position of a strong potential partner, rather than a desperate owner just looking to sell.

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Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

GET YOUR VALUE BUILDER SCORE TODAY!!

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Whether you are looking to exit your privately held business, represent an acquisition-minded corporation, 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.

Call Colonial Business Brokerage today at (443) 982-7332.

5 Reasons Why Now Might Be The Right Time To Sell

Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?

While your objective to build your company’s value is admirable, here are five reasons why you may want to sell sooner than you might think:

You May Be Choking Your Business

When you start your business, you have nothing to lose, so you risk it all on your idea. But as you grow, you naturally become more conservative, because your business actually becomes worth something. For many of us, our company is our largest asset, so the idea of losing it on a new growth idea becomes less attractive. We become more conservative and hinder our company’s growth.

Money Is Cheap

We’re coming out of a period of ultra-low interest rates. Financial buyers will likely borrow money to buy your business so—at the risk of oversimplifying a lot of MBA math—the less it costs them to borrow, the more they will spend to buy your business.

Timing Your Sale Is A Fool’s Errand

The costs of most financial assets are correlated, which is to say that the value of your private business, real estate, and a Fortune 500 company’s stock all move in roughly the same direction. They all laid an egg in 2009 and now they are all booming. The problem is, you’ll have to do something with the money you make from the sale of your company, which means you will likely buy into a new asset class at the same frothy valuation as you are exiting it.

Cybercrime

If you have moved your customer data into the cloud, it is only a matter of time before you become the target of cybercrime. Randy Ambrosie, the former CEO of 3Macs, a Montreal-based investment company that manages $6 billion for wealthy Canadian families decided to sell in part because he feared a cyber attack. Ambrosie and his partners realized they had been under-investing in technology for years, at a time when cybercrime was becoming more prevalent in the financial services space. Ambrosie decided to sell his firm to Raymond James because he realized the cost of staying ahead of hackers was becoming too much to bear.

There Is No Corporate Ladder

In most occupations, the ambitious must climb the ladder. Aspiring CEOs must methodically move up, stacking one job on the next until they are ready for the top post. They have to put in the time, play the right politics and succeed at each new assignment to be considered for the next rung.

By choosing a career as an entrepreneur, you get to skip the ladder entirely. You can start a business, sell it, take a sabbatical and start another business and nobody will miss you on the ladder. Your second (or third) business is likely to be more successful than your first, so the sooner you sell your existing business, the sooner you get to take a break and then start working on your next.

It can be tempting to want to time the sale of your business so that the economy and your company are peeking, but in reality, it may be better to sell sooner rather than later.

Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now

 

 

Similar Companies Can Have Huge Value Differences

Can two companies in the same industry have very different valuations? In short, the answer is a resounding, yes. Let’s take an example of two companies that both have an EBITDA of $6 million but with two very different values. In fact, Business One is valued at five times EBITDA, which prices it at $30 million whereas Business Two is valued at seven times EBITDA, meaning it has a value of $42 million.

Value Difference Checklist

  1. Revenue Size
  2. Profitability
  3. The Market
  4. Growth Rate
  5. Regional/Global Distribution
  6. Management & Employees
  7. Capital Equipment Requirements
  8. Systems/Controls
  9. Uniqueness/Proprietary
  10. Intangibles (Intellectual property/patents/brand, etc.)

There are quite a few variables on the above checklist that stand out, with the top one being that of growth rate. Growth rate is a major value driver when buyers are considering value.

Business Two, for example, with its seven times EBITDA has a growth rate of 50%, whereas Business One, with its five times EBITDA has a growth rate of just 12%.

Discovering the real growth rate story means answering some pretty important questions.

  1. Are the company’s projections achievable and believable?
  2. Where is the company’s growth coming from?
  3. Are there long-term contracts currently in place?
  4. Where is the growth originating? In other words, what services or products are driving growth? Will those services or products continue to drive growth in the future?
  5. How is the business obtaining its customers for the projected growth?
  6. How reliable are the contracts/orders?

Ultimately, finding the difference in value between two businesses, that otherwise appear similar, usually resides in growth rate. This is a factor that should not be overlooked. It is essential to know a company’s growth rate as well as the key questions to ask regarding its growth. If you are going to obtain an accurate valuation as well as understanding the valuation between different companies, this part of the process cannot be overlooked.

Copyright: Business Brokerage Press, Inc.

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Third Time’s A Charm: From False Starts To Finishing Big

Scott Miller grew Miller Restoration to a $3M business specializing in cleaning up the mess caused by floods and fires. When a new business idea caught his attention, Miller decided to sell his business. After two false starts, he ended up successfully selling for 3.5 times pre-tax profit.

Miller knew telling his employees would be hard, but nothing could prepare him for what happened next.

In this episode, you’ll learn:

  • Pros/Cons of having a business named after you
  • How false starts with potential acquirers can lead to a bigger payday
  • How a capital lease can impact the value of your company
  • The best way (and worst way) to tell employees you’re selling the company

Listen Now

Miller navigated offers from potential acquirers more easily because he knew what his target sale price was. Module 12 of The Value Builder System™ walks you through The Envelope Test, which is designed to help you determine your dream check.

Get started for free right now by completing Module 1.

There’s No Business Quite Like a Family Business

The simple fact is that family businesses are different. After all, a family business means working with family and all the good and bad that comes with it.

While an estimated 80% to 90% of all businesses are family owned, relatively few are properly planning for what happens when it comes time to sell. According to one study, a whopping 72% of family businesses lack a developed succession plan which is, of course, a recipe for confusion and potentially disaster. Additionally, there are many complicating factors, for example, studies indicate that 40% to 60% of owners of family businesses want the business to remain in the family, but only 40% of businesses are passed to a second generation and a mere 10% are passed down to a third generation.

Let’s turn our attention to a few of the key points that family business owners should consider when selling a business.

  1. Confidentiality should be placed at the top of your “to do” list. When it comes to selling a family business, it is vital that confidential is strictly observed.
  2. Remember that it may be necessary to lower your asking price if maintaining the jobs of family members is a key concern for you.
  3. Family members who stay on after the sale of the business must realize that they will no longer be in charge. In other words, after the sale of the business the power dynamic will be radically different, meaning that family members will now have to answer to new management, outside investors and an outside board of directors.
  4. Family members will want to appoint a single family member to speak for them in the negotiation process. A failure to appoint a family member could lead to confusion, poor decision making and ultimately the destruction of deals.
  5. When hiring a team to help you with selling your business, it is critical that your lawyer, accountant and business broker are all experienced and proven.
  6. Don’t hold meetings with potential buyers on-site.
  7. Every family member, regardless of whether they are an employee or an investor, must be in agreement regarding the sale of the company. Again, one of your primary goals is to avoid confusion.
  8. Family employees and family investors must be in agreement regarding the sale price or there could be problems.

Working with an experienced business broker is a savvy move, especially when it comes to selling a family business. Business brokers know what it takes to make deals happen. Being able to point to a business brokers’ past success will help reduce family member resistance to adopting the strategies necessary to successfully sell a business.

Copyright: Business Brokerage Press, Inc.

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How Forecasting The Future Led To A $100M Sale

Back when mobile phones had green screens with black dots on them, Andy Nulman founded Airborne Mobile. He knew the time was coming when technology would enable full-scale media content on mobile devices, so he knocked on doors and asked companies like the NHL, Maxim, and Disney for assets he could transform into mobile media.   

In one year, the company went from $2M in revenue to $20M driven by the explosion in the adoption of mobile devices. Leveraging his client list, Nulman sold 85% of Airborne Mobile for over $100M and retained 15% of the company—a position he would later expand in a strange twist of fate.

In this episode, you’ll learn:

– How to leverage brands you’re working with to position your company for an acquisition

– One way to evaluate your logo

– What a “put option” is and how it is used in the M&A process

– The danger of believing your own press

Listen Now

Find out how you score on the eight factors that drive your company’s value by completing the Value Builder Questionnaire:

Get Your Value Builder Score Now