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 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 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.
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
- Revenue Size
- Profitability
- The Market
- Growth Rate
- Regional/Global Distribution
- Management & Employees
- Capital Equipment Requirements
- Systems/Controls
- Uniqueness/Proprietary
- 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.
- Are the company’s projections achievable and believable?
- Where is the company’s growth coming from?
- Are there long-term contracts currently in place?
- 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?
- How is the business obtaining its customers for the projected growth?
- 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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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.
- 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.
- Remember that it may be necessary to lower your asking price if maintaining the jobs of family members is a key concern for you.
- 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.
- 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.
- 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.
- Don’t hold meetings with potential buyers on-site.
- 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.
- 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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Around the Web: A Month in Summary
A recent article posted by The National Law Review entitled “Thinking of Selling? Start Early, Build Your Team” explains the importance of putting together a good team of trusted advisors well in advance of selling your business. Your team should include an attorney, accountant, investment banker, and wealth manager. This team will help you with various aspects of selling your business such as:
- Setting a realistic valuation on the business
- Finding potential buyers
- Handling due diligence and information requests from buyers
- Structuring a transaction for tax & liability protection
- Dealing with the sale proceeds and making sure your goals are met
It is a good idea to put this team together as soon as possible if you’re thinking of selling, so everyone has time to prepare. There are so many aspects to a business sale and it is essential to have an experienced team of professionals to guide you in the process.
Click here to read the full article.
A recent article from The San Angelo Standard-Times entitled “Business tips: Don’t neglect due diligence when buying a business” emphasizes the important of due diligence when buying a business, which consists of looking into and understanding the important aspects and fine details of the business before closing.
The first aspect to consider is if the business is right for you and your personal circumstances. Taking over a new business will require some help from the previous owner who has knowledge of the business and the industry. You will also want to take into account how many hours are needed, if the job will involve a lot of physical work, and if your family supports you in the purchase of this type of business.
Reviewing and analyzing the seller’s numbers and documents is also a huge part of due diligence. Consider using the help of a CPA, consultant or business broker to go over the financials of the business. You will also want to look into things such as if there are any claims on the business or if the business owes back taxes. Doing your due diligence now will ensure that there are no surprises later on in the process.
Click here to read the full article.
A recent article posted by the Smart Business Network entitled “Planning an exit when a succession plan isn’t an option” explains that selling your business should be part of your exit strategy when creating a succession plan is not an option. To prepare a business for sale, the business owner should recognize the strengths of the business which would appeal to potential buyers and should also have a good understanding of the business’ financials.
Business owners may also want to work with a bank that is experienced in exit planning. The bank can assist with providing insight into how buyers will view their business and what obstacles may occur while a buyer is trying to finance the acquisition. Banks will also be able to work with the buyer in assisting them with financing.
It’s important for a business owner to work with experienced professionals who have worked with sales, acquisitions and exit strategies to help them prepare for a business sale.
Click here to read the full article.
A recent article posted by Business.com entitled “Why It’s Prime Time to Buy a Business from a Retiring Baby Boomer” gives several good reasons why it is a good idea to consider purchasing an existing business, as a flood of baby boomers will be looking to sell their businesses and retire over the next decade.
There are many benefits to purchasing an existing business:
- Minimal upfront costs and you not only purchase the business but also the brand, customer-base, management policies and more.
- Low risk because the business is already established and has a proven track record.
- Steady cash flow along with employees and equipment.
With the generation of baby boomers looking to sell, there will be ample opportunities available for buyers. It’s important to stay in the loop and keep an eye out on available businesses by staying connected to your professional network, brushing up on local & industry publications, looking at online marketplaces, and working with a business broker.
Click here to read the full article.
A recent article written by Live Oak Bank entitled “6 Business Acquisition Tips from SBA Loan Experts” outlines six factors that lenders review for loans financing mergers and acquisitions.
- Stable or Positive Trend – Not only a positive trend but stability in these trends are what lenders look at to make sure that any recent growth or improvement is sustainable. A decrease in revenue is a red flag and a negative trend should be stabilized or reversed.
- Business Plan – Buyers need to have a business and transition plan for the business they are acquiring so lenders can see they have a good understanding of the business and plans for improvement.
- Key Employees – Lenders like to see that key employees will stay on with the new owner, which helps lower the risk and make the transition easier.
- Seller Transition Period – Make sure you have a transition plan in place where the seller is able to help train and assist the new owner.
- Seller Financing – The seller financing a portion of the deal shows the lender that they are confident in the new owner and lowers the risk factors.
- Working Capital – M&A lenders will review the financials of the business to see what working capital is needed. The buyer should demonstrate a clear understanding of how much and what type of working capital is needed for the business transition.
Click here to read the full article.
Copyright: Business Brokerage Press, Inc.
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The Difficult Issues Often Attached to Valuing a Business
There is little doubt that valuing a business is often complex. In part, this complexity is due to the fact that business evaluation is subjective. The simple fact is that the value of a business is often left to the mercy of the person conducting the evaluation. Adding yet another level of complexity is the fact that the person conducting the valuation has no choice but to assume that all the information provided is, in fact, correct and accurate.
In this article, we will explore the six key issues that must be considered when determining the value of a business. As you will see, determining the value of a business involves taking in several factors.
Factor #1 – Intangible Assets
Intangible assets can make determining the value of a business quite tricky. Intellectual property ranging from patents to trademarks and copyrights can impact the value of a business. These intangible assets are notoriously difficult to value.
Factor #2 – Product Diversity
One of the truisms of valuing a business is that businesses with only one product or service are at much greater risk than a business that has multiple products or services. Product or service diversity will play a role in most valuations.
Factor #3 – ESOP Ownership
A company that is owned by its employees can present evaluators with a real challenge. Whether partially or completely owned by employees, this situation can restrict marketability and in turn impact value.
Factor #4 – Critical Supply Sources
If a business is particularly vulnerable to supply disruptions, for example, using a single supplier in order to achieve a low-cost competitive advance, then expect the evaluator to take notice. The reason is that a supply disruption could mean that a business’ competitive edge is subject to change and thus vulnerable. When supply is at risk then there could be a disruption of delivery and evaluators will notice this factor.
Factor #5 – Customer Concentration
If a company has just one or two key customers, which is often the situation with many small businesses, this can be seen as a serious problem.
Factor #6 – Company or Industry Life Cycle
A business, who by its very nature, may be reaching the end of an industry life cycle, for example, typewriter repair, will also face challenges during the evaluation process. A business that is facing obsolescence usually has bleak prospects.
There are other issues that can also impact the valuation of a company. Some factors can include out of date inventory, as well as reliance on short contracts and factors such as third-party or franchise approvals being necessary for selling a company. The list of factors that can negatively impact the value of a company are indeed long. Working with a business broker is one way to address these potential problems before placing a business up for sale.
Copyright: Business Brokerage Press, Inc.
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