
Why Do Owners Need to Plan an Exit Strategy?
Did you know that nearly sixty percent of business owners have no exit strategy in place?
Akin to a ship sailing in the ocean without a destination, these businesses face an uncertain future. They will probably experience unnecessary stress and face financial risk.
Since it is so easy to get caught up in the day-to-day aspects of business management, it makes sense why so many business owners let a well-thought-out exit strategy slip by the wayside.
Planning an exit strategy is not only essential for navigating your business’ future, but it also plays a crucial role in maintaining its value, protecting your legacy, and ensuring financial security.
To make things easier for you, we’ve put together a guide. Keep reading if you want to find out more.
The Benefits of Having an Exit Strategy
There are many great reasons why you should develop an exit strategy. Here is everything that you need to know.
A Blueprint for Success
An exit strategy functions as a roadmap to guide your business toward its intended destination. This is much like how architects first draw blueprints before building houses.
Successful entrepreneurs design an exit plan before they even begin to build a business. This plan cultivates a brand strategy. This strategy will factor in the end goal and drive a business towards that vision.
Just as a game of chess is more effective with a plan, so too is business ownership. By visualizing and planning your endgame early, you can align your current activities with your ultimate objectives.
This way, your every move contributes to your final goal of a successful exit.
Informs Strategic Decision Making
Having a clear exit strategy informs your strategic decision-making process. Maybe you intend to sell a business to the highest bidder. It could also be the case that you want to pass it on to a family member.
Regardless of what your intentions are, the type of exit you foresee will significantly impact the choices you make throughout your business’ lifecycle.
For instance, if your exit plan involves selling your business to a larger corporation, you might focus on building up assets and client lists. These are resources that would be attractive to potential buyers.
On the other hand, if your goal is to pass the business to a family member, you might invest more in training and mentorship.
Enhances the Value of a Business
An exit strategy is not just about planning for the end. It also boosts your business value in the present.
By demonstrating to investors, stakeholders, and potential buyers that you have a plan in place, you underscore your forward-thinking leadership and the business’s overall stability.
Such foresight can increase investor confidence and potentially enhance your business’s market value. Moreover, a clear exit plan makes your business more attractive to potential buyers.
These individuals will appreciate the reduced risk and uncertainty.
Provides a Flexible Template
An exit strategy gives a clear direction. But understand that it is not set in stone. It’s a flexible template that you can adjust as your business grows and the market changes.
By revisiting and revising your strategy over time, you ensure that it remains relevant and keeps pace with your evolving business landscape.
Why You Should Have Two Exit Strategies
Most business owners have never considered creating two exit strategies. They only think about the best-case scenario when it comes to stepping down.
Here are the two different types of exit strategies that you should develop.
Voluntary Exit Strategy
A voluntary exit strategy is the ideal scenario where the business owner chooses when and how to step down. This could be through selling the business, transferring ownership, or even taking the company public.
In these situations, the owner has control over the process and the luxury of time to ensure a successful transition. This kind of strategy is typically what most business owners envision when they think of their “exit.”
Involuntary Exit Strategy
Unfortunately, not all exits are planned. Sometimes, unforeseen circumstances can force an owner to leave their business.
Illness, family emergencies, financial challenges, or market shifts can result in an unplanned exit.
This is where an involuntary exit strategy comes into play. It ensures that if the unexpected happens, there is a plan to protect the business, its employees, and the owner’s investment.
Cultivating both a voluntary and involuntary exit strategy is a sign of a responsible business owner.
This comprehensive planning prepares a business for both anticipated and unforeseen changes.
For example, if you need to suddenly hand the reigns to a new owner, you’ll need to have a plan in place for teaching this new leader what business ownership entails.
What an Exit Strategy Should Involve
An exit strategy involves a carefully structured exit plan that outlines the process of transitioning out of a business. This plan defines how, when, and to whom the business will be sold or transferred.
It includes details such as potential buyers, valuation methods, and key milestones leading to the transition. The balance sheet is an essential financial document showing a company’s assets, liabilities, and equity.
It plays a vital role in the exit plan. It helps establish the business’s value, which is fundamental in negotiations and ensuring a profitable exit. Therefore, a well-crafted exit strategy is a key tool in business planning.
Why You Need an Exit Strategy
There are many great reasons why you should develop an exit strategy for your business.
Not only is developing an exit strategy a great aid for those who want to enhance the value of their businesses. It can also inform the decision-making process.
Lastly, remember how important it is to develop an involuntary exit strategy along with a voluntary exit strategy.
Do you need help selling your business? If so, Fusion can help you. We are experienced business brokers who you can trust. Don’t hesitate to contact us to get started today!
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Common Mistakes to Avoid When You Value a Business
US business sales are on the rise. According to the latest statistics, over 10,000 businesses are sold each year. Is your business gearing up to join this exclusive club?
If so, you are probably in the midst of learning how to value a business. Company valuation is always difficult, but it can feel downright impossible when it’s your first time.
Luckily, there are a few tried-and-true methods that can help you out. We created this guide to help you understand different valuation methods and the mistakes to avoid when choosing them.
Do you need help determining the value of your company? Then this article is for you. Keep reading to learn the top mistakes new business owners make when calculating business value.
Not Choosing the Right Valuation Method
There are a handful of different valuation methods suitable for various types of businesses. The valuation method you should choose depends on your goals.
For example, do you want to use the most common or reliable valuation method? Do you want to put your company in the best light or be as truthful and accurate as possible?
Other factors to consider when evaluating the right valuation method for your business include:
- The type of company you own
- The size of your company
- The state of your industry
Regarding company type, there are generally two: asset-light and IP or asset-heavy businesses. These business types would benefit from different valuation methods. More on this in a moment.
Company size doesn’t determine which method to use. Instead, it determines how many valuation methods may be right for your company. Larger companies can benefit from more method types than smaller ones.
Is your industry in decline? If so, you may want to use asset-based or comparable valuation methods over profit-based ones. And companies in poor or healthy industries should stray to the conservative side of things.
Additionally, you may want to consider the type of method potential buyers may prefer. For example, some buyers may want to know the value of your business assets. Others may only care about potential profits.
Considering Sales and Profits Alone
Sales-and-profits-based valuation is also known as the discounted cash flow method. It is the most accurate way to value a business. However, it may not be right for all companies.
Situations requiring other valuation methods include if your business is losing profits but has a lot of valuable assets. Conversely, sales and profits-based valuations are better for cash-rich companies with fewer assets.
To use this method, you must calculate your company’s pre-tax earnings. This is known as the Seller’s Discretionary Cash Flow (SDCF). SCDF considers profits before taking out operational costs, salaries, interest, etc.
Once you determine this figure, you can add in the multiplier. Most businesses are valued at one to three times SCDF. The multiplier you should use depends on owner risk, company size, and more.
Not Determining the Value of Assets
Discounted cash flow valuations may be the most accurate method, but the most common method is assets-based valuation.
Asset-based valuation may not work for software or service companies and businesses in other asset-poor sectors. The types of companies this valuation method is ideal for are those with significant hard or soft assets.
Soft assets are valuable brands or IPs. For example, a new software startup may have valuable code behind its product. This can greatly increase the company’s value even if it isn’t yet turning a profit.
Meanwhile, hard assets are physical assets that hold value. Hard assets include but are not limited to the following:
- Inventory
- Merchandise
- Equipment
- Office furniture and supplies
- Company vehicles
- Machinery
- Real estate
Another asset to consider is goodwill. Goodwill is a non-quantifiable asset that refers to your brand’s reputation in the market. High-quality customer service, strong talent, and consumer loyalty are all examples of goodwill.
Leaving Out Assets and Liabilities When Calculating SDCF
We left out one thing when explaining how to calculate SDCF: assets and liabilities. If you plan to use your business profits in your valuation method, you must also consider these factors.
The SDCF multiplier will take some assets and liabilities into account. However, many multipliers leave out certain hard assets, in particular. Some common ones are inventory, real estate, and cash-on-hand.
It is crucial to add these assets back into your SCDF equation. Additionally, if there are any liabilities your multiplier leaves out, ensure you subtract that from your total valuation as well.
Not Considering Comparables
Has there been a lot of M&A activity in your space of late? If so, using comparable companies (AKA comps) to value your business may be the method for you.
For this method to work, you have to comp your business to others that sold recently. Business sales that occurred too long ago may not account for current factors influencing your industry.
You must also consider factors like size, reputation, and intangible assets. If you don’t, you may try to compare your small business to a Fortune 500 that recently sold in your industry.
Even if you don’t want to use comparables for valuation, consider looking at comps to determine your SCDF multiple. Or you can use comps as just one aspect of your valuation strategy.
Need to Value a Business? Let Fusion Help Sell Your Business in St. Louis
Learning how to value a business is easy when you avoid these mistakes. So instead, use the valuation methods in this guide to get the most out of your sale.
Are you gearing up to sell your business in the Metro East? Fusion is a full-service business brokerage serving small and medium-sized firms. Get in touch with Fusion today to learn more about how we can help you sell your business.
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Understanding the Discounted Cash Flow Method, and How to Use It
Recent statistics reveal that in 2021, the median sale price for small businesses was up 16% over the previous year. Median cash flow was up, too, by 11%. With a promising market, now is an excellent time to consider selling.
Before you decide if it is the best time to sell, you must determine what your business is worth. To determine business value, you must calculate your discounted cash flow. This is an analysis that investors and buyers will look at when they consider if your business is right for them and if the price is right.
If you are considering selling anytime in the future, keep reading for the full scoop.
What Is Discounted Cash Flow?
It’s a valuation technique. Discounted cash flow uses expected future cash flows along with a discounted rate. It estimates an investment’s present fair value.
This calculation focuses on TVM or the time value of money. TVM is a concept that professionals refer to when they believe that today’s money will be worth more tomorrow. It assumes that the dollars you use today will appreciate by investing today.
For modern finance, this is a pillar idea.
Why it’s Important
This model can estimate an asset’s value. It is a fundamental cash flow analysis technique. Discounted cash flow is both qualitative and quantitative by nature.
With the detailed assumptions from a DCF model, it can forecast future cash flow and potential business growth. Analysts must spend a lot of time with these assumptions, including considering environmental, economic, and social issues which can affect the cash flow in the future.
Estimating a Business Value
A discounted cash flow analysis is an industry-standard and comprehensive way to estimate an investment’s fair value. It helps to determine what a business will be worth.
There is a wide variety of data to consider when calculating discounted cash flow. This includes tax rates, the WACC, and the cost of equity.
WACC
The acronym stands for “weighted average cost of capital.”
It calculates an organization’s cost of capital. You weigh each category of capital proportionally. All sources of capital, which can include bonds, preferred stock, common stock, and other long-term debt, are a part of the WACC calculation.
Free Cash Flow
FCF is critical to the DCF model. It reduces the noise that financial reporting and accounting policies can create. A vital benefit of the discounted cash flow valuation is that this approach does not rely on market wide over or under-valuation.
It is imperative that the data in the discounted cash flow analysis is accurate. Otherwise, it will not be effective for your organization.
How Do You Calculate a Discounted Cash Flow?
It is a progressive and cumulative process because DCF depends on free cash flow. Free cash flow is how much cash a business creates following all cash outflows.
Accounting policies significantly impact financial statements because they include non-cash expenditures. Free cash flow measures profitability.
Here is the formula for finding free cash flow.
Free cash flow equals interest expense plus cash flow from operations, then subtracts tax shield on interest expense, and then subtracts CAPEX (capital expenditures).
Although, there are other ways you can calculate your free cash flow, too. Here are two more formulas.
Free cash flow equals [(1-Tax Rate) x EBIT] plus non-cash expenses, minus liabilities/change in current assets, and then subtract CAPEX.
Free cash flow equals interest expense plus net income, minus tax shield on interest expense plus non-cash expenses, minus liabilities/change in current assets, and then subtract CAPEX.
All these formulas will do the trick. Which one you use should depend on the information you have readily available.
Calculating Discounted Cash Flow
You can use this formula after you determine your free cash flow. Remember, the DCF relies on the discount rate. Here is the basic formula.
Discounted cash flow equals FCF1 divided by (1 plus r)¹, plus FCF2 divided by (1 plus r)², plus FCFn divided by (1 plus r) n.
Here are the different free cash flow figures and how you find them.
- FCF is the free cash flow for any given year
- FCF1 is the free cash flow for year one
- FCF2 is the free cash flow for year two
- FCFn is the free cash flow for each additional year
“N” stands for each additional year. “R” is the discount rate.
Why You Need DCF For Business Value
Discounted cash flow analysis is how you can provide a case for a company or asset’s present value and how much it could make a buyer in the future. You want to tell a story that your company or asset is making a certain amount today but will be much more worthwhile in the future. Investors and buyers want to see proof of business growth.
Projections can only go so far. Five to ten years is a typical timeframe for estimating future value.
The DCF Valuation method is sensitive to assumptions. Any minor tweak can make a tremendous fluctuation.
Get the Best Brokerage Service
If you are unsure about your discounted cash flow analysis, ask a professional to help. Fusion Business Services has been helping organizations for years determine their DCF and their business sales options.
They begin with an in-depth planning session that is totally confidential. If you have something on your mind regarding your business value, the professional at Fusion Business Services has the answers.
Contact Fusion Business Services today to learn more.
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Business Valuation: The Process and Methods (Explained)
There are more than 33 million small and medium-sized businesses scattered across the US. Many of those businesses are concentrated in urban areas, such as the metropolitan St. Louis area. The simple population density concentrates people with entrepreneurial leanings into a small area.
Despite all of the hard work and long hours, often 50 hours a week or more, there does come a time when most business owners are ready to pack it in. If they want to sell the business, rather than simply close, they’ll need a business valuation.
Not clear on the nature or use of a company valuation? Keep reading and we’ll cover the essentials of the valuation process and methods.
What Is a Business Valuation?
In simple terms, a business valuation aims at creating a realistic assessment of the business’s economic value. Some business valuations assess the value of the entire business, while others only look at evaluating part of the business.
For example, let’s say that you run a medium-sized manufacturing concern. You have two production plants that serve two different kinds of clients.
Let’s say that you’re the sole owner and want to retire. If you don’t have someone in mind to take over the business, you may decide to sell it.
If someone comes along and only wants to buy one of the production plants, you’d do a partial business valuation. If someone wanted the whole business, you’d do a full valuation.
Uses
The most recognizable use of business valuations is for the purpose of selling the business. It’s not the only potential use for a valuation.
In some cases, potential investors might want a valuation before deciding if or how much they’ll invest. Business valuations happen sometimes during divorces to ascertain the full scope of the couple’s assets.
You might also want a valuation for tax planning, estate planning, or even for mediation with stockholders.
What Is the Business Valuation Process?
The exact steps taken in a business valuation process depend in part on the particular valuation method selected. We’ll cover the main methods below. What follows is a general sequence of events that occur in most business valuations.
Determining Scope
The individual or company providing the valuation will look for clarity about the scope of the valuation. For example, are they determining a value for the entire business, part of the business, or a specific number of stock shares?
As part of this step, they’ll also want a specific date for setting the value, since the total value can fluctuate over time. In many cases, they’ll simply set the date for the business’s most recent tax filing.
You must clarify what the report is for. If you need it for estate planning, rather than litigation, the depth of the valuation may vary. They’ll also need to know what kind of report you need, as reports can range from basic summary reports to in-depth reports.
Document Production
The valuation service will likely ask you for a lot of documents. The exact documents will vary from business to business and industry to industry.
For a retail business that depends on a high volume of transactions, the company may want fairly in-depth sales reports. For a business that makes approximately 6 custom yachts per year, a profit and loss statement might suffice.
In most cases, the company will provide a specific list of documents it wants.
Analysis
The valuation service will then analyze the information. They’ll typically compare it with industry information, since this can shed light on whether business profitability is average, above average, or below average.
Management Discussion
Depending on the analysis results, the valuation company may also come up with a set of follow-up questions for the owner or management team. This kind of management discussion typically focuses on clarifying information or understanding factors that the documents may not make clear.
Final Analysis
After that discussion, the valuation company will use one of the methods below to develop a final valuation. They’ll issue a report that the business owner can then provide to potential buyers.
This process can move quickly or slowly, depending on the size, complexity, and industry of the business.
Business Valuation Methods
There are several business valuation methods that a valuation company might employ to value a business. Let’s take a quick look at the most common approaches.
Book Value
Book value is one of the simplest approaches. It essentially adds up all of the assets on the business’s balance sheet. Then, it subtracts all of the liabilities on the balance sheet from the total asset value.
Liquidation Value
The liquidation value assumes that you own a distressed business. This approach adds up the value of your assets and subtracts a percentage from that value for a final value. The valuation company must determine the exact percentage it will subtract.
Market Value
Market value can take a couple of forms. A basic market value approach simply multiplies the number of shares in a company by the going sale price of that stock.
A more complex version compares similar companies to arrive at a relative value for the business. This approach can provide a better real-world picture, but it is also subject to market errors like as an industry bubble overvaluing businesses.
Discounted Cash Flow
The discounted cash flow approach assesses the immediate value of predicted future profits. In this approach, the size of the discount applied to that value reflects the risk that the business will underperform.
Each approach has benefits and problems. Ideally, you should get multiple valuations based on different valuation methods for a clearer picture.
Business Valuation and You
Business valuation is a tool that you can use to determine a realistic asking price for a business you want to sell. There are several possible valuation methods that you can use, but multiple valuations give you the most clarity about your business’s ultimate value.
Fortunately, while the methods of business valuation can prove complex, you can hire someone else to take on that headache.
Fusion Business Services helps St. Louis-area business owners value and sell their businesses. For more information or to schedule a consultation, contact Fusion Business Services today.
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8 Important Things to Know (And Ask) When Buying a Restaurant
Nothing comes close to the exciting buzz of opening a new business. However, the average startup costs for a new restaurant business are between $275,000 and $425,000. Buying an existing restaurant could be the perfect option if you want to avoid the turmoil (and startup costs) of starting one from scratch.
Before you jump into your new venture, there are some essential things to consider. Firstly, running a restaurant is not for the faint-hearted! It would help if you also researched the prospective restaurant thoroughly to avoid any nasty legal surprises.
This guide will walk you through what to know (and ask) before buying a restaurant.
1. Why is the Owner Selling the Restaurant?
Is the owner retiring or starting a new venture? Understanding why the owner is selling their restaurant can provide insight into how the business is performing. Speaking to the owner is also a great way to learn about the brand and story behind the company.
Working with a professional, knowledgeable business broker can help you gain access to helpful information and uncover the seller’s motivation for selling. A broker can use this information to negotiate a better price for the buyer.
If the owner struggles to generate profits, you may need to rebrand and make drastic changes. If the restaurant was successful, would they be selling it? Remember that you will inherit the good, the bad, and the ugly when you buy a restaurant from the previous owner.
2. Location, Location, Location
The best way to research a location is to visit as a customer. Check out the area and take notes on the competition. Your findings will give you an idea of whether the site is popular and how other businesses perform in the vicinity of the restaurant.
Learning about the location will also tell you if the rental rates are fair for your property. Crime rates and new developments can also have an impact on the performance of a restaurant.
3. What is the Restaurant’s Reputation?
You can ask the locals what they think of the restaurant as you research the local area. Do they dine in or take out? Do they enjoy the food?
Lots of restaurants have loyal customers who visit them regularly. Observing the restaurant from a customer’s perspective will allow you to identify whether your prospective restaurant has a loyal following that you will inherit.
Checking online reviews will give you an idea of the restaurant’s reputation within the local community and beyond. Pay attention to negative feedback and consider how you would address their issues when you take over the restaurant.
4. The Competition is Fierce
There were 660,936 restaurants in the US as of 2021. Your restaurant must have a unique selling point if you want to succeed in the restaurant industry. It’s a good idea to include a non-compete clause in your contract to prevent the seller from opening up a similar restaurant nearby.
Establish the restaurant’s unique selling point (USP) by conducting a competitive analysis and tracking industry trends.
5. Existing Employees
When you buy an existing restaurant, you also take on the staff. Identifying which employees are critical to the restaurant’s success should be part of your due diligence before you complete the purchase. Some employees may wish to terminate their employment if a new owner takes over the restaurant.
Your new employees are a direct connection between you and your new customer base. They can teach you everything there is to know about your new business and how to help it succeed. Taking their opinions on board will be crucial to your future business strategy.
6. Check the Licenses and Permits
You may need to apply for state-specific licenses and permits to run your restaurant. Your restaurant must have a liquor license if you sell alcoholic beverages. It is also worth checking if any violations or outstanding debts could jeopardize the restaurant’s success.
Does your restaurant use a dumpster for garbage disposal? You may need a dumpster placement permit. Licenses and permits vary depending on your location, so it is best to check with your local authority before you sign the contract.
Ask the seller about licenses and permits so that you are aware of which ones you need. You can check your local government website to view inspection results and any health code violations against the restaurant before you buy it.
7. Marketing is Crucial
Keeping customers interested in your new restaurant is vital for success. What is the current owner doing to advertise the restaurant? Consider your marketing strategy before you buy so you can figure out how you would cater to the demographic.
Take a look at the restaurant’s social media and website before you commit to the purchase. Do they have a solid online following with plenty of positive reviews? A paper-based marketing strategy may work better if the customer base is an older crowd.
8. Buying a Restaurant is an Adventure
Buying a restaurant is hard work. However, the rewards you’ll receive along the way will make it worthwhile. Running a restaurant is the perfect way to introduce people to your recipes and culture alongside great music and delicious beverages.
Owning a restaurant will also give you more opportunities to give back to your community. You can donate surplus food to charities and homeless shelters or sponsor a worthy cause.
Get Support With Buying a Restaurant
Buying a restaurant is the perfect way to enter the business world without taking substantial financial steps. An existing restaurant with an established customer base, trained staff, and permits will allow you to take over where the previous owner left off. It would be best to research whether the restaurant for sale is a risk or a path to success.
Are you ready to buy a restaurant? Take the first step and book a free consultation with Fusion to make your dream a reality.
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