How to Evaluate a Business Acquisition Offer
Statistics show that there are 33.2 million small businesses in the US. This surprisingly accounts for 99.9% of all businesses in the US.
If you own a business, you may eventually want to sell it. If this is the case, you will receive a business acquisition from a potential buyer.
It is very important to understand what a business offer is and what details it should have. You will need to understand these things so that you can choose the best business acquisition plan.
Keep reading to find out how to evaluate a business acquisition.
What Is an Acquisition Offer?
You may not understand what a buyout offer is and what it means for your business. A basic acquisition is when one company purchases another company’s shares.
The company may buy all that company‘s shares or a percentage. This is usually done amicably as both companies negotiate the terms of this transaction.
This allows you to sell a part of your company or the whole company. Keep in mind that there are different kinds of acquisitions that may happen.
For example, a vertical acquisition is when a parent company buys a company along its supply chain. A horizontal acquisition is when a company buys a competitor.
These are just two examples of the kinds of acquisitions that may take place. These depend entirely upon the two businesses and how the transaction goes.
What to Look for in an Acquisition Offer
When a company wants to acquire a business, it will send a business acquisition. This shows intent to purchase, allowing you to weigh the pros and cons.
This business offer gives you an idea of what the deal will be. You will be able to see if it is a good offer and if you will benefit from it.
It is very important to understand these details so that you make the best decision for your business. Here are some examples of things you need to look into.
The Finances
One of the most important aspects to focus on is how much money you will be getting. You need to make sure you understand the value of your business to determine its worth.
From there, you will be able to tell if the acquisition is offering a fair price. Something else to consider is the growth potential of the company.
A company that is on its way up and showing significant growth is more valuable. Because of this, you may want a higher price to make up for the growth it will experience in the future.
Keep in mind that the price is not the only thing to consider. There are other details that outweigh this and should greatly influence your decision.
Legitimacy
When you receive a business acquisition, you need to make sure it is legitimate. There are a lot of scams online and caution is absolutely necessary.
You should look into the company that has sent the offer. If this is an established company, the offer is most likely legitimate.
You may want to contact your business attorney and financial expert to evaluate this as well. This will help you to make sure any offer you are considering is legit.
Understand the Buyer
It is also important to make sure you understand who the buyer is. There are two types of categories they could fall into, a financial buyer or a strategic buyer.
A financial buyer is a group that funds purchases of businesses. These are buyers that will usually resell the business after many years to make a profit.
They are more focused on incremental changes that help with the value. Strategic buyers are either competitors, suppliers, or customers.
They acquire businesses to add to their current business or as another branch. They look for long-term value since they do not usually plan on reselling.
Buyer Motivation
Depending on the business acquisition, you need to consider buyer motivation. Strategic and financial buyers are going to have different motivations.
These are things that could affect you depending on how much of the company is acquisitioned. For example, if this is a family business, you may care about what happens afterward.
You may want to make sure the integrity of the company is maintained. Or you want to make sure employees and managers are kept employed.
How to Respond to an Acquisition Offer
Now that you know what to look for in acquisitions, how do you respond? When you have decided on business offers you are interested in, you need to formulate a response.
There are a few routes you can take when doing this that you will need to understand.
Rejection Or Negotiation
If you are not happy with the offer, you have the option of rejecting it. It may not align with your goals or offer a fair price.
If you do like the offer, you have the option of negotiating it further. This is helpful if you want a slightly different price or you want the terms to be different.
Full Sale/Limited Sale Process
Other options include a full sale, this can happen if everything is as you want it. Then you will be able to proceed with the transaction to sell your company.
With a limited sale process, you may discreetly contact other acquirers. This can be done as you are discussing the current acquisition.
Business Acquisition Offer 101
If you have a business that you want to sell, you will receive business acquisition options. These are business offers that you will need to vet for terms and finances.
Are you interested in selling your business in the St. Louis area? Contact us today at Fusion to book a consultation.
Read More
How Improved Negotiation Tactics Can Benefit Your Deals
There is no underestimating the importance of negotiation when you are buying or selling a business. Let’s take a look at some of the most often used strategies and our recommendations.
The Direct Approach
One approach in negotiations is what we often refer to as the “take it or leave it” strategy. In this scenario, the buyer makes an offer, and the seller then counters that offer. There is little negotiation work necessary, as both parties are direct and simple about the numbers and terms they propose. The drawback to this approach, however, is that when it doesn’t work, there is little to no recourse. When this “direct approach” offer isn’t accepted by one of the parties, there is little opportunity for flexibility on either side. Therefore, the direct approach can be somewhat of a risk.
Focusing on Influential Details
There are typically certain aspects of a deal where a buyer or seller is unwilling to compromise. Sometimes this aspect isn’t even financial in nature. It could be anything from the desire to move the business to a new site, to employment of a friend or relative. Once the negotiations embrace and include these non-negotiables, it can help expedite a successful deal.
Splitting the Difference
A common approach that is seen when buying or selling businesses is that one side offers to split the difference. Unlike the direct approach, there is a good deal of flexibility here. When one party shows that they are open to split the difference, it is often seen as a way to keep negotiations going. Another point in favor of this approach is that communication continues. Obviously when one or both sides stop talking, the deal has not been successful.
Third Party Involvement
When it comes to finding solutions and resolutions, having a third party involved is tremendously beneficial. When you bring in a business broker or M&A advisor, that individual can then help facilitate the negotiated solutions. This third party is seen as skilled, yet also more of an impartial party. Business brokers and M&A advisors also have many years of experience encouraging buyers and sellers to understand and work with one another.
Your brokerage professional can help both parties agree to a fair price while handling the aspects of all the small details involved in buying and selling businesses. Negotiations almost always benefit from having a professional involved, as they bring a different, and much needed, perspective to the table.
Copyright: Business Brokerage Press, Inc.
The post How Improved Negotiation Tactics Can Benefit Your Deals appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
How to Transfer Business Ownership to Family
Did you know that there are more than 33 million small businesses in the United States? If you have a business, you might be wondering how you can pass it on to your family members. Many people think that it’s an easy thing to transfer business ownership.
But this is not always true. Transferring a family business can be tricky if you don’t know what the process entails. This is why you need to do plenty of research before you make this decision.
Where should you start with this process? What is the best option for you and your family regarding a business transition? Keep reading and learn more about how it works below.
Sell or Gift the Stock Over Time
Business ownership is determined by stock ownership. Suppose your business has 100 stocks. The business owner will initially own all or most of them.
This is what gives them most of the power over the company. If you own 50 of those stocks, you own half of the business. Once you no longer own any stocks, you won’t own the business.
This is why selling or gifting stocks to your family is a good way to transfer ownership to them. Selling a business is not as necessary as selling your business stocks. There is no need to do this all at once.
You can give your family members a few stocks here and there over the years. This allows for a slow and smooth business transition. You can determine how you want to give the business stocks to your family.
Do you want them to buy the stocks, or would you rather gift the stocks to them for free?
The Details
This process may need some financial planning to pull off successfully. This is because there is a lot to consider regarding the transfer of business ownership.
Things will change once your family owns more of the business than you do. Once your family owns the majority of the stocks, they’ll have more power to make decisions concerning the business. If you don’t like those decisions, there’s not much you can do.
This is because you no longer own the majority of the business. While you can still make some decisions with any remaining stocks you may have, those decisions may be very minor. Once you transfer all of the business ownership to your family, you’ll no longer have the freedom to make decisions regarding the business.
Sell the Whole Business via an Installment Sale
An installment sale is a good idea if you are worried about losing a lot of the sale money to taxes. Suppose your business is worth a million dollars. Selling this business at once and having your family pay in a lump sum is simple, right?
Not necessarily. Doing this will require you to pay huge amounts of taxes on the money that you received. You might have to pay hundreds of thousands of dollars in taxes. But you can avoid this with an installment sale.
This sale requires the buyer to pay you, the seller, in installments. You still have the opportunity to sell your business at one time. But you will not receive all the money for the sale at one time.
You may receive a small percentage of the payment for the year, followed by another small percentage next year, and so on. You can also get several payments within one year if you want to get the process done faster.
But most people prefer to spread the process out so they aren’t overwhelmed by taxes.
What You Need to Know
Once you sell the business, you might prefer to receive 10% of the payment that year. You may receive another 10% next year.
You can also do this if you don’t want to sell the business all at once. You can instead sell percentages of it every year. Your business ownership will slowly trickle away to your family.
The main problem with this is that it takes a while. If you want to part with your business right away, you might have to consider another option. Also, there is no telling if the value of your business will decrease over the years.
This could leave you at a disadvantage if you don’t think ahead.
Consider Stock Redemption
This option requires the company to buy out the current shareholders in favor of increasing the ownership of other shareholders. The money you gain from this sale will be subjected to capital gains taxes. This may sound like a bad thing, but it could be beneficial.
This is because capital gains tax rates are lower than other tax rates your payments could have been subjected to. The problem with this method is that it won’t work if you are the only shareholder. There has to be more than one shareholder for the company to buy out the others and transfer ownership.
This process can also be complicated if you’ve never done it before. This is why it’s a good idea to have someone who can help you, like a broker. Having a professional on your side will make the process much smoother and easier to understand.
How to Transfer Business Ownership
Learning how to transfer business ownership can be a daunting task if you don’t know anything about it.
Stock redemption is a good option, as is an installment sale. You can also try selling or gifting the business’s stocks over time.
A business broker can make this process much easier. Are you ready to get started? Check out our services and see how we can help.
Read More
How Can You Identify a Serious Buyer?
No one wants to waste their time and energy trying to sell their business to someone who isn’t actually planning to buy. That’s why it’s so important for you and your business broker or M&A advisor to focus on the most qualified and serious buyers. But how can you really make these kinds of assessments about a buyer’s viability until they sign on the dotted line? Let’s take a look at some signs that will help you figure out your buyer well in advance.
Do they have a history of ownership?
When someone has owned a business in the past, they have a firm understanding of what is involved. As a result, they are more likely to be a serious buyer. It also means they are more likely to move forward. You will also find that they have the ability to make a substantial down payment and financing options. While they might want you to help them with financing, you should still be looking to ensure they will put their own capital at risk as well.
Are they seeking information about your cash flow?
If a buyer is serious, it goes without saying that they will want to make sure the business is profitable. They should be asking a lot of questions about not only your cash flow, but also your inventory. If you have unusable inventory this could be of concern to a buyer. Be sure to disclose this information upfront, as it will likely be discovered in the due diligence process regardless.
Are they asking about the health of your staff?
Any real buyer would want a dedicated and reliable staff. If your buyer is asking about salaries, it is a good sign that they are serious. After all, if you’re only paying minimum wage, chances are that your staff will not have a lot of staying power. These days, many companies are suffering due to staffing issues, and it’s something that should be front and center in any serious buyer’s mind.
Do they have an interest in the industry?
If your prospective buyer is asking questions about the industry, that is another good sign. After all, who would really want to buy a business without detailed knowledge about the industry they are about to enter? Along the same lines, if you know your buyer has experience in a given industry, it means they are more likely to go through with a purchase. If they lack experience in your industry, do they at least seem passionate about the industry? If they seem like they are not asking probing questions, this might mean they are wasting your time.
Are they asking about capital expenditures?
Your prospective buyer will want to know how money is being spent. You can expect them to make sure that major expenses have already been paid for as they will want to make sure they won’t be caught off guard by large pending purchases.
Do you have professional assistance?
The bottom line is that the more in-depth questions a person is asking, the more serious they are likely to be. Your business broker’s job is to screen prospective buyers. Years of experience doing so helps them know the warning signs that pop up when buyers profess to be interested, but are not likely to go through with the sale.
When you are trying to sell your business, it is critical that you focus your time wisely. Your brokerage professional will help ensure that you do not waste time working with people who are just kicking the tires.
Copyright: Business Brokerage Press, Inc.
The post How Can You Identify a Serious Buyer? appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
What Are the Different Business Valuation Methods?
The more than 33 million American small businesses stand as a testament to the entrepreneurial spirit in the national character. This spirit is often seen most clearly in urban areas. With higher population concentration, you get more people looking to start businesses.
Yet, even die-hard entrepreneurs eventually reach a point where they want to do something other than running the businesses they started. With 60-hour weeks a norm for many business owners, it’s hard to blame them.
If you sell, you’ll need a business valuation. Let’s look at some of the common business valuation methods.
Business Valuation Uses
The most obvious reason that someone gets a business valuation is for the purpose of getting a target price range for when they sell the business. That is not, however, the only reason for getting a valuation. Other common reasons include:
- Tax purposes
- Divorces
- Mergers
A business owner might even want one as a sanity check before they take out a major loan.
Business Valuation Basic Procedure
Before agreeing to a valuation, it’s helpful if you understand the function of and procedure for a business valuation. The main function of valuations are for the seller or a buyer to get at least a semi-objective sense of the raw value of a given business.
The procedure for a valuation is relatively straightforward. It has five general steps.
1. Scope Determination
The scope determination step is mostly about getting clear on what exactly the valuation company is there to set a value for. For example, are they doing a valuation for the whole business, a subsidiary, or something else?
As a general rule, this also involves assigning a value date. Since values can change over time, the company must pin the value to a specific time in the past.
2. Producing Documents
The next major step in the process is for the business to produce all the relevant documents. The valuation service will provide specifics about what documents it requires, although those may vary based on the types of business involved.
3. Analysis
The valuation service will then conduct an initial analysis using one of the common valuation methods. See below for more about methods.
4. Management Discussion
Following the initial analysis, the valuation service may request a follow-up discussion with management. These discussions usually seek additional clarification or information that the service couldn’t glean from the documentation.
5. Final Report
Following the management discussion, if it happens at all, the valuation service will then issue a final report. This report will contain the business’s value based on the service’s analysis.
The speed of this process can vary tremendously based on factors like business size, industry, and exactly how complex your business finances are at the time of the valuation.
Now, let’s look at some specific valuation methods.
Book Value
If there is a quick and dirty version of business valuation methods, the book value method is it. This approach starts by looking at all of the assets that are on your business balance sheet. Then they add up the total value of those assets.
Next, they look at all the liabilities on your balance sheets. Then, big shocker, they add up the total value of those.
Finally, they subtract the sum of the liabilities from the total asset value. Whatever is left is the business’s value.
Given the ease of manipulating asset and liability numbers on a balance sheet, this method isn’t a particularly reliable one. It’s best used as a ballpark figure.
Liquidation Value
The liquidation value method shares some features with book value method, in that both deal with assets and liabilities. The liquidation valuation makes a calculation about what would remain if you sell off all of the business assets and settle up for all of the liabilities. The business value is whatever is left over.
Discounted Cash Flow
The discounted cash flow method is often viewed as one of the better valuation approaches. This approach essentially attempts to project future earnings from a business.
If that sounds like a complicated problem, it is. The valuation company must make a substantial number of informed assumptions about everything from the business itself to economic conditions, social conditions, and even what will happen with the environment.
Given these assumptions and weighing the risks involved with a given industry or a particular kind of business, the valuation service will apply a discount rate to these future earnings. Those calculations, including the discount, let them estimate the current value of the business.
Market Value
The market value method typically takes one of two main forms. In the more basic form, the valuation company finds the stock price at a given time, such as the most recent tax day, and multiplies that price by the total stock shares for the business.
The more complicated market approach seeks to find the business’s relative value. This typically involves an in-depth comparison with a similar business or company. For example, they’d look for a company in the same industry, of about the same size, and ideally providing a very similar set of products or services.
It’s important to understand that all of these approaches have limitations.
Tips
You should discuss the pros and cons of the approach your valuation service will take before you agree. In fact, it’s generally for the best if you get at least two or, even better, three valuations using different valuation methods. If multiple valuations all put the value of your business in the same general area, it’s probably a reasonable price to ask.
Business Valuation Methods and You
When you do finally decide that it’s time to hand up your current entrepreneur’s hat and sell, you need a starting point for your asking price. The business valuation methods above can provide you with that starting point.
Just remember that these valuation methods are, by nature, imperfect. They’re often constrained either by time or by unavoidable assumptions of future conditions.
Fusion Business Services can help you sell your St. Louis business. For more information about what we can do for you, contact Fusion Business Services today.
Read More