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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A recent article from Small Business Trends entitled “41% of Entrepreneurs Will Leave Their Small Business Behind in 5 Years” summarizes a report by a global financial services firm that looks at business ownership and entrepreneurialism in modern America. The report found that almost 60% of wealthy investors would consider starting their own business while more than 40 percent of current business owners are planning to exit their business. Of the 41% of business owners who are planning to leave their business in the next 5 years, half of them plan to sell their business.

The report highlights how heirs in the family are often reluctant to take over the family business and that many business owners underestimate what they need to reach a successful sale. The report notes that 58% of business owners have never had their business appraised and 48% have no formal exit strategy. One of the main takeaways from this should be that small business owners need to prepare for selling their business and they should create an exit plan well in advance.

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A recent article on the Axial Forum entitled “9 Reasons Acquisitions Fail — and How to Beat the Odds” shows us how looking at why others have failed can help you to learn from their mistakes in order to have a successful acquisition. Here are 9 common causes of failed acquisitions:

1. Strategy – Poor strategic logic was used and it was not a good fit for integration
2. Synergy – Potential synergy between the companies is overestimated or the complexity is underestimated
3. Culture – Incompatibility between the companies, ineffective integration, or compromising the positive aspects of one business to create uniformity
4. Leadership – Poor leadership, not enough participation in the transaction & integration process, clashes between leaders
5. Transaction Parameters – Paying too much, inappropriate deal structure, negotiations taking too long
6. Due Diligence – Not enough investigation is done beforehand, failure to act on findings
7. Communications – Lack of proper communication can result in talent loss, customer loss, and many more problems which eventually lead to failure
8. Key Talent – Failing to identify or retain key employees
9. Technology – Failing to identify incompatibilities or underestimating the complexity and time required for integration

Integration involves several steps starting from the initial strategic thinking, to due diligence and then carrying on into the months after the deal is made. Deal makers and business owners need to consider all steps of the process to make an acquisition successful.

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A recent article posted by WilmingtonBiz Insights entitled “How Does Exit Planning Protect Business Value?” explains the importance of exit planning in retaining and growing business value.

The article gives an example of two similar businesses, both valued at $5 million, who take different strategies towards increasing their companies’ values before selling. The first company invests in more equipment and hiring more employees, but does not work with any advisors besides their CPA at tax time. The second company works with their CPA, an exit planning advisor and a tax specialist. They build a strong management team, cut the owner’s work week in half, and convert the company to an S corporation. They also work with a business broker to buy two smaller competitors which broadens their market.

When the Great Recession of 2008 hits, both companies are affected but in very different ways. The first company has to lay off all the new employees they hired and their new equipment sits unused. They end up selling their business for less than what it was valued at. The second company has minimal layoffs and has extra money saved from strategic tax planning. Their business is valued at $15 million because of the two businesses they bought, and they are able to exit their business with $10 million profit. No matter what unforeseen circumstances may occur, the right planning can make a huge difference.

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A recent article from Divestopedia entitled “Constructing a Buyer List and Finding the Right Buyer for Your Company” explains how buyer lists are created and what makes a good buyer. The first step in constructing the buyer list is to determine the objectives of the seller such as leaving a legacy or retaining the local employment base.

M&A advisors will have many existing resources to start with including an in-house database, established relationships in the industry, business networks, and more. Adding your competitors to the list is another thing to consider, which will depend on the goals of the seller and the reputation of the competitors.

The ability to pay is the main qualifier to look at in finding a good buyer. Consider the following factors when looking for a buyer who can pay a premium:

• Economies of scale
• Economies of scope and cross-selling opportunities
• Unlocking underutilized assets
• Access to proprietary technology
• Increased market power
• Shoring up weaknesses in key business areas
• Synergy
• Geographical or other diversification
• Providing an opportunistic work environment for key talent
• To reach critical mass for an IPO or achieve post-IPO full value
• Vertical integration

The best way to find the right buyer is to approach all potential buyers, talk to them and see if it’s a good fit.

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A recent article from Business Sale Report entitled “Almost a quarter launch businesses with a sale in mind” summarizes the results of a new study which asked nearly 1,000 entrepreneurs about their start-up history and their motivation for launching businesses. The study found that 23% of those starting their own business have their exit as a primary goal, with 83% of those claiming that selling at a profit is their main incentive.

The top 2 answers for why they started their business were that “It was a passion of mine” and “I knew it would eventually sell well and had exit in mind.” All of the study participants said that they wished they had an exact way to know the value of their business and more than half said they had no real way of knowing the value of their business.

If you are starting a business with a main goal of selling the business for profit, it is essential to know your valuation so that you get a fair price.

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Copyright: Business Brokerage Press, Inc.

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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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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.

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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.

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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.

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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.

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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.

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Copyright: Business Brokerage Press, Inc.

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