Many business owners don’t understand the concept of goodwill or how to calculate it. When a buyer is willing to pay a premium price for a business, far more than the company’s assets would typically dictate, that is considered goodwill.  Any company can benefit from understanding how goodwill is cultivated and increasing it within their operations. 

What is Goodwill? 

Goodwill can be as simple as your company having an exceptional reputation and a very loyal base of customers. Often highly sought-after technology can be a part of goodwill.  In other cases, goodwill can be in the form of IP or desirable domain names. However, as you can imagine, it is difficult to put a specific price on these kinds of benefits. 

When a business involving goodwill is sold, it can be very challenging to determine a fair amount for a business, since subjective values are involved.  In some cases, it can even be overvalued by the buyer. Your Business Broker or M&A Advisor will take goodwill into account when determining a fair and reasonable company’s valuation. 

The Case of Personal Goodwill

In some cases, a company’s goodwill is personal. This is often due to a professional building personal goodwill with customers or clients. Oftentimes this is a relationship built over a period of time. In these cases, the goodwill is not necessarily transferable. The business is associated with a person who is often the founder of the company. You will typically see this kind of situation with dental and doctor’s practices and law offices.   

So how does personal goodwill impact the sale of the business? When you sell it might be natural that the buyer will want protection in case the business faces a downturn when the current management departs. 

What can work for the buyers and sellers is for the business owner to agree to stay onboard for a designated period of time.  This can help ease the transition to the new business owner.  In other cases, the buyer and seller arrange an “earn out.” Any lost business is factored at the end of the year, and then this percentage is subtracted from the amount owed to the seller. In some cases, funds are placed in escrow and adjustments are made depending on the performance of the business. 

If you are buying or selling a business that involves personal goodwill, your situation may be different from that of the majority of businesses. However, a Business Broker or M&A Advisor can guide you through the process and ensure that all parties are satisfied. 

Copyright: Business Brokerage Press, Inc.

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You may have heard the advice, “the best time to prepare to sell is when you start your business.” While this statement is far from realistic for most business owners and may even sound humorous, it does contain a certain amount of wisdom. When it comes to getting the best outcomes selling your business, preparation cannot be undervalued. 

No matter where you are in the journey of running your business, we encourage you to prepare as much as you can. With that in mind, let’s take a look at some considerations and decisions that you’ll need to make when you do get ready to sell. It’s never too early to begin pondering the answers to these questions. 

If you are involved in the day-to-day running of your business, logic would dictate that you’re quite busy and don’t have time to dedicate a lot of time towards the process of selling your business. The good news is that is one area where a Business Broker or M&A Advisor will make all of the difference. 

Brokerage professionals will perform a variety of tasks from start to finish, including negotiating and interacting with prospective buyers on your behalf.  These professionals will be able to work on many things independently and, if it is your preference, they can notify you only about the most relevant details of the transaction. On the other hand, you may want to be very involved in the process of selling. If that is the case, let your brokerage professional know. 

Regardless of how involved you are with the business and the sales process, you will want to ensure that things stay as consistent as possible when you are in the sales phase. The reason for this is that buyers will want to see consistency. Any change in operations or revenue earned could turn out to be a red flag for a buyer. 

Another item that is worth thinking about ahead of time is confidentiality. Professional Business Brokers and M&A Advisors will put utmost importance on confidentiality. When confidentiality isn’t taken seriously, leaks are very common. These could quickly interfere with the sale, whether it is due to a client/staff looking elsewhere or competitors taking advantage of the situation. Your brokerage professional will advise you of the policies and precautions that work best when it comes to preventing leaks and only revealing details about your business to prospective buyers who have been carefully vetted.

If you have partners in your business, it makes sense to bring up the discussion of a future sale well in advance. This will allow you to get on the same page about your plans for how things will be handled when the time comes. In the case that the date of the sale ends up being before you expect it to be, it will be very helpful to have already addressed these issues. 

Copyright: Business Brokerage Press, Inc.

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Everyone knows that good employees are important for a thriving business. That’s why there has been so much emphasis on keeping employees happy. When your employees are feeling not only satisfied, but also valued, they will be more likely to keep your clients satisfied too. Your business will be more likely to thrive and grow. Of course, this works in the opposite direction as well. When your staff is frustrated and angry, their actions can drive away your customers and clients. If you are looking to sell your business for maximum revenues, it is a good idea to also maximize employee satisfaction levels.

Research from Oxford University found a link between happiness and productivity. According to their study, workers are 13% more productive when they are happy. It goes without saying that employees will be more likely to feel satisfied when they feel that their salary and benefits are fair for the work they do. If they are resentful about the compensation they are receiving for their work, this will ultimately impact their performance. 

When you think about some of the most successful companies, you realize that many of them invest substantially in supporting their employees to cultivate higher levels of employee satisfaction. For example, Google is well-known for offering a wide range of perks ranging from parental leave and paid time off to free lunches and fitness facilities. 

When it is feasible for employees to work remotely, many employers are finding that it makes sense to offer them this possibility. Not only will it help staff members to manage childcare, but also it can end lengthy and stressful commutes to work that could result in stress and anxiety. 

Research in the journal Frontiers in Psychology showed helpful interventions that are proven to increase employee happiness levels. These included training in resiliency, mindfulness, and cognitive-behavioral techniques. 

When you exhibit good leadership and act as a positive role model, your employees will likely follow suit. Employees should be acknowledged and rewarded for a job well done. In some cases, this may be a financial bonus, but in other cases it could simply be patting that employee on the back. Cultivating a positive company culture will prove to boost overall morale. This will increase success for your entire company. 

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Family businesses are critical to both the US and World economies. In fact, in the US alone, there are approximately 5.5 million family owned and controlled businesses.[1]  While much of the world’s wealth is a byproduct of family-owned businesses, the fact is that most are not actually prepared to sell in a way that will profit the owners for their life’s work.

Many owners of family businesses care deeply about the legacy that they built and want it to remain in their family or with someone that will continue it with the same mission, vision, and values on which it operates. This is often difficult as the owners lack an established succession plan or exit strategy.

Studies show that about one-third of family owners never even plan to retire. As a result, they have no succession or exit plan in place. In some cases, the business is forced to form a strategy by default when the business owner becomes burned out, disabled or worse, passes away. This is clearly not the best path when it comes to maximizing profits.

Pros and Cons of Conveying Your Business to Family Members

According to Businessweek.com, the average lifespan of a family-owned business is 24 years.  About 40% of family-owned businesses are successfully passed down to a second-generation with only about 13% passed down to a third generation. [2] With the fourth generation and beyond, the survival rate is 3% or less.  Regardless of whether a family business owner intends to convey their business to a third party or have it remain in the family, it is important to maintain confidentiality and have the proper documentation in place for a successful transition.

There are disadvantages that need to be considered if you plan to sell your business to a family member. One key disadvantage is that a family business owner will typically receive less value for their business than engaging the sale with an independent third party.  Selling to an independent third party can often force a family business owner to also paradoxically agree to a lower value in an effort to negotiate the retention of jobs and incomes for the family members they wish to remain with the business after the sale.  It is important to prepare the remaining family members that they will have to accept the fact that they now answer to new ownership and management with the business.

Handling Multiple Owners and/or Decision Makers

If there are multiple owners and/or decision makers in the family-owned business and the business is being sold to a third party, it is important to appoint one family member to represent the negotiations. Having multiple decision makers at this critical step in the process of conveying the business to a third-party owner can lead to numerous issues and headaches for both the buyer and seller. Many times, multiple decision makers cause failure in the ability to transition the business to third-party ownership, as the parties involved have competing priorities with the sale of the business that prevents satisfying everyone involved in the process.  Keep in mind that all family members must be in consensus with the price, terms and sale of the business or it will never happen. This fact can be true even if the family members involved are just employees or active/passive investors in the business. Disagreements among family members often derail the possibility of a deal happening.

Obtaining Outside Assistance

To increase your probability of success with conveying a family-owned business to future generations or new independent ownership, having a third-party guide you through the process who is not emotionally involved like the various family members involved, can be critical in making the deal happen. That’s why a variety of professionals including business brokers, M&A advisors, lawyers, and accountants should be brought in to help.

This article highlights just a few of the myriad of issues and process involved in conveying your business to new ownership once you decide it is time to retire or move on to a new venture.  If you are just beginning or actively considering transitioning your business to new ownership, please do not hesitate to reach out to us for advice and assistance.

[1] https://www.gvsu.edu/fobi/family-firm-facts-5.htm

[2] https://www.johnson.cornell.edu/smith-family-business-initiative-at-cornell/resources/family-business-facts/

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If you’re getting ready to sell your business, you’ll want to be on high alert for potential warning signs that could potentially derail the deal. Of course, time is of the essence when it comes to finalizing your deal. Why spend time negotiating with a buyer who is either not really interested or is simply not qualified to buy? Let’s take a look at some of the top buyer warning signs.

1. Lack of Buyer Experience

When it comes to individual buyers, you’ll want to see if they have experience in your industry. If a prospective buyer is not knowledgeable about your business, they might initially seem very excited but then get cold feet once they dive in and learn more about the industry.

The same can be said for a potential buyer who has never purchased a business before. If you’re dealing with a newbie, you’ll want to feel confident that this individual understands the ins and outs of buying a business before you dedicate too much time to their deal. After all, the process of buying a business can be long and complicated. Inexperienced buyers might find that they no longer want to continue progressing once they get a better idea for what is involved.

2. Undisclosed Financial Information

Along similar lines, you’ll want to work with a buyer who is open about their financials. If you are denied access to financial statements, you will have no way to verify that this buyer is actually equipped to purchase your business.

3. Early Communication Issues

Another common red flag to watch for is that a company says they are interested in buying your business, but the company’s actual decision makers are uninvolved in the communication. If a company is legitimately interested in purchasing your business, you will be communicating with a key player like the President or CEO.

Protect Your Interests

When your business is on the market it is a very important time to make sure that things stay consistent. If a legitimate buyer sees dips in sales or quality of your offerings, it could put a future deal on the line. That’s why you will want to protect your time by not wasting it with buyers who are not a good fit or who lack a high level of interest. Along the way, be sure to trust your intuition. If you sense something might be “off” with a potential buyer, this might very well be the case.

When you work with a business broker or M&A advisor, it will offer you a high degree of protection against falling into a rabbit hole when you should be focusing on keeping your business running as successfully as possible. Your brokerage professional will carefully vet buyers to ensure that they are actually viable candidates.

Copyright: Business Brokerage Press, Inc.

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If you are like most business owners, you have never sold a business before and might not have a clear idea of what the process is like. We recommend preparing your business in a way that makes the sale and transition process as easy for your buyer as possible. It should come as no surprise that buyers will like the idea of an easy transition. 

It will be very beneficial if you take the time in advance to evaluate the steps and think about what you can do on your end to benefit your buyer. Since you’re the expert on your business, you have unique insights into what would make the transition the most seamless for the other party. When you prepare for the sale with your buyer’s experience in mind, you will likely not only speed up the sales process, but also increase the selling price. 

1. Automate Processes

Just like you may have never sold a business before, your buyer may have never bought a business before. If you can figure out how to automate as many processes as you can, it will help with their workflow and reduce the level of intimidation your buyer may be feeling about taking over. 

2. Establish a Second in Command

One thing you can do is have a second in command on your staff. If there is a competent employee that your buyer can depend upon for assistance and support, that fact alone will be tremendously attractive. If you do not yet have that person in place, you might have an eye on choosing a person and preparing them for this role. Speaking of staff, you will want to make sure your entire staff is well-trained and any HR issues are resolved in advance. 

3. Keep Things Consistent 

As you get closer to the time you will put your business up for sale, you will want to begin to work with vendors and key customers. You will want to ensure that the supply chain and significant customers are consistent. Otherwise, this could cause major disruptions for your buyer and impede his or her success.  Of course, it goes without saying that you’ll want to keep the potential sale of your business completely confidential. If customers, vendors, and even employees learn about an upcoming sale, this fact alone can lead to a chain reaction of disruptions and problems. 

A business broker or M&A advisor can help in a wide variety of ways when you are getting ready to sell. They are experts in maintaining confidentiality while taking you through the sales process from start to finish. Brokerage professionals will also assess your business and inform you of any areas that could be improved to make your business more attractive to buyers. 

Copyright: Business Brokerage Press, Inc.

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