The purpose of these articles is to educate both buyers and sellers of the many different issues related to a business transfer. The subject matter includes things like the value of a business, the variables involved in a business transaction, financing and structure of a transaction, planning your exit strategy, etc.
We would like your feedback. Visit our latest Blog below or search our archives for past blogs.
Don’t wait until
you decide to sell. Set your business up right with these critical steps
We've all heard at one point or another that in order to get the best
price for your business, you should maximize sales, identify new growth
opportunities, build cash flows, differentiate between your key competitors,
and minimize the owners role.
Taking these steps improves management practices, and can improve the
desirability and marketability of your business.
But there are other critical steps that, if overlooked, may cause your
ideal buyer to discount the selling price, or worse, simply walk away.
1. Transitional training
If you've set a hard and fast end date you may alarm quality buyers.
No one knows more about your business than you. Buyers assume that the
outgoing owner will assist in training and the transition of leadership with
current staff, suppliers and customers.
Buyers get scared off when the training doesn't match up with the
complexity of the business and the experience they bring to the table. Ask your
prospective buyer up front about their expectations—and try to understand why
they're worried. Share your experiences with training new incoming employees in
the past, as this is often an indication of the learning curve.
If you're open-minded and realistic you'll settle on a training period
both parties are comfortable with.
2. Cash deals
You need to show all your results on the books and be open, honest and
accurate about all things.
Growing up I could never figure out the saying, "You can't have
your cake and eat it too." It was only recently, when I met a retailer who
was experiencing double-digit growth for years but not showing it on the books,
that I came to understand the saying.
He was disappointed that he could only secure an offer based on his
"official" books, not the dusty ones he kept in the credenza behind
the desk. Not to mention the line-up of buyers who quickly passed on the deal,
wondering what else wasn't recorded on the books.
Buyers don't trust results they can't verify. The documented financial
performance of the past three year's cash flows will be the basis from which
price and terms are determined.
If the results on the books won't get you the offer you want, you may
want to think about whether now is the right time to sell.
3. Lack of a long-term lease
If location is important to your business, you should secure a long-term
lease before selling.
The lease terms can be a major consideration for a buyer. A restaurant
with a long-term lease on a good location can be attractive. Plus, an expiring
lease could spook buyers worried about possible rent increases.
other hand, a long-term lease can be a detriment for a business that needs more
space to grow. When it comes time to negotiate a new lease, think carefully
about your plans for growth and expansion, your marketing strategy, operating
costs AND potential plans for exiting
the business. Preplanning in advance can go a long ways towards a successful
4. Failure to diversify
Buyers know the impact of losing a customer that represents 20% or
greater of your overall sales could be devastating. Yet, a lot of companies do
have a single customer or a few large customers that dominate their overall
sales. Nobody wants to turn down business! But when it comes time to sell the
company, this becomes a huge problem.
Find a way to diversify your customer base BEFORE you ever decide to
sell their business—a few years in advance.
Start by nurturing the relationships with current customers who
represent a much small percentage of your overall business. Generally a small
volume increase with a handful of good smaller customers will mitigate the
impact of one large customer.
From budding entrepreneurs to sophisticated strategic acquirers, the
opportunity to buy an existing company can be very rewarding. It can also be
very frightening. That's why it's so important not to spook quality buyers.
Even when everything is set up properly, it can be months before you attract
the ideal buyer with the finances and skill sets necessary to buy your
business. The last thing you want is lose the sale because you overlooked
something that you could easily have addressed ahead of time.
Do you have a small business question you
would like answered about this article or others?
is a Business Broker with VR Windsor
Inc., which sells businesses to
buyers across Canada and around the world. His 14-year career includes diverse
senior management positions in marketing, advertising, sales management and
operations management. He blogs about selling businesses at Maxbizvalue.blogspot.ca
Yes, it's overwhelming. There
is so much new technology invading our world it can be hard to understand and
realize its impact.
owners have to figure out what might help their businesses grow.
it be email campaigns, social media, e-commerce, more functional websites,
cloud computing or new equipment, business owners need to embrace
it. Businesses that do not keep up with the new technologies may
find their companies difficult to sell!
Click here for an excellent article and 4 broad steps marketers need to take if they hope to meet customer demands and grow market share.
Do you have small
business questions you would like answered about this article or others?Please visit www.VRWindsor.com
or call 519-903-7807.
William Sivell is a Broker at VR Windsor Inc., Business Brokerage; his blog appears
If you are considering a decision to
buy a business, and you just so happen to have found the perfect opportunity
here are a few questions to help to ensure that you will be happy with your
The broker will set up a meeting with the seller once you select a business you
are interested in. This will give you an opportunity to speak candidly with the
seller and find answers to your questions.
question you may consider asking is, “why are you selling”. Ensure you are
comfortable the answer, make sure it is honest and consistent.This will put you in position to dive much
deeper into the interview.
You will ALSO
want to ask questions about:
The product and service mix, are there
opportunities for additional services or new products in the pipeline with the existing
The customer mix, do they have any 1
customer that represents greater than 10% of the overall gross sales?
The competitive environment, who is the
largest/strongest competitor, what is your competitive advantage?
The key employees, what is the role of the
owner and which employees are critical to the operation of the business?
The cash flows, how do you bill customers,
up front, during or after a project is complete?
The sales and marketing, what is the
current strategy, are there any changes necessary in the future.
Just to name a few.
If you are still interested in purchasing the business after a discussion with
the owner, the broker will help you draft an offer based on the price and terms
you feel are appropriate.
The legal language that makes up a professional business brokers letter of
intention will be thorough. In fact, two of the most important clauses in our
Offer make the transaction contingent upon your lawyer reviewing the legal
language of the Offer and your accountant's analysis of the seller's financial
Once these contingencies have been satisfied, the broker will carefully manage
the rest of the transaction to make sure that all the conditions of the Offer
are satisfied through the closing.
Do you have a small business question
you would like answered about this article or others?
Bill Sivell is a salesperson with VR
Windsor Inc. [www.vrwindsor.com]
519-903-7807, which sells businesses to buyers across Canada and around the
world. His 14-year career includes diverse senior management positions in
marketing, advertising, sales management and operations management. His blog
appears every Tuesday.
The danger in
thinking your business is worth more than it is—plus tips to increase its value Equipment and inventory are tangible assets required to generate sales
and earnings. They are certainly critical to many business operations. But when
it comes to determining a business' value, the hard truth about hard assets is
that they make no difference.
What really matters is the cash flow generated from these and other
operating assets. Yet, so many business owners believe there is some mysterious
process that will allow them to add the value of these assets to their grand
total when it comes time to sell.
The danger with setting an inflated asking price is that your business
may be passed over by good, qualified buyers. The longer it its on the shelf,
the less appealing it becomes. You also open yourself up to experienced buyers
leveraging an inflated price to get the upper hand during the negotiating
Why the "add on" philosophy doesn't make sense
Consider the following examples of two businesses.
The first is a trucking company with $500,000 in trucks and dispatch
equipment, all of which it needed to run the business. The second is a roofing
company with a small number of employees and only $45,000 in inventory and
The trucking company generates $200,000 in cash flow, whereas the
roofing business earns $800,000. Even though the trucking company has more hard
assets, most buyers would find the roofing business much more attractive
because of its far stronger cash flow.
Proponents of the "add-on" philosophy would argue that if the
above two businesses each had a cash flow of $300,000, the trucking company
would justify a higher price. But this doesn't make good business sense. Ask
yourself, would you pay more for the same level of earnings?
Knowledgeable buyers are interested in cash flow and cash flow alone.
They will insist that the assets needed to generate that cash flow are included
in the sale price.
The level of inventory will have virtually no impact on value. Business
owners often try to rationalize this "add-on" logic because their
inventory fluctuates throughout the year. Unfortunately, this method increases
the risk for any given business. The inventory at closing may not be enough to
support the cash flow, thus requiring the buyer to invest within to support the
At best, adding inventory to the price of a business increases the risk
that the buyer won't get their expected rate of return on their investment. At
worst, this method could lead to business failure because the firm will be
undercapitalized and unable to acquire additional funds to buy the necessary
The reality for many businesses is that there aren't significant
variations in the amount of inventory that they carry throughout the year.
Those businesses that do tend to see those fluctuations only during a few
months of the year, such as holiday seasons. It's not that difficult to
determine the inventory that should be included in the price to support the
annual gross sales and cash flow.
Exceptions to the rule
There are some situations in which assets are considered in
valuing the business. Equipment, inventory and other assets are considered when
a company is being sold under less-than-ideal conditions, such as when it has
no profits or cash flow. In those cases, assets would be used to determine the
value of the business. Problems then arise in establishing the worth of those
items. Typically, buyers aren't interested in these businesses because the
seller already has proven that the company hasn't made a profit.
But for the most part, cash flow is crucial to building value.
Three ways to increase cash flow
1. Stay active and focused: Countless owners have watched profitability
slip away as they became more interested in the next stage of their life. Get
active in the development of key employees, because they will be the catalyst
for driving sales, operational efficiencies and customer satisfaction. Plus,
stay focused on limiting your role in the day-to-day operations of your
business. The less customers need you personally, the better the chance for
2. Build a bigger mousetrap: Size matters. Find
ways to add sales volume. By opening new geographic markets, you may be able to
take advantage of organizational synergies and build a larger volume of
customers and sales. Alternatively, look to introduce new products or services
you may sell to existing customers and build some depth with folks with whom
you already have a relationship. Finally, similar to many businesses, you may
find building market share by adding new customers as the most logical step for
3. Operate on the cheap: There is little glory in finding more
cost-efficient ways of doing things, but these often deliver the quickest road
to prosperity. You should regularly review and challenge your suppliers to
ensure you're getting competitive pricing in areas such as rent, insurance,
utilities, wholesale goods and office supplies. Remember: a dollar saved on
operating expenses goes directly to cash flow.
Buyers are looking for businesses with positive cash flow. By focusing
your efforts to build value through improved cash flow, you will improve the
day-to-day operation of your business, enjoy a higher selling price and improve
the likelihood of a successful transaction.
Do you have a small business question
you would like answered about this article or othersBill Sivell is a Business Broker with VR
which sells businesses to buyers across Canada and around the world. His
14-year career includes diverse senior management positions in marketing,
advertising, sales management and operations management. He blogs about selling
businesses at Maxbizvalue.blogspot.ca