Consider Your End Goals When Completing Your Tax Return

Minimizing income taxes - short term strategy or long term mistake?

Many business owners and their accountants are absolutely fixated on minimizing taxes by showing no income.  But this can be misguided planning for trying to get top dollar when selling  the company. 

 

Business owners need to realize valuation is usually determined by a multiple of identifiable cash flow and that banks make acquisition loans based on tax returns. 

 

Not paying taxes can be a short term strategy that might not pay off at the end!

Do you have small business questions you would like answered about this article or others?  Please visit www.LibertyBusinessBrokersofOntario.com or call 519-903-7807. 

William Sivell is the Owner and Broker of Record of Liberty Business Brokers of Ontario; his blog appears every Tuesday.

 

 

4 Oversights That Make Your Business Less Valuable

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.

On the 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 transaction.

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?

Bill Sivell 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

 

 

Business Owners Must Take Advantage of the New Technologies

Yes, it's overwhelming.  There is so much new technology invading our world it can be hard to understand and realize its impact.

Business owners have to figure out what might help their businesses grow. 

Whether 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 every Tuesday.

 

The Hard Truth: What Your Business is REALLY Worth

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 process.

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 equipment.

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 business.

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 inventory.

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 growth.

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 sales growth.

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 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

 

Good Profit Margins Are What It's All About

Too many business owners are scared to death to raise prices for fear of losing customers.

In many cases, competition does make it difficult.  But there are many situations if business owners would do some research, they would find out there isn’t as much resistance as they thought.  And when they finally raise prices, they find out they lose very few customers and make a lot more money (also increase the value of the business).

Don’t wait too long.

Start by…

·         Check out you competition, have they adjusted pricing in the past 6-12 months.

·         Connect with a similar business that operates out of town, what sort of adjustments have they made to their prices

·         Do the math, if you are a restaurant owner, have you measured the impact of increases in food costs to your cost of goods sold, if you have vehicles in your business, have you considered how gas prices have impacted your overall expenses.

·         Be creative, many businesses have found ways to creatively increase prices through surcharges, add-ons, and value added services. 

·         Warn your customers in advance.  A well formulated letter can help communicate your future increase, plus can provide a marketable point of contact.  Who says you can’t offer an incentive to your customers for buying now, versus waiting till prices are higher?

·         Do what you say.  Raise prices in an orderly fashion, as you have promised.  Be systematic; ask for feedback from your front-line staff and customers.  You will learn lots from what they say.

·         Be patient and track results.  In a short time you will realize you have made a good decision, and make amendments where you need to.

Bottom-line, healthy profits margins make business owners more money, and help increase a business’ value.  You will make your business more marketable to buyers and increase the likelihood of a successful transfer when the time is right for you to sell. 

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 sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

 

I Lost My Exit Plan

Business Owners should be planning for their own future but they are so busy running their companies every day, they never seem to have time to plan for exiting the business

But they can’t avoid planning for this critical time in their lives. 

Presenting a business for sale is very different than managing it with the business owner’s personal management style and priorities. 

Why is planning so important?  It illustrates who you are and where you want to be, it will help you prioritize, it guides you along the way, and it keeps you focused.  Most importantly, it can help protect and perhaps build value in your business.

In the early stages of your plan you should document your goals.  More than just daydreaming about the day of retirement, actually write down what your income needs will be.  Start to quantify what you need from the sale of your business and establish your optimal age to execute your plan. 

Know Your Finish Line!

Your goals should include more than just numbers.  What are your personal goals?  Is the business’ legacy important to you?  What about your kids, how would they be impacted by your transition?  Decide what is optimal and work from there.

It can take years to properly prepare a business for sale to get the highest price.  Business Owners should start creating an exit strategy at the earliest possible opportunity!

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 every Tuesday.

 

Time to Revise the Business Plan... Again!

The days of the 5 and 10 year business plans are long over.

In today’s business climate everything is changing at such a fast pace.  Business owners need to review their plan to determine what has already changed and forecast what could change – competition, technology, demand for the product or service of the business, etc. 

The typical business plan will include many of the following categories:

¨  Vision and Mission Statements

¨  Market Analysis

¨  Marketing/Sales Strategy

¨  Competitor Analysis

¨  Financial Plan

¨  Budget

¨  Timelines

¨  Business Model

¨  Industry Analysis

¨  Trends Analysis

¨  Action Plan

¨  Executive Summary

¨  Milestones

However, before you begin, I would suggest you challenge yourself to address the following questions and you will find the rest of your plan will become crystal clear by its conclusion:

1.    What burning need does your business resolve for your customers?

2.    What would you have to change to double your number of customers?

3.    What makes your product/service different compared to your strongest competitors?

4.    What are you doing to make your business less dependent on you personally?

5.    What are the market opportunities/threats for the Business?

6.    Who are the key employees in your business and what are you doing to find more like them?

Plans must be updated and must be realistic for the foreseeable future.  Start today and set a deadline to complete.  Business owners find that investing in strategic planning not only improves their management practices, it can improve the desirability and value of their business as well.

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.

 

5 Ways to Sell Your Business Faster and for More Money

It’s no secret that some businesses are in greater demand than others. The trick is to understand why, and model your business around those characteristics.

When a business is more marketable it means they will typically sell more quickly and the seller will receive a better price. 

Most business do not possess all of the characteristics of a marketable business since you could probably create a list of 50 or more items to consider.  The key is to focus on those characteristics that have the greatest impact.  Here 5 keys to marketability:

1.    3 Years of Growth.  Not only is it important to have financial records that are up-to-date and accurate; a key indicator of success is the most recent trend of sales and profitability.  If one or both are not trending up, you’ll need to put steps in place to turn that around, or you’ll likely find low interest and downward pressure on your business value.

2.    Too dependent on the owner. The more customers need you and ask for you personally, the harder it is to grow your business and less valuable your company will be. Business owners who do not delegate need to make a strong effort to have experienced people in place before they ever try to sell their companies. 

3.    Your equipment is in good condition. There is little question that buyers of businesses are looking for good, positive cash flowing businesses.  They also realize that in order to sustain a level of cash flow a business has historically achieved they will likely need to continue to maintain and invest in Equipment.  Businesses that require an immediate investment to improve and upgrade Equipment will find Buyers looking to discount value to compensate for that investment.

4.    Diversification of Customers.  Any 1 customer representing more than 10% of sale increases instability which increases risk in the Buyers eyes.  Buying businesses is risky and that risk is exaggerated if there is fear that a failed transition with one customer could result in a drop in sales of greater than 10% of the overall sales. The better you are able to diversify your client base the more like you can mitigate the risks associated with buying your business.

5.    Size Matters.  The “Small Company Discount” is the perception that smaller companies are riskier than larger businesses because they have not found a way to grow beyond the efforts of the owner and therefore are reliant on the owner. While growing for the sake of growth is not wise, finding ways to either develop more customers, or sell more things to your existing client base will improve marketability.

When selling a business it must look good in as many areas as possible.  Although preparation might seem time-consuming, many owners find that working on the above keys to marketability not only improves the desirability and value of their business, it can improve their management practices as well. Plus, when a buyer makes an accepted offer, the aforementioned preparation can help the deal close quicker.

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.

 

Unlocking the Mystery of the Business Multiple

Establishing a price to market a Business is not an exact science. 

There are many different methods such as the Asset Valuation Method, Critical Factors Method, Debt Capacity Method, etc. whereby different experts can come up with different opinions.

However, if identifying a Business' value is not an exact science, it really should not be too complex?  It isn't! 

The reality is that what motivates most buyers to purchase a Business is the opportunity to earn the income the Business is generating.  We believe that the Cash Flow Method is the most practical way to establish a Business' value.

As part of the Cash Flow Method's calculations, it utilizes a vague and ambiguous term called a Multiple.  Let me explain what this term means.

Most people are familiar with the term "Cap Rate" which is short for Capitalization Rate which is commonly used to help establish the value of income producing Real Property.  For income producing Businesses, a Multiple is the exact same, but only in reverse. 

In laymen's language, the term Multiple means that a business selling for a 1.5 Multiple will generate a 66% Return on Investment for the Buyer.  A Business that sells at a 4.0 Multiple would offer the Buyer a 25% Return on Investment.  A 2.5 Multiple represents a 40% Return.

There are a number of factors that can positively or negatively affect a Business' Multiple. An example of a few are:

Asset or Stock Sale		Barriers to Entry
Cash or Terms being offered		Type of Industry
Customer Base		Demand for Product
Environmental Risk		Excess Earnings
Franchise or Independent		Key Personnel
Length of Operation		Location, Lease and Rent
Market Share		Proprietary Product
Social Desirability		Stability of Income
Stability of Revenue,		Condition of Furniture, Fixtures and Equipment

Like most property owners, many Business Sellers feel that their Business is unlike any other.  They are usually correct.  However, that is not reason enough to justify a higher Multiple.  Most of the time, what generates a higher Multiple is a Business with Excess Earnings, Key Personnel in place, or a Proprietary Product.

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.

 

Oh, it's just a Closet!

The skeletons will have to come out at some point.

Whether applying for a loan or selling the company, business owners must be prepared to disclose EVERYTHING.

Some popular ‘skeletons’ the find their way to the forefront are:

·         Outdated Inventory – obsolete or redundant inventory only artificially inflate your balance sheet.  They do not necessarily add value to your business.  Cleaning and purging on a quarterly basis is a good way to stay on top of this measure.

·         Obsolete Technology – every industry is different, but it’s important to regularly be reinvesting in your business.  Tradeshows, suppliers and trade publications are great sources for information on the latest and greatest technology in your field.

·         Largest Client that just Closed – if you have any customer that represents greater than 10% of your overall gross sales you run the risk of dramatically affecting your profitability and business value. Diversification is the key to long term stability.

·         Key Employee who just Quit – Do you perform regular performance evaluations, do you stay on top of industry trends for wages and benefits, are you continually motivating and challenging your top people?  For key people remuneration levels are important, but often times they are motivated by other factors like workplace culture, challenging work, effective leadership, learning opportunities, internal relationships, etc.

When selling a business it must look good in all areas.  To not be disappointed, business owners must plan, address weaknesses, and be realistic in their expectations if they don’t have solutions.

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.