The wrong price can be a big mistake

Too high is bad; too low is bad.

If the price is too high, buyers don’t think you are serious and won’t investigate the opportunity.  The offering can become inactive or worn-out, and has to be taken off the market or dumped below the market.

If it is too low you will leave something on the table.

Most sellers do not know the market value of their business. 

Unfortunately, the explanation isn’t always an easy one.  The truth is if you ask 10 people you probably will get 10 different answers on the valuation of a business.  There are a number of methods:

·         Book Value

·         Liquidation Value

·         Price to Earnings Ratio

·         Discounted Cash Flows

·         Etc.

The easy answer is, “Your business is only worth what someone is willing to pay you and what you’re willing to accept.”  The long answer is a lot more complicated.

The basic criterion of most buyers is return on investment (ROI).  This number will vary depending on risk, perceived inflation and other subjective and objective perceptions about the business and related market conditions.

One of the most effective valuation methods is known as “cash flow” since it considers the cash flow ‘return’ and selling price ‘investment’ in the equation.  Buyers typically are comfortable with this method because, at the end of the day, although they are buying a company, what they really are buying is its cash flow.

With an understanding of a business’ actual cash flow, different multipliers can be applied to determine a fair market range of value for the business.  Multipliers vary depending upon the type of business.  Of course many other factors can affect the multiplier.  For example, new products in the pipeline, strong market share and a diversified customer base positively affect the multiplier.

Conversely, out-dated inventory, declining market share and the risk that key personnel could leave the business and disrupt operations could have a negative impact.  Why?  Because they relate to risk, the higher the risk the more likely the buyer will insist on a higher ROI and lower multiple.

You’ll notice that this method contains no mention of the ‘terms’ of the transaction.  This is an incredibly important factor and needs to be considered in order to ‘prudently’ position your business to sell.   And one to be discussed in a future blog. 

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.

Is Your Decision to Sell Firm?

One of the biggest mistakes business owners can make is the lack of a ‘Firm Decision to Sell’.  My advice… If you have not deliberated and come to the firm decision that you are going to sell, don’t start the selling process. 

Preparing to sell your business means more than simply straightening up the files and getting up-to-date with your bank statements.  In order to get the best price there a number of steps the Seller needs to take.  Often those steps may seem time consuming; however, done properly they can lead to improving their management practices and ultimately improve the desirability and value of their business. 

Plus, once a Seller and Buyer come to an agreement, often times the preparation to help sell the business can help the deal close quicker.

The #1 question buyers will ask is ‘Why are you selling’.  Sellers must always know their reason for selling and it must be firm in their minds.    Most sellers are motivated by reasons other than money.  For example, a pending retirement, a critical illness to themselves or family, pressure from a retired spouse, and burn-out are just a few popular reasons. 

Money and the right price are important, but if the Seller is not mentally prepared to sell, don’t.  

Selling a business can be a complex legal, financial, and emotional process.  Most know a successful business sale needs a motivated Buyer, but equally important it needs a motivated Seller.  A motivated Seller is someone who has a definitive objective in mind, someone who understands what’s involved in the process and someone who has a desire to reach the finish line. 

Don’t make the mistake to think this means a Seller will need to sacrifice on their business value.  It is a necessary ingredient to a successful transfer.

A business broker is a professional that Sellers should turn to for assistance when deciding to sell or as they deliberate over the prospect of selling.  This will give the Seller an opportunity to learn about the process, how Buyers are likely to view their business and prepare them to maximize their value.  

Also, not only does having a third party represent their interests indicate that they are taking this venture seriously; it can often lead to a number of buyers being interested in their business.

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.

Picking An Exit Strategy That Is Best For You and Your Business

For many business owners, the exit strategy from their business consists of finding a buyer who is ready, willing and able to purchase their business under terms acceptable to both parties.  This enables the seller to move into a new phase of life where there is an end of responsibilities associated with the business and the beginning of different pursuits away from it.

However, for some owners, their exit strategy consists of executing a succession plan where they find a replacement that will be able to take the reins of the company and keep it pointed in the right direction.  This strategy will mean less time at the office and more time spent away but not a complete separation from their business.

Successors can be beneficial because they are usually eager to make their mark on the business.  Often, they can see upcoming trends more clearly.  When you combine their energy and insight, the new leader may even be positioned to grow the company. 

However, finding the right successor can be a challenge.  It begins with the outgoing owner figuring out what kind of person is best for the company, not themselves.

This is no easy task.  In fact, many experts recommend against trying to find a clone because when the replacement ends up in charge, it will be at a future date where different talents may be required.

Their next step should be to survey available people from both within and outside the company.  The prospective replacements’ skill sets not only need to be examined but also their willingness to take the job.

Once the chosen candidate is identified, the owner needs to determine the additional talents the replacement needs and come up with a plan to ensure they are developed.  When the successor is close to being ready, it is often a good idea to give the “understudy” a “dress rehearsal”.  For some owners, that can mean taking an extended vacation or beginning to work part-time.  For the exiting owner, they may still need to call the office every day, but between their calls, the successor will be making all the decisions.

With this exit strategy, while the outgoing owner is resolving some of his work-related issues, he may also unfortunately be creating some new problems.  The exiting owner needs to be aware of the sensitivities of those who were not chosen.  These employees may choose to leave the company or perhaps worse, stay and become trouble-making malcontents. 

Sometimes succession isn’t the best solution when it comes to a family run business.  An exaggerated example is the humorous commercial on television where “Chip” is a newly appointed Chief Executive Officer of a large company simply because he is the outgoing CEO’s son.  The results are disastrous.

I am not suggesting that this happens frequently in real life, but unfortunately, we’ve all seen similar situations where it has.  In some of these situations, the successor hasn’t been qualified while in others, they may have been qualified, but just not truly interested.  The results are usually the same.

Think about how the decision will be compounded if the owner has two or more children involved in the business.  The owner’s first decision of choosing who will take over the business is the “easiest” – if you can call it that?  The owner must select the child who has most consistently exceeded company goals, who has been the most innovative, who works better with employees, customers and vendors, who has more of the skills required as a CEO?

Now comes the harder part.  It’s one thing to pass over a non-family member.  It’s another when you have to choose one child over another.

Regardless of which path is followed, the decisions that are made can significantly affect both the life of the business and the outgoing owner so they need to consider all the consequences.

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.

Buyer’s... take an honest inventory of skills

I’ve written a few times about the benefits of buying an existing business rather than starting a new one. 

By purchasing an existing business you can dramatically minimize the risks associated with starting one from scratch.   Existing businesses have a proven track record of profits, they may have a well-known brand, name, location, product mix, etc, and an established customer base for immediate cash flow.  Many new start-up businesses don’t make it through their first birthday and fewer make it to their 5^th anniversary. 

Whether your decision is to buy or start a business, I can suggest a few things that will help to ensure that you will be happy with your decision.

First, get a solid understanding of your financial situation.  While financing may be available, it is imperative that all aspiring entrepreneurs know how much money they are prepared to invest.  Plus, and perhaps more importantly, how much they expect to make. 

Second, take an honest inventory of your skills, knowledge and interests.  Things such as, do you enjoy interacting with people or are you more comfortable behind a desk?  Do you like being the leader, making decisions and managing people?  Do you have some technical expertise or talents that you can leverage?

Finally, one of the keys to a successful business is finding the right business for your personality. Adapted from Rhonda Abrams’ book, What Business Should I Start?  The E-Type Test will show you what of nine E-Type personality traits and working styles you identify with. Answer all the questions and your E-Type will be displayed in a pie chart. More information will be displayed as you mouse over the results.

Once you complete steps 1-3 start your search by scheduling an appointment with a business broker.  They can show a buyer a variety of businesses that are legitimately interested in selling and help them through the purchase process.  With plenty of businesses to choose from in today’s market, it is more important than ever to make sure that their efforts remain focused on choosing the right business for them.

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.

How Outside Influences can hamper a business sale.

Selling a business takes many twists and turns.  During the preverbal dating stage relationships between buyer and seller are delicately created.  After buyers have dialled into a specific business of interest, they will meet the seller in order to speak candidly with the seller and find answers to their questions.

When a buyer is still interested in purchasing the business after a discussion with the owner, the broker will help draft an offer. Once an agreement is settled on, there begins the process of the buyer and seller fulfilling their conditions and contingencies within the deal, in order to close the transaction successfully.

Unfortunately, there are a number of reasons why a business sale doesn’t close successfully.  Some deals unravel because of the buyer or seller, and unfortunately some are caused by third parties.  The reasons are numerous but most can be resolved.

Landlords may become difficult to deal with when it comes time to transfer the lease or grant a new one.  This strangest example is of a high profile restaurant deal that fell apart because the landlord didn’t like the menu.

Sometimes, both buyers and sellers may receive overly aggressive advice from outside advisors.  Advisors should always remember and work towards the goal of putting the deal together, not erect roadblocks to derail it.  Something as innocent as a letter from a lawyer just prior to closing can break the chemistry between the principals.

Accountants can also influence a deal.  For instance, rarely have I met a buyer’s accountant who thought his client didn’t pay too much for a business.

Conversely, I’ve hardly met a seller’s accountant who felt that their client sold their business for enough money.

Professional business brokers are aware of the various ways a deal can unravel.  They can reduce frustrations by managing and depersonalizing the process.

For sellers, using a broker means they can continue to maintain their focus on making the business as profitable and attractive as possible while the business is marketed confidentially.  For buyers, using a broker allows them to follow a step-by-step process while remaining focused on choosing the right business for them and the pending matters associated with them operating it.

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.