Sometimes, you have to kiss a few frogs to find a princess

I often talk about the number of buyers who are looking for good companies to buy in Southwestern Ontario.  However, at the same time, I mention an informal survey among associates which indicates less than 5 percent of those who had intentions of buying a business ever do. 

Why is it then that some individuals actually purchase a business, yet the vast majority do not?

There are many reasons for this….

A buyer may have unrealistic expectations regarding the price of a business.  I can’t believe the times I have seen a potential buyer’s chin hit the floor when they realize the financial investment it takes to purchase a good company with positive cash flow.

Related to this is the misconception some buyers have about being able to buy a business while they continue to be employed at their current place of business.  This is like babysitting a 2 year old while napping.

Even though buyers may often have an urgent “need” to buy a business, they lack the courage to take the “leap of faith” necessary to go through with the sale.  Like a lot of things in life, it’s easier to talk about doing something than actually doing it.

Also, a recent financial setback can impact a potential buyer’s ability to consummate the deal.

A family crisis, a significant other’s loss of a job, a bad quarter in the stock market, etc. can impair the buyer’s ability to raise the necessary capital.

Sometimes, it’s not even the buyers fault as outside influences can also hamper the successful transfer of a business.  For example a buyer may receive well-intentioned yet overly aggressive advice from outside advisors. 

Although anecdotal, it is difficult to find a buyer’s accountant who felt that their client didn’t pay too much for a business.  Conversely, seldom have we come across a seller’s accountant who felt their client sold their business for enough money. 

Lawyers can also influence a deal.  While working to protect their client’s interests, at times, lawyers need to be reminded to work toward the goal of putting the deal together, not build roadblocks to derail it.  After all, their client’s fundamental goal is to sell their business.

One of the main reasons why sellers should consider turning to a competent business broker for assistance when deciding to sell their business is because of the minimal amount of prospective buyers who actually become owners.

A professional facilitator means the seller can continue to maintain their focus on making the business as profitable and attractive as possible while the broker separates the real buyers from the wannabes.

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.

Dispelling the myth about assets and inventory

When both the seller and buyer focus on the issues at hand and stay away from myths, common ground can usually be found that gets both parties what they want.

A popular myth is that furniture, fixtures, equipment, inventory and other assets are always “add-ons” to business evaluations.

This is not true.  The real value of a business is based on its cash flows; assets simply are the tools required to generate the business’ sales and earnings. 

Assets and inventory are considered when a business is being sold in less than ideal conditions, such as when the company has no profits or cash flow.  Problems then arise in establishing the worth of those items and typically, buyers usually aren’t interested in these businesses because the seller already has proven that the company hasn’t made a profit.

One of the most effective approaches to establish value is by the ‘Cash Flow Method’. 

Start by allowing the Seller to paint a picture of the business’ true profitability.  Buyers typically are comfortable with this method because, at the end of the day, although they are buying a company, what they are 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, size of market share, new products in the pipeline, key personnel, diversification of customer base, and many, many more.

Unfortunately, establishing a business’ value is not always easily answered.  A business broker is a professional that Sellers and Buyers should turn to for assistance when deciding to sell or buy a business.  By allowing a skilled Broker to do their job they will not only help with value recommendations, but assist in confidentially marketing a business for sale and negotiate a win-win transaction.

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.

Things to consider when deciding to buy a small business

When deciding to buy a business, prospective buyers sometimes are faced with the following dilemma:  Do I buy an existing business or do I buy a new franchise? 

Some of the advantages of an existing good independent business include a proven track record of sales and profits, a well-known name and location, a strong mix of products and services, a group of knowledgeable employees and good customer base.

Buyers will be able to use the business’ established customers for immediate cash flow and as the base for future business growth.   This will help eliminate what can often be an extensive and challenging start-up period for owners. 

Because of seller financing, the new buyer of an existing business is able to leverage their buying potential into a larger business with bigger cash flow.  Also, due to the seller financing the transaction, the seller will want to ensure that there is a smooth transition to ensure the buyer’s success.

Finally, buyers of existing businesses will have full control of the company’s strategic direction without having to share their profits with anyone else. 

There are benefits with buying a franchise too.

Buyers are able to purchase an established business plan with step by step guidelines.  Most franchisors offer training and operational support due to their incentive of the royalty fees that they will earn from the franchisee.  Usually, the franchisee will also have access to other owners for help, ideas and moral support.

Regardless of which path a buyer chooses to follow, they need to exercise a considerable amount of due diligence.  In fact, in many ways, a buyer has to ask more questions and do more research when considering purchasing a franchise.

For instance, they will not only need to thoroughly understand the business and the current economic landscape; they will also need to comprehend all the issues associated with the franchisor. 

Franchise buyers will need to understand the immediate out of pocket expenses they will incur upon their purchase.  They will need to research what other fees they will be responsible for paying.

Buyers will likely have to pay the franchisor a royalty as a percentage of their sales, and they may also be required to lease equipment, purchase supplies or services directly from the franchisor.

Buyers will need to explore the level of regional protection they will have.  What are the franchisor’s guarantees that they will not sell other franchises in the area – and for how long? 

What kind of empire building opportunities will the buyer have?  Some of the more successful franchise owners are those who own multiple outlets in the same area, and are able to utilize their economies of scale.  Buyers should also find out if they will have first right of refusal for new franchises.

Unpleasant as it may seem buyers need to know what percentage of the franchises they are considering purchasing fail each year and how many close with the first two years.  Understanding the turnover rate of franchise ownership will also help paint a picture of attractiveness. 

As with purchasing any business, a buyer not only needs to have a plan going into the business, they should have an exit strategy as well.  Franchise buyers need to identify what kinds of restrictions they will be under when they decide to sell.  Will they be able to sell it to anyone or only to the franchisor?  They should also research the comparable sales prices of franchises that have recently sold. 

Although it is difficult to make blanket statements about which franchise models are better than others, buyers need to understand where their franchisor’s interests lay before they purchase.

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.

Will the business numbers look good to anyone else?

Business owners can operate their company as they wish, but when they are ready to sell, will it appeal to buyers? 

If the numbers don’t make sense or show profits, who would want to buy it?  Business owners who want top dollar for their company must be able to reveal all elements of owner cash flow that buyers and lenders will accept.  Otherwise, there will only be disappointing offers or no offers at all!

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.