Understanding inventory when selling your business

Reporting a lower inventory to their accountant is something many business owners have been doing for a long time.  And many accountants just accept the number.

In addition to the obvious concerns, when it comes to selling the business, big problems can arise.

Can the inventory be verified and accurately costed?  Is all the stock of reasonable age?  Is the inventory current and saleable?

There are many thing business owners can do to make their businesses more marketable.  Up-to-date and accurate financials, diverse customer base and vendor list, and key personal in place are all great ways to maximize value at point of sale.

A lesser known yet impactful characteristic of a business for sale is its inventory. 

Consider the scenario of a business with aged, damaged or redundant inventory.  While those assets can be shown on the books, and in many cases to banks for financing, they will be viewed negatively at point of sale.  Buyers may trust but will verify and eventually discover inventory misgivings as deep into the process as at the closing table.

The best way to overcome this pothole is to give their accountant an accurate inventory value each year, to regularly clean-out and clear-out non-saleable goods and damaged items and to have a systems to monitor and control levels for busy and slow seasons.

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.

What's Worse Than No Buyers? Just One!

Don’t fall into the trap of focusing all your efforts on a single buyer for your business--no matter how attractive they may seem

Finding buyers for an existing business can be a frustrating and time consuming process. Communicating that your business is for sale to the largest audience possible is the only way to maximize value, yet openly advertising it can be disastrous.  The possible ramifications of a concerned employees, customer, competitors and vendors can dramatically affect moral, hurt sales, increase direct competition and upset key relationships.

As with any kind of marketing, you need to understand their target market. Business sellers are no different, they need to identify the potential buyers of their company in order to effectively promote it.

The largest group of potential buyers are your competitors, suppliers and customers. Although there are risks associated with divulging proprietary information to them and word getting out that you are looking to sell, this group--if handled appropriately--can represent an attractive prospect list. Most often, this group understands the intricacies of the industry and can relate to the opportunities and threats that exist today. 

Competitors and suppliers, in particular, often have duplicate processes and functions that can be eliminated, adding additional benefit during the transition to new ownership.  A recent merger saw the purchaser implementing many human resource procedures into his existing company that he found in place at the business they just bought. In this case, the buyer was able to save on duplication of departments and add additional savings.  The additional added value to the buyer helps improve marketability to the seller, making these prospects very attractive.

Another potential group of buyers are strategic acquirers. Not to be confused with competitors, these are buyers who may be interested in the synergies created when integrating another company into their existing company.   For example, a similar business operating in a different market may be interested in expanding into a new regional market. Or, it may be interested in a business’s distribution channels, technology, or products, which would strengthen its existing infrastructure or product offering. 

Employees are another group of potential business buyers. Selling to an existing manager or to staff through employee stock-ownership plans can sometimes be beneficial but if the deal falls through, hard feelings and a stressed working environment can be the result. A careful inquiry and deployment of information is advisable for this group to determine if a viable conclusion is possible. Remember, regardless of motivation, buyers need some level of financial wherewithal to buy a business.  Proceed with caution if you are not confident they have the financial ability to step-up.

Investors and career changers are another significant pool of buyers.  Many investors have realized that as a business owner, the return on their investments can be significantly greater when successfully operating their own company versus the volatility of the stock market. Career changers, typically managers and seasoned executives and executives who have taken early retirement packages, see similar advantages of being in business for themselves.

Investors and career changers have certain traits that should not go overlooked. They typically have a strong business background and a real entrepreneurial spirit. Often the one trait that is usually not present is a specific knowledge of the business they are buying. 

This usually comes as a big surprise to many sellers. Many owners believe that there is no one who can run their business like they can. While they rightfully should be proud of their experience, a new owner brings a fresh set of competencies to the business, which can complement what’s already there.

One of my favourite examples is the junior executive with an international industrial company who had strong management and communication skills who ended up buying a flower business.   The other is a lawyer who had excellent negotiation and marketing skills that ended up purchasing a subcontracting business.  Even though these two buyers lacked specific in-depth technical knowledge of the business they bought, both found success in unlikely businesses.

Attracting a variety of buyers to a business acquisition is at the heart of maximizing value to the seller. Just like you wouldn’t market your house to one person, the same principles can be applied to a business transaction. If a buyer knows they are the sole interested party, they can control negotiations. Increasing buyer competition is the main reason why sellers turn to a professional business broker when deciding to sell. Business brokers have the know-how to generate more leads through their own database of buyers, other brokers and advisors; they broaden the pool of potential buyers through advertising and promotion; and they can approach competitors and suppliers carefully to preserve confidentiality.  By allowing a skilled broker to confidentially guide sellers through the sales transaction step by step, owners will protect their sale value and remain focused on their job, making their business as profitable as possible.

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.

 

Fresh Ideas Necessary

Unfortunately, there are businesses whose market has changed so drastically that their products or services now have limited demand.  And it might not be the slow economy!

Those business owners may have to consider a whole new business model and get into research and creative thinking mode.

There are a couple of places a business owner could start:

·         Internet – probably the easiest and fastest way to get creative.

·         Peer groups – every local municipality have networking groups filled with like-minded entrepreneurs.  Sharing your challenges and thoughts will surely produces a different ideas.

·         Competition – there is no shame in copying a good idea.  I didn’t invent blogging; I copied the idea and made it personal to me.

·         Provincial/Regional Economic Development offices (also the Chamber of Commerce) – often times they have people on staff specifically there to help you.  In a way you are already paying for the service, you should use it.

·         Customers – ask the people that use your product or service, they are the ones that can give you the most info and ideas.

·         Employees – create an environment that fosters ideas is great, but take the next step ask outright.  You might be surprised with what you get.

Spending the time using some or all of the above resources will help ensure you never find your business’ products or services redundant.

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 much is your business worth?

There are many methods for establishing business value. But only one gets to the heart of what a buyer is willing to pay

When you decide to sell your company, establishing fair market value is one of the most difficult issues a small business owner must face. There are so many options involved in valuating a business—the capitalization rate method, the debt capacity method, the critical factors method. But the reality is a business is worth what a buyer is willing to pay and a seller is willing to accept.

One of the most effective methods of getting to this number is the “cash flow” method, which takes the business’s net profit and combines it with the owner’s salary and personal perks. Plus interest and depreciation. Buyers are typically comfortable with this method because when they are buying a business, what they are really buying is its cash flow.

When a company’s cash flow is identified, different multipliers can be applied to then determine a fair market range for the business. A business multiple is a measure of return on investment.  Most people are familiar with the term “capitalization rate,” which is commonly used to establish the value of income-producing real property (the land and anything attached to it).

For income-producing businesses a multiple is the same, but inversely related. A business selling for a multiple of 1.5 would generate a 66% return on investment for a buyer, while a business selling for a multiple of 4 would offer a 25% return. A manufacturing facility, for example, would likely have a higher multiplier than a service business because it’s often easier to enter into many service sectors than to open a manufacturing facility.

One key factor affecting the multiplier is excess earnings.  If you look at two businesses in the same industry, each will have dramatically different multiples if one has a net cash flow of $100,000 and the other has $1,200,000. A good general rule of thumb is that the higher a business’s net cash flow, the higher the multiple.

Many other things can also affect the multiplier, in both positive and negative ways. New product development, strong market share and a diversified customer base (i.e., having no one customer represent more than 10% of sales) can positively impact the multiplier. Conversely, outdated inventory, declining market share and risk that key personnel could leave the business and disrupt operations might have a negative impact.

In addition, business owners frequently don’t give enough consideration to the impact the transaction terms can have on a deal. An all-cash deal or one with a large down payment will give the buyer a reason to expect a discount on the sale price, while a smaller down payment will cause the seller to expect a higher sale price.

For many owners, one of the most troubling aspects of the cash flow method is assets, such as furniture, fixtures, equipment or inventory, are not taken into consideration. While those items do contribute to establishing cash flow, they have limited individual value. There is an exception to this rule: assets are considered when a business is being sold that has no profits or cash flow. Typically, buyers usually aren’t interested in buying these businesses because the seller has proven that the company isn’t profitable, but, in those cases, assets would be used to determine the value of the business.

When an owner is considering selling his or her business, looking at different evaluation methods may have some merit, but the cash flow method tends to be the most practical. Many even find understanding the impacts on value can improve both the desirability and the worth of their business. 

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.