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.

 

Why Launch a Business When You Can Buy One?

You can minimize the risks associated with starting a business from scratch by purchasing an existing one. Here are four reasons why. 

At one point or another, most of us have experienced the urge to do something entrepreneurial. The chance to be master of your destiny and your investments can be alluring.

It can also be very frightening! We’ve all read about the high failure rates for new startup businesses. 

The reasons for this reality are numerous. Insufficient operating capital, bad management, incompetence, strong competition, weak customer base, poor business concept or even just plain bad luck highlight the long list of things that can be detrimental to any new business. Furthermore, new business owners need to manage a multitude of details, such as product and service positioning, branding, marketing, employee hiring and training, site location, choosing vendors and establishing terms, to name just a few. Even when all the stars are aligned and correct decisions are made, it can be months or even years before a startup begins to see positive cash flow. 

Imagine if the potential pitfalls of a startup could be significantly reduced for you as a business owner. Well, they can! By purchasing an existing business instead of trying to start one from scratch, a buyer can dramatically minimize the risks associated with startups.

Benefit #1 - Make money on Day 1: Successful existing businesses have a proven track record of profits that generally continue long after the business has been sold.

Unlike most startups, you will be making money on your new business the day you take over. Plus, in many cases business buyers have different skills and expertise than the exiting seller. As the new owner, you can take the business to even higher profitability by incorporating new ideas, know-how and energy. This can be advantageous for entrepreneurs who envision opportunities to explore an innovative product, new market or technology. And the existing cash flow can help fund their new ideas.

Benefit #2 – Stay focused on your long-term goals: Taking on a business with a well-known name, location, product mix, knowledgeable employees, etc. will enable a new owner to focus on long-range strategic planning rather than day-to-day minutiae.   

There will be no suffering through an extensive startup period as you struggle to attract customers to your business. Existing business owners will tell you at great length the sacrifice they made in the early years as they literally took responsibility for every job in their business. You can avoid months, and sometimes years, of long hours, marketing failures, unpredictable revenue and expenses most typically associated with startups. Existing businesses with a history of success have already identified an ideal pricing model and marketing formula, and boast experienced employees and a company culture which can take years to figure out successfully. While there will be potholes to avoid along the way, as a new buyer you can dedicate most of your time to building new product lines, customers, or technologies.

Benefit #3 – Leverage your buying potential: Existing businesses can be very attractive because buyers are typically able to use the seller’s financing to leverage their purchase.

A major reason for startup failure is a lack of capital, which is often a result of limited available financing and the inability to predict the amount of capital required. Seller financing can resolve both issues. In other words, with only a pre-determined portion of the asking price down, buyers can use the cash flow from the business to pay off the seller over a negotiated period of time. This ensures that the buyer can minimize their up-front investment, maximize the bang for their investment dollar, and share some of the risk with the seller by ensuring they have a vested interest in your success.

Benefit #4 – Get training through a transition period: A new owner can negotiate a time frame within which the previous owner will stick around to ensure a smooth transition.

Whether or not you’re familiar with the industry, the market or the business you are buying, having the support of the one person who knows these things best can prove invaluable. In many cases, business owners recognize they can add value and marketability by providing for a transitional training period. Not to mention the importance of the business’ legacy, which will give the current owners further motivation to help during the changeover. Additionally, the issue of seller financing will ensure the sellers want to do everything they can to ensure the success of the new owner.

Once you’ve decided to buy a business, the question then becomes which one.

After narrowing your choices to a manageable few, take your time to make sure you can comfortably see yourself in the shoes of the former owner. You should be able to get an intimate understanding of the owner’s motivations for selling and have a chance to review information regarding the financial performance, staffing, facilities, equipment, inventory, product lines and customer base of the business.

Then take the next, and often most difficult step: make an offer!

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.