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

 

 

Critical Questions to Ask Before You Buy a Business

If you are considering a decision to buy a business, and you just so happen to have found the perfect opportunity here are a few questions to help to ensure that you will be happy with your decision.

The broker will set up a meeting with the seller once you select a business you are interested in. This will give you an opportunity to speak candidly with the seller and find answers to your questions.

A popular question you may consider asking is, “why are you selling”. Ensure you are comfortable the answer, make sure it is honest and consistent.  This will put you in position to dive much deeper into the interview.

You will ALSO want to ask questions about:

The product and service mix, are there opportunities for additional services or new products in the pipeline with the existing customers?

The customer mix, do they have any 1 customer that represents greater than 10% of the overall gross sales?

The competitive environment, who is the largest/strongest competitor, what is your competitive advantage?

The key employees, what is the role of the owner and which employees are critical to the operation of the business?

The cash flows, how do you bill customers, up front, during or after a project is complete?

The sales and marketing, what is the current strategy, are there any changes necessary in the future.

Just to name a few.

If you are still interested in purchasing the business after a discussion with the owner, the broker will help you draft an offer based on the price and terms you feel are appropriate.

The legal language that makes up a professional business brokers letter of intention will be thorough. In fact, two of the most important clauses in our Offer make the transaction contingent upon your lawyer reviewing the legal language of the Offer and your accountant's analysis of the seller's financial statements.

Once these contingencies have been satisfied, the broker will carefully manage the rest of the transaction to make sure that all the conditions of the Offer are satisfied through the closing.

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.

 

3 Reasons Why Buyers Should Use a Business Broker

Many have felt the desire to do something entrepreneurial. There are 2 distinctly different paths to follow – start a business from scratch or buy an existing business.

Fortunately for business brokers many of these individuals are aware of the national statistics that are stacked against the likelihood of developing a successful start-up.

By purchasing an existing business, a buyer can dramatically minimize the risks associated with starting a brand new business. And, a professional business broker can be helpful in many ways including finding and executing on a successful transaction.

Serious Sellers:

Sellers who have listed their business with a broker are serious about selling. This eliminates wasted time dealing with owners who are not motivated to sell. Many business owners started their business to someday sell it, so they may be open to the inquiry. Flushing out the truly motived seller is a process a broker spends a great deal of time perfecting.

Variety of Inventory:

A professional broker will have many different types of businesses for sale, many of which you may not be aware of. Many prospective buyers don’t know what they want, but absolutely know what they don’t want. By working with a broker with an inventory of available business buyers are able to shop the market to determine what is the best fit for your skills and interests.

Valuable Information:

Brokers know the information you need to make an informed decision. Brokers maintain up-to-date information, signed and dated by the seller. They organize their files to be able to address just about every question imaginable, they store facts and data directly from the seller and they are quickly able to work through a business’s profile. Brokers and buyers equally value their time and will put information in play to make sure you hone in on the business that is ideal for you.

For many buyers, the process of purchasing a business is not a familiar process. A broker will be able to help guide you through all the steps and intricate procedures associated with buying a business. This will allow you to concentrate on getting ready to successfully operate your new business.

Plus, they will also have checkpoints along the way where you may bring in other advisors to help you analyze contracts and financial data.

An informed buyer is much more likely to successfully buy a business. Professional business brokers employ numerous procedures that eliminate many of the risks involved in buying a 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.

 

Too many personal expenses will impact credibility

Burying your personal expenses so deep in your corporate statements will make it difficult to find for everyone…. including the bank and business buyers.

You’re not alone, minimizing tax liability is a strategy all business owners think about.

When it comes time to obtain financing or sell the business, buried personal expenses and assets can create a problem in determining the true cash flow.

Consider a recent seller who watched as countless qualified buyers walked away from their interest into his business when they discovered personal Brazilian courier expenses in his local retail hardware store.

Imagine how suspicious buyers became when they discovered a large local printer described her many Meals and Entertainment Expenses as personal in nature despite playing a large front-line role in the sales of the corporation.

Buyers and bankers won’t always give credit to many of these items. As a result, the cash flow can be suspect, and when you apply a multiplier to determine the value of the business, the results can be disappointing.

Plus, the underlying credibility of the seller may be jeopardized which can derail an agreement with a buyer before the train ever leaves the station.

 It is in the best interest of the business owner to show a healthy bottom line and minimize the burying of personal expenses in the years preceding the sale of their business. They will find they’ll improve the likelihood of selling at the highest price and improve the probability of a successful transfer.

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.

 

Get Your Credit Report Before You Buy

Many have felt the desire to do something entrepreneurial. Few prospective business buyers take the time to map out a plan that will improve the probabilities of a successful business transfer.

By purchasing an existing business you can dramatically increase your chances of success.   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. 

If you are considering a decision is to buy a business you will need to take an honest inventory of their skills, knowledge and interests. You need to truthfully catalogue skills and talents that can be incorporated into a business.

Plus, you will need to know how much money you are prepared to invest and how much you expect to make. Typically, these two amounts are directly related to one another.

Part of this exercise is getting a solid understanding of your credit score. Whether your eventual purchase includes all cash, Vendor financing or Third Party financing your credit report will inevitably be requested. Knowing ahead of time the information is accurate can make or break a business transaction.

A recent article in the Windsor Star by Ellen Van Wageningen http://www.windsorstar.com/Check+your+money+report+before+others/8073031/story.html provides some great insight and information to consider before you buy a business.

At this point, don’t be too concerned if you’re unable to identify exactly what type of business you’re looking for. The more focused and realistic you are in your personal review, the more attentive you can be in identifying attractive business opportunities and eliminating businesses you’re not interested in.

Having a plan for executing a successful business transfer will help you stay on track, allow you to dedicate the time and energy necessary, and get you a successful business that is ideal for you. 

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.

 

How the Sale of a Business Can Go Off the Rails

Some business sales unravel because of the seller, others because of the buyer and even more due to third parties. The reasons are numerous—but most can be resolved

Like many negotiations in life, business transactions require a willingness to consider the other party’s concerns. If there is no sincere motivation on the part of both the buyer and seller of a business the likelihood that it will fail increases dramatically. There are a number of reasons why. 

Sellers may be the cause…

Some sellers do not have a reason to sell and are merely testing the waters to see if anyone would purchase their business and at what price. Because they are not legitimately interested in selling, they’re not willing to consider the buyer’s concerns or to be flexible enough to overcome the many complexities involved in the transaction.

Even when owners are motivated to sell, there can be problems if they are unrealistic about the value of their business or don’t want to offer seller financing. In either case, credible and legitimate buyers will be lost instantaneously. Unfortunately, some business brokers add fuel to the seller’s cause by sharing with them unreasonable expectations, often in an effort to secure a large upfront non-refundable fee.

Some sellers fail to be honest about their business or its situation. They will misrepresent the financial condition of the business or may not disclose the real reason for selling. Even if the error is not intentional, the sudden appearance of inaccurate information can scare off the most sincere buyer.

If you are a seller:

• Be open, honest and accurate about all things, both good and bad.
• Be prepared with financial documents that are up-to-date and accurate.
• Be ready to articulate your reason for selling. Be honest and hopefully not urgent.
• Get legal commitments in order, such as leases, permits, and contracts.
• Get an objective, impersonal review of your business and its market value

Buyers may be the cause…

Buyers often exhibit many of these same tendencies. They may have unrealistic expectations regarding the price of a business. Or they may have an urgent “need” to get a business but lack the courage to take the leap of faith necessary to go through with the acquisition.

Some buyers have experienced a recent financial setback that impacts their ability to meet their financial obligation as part of the deal. I faced this situation recently when a large deal fell apart after the buyer was unexpectedly served with divorce papers.

If you are a buyer:

• Be open and honest about your skills and competencies.
• Create a personal financial statement and understand your current financial standing.
• Get comfortable with the amount of investment you’re willing to make, and stay within your financial risk tolerance.
• Share your acquisition intentions with your personal stakeholders before you start looking.

Third parties may be the cause…

Outside influences can also hamper the successful transfer of a business. Landlords may become difficult to deal with when it comes time to transfer a lease or grant a new one. This happened this past summer when a landlord wanted to significantly alter a longstanding lease of a buyer who wouldn’t stand for it. 

Sometimes, both buyers and sellers receive overly aggressive advice from outside advisors. Advisors should always work toward the goal of putting the deal together, not erect roadblocks to derail it. A couple of months ago, a large merger of two leading businesses almost didn’t happen when days prior to closing, an innocent letter from a lawyer almost broke 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, you’d be hard-pressed to find a seller’s accountant who felt their client sold their business for enough money.

For your advisors to be catalysts behind a successful deal, you should:

·         Ensure your accountant has a history of working with both buyers and sellers; they will need to see things from both perspectives.

·         Confirm your lawyer has experience with business sales of a similar size and nature.

·         Understand how your business broker will be able to manage confidentiality, negotiations and both parties’ advisors.

·         Get your advisors talking and working together.

There can be endless reasons for why a business sale does not successfully close, most of which can be mitigated with some thoughtful planning and understanding. Most importantly, they can all be resolved when the parties at the table are motivated to execute a deal. Whether you’re a buyer or seller, start managing these common issues before you get involved in any negotiations and you’ll be on your way to an outcome all parties are happy with.

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

More columns by Bill Sivell

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.

 

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.

 

Favourite Business Quotes

On the heels of another wonderful holiday long weekend I thought it would be appropriate to share some of my favourite quotes.  The truth is these long weekends often times are more tiring than relaxing and lightening up the weekly blog seems to be the appropriate thing to do. 

Enjoy, and I would love to hear some of your favourites…

·         “The golden rule for every business man is this: Put yourself in your customer’s place”. – Orison Swett Marden

·         “The winners in life think constantly in terms of I can, I will, and I am. Losers, on the other hand, concentrate their waking thoughts on what they should have or would have done, or what they can’t do.” – Dennis Waitley

·         “A man should never neglect his family for business.” – Walt Disney

·         “When I asked my accountant if anything could get me out of this mess I am in with my business, he thought for a long time and said, ‘Yes, death would help’” – Robert Morley

·         “Nobody talks about entrepreneurship as survival, but that’s exactly what it is and what nurtures creative thinking. Running that first shop taught me business is not financial science; it’s about trading: buying and selling.” – Anita Roddick

·         “The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.” – Henry Ford

·         “You’ve got to say, I think that if I keep working at this and want it badly enough I can have it. It’s called perseverance.” – Lee Iacocca

·         “Yesterday’s home runs don’t win today’s games.” – Babe Ruth

And my current favourite…

“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” – Peter F. Drucker

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.