Consider Your End Goals When Completing Your Tax Return

Minimizing income taxes - short term strategy or long term mistake?

Many business owners and their accountants are absolutely fixated on minimizing taxes by showing no income.  But this can be misguided planning for trying to get top dollar when selling  the company. 

 

Business owners need to realize valuation is usually determined by a multiple of identifiable cash flow and that banks make acquisition loans based on tax returns. 

 

Not paying taxes can be a short term strategy that might not pay off at the end!

Do you have small business questions you would like answered about this article or others?  Please visit www.LibertyBusinessBrokersofOntario.com or call 519-903-7807. 

William Sivell is the Owner and Broker of Record of Liberty Business Brokers of Ontario; his blog appears every Tuesday.

 

 

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.

 

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.

 

7 Keys to Preparing Your Business For Sale

Take these steps to successfully entice prospective buyers and increase the likelihood of a successful transaction

 

As they begin a new year, many business owners are considering how to prepare their business for sale. For some, this simply means sprucing up their operations with cosmetic improvements. For others, the following steps are necessary to ensure the goal of selling one’s  business can be fulfilled.

Determine if now is the right time to sell. A business valuation involves many variables (and many of them are subjective) that often means various “experts” looking at the same company can formulate different recommendations. However, many small and medium-sized companies are sold for prices expressed as a multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers will pay. If the business’s current financial picture doesn’t match your expectations, one or the other has to be adjusted.

Know your reason for selling.  This is one of the first questions a buyer will ask, so you need to be able to articulate your motivation. Your answer needs to be honest and, ideally, shouldn’t express any urgency. Buyers would expect to hear things like retirement, moving out of town or pursuing other non-related business interests. Red flags are raised if the answer seems ambiguous and unsure. This is why it’s better to sell when times are good rather than waiting to burnout when they aren’t.

Get your books in order. Prospective buyers will want to see at least three years of financial statements, including balance sheets and income statements. You will need to be able to document your business’s true profitability by identifying nonoperational expenses (e.g. personal auto lease and medical fees). Sellers need to quantify and substantiate these items because, at the end of the day, buyers purchasing a business are really buying into its profitability.

Make sure all legal commitments are in order.  This means reviewing your permits, leases, client and vendor contracts, etc. and understanding their impact on the business.  For example, if the business location is key to its performance, a long-term lease with options at or below fair market value would be appealing to a buyer. If client contracts, particularly large key clients, are coming due for renewal, buyers would find this less appealing as the risk of a non-renewal is much greater immediately following a transfer of ownership.

Don’t be a business owner who does it all.  Some businesses can’t survive without the owners trying to do everything themselves. And they have no key employees to help manage the operations. Buyers for businesses like these may be concerned if they themselves can’t replace the skills and experience of the owner. If you are absolutely vital to the business, efforts should be made to gradually delegate key responsibilities to various staff members. A business that is excessively dependent on the current owner increases the risk in the eyes of a prospective buyer. 

Put yourself in the buyer’s shoes. When a buyer comes out to see your business for the first time, it’s important to make a good first impression. Spotless office spaces, clean machinery, orderly desks, pleasant and smiling staff and vibrant activity are ways to leave a positive impression. Buyers look for companies that show well because this can often be indicative of an orderly run business.

Integrity is important. The common thread running through all of these steps is credibility. If you want buyers to move forward, you must show respect by being open, honest and accurate about all things, both good and bad. This starts with the information that is shared to summarize your business, but is imperative with all documentation and dialogue exchanged and will be critical in due diligence through closing to ensure the transfer stays on track.

Although preparation might seem time-consuming, many owners find that taking the above steps not only improves their management practices, it can improve the desirability and value of their business 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 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

 

Strategic Sale vs. Financial Sale

Business buyers come in many forms, but a strategic acquirer is more likely to net you the highest price.

Many small or medium sized companies are sold for prices expressed as a multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers will pay. You probably have heard multiples of this sort – 2 to 2.7 times Seller’s Discretionary Earnings. Sales at prices based on these sorts of multiples are characterized as “financial sales.”

Sometimes however, a larger company buys your company for reasons other than your profits or cash flow. They want some element of your business, not for what it generates in your business, but for what it does to their business. For example, you might have a product line they can easily and profitably sell to their existing customers. You might have a technology that they can use to cut their own costs. You might have all sorts of things they can profitably deploy in their business – geographic reach, certain prestigious customers, key employees or a good brand name. These elements of your business – the ones that have unusual value to certain buyers – are characterized as “strategic assets”. And the Buyers of interest are viewed as “strategic Buyers.”

The reason strategic Buyers are willing to pay more for your strategic assets is simple to understand. If they buy you as a standalone business, they can afford to pay a certain amount based on the ROI your business generates by itself. But if they get strategic assets that ALSO help them increase their existing revenues or decrease their existing costs, then they can afford to pay more, often much more.

When a larger company buys your company, they want to pay the price associated with a “financial sale” but secretly they hope to get more value by deploying your assets strategically. The key to getting paid the strategic sale price is having multiple strategic bidders, strategic assets that cannot be easily replicated and a skilled Business Broker advising and representing you in the sale process.

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.

 

Just keep hanging on!

Just keep hanging on, 2013 is going to be great.

"Happy holidays and our best wishes for the New Year!"

Bill

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 sellers can protect from getting their business back, after they sell it

Two questions sellers ask… “How much is my business worth,” and “How can I protect myself so I don’t get the business back later?

In many ways, the latter question is more sensitive issue than the first.  An improperly structured transaction can create problems for the seller years after he has sold the business. 

Although there are no guarantees, a combination of the following recommendations will significantly reduce the likelihood that the seller will be stepping back into the business after stepping out.  Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc. are obvious.  However, many are not. 

One of the most common mistakes sellers make is not getting enough of a down payment.  One of the best ways to ensure the successful transition of their business is to have the buyer invest a significant amount of their own capital in the transaction.  Few incentives inspire the new owner to achieve success greater than the risk of the loss of a significant amount of their own money.  In simple terms, it is a lot harder to walk away from a $150,000 down payment than $15,000.

Another way to minimize a seller’s risk is to know their buyer.  This goes beyond having some of the same interests, common friends and an affinity for the same brand of Cabernet.  It means a thorough review of the buyer’s credit, analysis of their personal finances and a complete resume illustrating, not only their accomplishments but their life experiences.  For example, if the buyer has a poor history of paying off his credit card, he likely might have problems making his monthly principal and interests payments to the seller on a timely basis.  If the buyer doesn’t have a strong financial statement, he may not be able to weather any unexpected slow periods. 

As far as life experiences go, the passion and skill sets that are required to run a day care will be significantly different than what would be needed to operate a manufacturing business. 

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

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 Broker at VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.

 

Why You Need An Entrance Strategy

Equally important to an Exit Strategy for retirement is an ‘Entrance Strategy’ to buy existing businesses.

While a popular trend today is for business owners to plan their exit, few prospective business buyers take the time to map out a plan to find an existing business that meets their needs

A fundamental trait of an exit strategy is that it is a planned event, meaning, it’s conceived before it becomes desirable or necessary. The same can be said for buyers who are thinking about buying an existing business. I call this an ‘Entrance Strategy’ as it designed to help focus on the steps needed to buy an ideal business. 

As a starting point, buyers need to take an honest inventory of their skills, knowledge and interests. They need to truthfully catalogue skills and talents that can be incorporated into a business. And they should be able to articulate their personal interests. For example, does the buyer enjoy interacting with the public or is he more content behind a desk? Is she comfortable with managing people and making decisions?  What technical skills or talents does he have that can be incorporated into a business?

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

Get a solid understanding of your financial situation.  Buyers need to know how much money they are prepared to invest and how much they expect to make. Typically, these two amounts are directly related to one another. Cash in the bank is the easiest benchmark, however, many times a buyer will liquidate securities, borrow from family, re-mortgage property, or leverage credit lines in their other businesses in order to make an agreed-upon down payment.

Along with the variety of resources available to the buyer are the varying timelines and liquidity factors associated with them. Knowing your financial position will save you time and energy during the purchase negotiations and help ensure a successful transfer. 

Start searching for available businesses that match your profile.  Scheduling an appointment with a business broker with a wide selection of businesses in their portfolio and searching online will give buyers a good sense of what is available. Buyers should start by eliminating those businesses they have no interest in. By narrowing the field of choice they can focus their energy on a smaller pool of opportunities.

Buyers will be required to sign non-disclosure and confidentiality agreements as they dive deeper into their investigation. These agreements ensure the buyer keeps his inquiry discreet and prevents the sellers’ employees, competition or suppliers from finding out.

Move the investigation to the next level.   Reviewing and analysing financial data, disclosure statements, and cash flows is important, but seeing is believing. Meeting and asking questions with a business owner will help clarify uncertainty, provide perspective and form a relationship.

The relationship of the buyer and seller is critical to the success of the business transfer. For buyers, it will mitigate the uncertainty and risk associated with buying a business and help in the transition period. For sellers, particularly in the case where there is vendor financing, being comfortable with the buyer’s ability to continue the operations of the business will lessen any concerns associated with financing.

Make an offer. This step is often the hardest for many buyers.  A letter of intention is often used by buyers and sellers to outline the general agreement. They are typically non-binding, but form the foundation of a formal binding agreement that will follow. This step is critical to continue to move the discussions forward, as the power of a signed offer is a clear demonstration of seriousness from a buyer.

A well-written offer to purchase will contain all the language necessary to successfully transfer a business, while offering a number of contingencies that will give the buyer (and the seller) the required safeguards.

Do your due diligence.  Once an offer has been accepted, the due diligence stage allows the buyer’s advisors to inspect financial records, legal documents, properties, assets, and affairs.  There is no point in beginning this until the buyer and seller reach an agreement on price, down payment and terms.

Beware that few outside advisors will advise a buyer to buy a business, and they shouldn’t be expected to. If pressed for an answer, they’ll often give the safest one: “No”.  In fact, rarely have I met an accountant who thought his client didn’t pay too much for a business. Conversely, I’ve seldom met an accountant who didn’t feel their client sold their business for enough!

Formalize the business transfer.  The last step involves the buyer’s lawyer drafting the necessary binding purchase and sale agreement to ensure a smooth transition. Things such as promissory notes, bills of sales, non-competition clauses, employment contracts and contacting governmental taxing agencies, enable the ownership of the business to change hands properly.

With plenty of businesses to choose from in today’s market, it is more important than ever for buyers to make sure their efforts remain focused on choosing the right business for them.  Having a step-by-step plan for executing a successful 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. 

Bill Sivell is a salesperson 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.