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.

 

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.

 

Barriers to entry help business value

As a business owner you probably are aware that there are many different factors that impact the value of your business.  A major impact to value is the amount of cash flow your business produces.  This makes sense considering buyers are buying business for the income they produce, so the more cash flow a business produces the higher value you would associate with that business.

But one company’s cash flow may be more valuable than another.

Why?  These factors are commonly referred to as value drivers. And they are elements that help make one business more attractive, less risky or more appealing than another. 

There are a number of value drives to consider.  For example, size of the business plays a heavy influence.   The perception that smaller companies are riskier than larger businesses drives prices down on small business and helps protect value on larger companies.

An interesting factor impacting value is best described as ‘Barriers to Entry’.   As a general statement, the easier it is to enter a particular industry, the less a purchaser will be willing to pay.  On the other hand, if there are substantial barriers to entry the less resistance you should get to a higher price.

How can you influence your industry’s ‘barriers’?

In many ways barriers or lack of barriers are specific to the industry you are in.  For example, the restaurant industry is widely understood as a very low barrier industry, while capital intensive industries such as manufacturing tend to have a high degree of barriers to entry. 

Regardless of your particular industry, I would suggest taking a close look at 3 factors to build a layer of protection in your market place…

Market Share:  The higher your share of the market the more likely you are able to differentiate your product or service from the competition.  Being able to stand alone protects pricing from becoming commoditized and further insulates you from new competition.

Customer Base:  Build a diverse cross-section of customers to protect business value.  If you have one customer that represents greater than 10% of your overall gross sales, you are exposing your business to risk of losing that customer and largely effecting profitability. Buyers tend to associate higher risk to businesses with one or two large customers, and pay a lower premium for those businesses.

Proprietary product: Things like patents, and licenses protect your business from competition.  They allow you to ensure profitable margins and they make your business more valuable to buyers.  In a world where buyers are using historic cash flow results to predict future profitability, proprietary products helps mitigate the risk of the competition duplicating products & services and stealing customers.

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.

 

What about that Big Customer

Many companies have a single customer or a few large customers that dominate their overall sales.  After all, nobody wants to turn down business!   But when it comes time to selling the company, this becomes a huge problem.

Why?

Revenues could drop! Many buyers won’t look at a business whose revenues could drop dramatically after closing from the possible loss of those customers.  Imagine the impact on a small manufacturer if 30% of their sales volume was moved to their competitor.  While variable costs may mitigate the short term hit, fixed cost will inevitably cripple most companies.  And, most importantly in the buyer’s eyes, cash flows can be dramatically reduced and in some cases eliminated.

Seller’s relationship with key customers.  In many cases those large customer relationships are as a result of the owner’s involvement.  They are typically long standing customers or were acquired as a result of the owner’s involvement in the sales pitch, the product production, the service provided or all of the above.  Regardless, in the customer’s eyes, not only did they buy from the company they bought from the company because of the owner.  Transferring a business like this requires a buyer willing to accept these risks and typically a more lengthy transition period in order to re-establish a relationship with the new owner. 

Buyer’s look for discounts.  The risks associated with stepping into the owner shoes will dramatically affect its value.  Business value is based on its cash flows and a multiplier.  A business multiplier is borne from the principles of risk and return.  The riskier the venture the higher rate of return expected from the buyer.  Since cash flow is established at a fixed historical average or a forecasted expected return, the way to realize a greater return is by paying less for the investment in the beginning.  Business owners with customers that represent greater than 20% of their overall sales revenue typically see downward pressure on value.

Somehow, some way, business owners have to find a way to diversify their customer base before they ever decide to sell their business.   Finding predictable, repeat and diversified customers will not only improve bottom-line profitability, it will also ensure business owners will maximize their value when it’s time to sell.

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.

 

Where are the business financials?

If business owners do not have all their financials and tax returns at their fingertips (and many don’t), it usually means they don’t refer to them to effectively manage their operations.  It also may mean they don’t understand them. 

Business owners should regularly review their financials with their accountant and other advisors to do the proper planning necessary for a successful business.  Plus, when it comes time to seek financing or sell the business, these all-important report cards must be immediately available.

Depending on the business type it is often recommended that you review your businesses performance on a monthly basis and in some cases weekly.  By staying focused on some of the key drivers a business owner can quickly analyze and assess performance, trends, and potential potholes:

·         Revenues are the driving force in any business.  A demonstrated growth in revenues and increases in profitability over the past 3 years will help drive a business’ value up. 

·         Expense controls can dictate overall profitability.  Rent and tenancy costs, advertising and promotion, interest, general office costs, maintenance, etc. are all key areas where most business can find ‘smart’ ways to minimize those expenses without jeopardizing current and future revenues.  

·         Employee wages and productivity often make the biggest impact to overall profitability.  Regularly reviewing production levels of all employees, as well as quarterly or semi-annual performance appraisals are effective ways to know the pulse of a business’ most valued resource.

·         Cost of goods and raw materials needs to be shopped.  Good vendor relationships are typically critical to securing low costs and favourable terms.  ‘Shopping around’ to ensure you are getting the best bang for your dollar is a necessity and should be scheduled into regular intervals.  It is often easier to maintain your current partnerships, however, those partners need to know and understand you will continue to demand the most competitive rates.

·         Receivables and payables can spiral out of control without a firm handle.  Depending on the cyclical nature of business or market expectations on terms; managing your cash-in and collections for some businesses is a matter of success or failure.  Taking advantage of quick pay discounts or matching extended payment terms with receivables are strategic financial decisions that need to be managed regularly.

A recommended way to ensure business owners have and review their financials is to schedule regular ‘executive time’.  Taking a Saturday morning once a month to review without interruption, dedicating the last Wednesday evening of each month to your own personal ‘board meeting’ or starting each Monday with an hour examination are all ways to ensure you prioritize your time.  By scheduling your time and prioritizing your agenda it won’t be long before you start seeing better results in profitability and build your business’ value.

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.