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.

 

The Truth About EBITDA vs. Cash Flow

EBITDA and Cash Flow are essentially the same measurement, with a couple of exceptions – usually BIG ones. 

EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) leaves in, or adds in if necessary, an expense for a General Manager to run the operation and does not recognize Discretionary Expenses as being discretionary.

This is why a “multiple” used in an EBITDA evaluation is usually higher than one used in a Cash Flow evaluation.  The reason being is with the EBITDA measurement, because there is “management in place”, the buyer is buying a “passive” investment.  Hence, the Buyer is generally prepared to pay a higher multiple (and earn a smaller return on their investment).

The following example of the same Business highlights the point:

		EBITDA		CASH FLOW
Net Profit		$800,000		$800,000
Adjustment for GM at FMV (fair market value)		-$150,000		not applicable
Adjustment for Discretionary Expenses		not applicable		$110,000
Adjusted Net Profit		$650,000		$910,000
Multiple		x4.14		x2.93
Value of Business		$2,691,000		$2,666,300

 

Due to the reasons outlined earlier, an EBITDA Buyer may pay a higher “multiple” for the business, but the business has essentially the same value.

This subtle but significant difference between “multiple” in these two methods can mean a big difference if the wrong “multiple” is applied to the wrong measurement.  For example, an EBITDA multiple of 4.14 applied to a Cash Flow Adjusted Net Profit measurement of $910,000 will grossly overstate the value of the business.

Typically you will find the majority of businesses in “Main Street” transactions generally have an Adjusted Net Profit of $600,000 or less, and typically have the owner as the operator of the business reaping the benefits of the Discretionary Expenses.

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.

Disspelling myths for aspiring entrepreneurs

Buying or selling a business can be very time consuming and often times stressful. 

It doesn’t help matters that most business owners have never sold a business before, and very often, business buyers are on the market for the very first time.   

Therefore, it’s important to dispel some of the common myths about buying a business.

The first myth is that a buyer is going to find the perfect business.   Unfortunately, there are no perfect businesses.  Buyers need to accept the fact that every business has faults.

The key is to find the right opportunity for you as a Buyer, and make it your perfect business.  Once a buyer has decided to do this, the question then becomes “What business is the perfect opportunity for me?”

A second myth is that somehow delaying the buying process will yield a better result.  Like any big decision the investigation and analysis stage takes time, as does the negotiations and eventual closing.  However, delaying the process purposely may give another buyer the opportunity to swoop in and purchase the business right from under you.

The key to analyzing and negotiating is to make it a priority.  Understand what risks you are comfortable with and what risks you are not.  Then decide on the deal points that are most important.  Negotiate hard for an agreement that you are happy with.  Delaying with the motivation of tilting the table will likely only frustrate both sides and leave you unhappy with the result.

Another myth often believed by buyers is to look at businesses beyond what they can afford.  It is common and advisable to sellers to offer financing to buyers to buy their business.  It can mean that buyer with $100,000 can actually afford a business worth $250,000.  It does not mean they can buy a $1,000,000 business.  A buyer who overextends himself will almost guarantee failure when some unexpected problem arises.

The key is to get a solid understanding of your financial situation.  While financing may be available, it is imperative that all aspiring entrepreneurs know how much money they are prepared to invest.  Plus, and perhaps more importantly, how much they expect to make. 

A business broker is a professional that buyers should turn to for assistance when deciding to buy.  They can show the buyer a variety of businesses that are legitimately interested in selling and help them through the purchase process.  With plenty of businesses to choose from in today’s market, it is more important than ever for buyers to make sure that their efforts remain focused on choosing the right business for them.

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.

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.

Raise my prices? You gotta be kidding me!

Don’t be a business owner who is afraid of raising prices.

Good profit margins are what it is all about.  Too many business owners are scared to death to raise prices for fear of losing customers.  In many cases, competition does make it difficult.  But there are many situations if business owners would do some research, they would find out there isn’t as much resistance as they thought.  And when they finally raise prices, they find out they lose very few customers and make a lot more money (also increase the value of the business).

Don’t wait too long.

Start by…

·         Check out you competition, have they adjusted pricing in the past 6-12 months.

·         Connect with a similar business that operates out of town, what sort of adjustments have they made to their prices

·         Do the math, if you are a restaurant owner, have you measured the impact of increases in food costs to your cost of goods sold, if you have vehicles in your business, have you considered how gas prices have impacted your overall expenses.

·         Be creative, many businesses have found ways to creatively increase prices through surcharges, add-ons, and value added services. 

·         Warn your customers in advance.  A well formulated letter can help communicate your future increase, plus can provide a marketable point of contact.  Who says you can’t offer an incentive to your customers for buying now, versus waiting till prices are higher?

·         Do what you say.  Raise prices in an orderly fashion, as you have promised.  Be systematic; ask for feedback from your front-line staff and customers.  You will learn lots from what they say.

·         Be patient and track results.  In a short time you will realize you have made a good decision, and make amendments where you need to.

Bottom-line, healthy profits margins make business owners more money, and help increase a business’ value.  You will make your business more marketable to buyers and increase the likelihood of a successful transfer when the time is right for you to sell. 

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.

Hope is not a Strategy

I first heard the term from Andrew Tepperman, President of Tepperman’s Furniture Stores a few years ago.  Since, the likes of Obama and other have used the term to describe strategies in politics and business.

I want to tell you about a GREAT day I had yesterday with 2 different business owners who have created successful businesses, based on the above premise. 

We all know of the tough economic times the world has faced, and more specifically Southwestern Ontario.  Image the struggles business owners face, seeing top-line sales shrink, and watching bottom-line profit almost vanish. They are responsible for the well-being of the families that work for them.  Some failed and pack things in, and some prevailed because they didn't rely on hope to get them through the tough times.

Both business owners, with completely different businesses and backgrounds had a few underlying strategies in common that not only got them through, but positioned their businesses to be stronger than ever.

1.    They found new revenue streams.  They didn’t change their strengths, they opened their eyes to new customers and clients, they put themselves in position to speak with those clients, and they grew they’re customer base. 

2.    They focused their advertising.  We’ve all heard the expression, throw enough ‘bleep’ against the wall something will stick.  Well I hate to say this but if you’re not focusing on who and where your customers/client are, and why you can satisfy there need for service or product you’re wasting a valuable resource… your money.

3.    They diversified their product/service offering.  Having all your eggs in one basket of products, services or worse, customers is dangerous to say the least. Both business started offering auxiliary services and products, they broadened their reach of prospective clients and customers and mitigated the impact of ‘slow-times’ by supplementing with their new offerings.

4.    They made tough decisions about staff.  Ugly conversation I know, but sometimes your employees are not in position to be successful and in turn make you successful.  Sometimes your employees don’t have the values and core competencies to make good on the cheque you provide them by-weekly.  These owners juggle responsibilities amongst their people and unfortunately parted ways with others. Those savings went directly into their back pockets.

5.    They took a hard look at operating and fixed expenses.  Both these business realized that while revenues continued to be hard to come by, many of their costs continued as if nothing had changed.  When was the last time you reviewed your insurance costs, medical insurance, lease rates for equipment and property, membership dues, utilities, telephones and internet, sub-contractors, repair and maintenance services, etc.  Business owners should be reviewing these regular, especially in tough times, and consistently once a year. Many of these costs are negotiable, these owners leveraged what was happening around them and had difficult conversations with their service partners, but it paid off.

Hope was not a strategy for both these businesses, they are actively building value in their enterprise and while tough times are always a possibility, they will continue find new ways to survive. 

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.