Dispelling the myth about assets and inventory

When both the seller and buyer focus on the issues at hand and stay away from myths, common ground can usually be found that gets both parties what they want.

A popular myth is that furniture, fixtures, equipment, inventory and other assets are always “add-ons” to business evaluations.

This is not true.  The real value of a business is based on its cash flows; assets simply are the tools required to generate the business’ sales and earnings. 

Assets and inventory are considered when a business is being sold in less than ideal conditions, such as when the company has no profits or cash flow.  Problems then arise in establishing the worth of those items and typically, buyers usually aren’t interested in these businesses because the seller already has proven that the company hasn’t made a profit.

One of the most effective approaches to establish value is by the ‘Cash Flow Method’. 

Start by allowing the Seller to paint a picture of the business’ true profitability.  Buyers typically are comfortable with this method because, at the end of the day, although they are buying a company, what they are really are buying is its cash flow. 

With an understanding of a business’ actual cash flow, different multipliers can be applied to determine a fair market range of value for the business.  Multipliers vary depending upon the type of business, size of market share, new products in the pipeline, key personnel, diversification of customer base, and many, many more.

Unfortunately, establishing a business’ value is not always easily answered.  A business broker is a professional that Sellers and Buyers should turn to for assistance when deciding to sell or buy a business.  By allowing a skilled Broker to do their job they will not only help with value recommendations, but assist in confidentially marketing a business for sale and negotiate a win-win transaction.

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.

Things to consider when deciding to buy a small business

When deciding to buy a business, prospective buyers sometimes are faced with the following dilemma:  Do I buy an existing business or do I buy a new franchise? 

Some of the advantages of an existing good independent business include a proven track record of sales and profits, a well-known name and location, a strong mix of products and services, a group of knowledgeable employees and good customer base.

Buyers will be able to use the business’ established customers for immediate cash flow and as the base for future business growth.   This will help eliminate what can often be an extensive and challenging start-up period for owners. 

Because of seller financing, the new buyer of an existing business is able to leverage their buying potential into a larger business with bigger cash flow.  Also, due to the seller financing the transaction, the seller will want to ensure that there is a smooth transition to ensure the buyer’s success.

Finally, buyers of existing businesses will have full control of the company’s strategic direction without having to share their profits with anyone else. 

There are benefits with buying a franchise too.

Buyers are able to purchase an established business plan with step by step guidelines.  Most franchisors offer training and operational support due to their incentive of the royalty fees that they will earn from the franchisee.  Usually, the franchisee will also have access to other owners for help, ideas and moral support.

Regardless of which path a buyer chooses to follow, they need to exercise a considerable amount of due diligence.  In fact, in many ways, a buyer has to ask more questions and do more research when considering purchasing a franchise.

For instance, they will not only need to thoroughly understand the business and the current economic landscape; they will also need to comprehend all the issues associated with the franchisor. 

Franchise buyers will need to understand the immediate out of pocket expenses they will incur upon their purchase.  They will need to research what other fees they will be responsible for paying.

Buyers will likely have to pay the franchisor a royalty as a percentage of their sales, and they may also be required to lease equipment, purchase supplies or services directly from the franchisor.

Buyers will need to explore the level of regional protection they will have.  What are the franchisor’s guarantees that they will not sell other franchises in the area – and for how long? 

What kind of empire building opportunities will the buyer have?  Some of the more successful franchise owners are those who own multiple outlets in the same area, and are able to utilize their economies of scale.  Buyers should also find out if they will have first right of refusal for new franchises.

Unpleasant as it may seem buyers need to know what percentage of the franchises they are considering purchasing fail each year and how many close with the first two years.  Understanding the turnover rate of franchise ownership will also help paint a picture of attractiveness. 

As with purchasing any business, a buyer not only needs to have a plan going into the business, they should have an exit strategy as well.  Franchise buyers need to identify what kinds of restrictions they will be under when they decide to sell.  Will they be able to sell it to anyone or only to the franchisor?  They should also research the comparable sales prices of franchises that have recently sold. 

Although it is difficult to make blanket statements about which franchise models are better than others, buyers need to understand where their franchisor’s interests lay before they purchase.

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.

Will the business numbers look good to anyone else?

Business owners can operate their company as they wish, but when they are ready to sell, will it appeal to buyers? 

If the numbers don’t make sense or show profits, who would want to buy it?  Business owners who want top dollar for their company must be able to reveal all elements of owner cash flow that buyers and lenders will accept.  Otherwise, there will only be disappointing offers or no offers at all!

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.

Plan your exit strategy before preparing to sell

A few months ago I wrote about the joys of helping business owners sell their companies.  I also wrote about the sorrows of explaining to someone contemplating selling their business that it might not be worth as much as they think.

But somewhere in the middle are situations where owners are able to sell their business but might have been able to sell for a higher price if they had done things differently.

I’m not talking about how they ran the company, their location or the quality of their equipment.  I’m talking about how they prepared the company for sale.

Business owners need to give careful consideration to how they want to exit their business.  An exit strategy is a long-term plan for transferring the ownership of their company to another entity.  The characteristic of a plan means it is conceived long before it becomes desirable or necessary.  This is what distinguishes exit strategies from more abrupt actions such as selling out.

Selling a business can be a challenge even in the hottest of markets.  To have a good chance of getting what they want, seller should give themselves plenty of time to lay the groundwork for a sale.  This isn’t done in a matter of weeks, but rather months and in many cases years.

Yet, research shows that the vast majority of business owners don’t have an exit strategy.

One of the first steps a seller needs to take is getting a thorough understanding of what they have to sell, or what they could have to sell, that somebody else might want to buy.

In other words, sellers should be spending time identifying types of potential buyers and finding out what they are looking for.

For example, if a seller wants to build a company that could be acquired by a larger competitor; they may decide to target different types of customers, in some cases sacrificing income in the interim.  A smaller quantity but higher quality of client base might be attractive to a competitor. 

In other cases, if a seller’s goal is to be merged with a related company, the seller might not need to pay much attention to the quality or quantity of customers they keep.  The seller might need to be more concerned with the product or services they provide.

The second step an owner should consider is to understand what happens during and after the sale.

Beyond the operational strategies outlined above, there are issues associated with the actual transition such as taxes, estate planning, key personnel, contracts, etc., which can impact the value of the business.

I’ll write about those issues in future blogs.

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.

Don't let your customers forget you are out there!

When sales are slow, business owners have a tendency to cut back on all marketing expenses.  Today, there are various ways of cost effective advertising to keep in contact with customers and prospects that might be considered. Talking to marketing consultants, reading books or searching on the internet are ways to find out what is working for others. 

There are direct mail campaigns such as postcards or coupon books.  Internet advertising or email campaigns can hit directly at the target audience.  Not communicating with customers and prospects will only hasten the sales slide and reduce the value of the business.

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.