A Listing Agreement is More than Just a Piece of Paper

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In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.

For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.

For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.

So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.

What is the Value of Your Business? It All Depends.

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The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.

  • Does an owner need to know for estate purposes?
  • Does the bank want to know for lending purposes?
  • Is the owner entertaining bringing in a partner or partners?
  • Is the owner thinking of selling?
  • Is a divorce or partnership dispute occurring?
  • Is a valuation needed for a buy-sell agreement?

There are many other reasons why knowing the value of the business may be important.

Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.

In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.

In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.

It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.

The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”

In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.

The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?

Business brokers can be a big help in establishing value or price.

Empire Receives Award as Business Broker Orange County

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Empire Business Solutions, a leading Business Broker in Orange County,  is please to announce that the firm has named as the recipient of the “Best Solutions Provider-USA.

Empire Business Solutions, a leading Business Broker and M&A Company in Orange County, California is please to announce that Acquisitions International, Inc has awarded Empire Business Solutions its 2014 “Best Solutions Provider of the Year-USA.”

Acquisitions International magazine recognizes and honors the leading dealmakers in our awards supplement, in which we combine votes alongside in-house research data and industry expertise to finalize the shortlists and the overall winners. AI’s awards are given solely on merit and not handed out like confetti.”

Empire Business Solutions is a leading Business Broker and M&A Specialist in Orange County since 2005.

 

 

A “Pig in a Poke"

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Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained a law firm to deal with the legalities of the sale. What’s left for the buyer to do is to make sure that there are no “skeletons in the closet,” so he or she is not buying the proverbial “pig in a poke.”

The four main areas of concern are: business’ finances, management, buyer’s finances, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry they are not familiar with. The seller, because of his or her experience in a specific industry, has probably developed a “sixth sense” of when the business has peaked or is “heading south.” The buyer has to perform the due diligence necessary to smoke out the real reasons for sale.

Business’ Finances: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited? Is the company profitable? How do the expenses compare to industry benchmarks?

Management: For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates? Is there a lot of change or turn-over in key positions? On the other hand, no change in senior management may indicate stagnation. Are the employees upbeat and positive?

Buyer’s Finances: Buyers should make sure that the “money is there.” Too many sellers take for granted that the buyer has the necessary backing. Sellers have a perfect right to ask the buyer to “show me the money.”

Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis.

By doing one’s homework and asking for the right information – and then verifying it, buying a “pig in the poke” can be avoided.

Building Wealth

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Most of us have seen an increase in our Net Worth over the last couple of years.  Housing prices have gone u 5%-20% depending on where you live in Orange County.  Stock portfolios have increased by over 10% or more.  However, if  you are like most, the majority of  your wealth is tied up in the success of your business.  Increasing the value of your biggest asset will have a much greater impact on your Net Worth and financial picture more than any run up in the prices of homes or stock market.  Here are 6  drivers  which impact the value of your business;

1.  Consistent history of increasing revenue and profit combined with profession books and records.

2.  Potential for Growth without relying on any one customer, employee or vendor.

3.  Recurring Revenues

4.  Is your business and business model differentiated from the competitors?

5.   Customer Satisfaction which will lead to re-purchases and referrals.

6.  Is your business able to run well without you in the picture?

If you have these drivers in your business now, you can get a premium for your business when it comes time to sell.  Build your business and build your wealth.

 

What Businesses are Selling?

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Below you will find the current “hot” business list courtesy of data from BusinessesForSale.com. We asked Businesses For Sale for a monthly ranking of business types based on the number of “hits” on their site. This ranking is not based on the actual sale of businesses.

Top Ten Businesses for April 2014:

  1. E-Commerce
  2. Advertising
  3. Websites
  4. Convenience Stores
  5. Restaurants
  6. Bars
  7. Internet
  8. Auto Repair, Service & Parts
  9. Retail
  10. Gas/Petrol Service Stations

Top Ten M&A Businesses for April 2014:

  1. Distribution
  2. Manufacturing
  3. Car Wash & Valet
  4. Fabrication
  5. Gas/Petrol Service Stations
  6. Mining
  7. Wholesale
  8. Road Haulage & Freight Services
  9. Food & Drink Distributors
  10. Food & Drink Wholesalers

Are You Prepared to Sell Your Business

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Be Prepared to Sell Your Business

 

Like the firemen who back the truck in order to be ready, you, as a business owner, need to be prepared when you get the call from someone who solicits to buy your business.  According to the latest Sellability Tracker report, the proportion of business owners who received an offer to buy their company in the quarter ending March 31, 2014 was up considerably from Q4 2013. Roughly 12% of business owners using The Sellability Score last quarter had recently received an offer to buy their business.

Companies are being  acquired more  because buyers have access to more cash than they know what to do with and interest rates are still very low.

This increase in activity among buyers has important implications for you as a business owner.  Chief among them is that you need to have a sellable asset when opportunity strikes.

Statistically speaking, the two most common reasons you are likely to sell your business are:

  1. A health scare; or retirement
  2. An unsolicited offer to buy your business.

As unsolicited offers increase, so too does the need for you to be ready if an opportunity comes your way. Unlike when the owner is in control of when he/she decides to list a property, the hallmark of an unsolicited offer is the fact that the owner doesn’t’ know when it is going happen; which means you need to operate your business as if an offer were always around the corner.

Companies that are sloppily put together with shoddy bookkeeping or too much customer concentration, or that are run by a Hub & Spoke manager, will end up being passed over for turnkey operations.

The time is now for you to get your company ready to showcase when opportunity comes knocking.

 

 

 

Creating Value in Privately Held Companies

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“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
     Russ Robb, Editor, M&A Today

Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family.  (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).

Building value in a company should focus on the following six components:

  • the industry
  • the management
  • products or services
  • customers
  • competitors
  • comparative benchmarks

The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry.  One advantage of privately held firms is their ability to shift gears and go into a different direction.  One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands.  This saved the company.

The Management – Building depth in management and creating a succession plan also builds value.  Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.

Products or Services– A single product or service does not build value.  However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.

Customers – A broad customer base that is national or international is the key to increasing value.  Localized distribution focused on one or two customers will subtract from value.

Competitors – Being a market leader adds significantly to value, as does a lack of competition.

Comparative Benchmarks – Benchmarks can be used to measure a company against its peers.  The better the results, the greater the value of the company.

Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.

What are the “hot” businesses for sale in Orange County

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I am often asked what business are selling in Orange County and across the country.   Buyers looking for a business or sellers wanting to sell the business, all want to know what is really going on out in the real world.  Here is what the latest;

Below you will find the current “hot” business list courtesy of data from Businesses For Sale. We asked Businesses For Sale for a monthly ranking of business types based on the number of “hits” on their site. This ranking is not based on the actual sale of businesses.

Top Businesses for Sale in March 2014:

  1. Café Bars
  2. Bars
  3. E-Commerce
  4. Convenience Stores
  5. Restaurants
  6. Nightclubs
  7. Sandwich Shops & Delivery
  8. Home & Garden
  9. Liquor Stores/Off Licences/Wine Merchants
  10. Pizza Delivery

Top Ten M&A Businesses for Sale March 2014:

  1. Distribution
  2. Manufacturing
  3. Wholesale
  4. Car Wash & Valet
  5. Fabrication
  6. Road Haulage & Freight Services
  7. Auto Repair, Service & Parts
  8. Gas/Petrol Service Stations
  9. Mining
  10. Construction

 

What Do Buyers In Orange County Really Want to Know?

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Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.

  1. Want to do their own thing; to control their own destiny, so to speak.
  2. Do not want to work for anyone else.
  3. Want to make better use of their skills and abilities.
  4. Want to make money.

These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.

The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.

There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.

  • How much is the down payment?  Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn’t be looking to purchase a business in the first place.
  • Will the seller finance the sale of the business?  It can be difficult to finance the sale of a business; therefore, if the seller isn’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
  • Why is the seller selling?  This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
  • Will the owner stay and train or work with a new owner?  Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
  • How much income can a new owner expect?  This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller’s ability to substantiate it with financial statements or tax returns.
  • What makes the business different, unique or special?  Most buyers want to take pride in the business they purchase.
  • How can the business grow?  New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
  • What doesn’t the buyer know?  Buyers, and sellers too, don’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.

Years ago, it could be said that prospective buyers of businesses had only four questions:

  1. Where is the business?
  2. How much is it?
  3. How much can I make?
  4. Why is it for sale?

In addition to asking basic questions, today’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.

Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one’s own business!