Strategic Ways to Sell your Business In Orange County

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Did you see the news that Facebook  acquired Internet messaging service WhatsApp for $19 billion? It is the largest-ever acquisition of an Internet company in history.

WhatsApp is a true find for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.

At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?

Nobody know for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion.   A strategic acquisition.

And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.

There can be many other strategic reasons why a bigger company might want to buy yours. Here are a few to consider:

1. To control their supply chain

In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.

2. Increase sales by having the existing sales people sales new products

Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPost had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.

3. To make their cash cow product look better

Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.

4. To enter a new geographic market

Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.

5. To get their employees

Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.

Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.

Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers?  Complete the Sellability Score questionnaire today and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Sellability. Take the test now: http://empireoc.com/sellability-score

What Are The Top Businesses for Sale In Orange County and Across the US

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Often I am asked what are the types of businesses that sell or is my business a business which can be sold.  To answer the first question, here are the top current top ten in both Main Street and M&A.

 

Top Ten Businesses for February 2014:

  1. Printing & Typesetting Services
  2. E-Commerce
  3. Convenience Stores
  4. Restaurants
  5. Websites
  6. Services
  7. Wholesale
  8. Telephone Services
  9. Bars
  10. Auto Repair, Service & Parts

Top Ten M&A Businesses for February 2014:

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

Valuations for Business Sold for Under $1,000,000

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A recent report from Business Valuation Resources of the 4Q 2013 Pratt’s Stats Private Deal Update reports the following pricing/valuation multiples of EBITDA used on sales made by business brokers, of businesses that sold for under $1,000,000:

2013 = 2.40
2012 = 2.36
2011 = 2.50
2010 = 2.34
2009 = 2.35
2008 = 2.58
2007 = 3.73
2006 = 4.15
2005 = 4.05

As you can see the changes in the multiples of EBITDA have had impact on the expectations of sellers.  Sellers I have run across often don’t like the current multiples/pricing and think their business is worth more than the market will bring.  The  challenge is because many business owners expect to receive multiples of EBITDA that simply are not happening, like they were pre-recession.

 

Do You Want Your Business to Be More Valuable This Year?

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For many, the first of the year is a time of rebirth and resolutions. It is a time to reflect on last year’s achievements and to set goals for the year ahead.

Some people will set personal goals but most company owners will set business goals, usually focused on hitting certain revenue or profit projections. But if your goal is to own a more valuable business in 2014, you may want to consider these goals:

* Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.

* Write down at least one process per month. You need to document your systems by putting it down in writing for others to follow. Resolve to document one system a month and by the end of the year you’ll own a more sellable company.

* Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.

* Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.

* Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.

* Find your lease as well as any other key contracts. When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord.   Make sure the lease can be assigned.

* Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.

* Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.

* Get your Sellability Score. All goals start with a benchmark of where you’re at today, and by understanding your company’s Sellability Score, you can pinpoint how you’re doing now and which areas of your business are dragging down your company’s value.  Visit our website at www.empireoc.com to take the Sellability survey.

A lot of company owners will set next year’s goals around their revenue or profits, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

The Pre-Sale Business Tune-Up For Selling Your Business in Orange County

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Owners are often asked, “do you think you will ever sell your business?” The answer varies from, “when I can get my price” to “never” to “I don’t really know” to everything in between. Most sellers may think to themselves when asked this question, “I’ll sell when the time is right.” Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, “it is a good idea to sell your horse before it dies.”

Four Ways to Leave Your Business

There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don’t have enough cash, or interest, to purchase the business. And, like offspring, they may not be able to manage the entire business. (3) Selling the business to an outsider is always a possibility. Get the highest price and the most cash possible and go on your way. (4) Liquidate the business – this is usually the worst option and the last resort.

When to Start Working on Your Exit Plan

There is another old adage that says, “you should start planning to exit the business the day you start it or buy it.” You certainly don’t want to plan on misfortune, but it’s never to early to plan on how to leave the business. If you have no children or other relative that has any interest in going into the business, your options are now down to three. Most small and mid-size businesses don’t have the management depth that would provide a successor. Furthermore liquidating doesn’t seem attractive. That leaves attempting to find an outsider to purchase the business as the exit plan.

The time to plan for succession is indeed, the day you begin operations. You can’t predict misfortune, but you can plan for it. Unfortunately, most sellers wait until they wake up one morning, don’t want to go to their business, drive around the block several times, working up the courage to begin the day. It is often called “burn-out” and if it is an on-going problem, it probably means it’s time to exit. Other reasons for wanting to leave is that they face family pressure to start “taking it easy” or to move closer to the grandkids.

Every business owner wants as much money as possible when the decision to sell is made. If you haven’t even thought of exiting your business, or selling it, now is the time to begin a pre-exit or pre-sale strategy.

Top Businesses for Sale

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Here is a list compiled by a leading businesses for sale website.

Top Ten Businesses for December 2013:

  1.  E-Commerce
  2. Convenience Stores
  3. Restaurants
  4. Fast Food – Non Franchises
  5. Websites
  6.  Bars
  7.  Auto Repair, Service & Parts
  8. Services
  9. Liquor Stores/Off Licences/Wine Merchants
  10. Gas/Petrol Service Stations

Top Ten M&A Businesses for December 2013:

  1. Distribution Businesses
  2. Wholesale Businesses
  3. Mining Businesses
  4. Auto Repair, Service & Parts
  5. Manufacturing Businesses
  6. Car Wash & Valet                         
  7. Food & Drink Distributors
  8. Food & Drink Wholesalers
  9. Transport Services
  10. Road Haulage & Freight Services

Business For Sale in Orange County Increased in 2013

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As a leading Broker and M&A Specialist in Orange County, it is important for our clients to have a clear picture of the current market conditions.   Several reports coming out in January indicate the number of transactions in 2013 grew significantly in Orange County led by exceptional growth in the restaurant and retail sectors.  The good growth increase in businesses for sale and closed transactions can be attributed to several factors, including the improved economy, excellent supply and demand fundamentals and continued improvement in the financials of the businesses for sale.

Considering Selling Your Business? Some Things to Consider

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  • Know the value of your business.   Don’t even think about selling until you know what your business should sell for.  Get a formal Valuation or, at minimum, a Broker Opinion of Value.  Call us to explain.
  • Get prepare to sell.  Have your financials properly prepared.  There is an often-quoted statement in the business world: “The time to prepare your business to sell is the day you buy it or start it.” Easy to say, but very seldom adhered to. Now really is the time to think about the day you will sell and to prepare for that day.
  • Sell your business when it is growing and it is doing well. The old quote: “The time to sell your business is when it is doing well” should also be adhered to. It very seldom is – most sellers wait until things are not going well.
  • Consult with your Tax guy.   Ask your accountant about the tax impact of selling your business. Do this on an annual basis just in case. However, the tax impact is only one area to consider and a sale should not be predicated on this issue alone.
  • Maintain or continue growing the business.   Continuing to manage the business is a full-time job. Retaining the best outside professionals is almost a must. Utilizing a professional business intermediary will allow you to spend most of your time running your business.
  • Finally, in the words of many sage experts, “Keep it simple.” Don’t let what looks like a complicated deal go by the boards. Have your outside professionals ready at hand to see if it is really as complicated as it may look.

How To Increase the Value Of My Business

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How valuable your business is to a prospective buyer is the extent to which the buyer can see where your sales will come from in the future.  A recurring revenue stream means the buyer might not have to inject cash into the business going forward and therefore will pay more for it.   Recurring revenue streams therefore increases the value of your business.  There are various forms of recurring revenue.

1.  Contracts (think wireless phones)

2.  Automatic renewal subscriptions (think websites which charge a monthly fee automatically charged at the first of the month)

3.  Sunk-money renewal subscriptions (think equipment lease and then subscribe to information to monetize the leased equipment)

4.  Renewable Subscriptions (think magazine subscriptions)

5.  Consumables (think razor blades)

This is the time of the year to plan for the future.  If you can incorporate a recurring revenue stream into your business you can increase its value.

 

 

Can You Really Afford to Sell?

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In many cases, the sale of a small company is “event” driven. That is, the reason for sale is often an event such as a health decline or illness, divorce, partnership issues, or even a decline in business.

A much more difficult reason for selling is one in which the owners simply want to retire and live happily ever after. Here is the problem:

Suppose the owners have a very prosperous distribution business. They each draw about $200,000 annually from the business plus cars and other benefits. If the company sold for $2 million, let’s say after debt, taxes and closing expenses, the net proceeds would be $1.5 million. Sounds good, until you realize that the net proceeds only represent about 3 1/2 years of income for each (and that doesn’t include the cars, health insurance, etc.). Then what?

The above scenario is not atypical, especially in small companies. These are solid companies that provide a very comfortable living for two owners. In the above example, the owners obviously decided they couldn’t sell because it didn’t make economic sense to them. The business was worth much more to the owners than to any outside buyer. Perhaps they thought that an intermediary could produce a buyer who would be willing to pay far more than the business was worth. But, the M&A market is a fairly efficient one.

So, what should they do?

The downside is that competition could enter the fray and their business would not bring in the same cash flow.

The business could also suffer because the owners are not continuing to build it. They apparently want to retire and take life easy, and this mind-set could dramatically undermine the business.

If the owners are forced to sell the business because it is declining, they, most likely, won’t even receive the $2 million they might have received earlier.

On the other hand, the owners, ready to begin their happily ever after, could bring in a professional manager. This addition would cut their earnings slightly to pay for the new manager, but it would also reduce their responsibilities and give the business a chance to grow with new energy and ideas.