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 earningsâ€
     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!

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: https://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.