Planning and Preparation for a Business Sale

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 Deciding When to Sell

Deciding when to sell might be touch call. If you’re like most entrepreneurs, the concept of selling your business pops into and out of your thoughts.  However the idea sounds good sometimes only to be put at the rear of your intelligence as a burst of new orders have to be satisfied. The explanations for selling are common and it could be surprising to you that a business owner’s incentive for selling is among the first things a possible buyer will ask about. Retirement, relocation, a change in career, are common incentives for selling.

Some entrepreneurs will sell when operations become too big to control personally, or they lack the resources to provide capital required for growth. It is vital to make plans for a transition before the evidence of burn-out and detachment show up on your fiscal reports. Enterprises that show downward sales and profit trends have a tendency to drive buyers away and/or wear away the best price you may receive for your business. If you know that retirement or a change in career is at hand, start getting ready to find the best buyer for your business.

The ideal time to sell your business is just before its pinnacle. At this point you are most certain to sell in a punctual fashion, and achieve the best compensation package for your business. Permit yourself sufficient time to find the correct buyer. It frequently takes six months to a year to find the best party, and another 60 days to finish the exchange.

Cutting The Umbilical Wire

When your clients call, are they looking for you, or is it your company name they identify with? Could any one of your qualified staff handle their desires? Are you the key technologist, the only one qualified to supply the product or service your clients demand? Are you able to take a holiday, and feel satisfied that your business may continue to run well? A possible buyer will wish to be sure that the majority of your clients will make it through a change of possession, and therefore the goods and services your company delivers can continue to develop. The transferability of a company and its buyers immediately influences a corporation’s nominal value. If you’re essential at your company, and want to sell your business inside the following couple of years, making attempts to share your consumer relations and operations commitments with key workers can help attain a great transition.

Why Buy a Franchise?

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“Major advantages and benefits of buying a franchise business”

Minimize Your Risk: One of the primary and major reasons you should consider buying a franchise business opportunity (versus buying an existing independent business or starting one from scratch ), is it gives you the opportunity to go into business for yourself with an excellent chance of success, while at the same time minimizing your risk of failure.

Starting a new business is inherently risky. Most studies conclude that over 90% of new businesses fail within 3 to 5 years. In comparison, U.S. Dept of Commerce studies have shown that over 92% of franchised businesses are still operating after 5 years in business.

Buying and owning a franchise is not for everyone. And there are some obvious disadvantages to buying into a franchise business like the lack of complete control and required payment of franchise and royalty fees for example.  If you do not like following a model or structure, this might not work for you. That being said, the overwhelming success of franchising as a viable and proven business model is simply undisputable.

Below is a list of other well known advantages and benefits of buying and starting a franchise business today.

  • Risk Reduction: Franchise industry stats indicate that the franchise business failure rate is approximately 2 to 3%, compared to over 80% for all new independent businesses started.. Although some small business experts believe that the failure rate for franchise businesses is higher that 3%, it is still is significantly lower than going it alone.
  • Proven Business Model: One of the major hallmarks of franchising is that it can offer entrepreneurs a turnkey business model with established and proven operating systems, services, and products already in place.  Having a proven system already in place eliminates the guesswork and errors a common business owner would normally face.
  • Financial Assistance:    Lenders are usually very comfortable financing the purchase of a franchise because they already have a proven track record.  Bankers usually look at franchises as having a lower risk of repayment default and are more likely to loan money base on it.        
  • Management/Consulting Assistance: An established franchiser can offer a wealth of knowledge and training on how to successfully manage and operate a franchise business. Keep in mind that the Franchiser has a vested and shared interest in your success and will provide the support and training necessary to ensure you are ultimately successful.
  • Franchise Site Assistance: Most retail franchise companies play a very active role in helping new franchisees select locations that have the best chance of providing good traffic and exposure. They can also help negotiate leases and provide invaluable advice and assistance during the build out phase of a retail location.
  • New Products and Services Development: To stay competitive in the market place most successful franchise companies will devote the necessary time and resources to develop new and profitable products and services.

 

Preparation for a Loan to Buy a Business

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At this point, you are either still looking for a profitable company to buy or have settled already in acquiring a certain company. Whatever you status is, the next essential thing you need at this point is money – funds to purchase the business you are eyeing. This is where business loans come in.

Since President Barack Obama signed into law the Small Business Jobs and Credit Act last month, reports state that loans backed by the Small Business Administration (SBA) increased by 30 percent for this year. When SBA ended its fiscal year, it had approved $16.84 billion, or 54,826 small business loans. This was within the past 12 months. The increase is attributed to the measures enacted by last year’s stimulus, which eliminated fees and increased the government’s maximum guarantee to 90%, up from 75%-85%.

The other side of the coin however, is that many businesses that filed for a loan were denied. Why so? Based on the study conducted by the Federal Reserve Bank of New York during June and July of 426 small-business owners, it found 59% of small businesses wanted credit, and half of those were denied. In addition to the small businesses that got nothing of what they sought, about 75% of those surveyed said they received “some” or “none” of the credit they wanted.

In an interview, Kausar Hamdani, Senior Vice President and Community Affairs Officer said, “Until now, we’ve only heard anecdotally about difficulties for regional small businesses in obtaining credit without any numbers to confirm this.” Meanwhile, Bernard Clineburg, Chief Executive of Cardinal Bank, said in her interview with MarketWatch, “As a bank that wants to make small business loans, we can’t find the borrowers…qualified borrowers are hard to find.”

Then what can you do to make your company more qualified? Here’s what we found out.

Be well-organized financially. As they say, talk is cheap. Lenders prefer to see things in black and white. It’s best to present to your lender your annual and interim financial statement, tax returns from the past three years and of course, your business plan, stating where your company has been and where it is headed. Of course, you should state that you intend to buy a business.

Be ready to tell your story. If your company survived the financial downturn, then you are worthy of a loan. What could set you apart is how you managed to survive and how you paired up compared to your competitors.

Transparency. It’s a cliché, but ‘honesty is the best policy.’ If you had unappealing credit history, your company shouldn’t hide it, instead bring it up front and explain the situation. After all, banks will find out about it once they check on your lending records.

Be realistic. Like any other loans, companies should be prepared to put up collateral for their loan. Percentage may vary but 15 to 30 percent is ideal.

What does it take to be successful?

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Certainly, you need adequate capital to buy the business and to make the improvements you want, along with maintaining some reserves in case things start off slowly. You need to be willing to work hard and, in many cases, to put in long hours. Unfortunately, many of today’s buyers are not willing to do what it takes to be successful in owning a business. A business owner has to, as they say, be the janitor, errand boy, employee, bookkeeper and “chief bottle washer!” Too many people think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses must be “doers.”

Is It a Good Time To Sell Your Business?

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It is no secret that the recent economic conditions have had a significant impact on most privately-held businesses over the past year or to. Not surprisingly, these same challenging economic conditions have also had a negative impact on merger and acquisition (M&A) activity. Thankfully, many privately-held businesses are beginning to see stabilization within their industries if not the beginning of a slow recovery. As a result, M&A activity appears to be on the rise. This is a good sign for all business owners, but particularly for those who are contemplating retirement in the next few years. Even so, there are a number of factors that impact the structure, timing, and valuation of a business sale. This includes the quality of the business, the number of qualified buyers, and the availability of financing.

Current Environment

Business quality – The quality of a business is still a key factor for attracting buyers. Now more than ever, acquirers are attracted to profitable companies with strong gross margins, loyal customers, tenured employees/management and attractive growth potential.

Many companies have been cutting costs to improve profits, but cost cutting has its limits. Once costs are optimized revenue growth is going to be the engine that impacts profitability. For example, we have seen businesses that have maintained their customer base over the past couple of years and have even gained new customers. Although their overall revenue and average revenue per customer is down from previous years, it is expected that the pent up demand from these customers will have a significant impact on future profitability as the economic environment improves.

Availability of qualified buyers – Some prospective acquirers perceive the current economic climate as an opportunity to expand or diversify their own business. And while some business owners believe that the only buyers right now are bottom feeders, this is definitely not the case. EBITDA multiples have decreased somewhat since 2007 according; however, strong companies are still being fully priced – because the demand for high-performing companies is definitely higher than the supply. In our own practice, we are currently negotiating deals that have multiple interested buyers.

In addition, private equity groups have cash to spend and are looking for opportunities. The amount of capital available for investment from U.S. private equity groups is at an all-time high with a gap of $400 billion between the amount of funds raised over the past few years and the equity invested.

Finally, some companies/industries have become even more attractive because they have proven their ability to perform well during the economic downturn. Health care, technology, and certain manufacturing companies are all enjoying this kind of increased attention.

Financing – Acquisition financing is more difficult to obtain than it was two years ago, but transactions are still getting done as lenders seek to finance deals that make sense. However, lenders are being more particular when it comes to approving buyers. They are looking for buyers who have relevant experience, a clear business plan and collateral assets.

Positive trends are important, and some lenders are interested in seeing a full-year on the books in 2010 – with improved performance over 2009 – before they will approve financing. In some cases, transactions may require more seller financing than was required in the past, so factor this into your planning. Even so, your goal should be to be substantially cashed out at closing.

Going Forward

The time to sell is when the business is steady or growing, the employee base and/or management team is stable and (perhaps most importantly) when an owner is ready based on his or her personal and financial objectives. This means sellers should understand what the market may be willing to pay for their business, and should plan ahead with a professional adviser to help determine the best time to sell.

Waiting a few years as the economy continues to recover is a valid strategy if the owners have a longer term retirement horizon. However, this may be an ideal time for planning an eventual sale. Business owners cannot control the external economic environment, so they should focus on the internal factors that can make a business more attractive. These factors include management succession, diversification of revenue, competitive or strategic advantages, opportunities for growth, asset base, and transparent financial records among others.

Trends are important when determining the right time to sell. If you do not have a system for tracking certain metrics and trends then this is a good time to implement one. Positive trends can demonstrate predictable or recurring revenue streams, and the ability to track such trends on a quarterly or even a monthly basis can be very valuable. The exact metrics to track depend on the type of business, but in general you should have the ability to track sources of revenue by customer, product/service and geography, as well as detailed costs and any other metrics that may be unique to your particular industry.

If you are contemplating a transition –  structuring a buyout by employees, or selling it to a third party – you should be asking and answering a host of specific questions. In our experience, we have realized that planning ahead and following a well-executed process can increase the value of a business by 10-30%.

I invite you to contact us if you are interested in planning a future sale. Our conversation will be strictly confidential, and I am sure it will be worth your time.

Sales Price vs Asking Price

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A recent survey by BizBuySell, using their data, makes for not only interesting reading, but is very informative. BizBuySell, one of the leading websites which list businesses for sale, is providing a valuable service to all sellers by providing this date.

One  figure is significant because it bears out a figure from other sources. The chart in the BizBuySell report on small business sales price versus asking price came out at approximately 84 percent for 2011, just about the same as many other indexes.  This is a very valuable statistic. The BizBuySell report represents thousands of sales and therefore the percentage of asking price versus selling price is very meaningful.

When an offer is presented to a seller and is only 20 percent less than the asking price, the information in this report can help make a deal. And, certainly if the offer is only 10 or 15 percent less than the asking price, the results of thousands of closed deal should make a seller grab the deal. It’s pretty hard for a seller to argue with thousands of sales. What this figure strongly suggests is that businesses are listed for about 15% more than what they are really worth in the market place.

What Business is Right For You?

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When you or your company decides to pursue growth through acquisition, you generally have certain criteria in mind. As you search the market for possible acquisition opportunities, you can be left with a lot of options. The question for you now is: Are you looking to buy the right business?

Let’s go back to the point where you are simply looking for a business to buy.  You have criteria – gross revenue and EBITDA targets, location in a certain region, a certain number of employees, etc. Surely, through due diligence and other methods, you would know if these numbers are realistic and if their projected numbers are indeed attainable.

Another (obviously) important criteria to consider is the industry. If you or your company is simply looking to expand operations, then you would certainly choose to buy a business within the same industry you are currently working in.  In that case, there wouldn’t be much adjustment on your part because you know the industry and how the market moves.

But what if your company is looking to venture into other fields? Surely you would choose a company whose sellers are willing to train you during the turnover process. However, you should be cautioned, they could never prepare you for everything that may happen down the road. If the company goes south, does it mean you chose the wrong business to buy?

Not necessarily. The economic circumstances that could lead your company to ‘failure’ do not make your decisions the wrong ones. When a merger fails, it could be management issues that lead to that situation. After buying the business, your company starts calling the shots. If they aren’t the best and most strategic decisions, there’s nowhere to point the finger.

By the end of the day, it all boils down to you, the buyer. Any business for sale could be the right business for you so long at it fits all of the criteria you have set. What’s more, it all depends on your mental/psychological capacity to run the business, your skill sets and the ability to integrate it into your current company.  It will be challenging but worth the rewards.

Want to sell your business? What You Need to Know

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Surveys of the business brokerage industry maintain that only 25 percent to 30 percent of businesses that are listed for sale actually ever sell.

The three main reasons the majority of businesses listed for sale don’t sell:

• The owner has an unrealistic expectation of the business’ value.

• The business is breaking even or losing money.

• There is a fundamental problem with the business and/or the business model.

Sometimes one or all three of these conditions exist at once.

Most businesses can be sold, provided that one of the above three issues doesn’t exist, or a new owner has the ability to fix the problems.

Having a realistic expectation of a business’ value is a manageable condition and perhaps the easiest to solve. For many owners, it can be difficult to come to a realistic expectation of value.  This is understandable because most small business owners have invested a significant amount of time and money, not to mention blood, sweat and tears, into their “baby”.  Selling the business is like one of their children who is about to leave home for the first time.

Determining a realistic value of the business is essential and will do the most to prepare a business for sale. How to do this?  First, do a little research on business valuations.  Many business owners think the business is valued on a multiple of revenues.  A buyer is much more interested in the businesses EBITDA or re cast earnings than revenues.  Getting a realistic value for your business should be the first priority.  Because Empire Business Solutions is an experience M&A specialist, we can help you determine a realistic value for your business.   We have access to valuation software and transaction comparables which can provide a basis for a realistic price for your business.  Please call us for a free article on valuation or a free consultation on selling your business.

Next, talk to a M&A/business broker advisor who has transactional business sales experience.  Make sure that the person has real-world experience in the size of business that you are considering selling. Theory is great, but you want someone who has done this before and can give you an honest assessment of the value.  Most M&A/business broker advisors have software which can generate a reasonable opinion of value so you can get an idea of value.

If the initial indication of value from your advisor is within reason of your expectations, the next step might be to get an independent and objective third-party business appraisal. A formal appraisal will give you the most information on the business’ value and will be the most thorough. This can be expensive but can be useful in negotiation with a potential buyer. The appraisal must be objective and, therefore, it should not be provided by your current bookkeeper or CPA.

It should be completed by someone who performs business appraisals on a regular basis. Since a state license is typically not required to execute business appraisals (unlike in real estate), review the appraiser’s qualifications and designations.

The second two issues are more problematic and more difficult to repair. A business that is losing money can be very difficult, if not impossible, to sell. On top of that, the business model might be flawed or not working right, creating the losses in the first place. Questions that need to be asked are as follows:   How long has the company been in business?  Is the business model viable in today’s economy?  What is it about the business that isn’t working?   Can new products or services be offered under the current model that will create appeal to the clients being served?  Can the business model be fixed?  These questions have to be answered honestly in order for the business to be repaired prior to sale. If the flaws can’t be mended, it might be time to rethink the business in general and, possibly, wind the business down.

After reviewing the business model for viability, you may determine that the business might be losing money but the model itself is not flawed. The owner needs to look at why the company is in the red. A business that is losing money can be very difficult or impossible to sell as buyers will not want to take on someone else’s burden. Many business sellers who are in trouble often try and convince a prospective buyer of the business’ potential and that, under new ownership, the troubled business will thrive. Buyers often do purchase businesses based on their potential, however, they typically will not base a price on potential but on the past financial performance.

To improve the business’ profitability, scrutinize every expense.  Once changes are made, those items can be added back or adjusted to the financials, retroactively, to show what the business would have looked like had those changes been made.

By educating themselves about the reasons why businesses don’t sell, owners who desire to exit their companies via sale stand a much better chance of completing that goal.

Rating Today’s Business Buyers

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Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.

The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.

Synergistic Buyers

These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.

A Final Note

Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.

Why Sell Your Company?

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Selling one’s business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.

  • Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
  • No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
  • Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
  • Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
  • Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
  • An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”

There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”