November 2015

Top 10 Ways Selling Your Business Can Go Wrong

I came across this article from Axial that does a good job illustrating some of the pitfalls or challenges that can cause a deal to go sideways when trying to sell a business.  Here are a brief description of the top ten ways selling your business can go wrong.  To read the entire article click here.

1. Unrealistic Value Expectations

The number one reason deals fail to close is because a seller’s valuation expectations are too high.

2. Unclear Story Elements

Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.

3. Quality of Earnings

Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm to continue its due diligence.

4. Length of Time

Every deal has a life of its own and its own momentum. Recognizing the ebb and flow of the deal momentum is critical to deal success

6. Customer/Vendor Concentration

If a significant amount of revenues is concentrated in a few customers, or if critical supply chain raw materials are concentrated in one vendor, the buyer’s perception of risk is elevated substantially.

7. Renegotiating Terms of the Deal

Renegotiating the terms, conditions, structure, and representations and warranties of a settled deal can be a deal killer

8. Lack of Robust Internal Controls

Frequently, the buyer’s due diligence process will reveal sloppiness (or worse) in internal controls (e.g., weak collection processes for aged receivables, manufacturing error rates, aberrations in the financial statements, regulatory filing inconsistencies).

9. Reaching for the Last Dollar

It is completely understandable that sellers who have put everything into their business want to get every dollar they can out of their business.

10. Inadequate Advisors

Selecting a quality deal team is critical to deal success. Business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit.

© Copyright 2015 Business Brokerage Press, Inc.

Important Lease Information when Selling or Buying a Business

If your business is not location-sensitive, that is, if your business location is immaterial to its success, then the following may not be important.  However, lease information is usually helpful no matter what the situation.  The business owner whose business is very dependent on its current location should certainly read on regarding important lease information when selling or buying a business.

If your business is location-sensitive, which is almost always true for a restaurant, a retail operation, or, in fact, any business that depends on customers finding you (or coming upon you, as is often the case with a well-located gift shop) – the lease is critical.  It may be too late if you already have executed it, but the following might be helpful in your next lease negotiation.

Obviously, a very important factor is the length of the lease, usually the longer the better.  If the property ever becomes available – certainly consider all the options it takes to purchase it.  However, if you are negotiating a lease for a new business, you might want to make sure you can get out of the lease if the business is not successful.  A one-year lease with a long option period might be an idea.  Keep in mind that you will most likely want to sell the business at some point – make sure the landlord will outline his or her requirements for transfer of the lease.

If you’re in a shopping center, insist on being the only tenant that does what your business does.  If you have a high-end gift store, a “dollar” type of store might not hurt, but its inclusion as a business neighbor should be your decision.  Also, if the center has an anchor store as a draw, what happens if it closes?  The same is true if the center starts losing businesses.  Your rent should be commensurate with how well the center meets your needs.

What happens if the center is destroyed by fire or some other disaster – who pays, how long will it take to rebuild? – these questions should be dealt with in the lease.  In addition to the rent, what else will be added: for example, if there is a percentage clause – is it reasonable? How are the real estate taxes covered? Are there fees for grounds-keeping, parking lot maintenance, etc?  How and when does the rent increase?  Who is responsible for what in building repair and maintenance?

A key issue for many business owners is determining who holds ultimate responsibility for the rent.  Are you required to personally guarantee the terms of the lease?  If you have a business that has been around for years, or if you are opening a second or third business, the landlord should accept a corporation as the tenant.  However, if the business is new, a landlord will most likely require the personal guarantee of the owner.

The dollar amount of the rent is not necessarily the most important ingredient in a lease.  If the business is successful – the longer the lease the better.  If it’s a new business, the fledging owner might want an escape clause.  And, in any case, the right to sell the business and transfer the business is a necessity.  Buyer’s will pay close attention to the length of the lease and wether the terms are above or below market value.  This can obviously be an asset or liability when it comes time to sell a business.

© Copyright 2015 Business Brokerage Press, Inc.

3 Costly Estate Planning Mistakes Business Owners Make

1. No estate planning at all. This one is a no brainer and a mistake that is common to everyone not just business owners. No estate planning documents means that the family must go through the Probate court to handle all personal and business related issues if the business owner becomes incapacitated or dies. This is costly on a number of levels because dealing with the court is expensive, slow, and stressful for all of those involved and it causes a disruption to the business itself.

2. Establishing a Trust but Failing to Fund the Business into Their Trust. Again, this mistake is extremely common to everyone. A trust is simply a legal contract which allows for the private (outside of court) management and distribution of one’s assets upon their incapacity and death. It is an estate planning tool used primarily to avoid the Probate Court. While it can be a very effective tool, the Trust will only control those assets which are formally and legally tied to the Trust. The common misconception is that if an asset is listed or named in the Trust documents somewhere, it is automatically under the control of the Trust.

THIS IS SIMPLY NOT TRUE!

Example: Business Owner sets up a trust for the benefit of him and his wife during his lifetime, with his children named as secondary beneficiaries upon both of their deaths. He neglects however, to change the title of his business to the name of the Trust. When he dies, his interest in his business entity (S Corp., LLC, Sole Prop.) is vested in his name. When he dies, a Probate court proceeding is required to transfer his interest in his business to his wife because simply naming the business itself in the trust documents is not sufficient to transfer his interest to the trust. Generally, the issuance of new stock shares, a book transfer, or assignment is required for the formal transfer of the business interest depending upon the type of business entity.

3. No Buy Sell Agreement or Business Continuation Strategy. When a business owner becomes incapacitated or dies, the business either has to be sold or it can be continued by another party. However, the mechanism by which this happens needs to be spelled out specifically and plans made ahead of time to provide for the efficient transition of the business. Even if the court is not involved in this process because the business owner has provided for it to be handled through their trust (see Number 2 above), there are a number of issues which should be addressed in more specificity that is best addressed in an additional document such as a Buy Sell Agreement. Some of these issues include the terms of the sale/transfer and the method for valuing the business. A lack of specific instructions can cause a disruption to the business and disagreements among the parties involved.

The moral of the story is that court is expensive, time consuming, and frustrating to deal with. By having properly funded estate planning and business planning in place, business owners can avoid the unnecessary burdens and costs to their families and their businesses of having to deal with the court system.

Cecilia Tsang

Family Wealth Law Group 

Sacramento, CA

Today’s Variety of Possible Business Buyers

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.

© Copyright 2015 Business Brokerage Press, Inc.

Start Planning Your Exit Strategy

Business owners are often asked, “Do you think you will ever sell your business?” The answers vary from: “Only when I can get my price” to “Never” to a realistic “I don’t really know” with everything else in between. “When will you sell your business?” is often asked, but very seldom answered. Certainly, misfortune can force the decision, but no one can predict this event. Most don’t believe or accept the old expression that advises, “It is always a good idea to sell your horse before it dies.”

There is an also an old adage that says: “You should start planning on exiting your business the day you buy or start one.” You can’t predict misfortune, but you can plan on it. Unfortunately, most sellers wait until they wake up one morning, and just drive around the block several times working up the courage to begin the day working in their business. This is a common sign of “burn-out” and is an-going problem with small business owners. Or, they face family pressure to start “taking it easy,” or to move closer to the grandkids. Now what?

There are really only four ways to leave your business. Obviously, the easiest is to put the key in the door and walk away. It’s also the worst way! The years of hard work building a business has a value. Another way is to transfer ownership to one’s children or child. Assuming one of them is interested and capable, it can mean a successful transfer and a possible income stream. A third way is to sell it to an employee. The employee may know the business, but may lack the interest or skill for ownership or the funds necessary to pay for it. The fourth way, and the one taken by the majority of small business owners, is to sell it and move on. Every business owner wants as much money as possible when selling, so now may be a good time to begin a pre-exit or pre-sale strategy. Here are a few things to consider when you start planning your exit strategy.

Buyers want cash flow.

Buyers are usually buying a business with a cash flow that will allow them to make a living and pay off the business, assuming it is financed – and most are. Buyers will look at excess compensation to employees and family members. They will also consider such non-cash items as depreciation and amortization. Interest expenses along with owner perks such as auto expense, life insurance, etc., will also be considered. A professional business broker is a good source of advice in these matters.

Appearances do count.

Prior to going to market, make sure the business is “spiffed up”. Do all of the signs light up properly at night? Replace carpet if worn; paint the place and replace that old worn-out piece of equipment that doesn’t work anyway. If something is not included in the sale – like the picture of Grandfather Charlie who founded the business – remove it. An attractive business will sell for much more than a tired and worn-out looking place.

Everything has value.

Such items as customer lists, secret recipes, customized software, good employees and other off-balance sheet items have significant value. They may not be included in a valuation, but when it comes time to sell, they can add real value to a buyer.

Eliminate the Surprises.

No one likes surprises, most of all, prospective buyers. Review every facet of your business and remedy any problems, whether legal, financial, governmental, etc., prior to placing your business up for sale.

Your professional business broker can assist in all facets of preparation. They know what buyers are looking for and they also are familiar with current market conditions