The Power of Recurring Revenue
Buyers and sellers alike love recurring revenue. But what is it exactly that makes it so attractive? Recurring revenue is generally viewed as a very good factor as it indicates positive cash flow, the potential for growth, business success and business stability. Let’s take a closer look at how it can benefit you.
Show You’re in Demand
Businesses, including IT companies, are valued higher if they can show recurring revenue, such as monthly subscriptions, SaaS subscriptions, or a transaction that consistently occurs. If your business is centered on a subscription based platform and you have high subscription levels, then you can expect keen interest from prospective buyers.
If you want to show a prospective buyer that your business is a good bet, then recurring revenue is a great place to start. Recurring revenue indicates that you have ongoing consumers and that means ongoing revenue. But recurring revenue indicates something else as well, namely, it indicates that your business is providing a consistent service that is consistently in demand.
Take the Pressure Off Buyers
Buyers like predictability. Recurring revenue means that a buyer knows that he or she can buy a business and count on income from day one.
Sellers can often forget that most buyers get nervous when they are making any kind of business buying decision. The power of recurring revenue is, in part, psychological as it allows buyers to realize that there will be revenue no matter what. Even if they do little to develop the business, cash will flow in. In other words, the psychological value of recurring revenue is that it takes much of the pressure off.
Examining Your Annual Recurring Revenue
If your business has a strong annual recurring revenue or “ARR”, then you should place a good deal of focus on this fact. Many feel that a company’s ARR number is a powerful indicator of a company’s overall health.
Ultimately, recurring revenue indicates a great deal about your company. High recurring revenue doesn’t just mean that you have a reliable source of income every period. It indicates that your business is providing a service that is needed and valued. Strong recurring revenues also indicate that your business is doing many things correctly and that your goods and/or services are of such a caliber that you are generating repeat business.
Visibility and Transparency
Savvy buyers also value visibility and transparency. Thanks to this kind of consistent income, it is easier for buyers to plan for and manage future expenses and increase a business’s overall stability.
Part of properly showcasing your business is to emphasize your business’s recurring revenues if they do indeed occur. A seasoned business broker can be an invaluable ally in helping you reveal your business in the best light possible.
Copyright: Business Brokerage Press, Inc.
Read More5 Reasons Business Brokers Improve Closing Rates
It has long been a well-known fact that business brokers can help improve closing rates. In this article, we will take a closer look at the five top reasons why having a business broker on your side can make all the difference in the world.
#1 – They Reach the Most Buyers
What seller isn’t looking to reach more buyers? When more candidates are reviewing your business, the odds of selling for your desired price only go up. The simple fact is that business brokers reach the most buyers. In fact, they usually have a long list of prospective buyers waiting.
#2 – Business Brokers Know How to Navigate Negotiation Hurdles
As the old saying states, “there is no replacement for experience,” and this definitely holds true for business brokers. Business brokers know what it takes to circumvent negotiation hurdles. Their years of hands on experience means they can spot problems long before they occur, and this dramatically helps them to successfully boost closing rates.
#3 – They Know How to Present Your Business
Once again, experience matters. Business brokers specialize in buying and selling, and this means that they understand how to best present those businesses. Showcasing your business in the best light possible and working to eliminate weaknesses in presentation is a vital part of the sales process. Business brokers put their experience to work helping sellers achieve the best presentation possible.
#4 – They Stay Focused
Business brokers sell businesses for a living. You, however, by contrast have to worry about the day to day state of your business until all the paperwork is signed.
Additionally, since you are unfamiliar with the process of selling a business, you very well may become bogged down in the process; this is more dangerous than it may seem. Sellers who spend too much time getting involved in the “ins and outs” of the deal may accidentally start to neglect their own business operations. The last thing you want in the time period leading up to a sale is for your business to suddenly flounder.
#5 – Business Brokers Are Highly Invested in Your Success
Business brokers only get paid if your business sells. That means they too have a vested interest in your success. You can expect them to do everything possible to ensure that the sale of your business goes through.
Added together, these five factors help to explain why business brokers have historically enjoyed high closing rates. If you want to improve your chances of selling a business, don’t try to do it alone.
Read MoreWhat is EBITDA and Why is it Relevant to You?
If you’ve heard the term EBITDA thrown around and not truly understood what it means, now is the time to take a closer look, as it can be used to determine the value of your business. That stated, there are some issues that one has to keep in mind while using this revenue calculation. Here is a closer look at the EBITDA and how best to proceed in using it.
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It can be used to compare the financial strength of two different companies. That stated, many people don’t feel that EBITDA should be given the importance that is frequently attributed to it.
Divided Opinion on EBITDA
If there is disagreement on EBITDA being able to determine the value of a business, then why is it used so often? This calculation’s somewhat ubiquitous nature is due, in part, to the fact that EBITDA takes a very complicated subject, determining and comparing the value of businesses, and distills it down to an easy to understand and implement formula. This formula is intended to generate a single number.
EBITDA Ignores Many Key Factors
One of the key concerns when using or considering a EBITDA number is that it is often used as something of a substitute for cash flow, which, of course, can make it dangerous. It is vital to remember that earnings and cash earnings are not necessarily one in the same.
Adding to the potential confusion is the fact that EBITDA does not factor in interest, taxes, depreciation or amortization. In short, a lot of vital information is ignored.
Achieving Optimal Results
In the end, you simply don’t want to place too much importance or emphasis on EBITDA when determining the strength of a business. The calculation overlooks too many factors that could influence future growth and prosperity of a business.
Business brokers have been trained to handle valuations to determine the approximate value of a business. Since valuations take many more factors into consideration, they also tend to be far more accurate.
Copyright: Business Brokerage Press, Inc.
Read MoreHow To Keep Employees Engaged When Selling Your Business
Ensuring that your employees stay on course during your ownership transition should be one of your key areas of focus. There are many key steps that you should take during this delicate time. Let’s explore the best tips for keeping your employees engaged throughout the entire ownership transition process.
Step 1 – Establish and Implement a Training Program Early On
If you are selling your business, then be certain that you train replacements early on in the process. Failure to do so can result in significant disruptions. Additionally, if you are buying a business it is of paramount importance that you are 100% confident that there are competent people staying on board after the sale.
Step 2 – Address Employee Concerns
No matter what your employees say or how they act, you must assume that they are worried about the future. After all, if you were them wouldn’t you be concerned at the prospect of a sale? The best way to address these concerns is to meet with employees in small groups and discuss their concerns.
Step 3 – Don’t Make Drastic Changes
Above all else, you want a smooth and fluid transition period. A key way to ensure that this time is as trouble-free as possible is to refrain from making any drastic changes before or after the transition. Remember the sale of the business is, in and of itself, shocking enough.
You don’t want to add yet more disruption into the process by making changes that could be confusing or unsettling. In other words, keep the waters as calm as possible. Drastic changes could lead to employees quitting or worst of all, going to work for a competitor.
Step 4 – Focus on the Benefits
If possible focus on the benefits to your employees. It is your job as the new business owner to outline how the sale will benefit everyone. Don’t let your employees’ imaginations run wild with speculation. Unfortunately, this is exactly what happens when employees and management feel as though they are not receiving any information about the sale. So don’t be mysterious or cryptic. Instead provide your employees with information, and keep the focus on how the changes will benefit them both personally and professionally.
Implementing these four steps will go a very long way towards helping to ensure a smooth transition period. Transition periods can be handled adeptly; it just takes preparation and patience.
Read MoreFive Reasons Business Brokers Improve Closing Rates
It has long been a well-known fact that business brokers can help improve closing rates. In this article, we will take a closer look at the five top reasons why having a business broker on your side can make all the difference in the world.
#1 – They Reach the Most Buyers
What seller isn’t looking to reach more buyers? When more candidates are reviewing your business, the odds of selling for your desired price only go up. The simple fact is that business brokers reach the most buyers. In fact, they usually have a long list of prospective buyers waiting.
#2 – Business Brokers Know How to Navigate Negotiation Hurdles
As the old saying states, “there is no replacement for experience,” and this definitely holds true for business brokers. Business brokers know what it takes to circumvent negotiation hurdles. Their years of hands on experience means they can spot problems long before they occur, and this dramatically helps them to successfully boost closing rates.
#3 – They Know How to Present Your Business
Once again, experience matters. Business brokers specialize in buying and selling, and this means that they understand how to best present those businesses. Showcasing your business in the best light possible and working to eliminate weaknesses in presentation is a vital part of the sales process. Business brokers put their experience to work helping sellers achieve the best presentation possible.
#4 – They Stay Focused
Business brokers sell businesses for a living. You, however, by contrast have to worry about the day to day state of your business until all the paperwork is signed.
Additionally, since you are unfamiliar with the process of selling a business, you very well may become bogged down in the process; this is more dangerous than it may seem. Sellers who spend too much time getting involved in the “ins and outs” of the deal may accidentally start to neglect their own business operations. The last thing you want in the time period leading up to a sale is for your business to suddenly flounder.
#5 – Business Brokers Are Highly Invested in Your Success
Business brokers only get paid if your business sells. That means they too have a vested interest in your success. You can expect them to do everything possible to ensure that the sale of your business goes through.
Added together, these five factors help to explain why business brokers have historically enjoyed high closing rates. If you want to improve your chances of selling a business, don’t try to do it alone.
Copyright: Business Brokerage Press, Inc.
Read MoreHow Three Moves Quadrupled the Value of this Business
Are you stuck trying to figure out how to create some recurring revenue for your business? Here’s how one business owner quadrupled the value of their business in three moves.
You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.
Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.
Steward set about to transform her business into a more valuable company and made three big moves:
- Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.
Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime.
90% of her customers switched from hourly billing to the Angel Watch program.
- Doubling Rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.
- Survivor Clause
Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.
Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.
Read More
Why Should You Hire A Business Broker
It’s more interesting to begin by asking: Can a business be sold without the use of a business broker? The undisputed answer is obviously yes. Many businesses still sell through private parties. Sellers hire brokers because they believe the broker will do a better job than they would.
Key functions of a broker
Business valuation: Fair market value is what a willing buyer will pay a willing seller, period. Without selling a number of businesses in a particular area, a broker couldn’t possibly know what fair market value is for a business. Without this experience it’s simply theory. The right broker will know the value based on experience, and work with local valuation experts to assist in the process.
Confidentiality: Brokers protect the seller and buyer in every possible way, even though the selling process requires the sharing of information. Using a good broker is the optimal way to ensure confidentiality.
Packaging and marketing: Quality brokers have expertise and know what makes a business attractive to a buyer. They can therefore identify strong selling points for each business, which a seller might not have considered. After all, selling a business is just that… Selling! Packaging and marketing are critical to the successful sale of a business.
Finding prospective buyers: Brokers should be constantly marketing to buyers through websites, direct mail, phone solicitation, and networking. This results in a large database of interested buyers of all sorts.
Buyer qualification: Brokers screen prospective buyers in several ways. They obtain documents such as credit reports and financial statements, as well as interview buyers regarding credentials and experience. Sellers do not want to waste time with buyers who may not have the needed experience or are not serious buyers.
Consultation: A broker works with owners throughout the process regarding all aspects of the sale, including the terms of sale, financing issues, non-compete and other contract issues, customer retention, and whatever else is needed to make the process run smoothly.
Negotiations: Brokers provide important third-party negotiation skills to ensure that the deal gets done under terms that are satisfactory. This is one of the most underappreciated aspects of what a good broker provides and could fill an entire book of its own. This is where the broker either pays for himself or costs the seller money.
Financing: Successful brokerage firms have access and expertise in obtaining financing for the buyer so that the seller can receive cash at close if the business and buyer qualify. A broker can also provide guidance and valuable experience with regard to seller financing issues when necessary.
Large Pools of Buyers: It is simple Economics 101: Sellers can’t get the best deal from one or two potential buyers they met at an industry seminar. The larger the pool of potential buyers, the better the chance of getting not only the right price and terms, but the best fit for your clients and staff.
There is a reason some brokers successfully sell many businesses each year, while others don’t. Some work hard and produce results while others merely list businesses and wait. Selling a business is not a simple process. It’s a complex, legally binding transaction with potential repercussions far into the future.
Randy Hendershot 916.993.5433 ext 5
3017 Douglas Blvd, Suite 300, Roseville, CA 95661
randy@evobizsales.com www.evobizsales.com
Read More5 Tips for Buyers of International Businesses
The decision to buy an international business is no doubt quite serious. There are numerous factors that must be taken into consideration when deciding whether or not an international business purchase is the right move. Let’s take a closer look.
Tip #1 – Relocating Vs. Hiring a Manager
Buying an international business can also mean a substantial life change. Before jumping into the process, it is critical that you know whether you will be relocating or hiring a manager to run your newly acquired business.
Obviously, owning a business is a substantial responsibility and you’ll want to ensure that you know exactly what is going on with your new acquisition. Sometimes that means actually being there. The bottom line is that you will either have to relocate or hire a manager.
Tip #2 – Regulations
Understanding regulations, taxes and customs are another must for buyers of international businesses. A failure to factor in these elements can literally undo one’s business or at the very least place you at a competitive disadvantage. The time and money you invest in learning how regulations, taxes and customs work in this new territory is time and money well spent.
Tip #3 – Research Similar Businesses
You will want to invest your time into research. In particular, you will want to research similar businesses that already exist in the place where you are investing. Why are those businesses successful? What could you do to improve on their model or approach? Don’t assume that just because you know how businesses fare in the United States that this knowledge will always translate over to other countries.
Tip #4 – Be Aware of Potential Cultural Differences
It is important to be aware of cultural differences during the negotiation process, but this is really just the beginning. Cultural differences do not end once the negotiation process is over. They have ramifications in areas including everything from dealing with your staff and vendors to getting professional assistance from people such as local accountants and lawyers. You will need to be aware of cultural differences and perhaps even learn to speak the language if you want your business to be a thriving success.
Tip #5 – Hire a Business Broker
Business brokers are experts in buying and selling all kinds of businesses and that includes international businesses. There are many layers to owning an international business and business brokers can help you navigate the waters. The sizable expertise that a business broker brings to the table can help save you considerable amount of frustration and confusion.
These five tips are invaluable for helping you determine whether you should opt for an international business and/or how to proceed once you’ve decided to move forward. There can be big opportunities in owning an international business, but it is critical to proceed with a clear cut strategy.
Copyright: Business Brokerage Press, Inc.
Read MoreEstate Planning Opportunities May Be Lost in December 2016
Proposed Regulations Just Issued: The United States Treasury (IRS) just issued Proposed Regulations that could have a dramatic impact on your estate planning by eliminating valuation discounts. For wealthy people looking to minimize their future estate tax, this is critical. Planning can also be essential for others as well. If you are concerned about protecting a family business from the risks of future divorce, or protecting your assets from lawsuits or malpractice claims, discounts can enable you to leverage the maximum amount of assets out of harm’s way, without triggering a gift tax to do so.
Act Now: Time is of the essence. Once the Proposed Regulations are effective, which could be as early as year-end, the ability to claim discounts might be substantially reduced or eliminated, thus curtailing your tax and asset protection planning flexibility.
What are Discounts, Anyway?: Here’s a simple illustration of discounts. Bernie has a $20M estate which includes a $10M family business. He gifts 40% of the business to a trust to grow the asset out of his estate. The gross value of the 40% business interest is $4M. Since a minority 40% trust/shareholder cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less than the pro-rata value of the underlying business. Thus, the value should be reduced to reflect the difficulty of marketing the non-controlling interest. As a result, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at $2.4M. The discount has reduced the estate by $1.6M from this one simple transaction.
Election Impact: If the Democrats win the White House and the Democratic estate tax proposals are enacted, the results will be devastating to wealth transfer planning. Some experts project that a Democratic White House could affect down-ballot races and flip the Senate to the Democrats. The Democratic tax plan includes the reduction of the estate tax exemption to $3.5M, elimination of inflation adjustments to the exemption, a $1M gift exemption and a 45% rate. The Democratic plan will most likely include the array of proposals included in President Obama’s Greenbook which seek to restrict or eliminate GRATs, note sale transactions to grantor trusts, and more. Wealthy taxpayers who don’t seize what might be the last opportunity to capture discount planning, might lose much more than just the discounts. They might lose many of the most valuable planning options.
Not a 2012 Boy Who Cried Wolf: You may recall the mad rush to plan in late 2012 on the fear that the gift, estate and generation skipping transfer (GST) tax exemption might be reduced from $5M to $1M in 2013. After many incurred significant costs and hassles in implementing planning quickly, that change never occurred. For those who might be affected by discounts, the situation in 2016 seems vastly different. The Proposed Regulations could be changed and theoretically even derailed before they become effective. The more likely scenario is that they will be finalized after public hearings and the ability to claim valuation discounts will be severely curtailed. If you do undertake planning, be cognizant of an important lesson from much of the poor planning that was done in 2012. Consider using planning techniques that assure you (or if you are married, your spouse) access to funds transferred in the discount planning. The main regrets in 2012 planning were for those who transferred assets out of their own reach. That is really not necessary.
What You Should Do: Contact your planning team. A collaborative effort is essential to have your planning done well. As your estate planning and tax attorney we can review strategic wealth transfer options that will maximize your benefit from discounts while still meeting other planning objectives. Projections completed by your wealth manager could be essential to confirming how much planning should be done and how. Your CPA will have vital input on wealth transfer options, federal and state income tax implications and more. Your insurance consultant can show you how to use life insurance to backstop some of the planning strategies, in coordination with the financial forecasting done by your wealth manager, to maximize both the tax benefits and your financial security.
Who Should Act: Married clients with estates that exceed $8M or more and single clients with estates of $4M or more should reevaluate the effectiveness of their plan.
Look for Upcoming Seminars: We are setting dates for seminars which detail the effect of these changes and describe some of the actions that may be appropriate to take. Please contact our office if you are interested in attending and let us know if a lunch, afternoon or evening time is best for you.
Content provided by: The Goralka Law Firm helps successful families, business owners and real estate owners achieve their enlightened dreams by better protecting their assets, reducing income and estate tax and providing for the distribution of their estate to the right people, at the right time and keeping the wrong people out. For over two decades, the Goralka Law Firm has satisfied our clients’ unique planning needs by collaborating with our partners, attorneys, accountants, business managers, financial planners, stock brokers and insurance professionals. As tax attorneys and as estate planning and asset protection professionals, our job is to provide peace of mind by easing the process of estate and asset protection planning, minimizing estate and income taxes and developing sophisticated retirement and post-mortem plans. Email: info@goralkalawfirm.com, Phone: (916) 571-9155.
Read MoreHighlights From Q2 2016 IBBA and M&A Source Market Pulse Survey On Businesses Sold
- Strongest Growth in businesses selling that are valued at $5M-$5M
- Buyers market for businesses valued under $1M, over the $1M mark is a Seller’s market