Selling a Business? Be Aware of These Four Potential Issues
We’ve outlined below a few unexpected aspects of the business sale process that can pop up. Sometimes they severely impact the turnaround time of a sale. But if you can understand these potential issues better, you will be better prepared to try to circumvent them.
1. Do You Have Time on Your Side?
It’s helpful to use an intermediary who will assist with the filtering of prospects vs. “suspects.” However, the inclusion of yet another party, in addition to both the business seller and potential buyers, increases the amount of time required to navigate the process.
Sellers are typically unaware of the time and documentation needed to compile the required Offering Memorandum. Once completed, the seller must provide both the intermediary and potential buyer more time to review and propose meetings and pricing. In the interim, owners are faced with the challenge of keeping their business thriving.
2. Trying to Do Too Much
It’s not surprising when a company owner is also its founder that individual is typically used to making all of the decisions. That’s why business owners in the midst of selling will soon find themselves challenged with the desire to fully be a part of both the selling process and the running of the business.
Delegation to someone else, such as the Sales Manager, can be truly invaluable. Think of your top people as extremely valuable resources. They may have first-hand knowledge regarding additional concerns such as competition and potentially interested acquirers. Bringing in trusted employees to be part of the sales process can be tremendously beneficial.
3. Delays Due to Stockholders
When mid-sized, privately held companies are supported by minority stockholders, these individuals must be included in the selling process—however small their share may be. The business owner will need to firstly obtain their approval to sell by using the sale price and terms as influencers. Of course, issues such as competing interests, pricing disagreements, and even inter-family concerns may cause conflict and further delay the process.
4. Money Issues
Once sellers decide upon a price that they would like to see, it is sometimes difficult for them to accept or even consider anything less. After all, a business owner likely created the company and may have a strong emotional attachment.
Another factor that often interferes with a successful sale occurs when sellers instantly turn down offers because they don’t meet with their desired asking price.
That’s when the intermediary can often come in to salvage the deal. A business broker often serves as a negotiator. He or she can work out a deal that is structured in a manner that works for both sides.
Copyright: Business Brokerage Press, Inc.
Read MoreWhat Is Really In The Mind Of A Business Buyer?
It is always important to try and put yourself “in the other person’s shoes.” This fact is of paramount importance when dealing with a prospective business buyer.
Thinking like a prospective buyer could, in fact, be the difference between selling your business and not selling your business.
Yes, it is important to continue to put yourself in your buyer’s shoes during the entire sales process.
It is easy to think that because everything is going smoothly with the sale of your business that the tough part is behind you. That may be true, but then again there could still be problems ahead.
Issues can come up at a moment’s notice when either your prospective buyer or his or her advisor raises a red flag. Additionally, the larger the business, the greater the complexity. This translates to the greater the risk of problems arising.
The “Little Things” that Could End Up Quite Big
Financial statements are of considerable importance. Quite often you’ll see contingencies regarding financial statements and/or business tax returns, so be ready and be organized. Lease issues is another common category for contingencies. Falling under the lease issue umbrella are topics such as whether or not the seller has agreed to stay on, or issues regarding the property or needs associated with the property if it is a rental.
Other common contingencies can include issues arising from equipment and fixtures that are being included with the sale. These are areas that could be easy to overlook, but they can serve to throw a major wrench into the workings of a deal.
The so-called “little things” can cause a deal to fall apart.
3 Key Steps for Preventing Disruptions from Contingencies
Step One – Create a Comprehensive List
One easy move you can make to prevent disruptions from contingencies is to make a list of all FF&E or furniture as well as fixtures, equipment or any other items that could be included with the sale. If an item is not included be sure to remove it entirely.
Likewise, if an item is inoperable then repair it ahead of time. Or at the bare minimum, you could make a list of items that are currently inoperable and include those items in your list. Remember, you don’t want a last-minute surprise or misunderstanding to jeopardize your sale.
Step Two – Check Your Leases
Problems with leases can send deals spiraling out of control. It is a prudent investment of your time to look at things like your leases. You’ll want to make certain that there are no issues that could be viewed as problematic.
If there are issues, then it is in the best interest of the deal that you disclose this information at the start of any deal. After all, you don’t want to waste anyone’s time, including your own.
Step Three – Predict Questions and Have Answers Ready
The time you invest in predicting potential questions and having the answers to those questions ready is time very well spent. You’ll look prepared and that helps build trust.
Be ready to answer questions that are likely to arise such as are you going to stay on with the business for a given period of time and what will be the cost, if any, of you doing so? What about employees staying on? Are there legal issues that should be considered? Being able to answer these kinds of questions is a prudent step.
Considering the needs of your prospective buyer will help you make a sale. In selling a business, there is no replacement for being organized and prepared.
Copyright: Business Brokerage Press, Inc.
Read MoreYour Company’s Undocumented Worth
The valuation is a major factor that influences the overall selling price of the property. Business appraisals are based upon a multitude of criteria and indisputable records such as comparables, projections, discount rates, EBITDA multiples, and more.
While the appraiser may have all the information he or she needs, the business elements might be overlooked. That’s why it’s extremely helpful for business appraisers to first grasp the purpose of an appraisal prior to getting started. Unfortunately, the appraiser is often unaware of additional considerations that may enhance or even devalue a business’ overall worth.
Is There Unwritten Value?
Business owners generally agree that prospective buyers are mostly looking for quality in depth of management, market share, and profitability. Though undoubtedly more subjective than documentation, figures, and calculations alone, information regarding key business elements such as market, operations, post-acquisition, value drivers, and fundamentals is highly valued to potential buyers.
Here are some questions to consider regarding a couple of these crucial elements:
Is there an abundance of market competition?
Does pricing reasonably align with the demographic?
Are the company goals consistent with advancing technology?
Are there various and/or global means of reach and distribution?
Does the business have more potential beyond a niche?
What’s the company’s competitive advantage?
What are the strengths and weaknesses of its competitors?
Is there a great deal of alternative technologies?
Are there various vendors?
Is the company’s location convenient to its target audience?
Increased Success & Valuation
Successful businesses thrive due to company-wide values and consistent customer-centric efforts. In his book The 100 Absolutely Unbreakable Laws of Business, Brian Tracy summarizes this as “a company-wide focus on marketing, sales and revenue generation. The most important energies of the most talented people in the company must be centered on the customer. The failures to focus single-mindedly on sales are the number one causes of business failures, which are triggered by a drop-off in sales.”
Tracy continues by pointing out that trends may be the most pivotal consideration and bottom-line contributor to any given company’s success and, therefore, valuation. For 2017, projected trends include the increased use of video marketing, crowdfunding as a source of product validation, nutrition and fitness tracking products, the use of e-commerce, and the acquisition and training of remote employees.
Understanding Trends
Start-up companies are likely practicing as many current trends as possible within their limited funding in an attempt to establish market share, while mature companies are hiring millennials to keep their business hip to those same trends in an effort to protect their existing share. Business owners would benefit from studying and ultimately executing these current trends, as well as from acknowledging the successes and mistakes of their competitors.
Tracy suggests that daily conversations that encompass problem-solving, decision-making, and team collaboration are pivotal factors in making a company successful. And those performing all of these necessities? As Tracy reiterates, top companies have the best people.
Copyright: Business Brokerage Press, Inc.
Read MoreBusiness Broker Survey Shows Service Businesses Perform Highest When It Comes To Sales
Recently, Business Brokerage Press performed a survey of brokers across the country to see what sells at the highest rate, and what they discovered was very interesting. Retail business sold at 17%, food and drink related businesses at 14%, service businesses sold at 25%, auto related businesses sold at 9%, manufacturing businesses sold at 16% and distribution businesses sold at 11%. Businesses labeled as “other” sold at 5% and professional practices at 4%.
What defines Service Businesses?
Looking at this gathered information, it is clear that “service type businesses” are very hot and doing quite well. The range for what is considered a service type business is, in fact, rather broad. It encompasses everything from a dry cleaner and hair stylist business to a massage therapy chain or dental practice. Just so long as a business is providing a service and doesn’t fall into another category, it falls under the “service oriented” banner.
Food and Drink Businesses
One of the next key nuggets of information from the survey is that food and drink businesses tend to perform quite well too. Food and drink businesses range from bars to sit down restaurants or fast food establishments. The simple fact is that people need to eat, and this truth is certainly reflected in the strong performance of food and drink businesses.
The need for certain types of businesses may change with changing times and changing technologies, but food and drink remains a staple.
Eating, for example, isn’t a trend and the tradition of visiting a local bar or restaurant is very established. In fact, some of the oldest continuously operating businesses in the world are bars and restaurants. Those looking for a business that has some degree of built-in stability and is likely to be at least partially immune to emerging trends will be well advised to consider food and drink businesses.
Those looking for a business that has some degree of built-in stability and is likely to be at least partially immune to emerging trends will be well advised to consider food and drink businesses.
The Mindset of Today’s Buyers
When you are considering what types of businesses that buyers may find interesting it is important to pause and reflect on the likely profile of prospective buyers. Today, a large percentage of prospective buyers are well educated and bring a lot of experience to the table. In short, they are savvy and know what they want.
This combination of education and experience also means that they are open minded and potentially flexible regarding the type of businesses that they will consider. Most prospective buyers will, in fact, be open to a wide array of potential options.
At the end of the day, the most important factor for most prospective buyers will be whether or not a business is profitable.
The majority of prospective buyers will not be making an emotional buy. Instead, due to their combination of experience and education, they are very likely to focus on profitability above all else. Of course, this fact underscores the importance of having your business ready to sell long before the first prospective buyer sees it.
Copyright: Business Brokerage Press, Inc.
Read MoreService Businesses Perform Highest When It Comes to Sales
Recently, Business Brokerage Press performed a survey of brokers across the country to see what sells at the highest rate, and what they discovered was very interesting. Retail business sold at 17%, food and drink related businesses at 14%, service oriented businesses sold at 25%, auto related businesses sold at 9%, manufacturing businesses sold at 16% and distribution businesses sold at 11%. Businesses labeled as “other” sold at 5% and professional practices at 4%.
What is a Service Business?
Looking at this gathered information, it is clear that “service type businesses” are very hot and doing quite well. The range for what is considered a service type business is, in fact, rather broad. It encompasses everything from a dry cleaner and hair stylist business to a massage therapy chain or dental practice. Just so long as a business is providing a service and doesn’t fall into another category, it falls under the “service oriented” banner.
Food and Drink Businesses
One of the next key nuggets of information from the survey is that food and drink businesses tend to perform quite well too. Food and drink businesses range from bars to sit down restaurants or fast food establishments. The simple fact is that people need to eat, and this truth is certainly reflected in the strong performance of food and drink businesses. The need for certain types of businesses may change with changing times and changing technologies, but food and drink remains a staple.
Eating, for example, isn’t a trend and the tradition of visiting a local bar or restaurant is very established. In fact, some of the oldest continuously operating businesses in the world are bars and restaurants. Those looking for a business that has some degree of built in stability and is likely to be at least partially immune to emerging trends will be well advised to consider food and drink businesses.
The Mindset of Today’s Buyers
When you are considering what types of businesses that buyers may find interesting it is important to pause and reflect on the likely profile of prospective buyers. Today, a large percentage of prospective buyers are well educated and bring a lot of experience to the table. In short, they are savvy and know what they want.
This combination of education and experience also means that they are open minded and potentially flexible regarding the type of businesses that they will consider. Most prospective buyers will, in fact, be open to a wide array of potential options. At the end of the day, the most important factor for most prospective buyers will be whether or not a business is profitable.
The majority of prospective buyers will not be making an emotional buy. Instead, due to their combination of experience and education, they are very likely to focus on profitability above all else. Of course, this fact underscores the importance of having your business ready to sell long before the first prospective buyer sees it.
Copyright: Business Brokerage Press, Inc.
Read MoreUnderstanding Leases When Selling Your Business
Leases can, and do, play a significant role in the buying or selling of businesses. It can be easy to overlook the topic of leases when focusing on the higher profile particulars of a business. However, leases are a common feature of many businesses and simply can’t be ignored.
Leases and Working with Your Attorney
Whenever a small business is sold, it is common that leases play a major role. In general, there are three different types of leasing arrangements. (If you have any questions about your lease, then you should consult with your attorney. Please note that the advice contained in this article shouldn’t be used as legal advice.)
Three Different Lease Options
In the next section, we will examine three of the most common types of leases. The sub-lease, new lease and assignment of lease all function in different ways. It is important to note that each of these three classes of leases can have differing complicating factors, which again underscores the value and importance of working with an attorney.
The Sub-Lease
The sub-lease, just as the name indicates, is a lease inside of a lease. Sellers are often permitted to sub-lease a property, which means that the seller serves as the landlord. It is key to note, however, that the initial landlord still has a binding agreement with the seller. Sub-leasing requires the permission of the initial landlord.
New Lease
If the previous lease on a property expires or is in need of significant change, a new lease is created. When creating a new lease, the buyer works directly with the landlord and terms are negotiated. It is customary to have an attorney draft the new lease.
Assignment of Lease
Assigning a lease is the most common type of lease used when selling a business. The assignment of a lease provides the buyer with use of the premises where the business currently exists; this works by having the seller “assign” all rights of the lease to the buyer. Once the assignment takes place, the business’s seller typically has no further rights. Also, it is common that the landlord will have wording in the contract that states the seller is still responsible for any part that the buyer doesn’t perform as expected.
Disclose All Lease Issues at the Beginning of the Sales Process
No one likes surprises. If there is a problem with your lease, then this is something that should be disclosed in the beginning of the sales process. Not having a stable place to locate your business can be a major problem and one that should usually be addressed before a business is placed for sale. Buyers don’t like instability and unknowns. Not having a firm location is definitely an issue that must be resolved.
Buyers want to see that you have made their transition from buyer to owner/operator as easy as possible. Providing clarity of issues, such as leasing, will help you attract a buyer and keep a buyer. Regardless of whether it is dealing with leasing issues or other key issues involved in buying or selling a business, working with a business broker can help you streamline the process and achieve optimal results.
Copyright: Business Brokerage Press, Inc.
Read MoreGaining a Better Understanding of Leases
Leases can, and do, play a significant role in the buying or selling of businesses. It can be easy to overlook the topic of leases when focusing on the higher profile particulars of a business. However, leases are a common feature of many businesses and simply can’t be ignored.
Leases and Working with Your Attorney
Whenever a small business is sold, it is common that leases play a major role. In general, there are three different types of leasing arrangements. (If you have any questions about your lease, then you should consult with your attorney. Please note that the advice contained in this article shouldn’t be used as legal advice.)
Three Different Lease Options
In the next section, we will examine three of the most common types of leases. The sub-lease, new lease and assignment of lease all function in different ways. It is important to note that each of these three classes of leases can have differing complicating factors, which again underscores the value and importance of working with an attorney.
The Sub-Lease
The sub-lease, just as the name indicates, is a lease inside of a lease. Sellers are often permitted to sub-lease a property, which means that the seller serves as the landlord. It is key to note, however, that the initial landlord still has a binding agreement with the seller. Sub-leasing requires the permission of the initial landlord.
New Lease
If the previous lease on a property expires or is in need of significant change, a new lease is created. When creating a new lease, the buyer works directly with the landlord and terms are negotiated. It is customary to have an attorney draft the new lease.
Assignment of Lease
Assigning a lease is the most common type of lease used when selling a business. The assignment of a lease provides the buyer with use of the premises where the business currently exists; this works by having the seller “assign” all rights of the lease to the buyer. Once the assignment takes place, the business’s seller typically has no further rights. Also, it is common that the landlord will have wording in the contract that states the seller is still responsible for any part that the buyer doesn’t perform as expected.
Disclose All Lease Issues at the Beginning of the Sales Process
No one likes surprises. If there is a problem with your lease, then this is something that should be disclosed in the beginning of the sales process. Not having a stable place to locate your business can be a major problem and one that should usually be addressed before a business is placed for sale. Buyers don’t like instability and unknowns. Not having a firm location is definitely an issue that must be resolved.
Buyers want to see that you have made their transition from buyer to owner/operator as easy as possible. Providing clarity of issues, such as leasing, will help you attract a buyer and keep a buyer. Regardless of whether it is dealing with leasing issues or other key issues involved in buying or selling a business, working with a business broker can help you streamline the process and achieve optimal results.
Copyright: Business Brokerage Press, Inc.
Read MoreThe Anatomy of a Successful Business Exit
Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.
Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer. What did Breedlove do right for a successful exit? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.
To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. At The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.
- Sell Less Stuff to More People
When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.
Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.
Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.
- Strive for 50%+ Net Promoter Score
One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.
The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.
Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.
When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.
This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.
- Create Recurring Revenue Streams
The third thing that made Breedlove’s company attractive was recurring revenue.
Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.
By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.
- Reduce Reliance on Customers, Employees, and Suppliers
Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.
Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.
- Find an Acquirer You Can Help Grow
By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.
In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.
At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.
In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding and successful business exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.
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