Three Common Errors Caused by Inexperience
The old saying that “there is no replacement for experience” is a truism that has stood the test of time. The simple fact is that a lack of experience can dismantle your deal.
Consider the following scenario – a business owner nearing retirement owns a multi-location retail operation that is doing several million in annual sales. He interviews a well-respected and experienced intermediary and is impressed.
However, the business owner’s niece has recently received her MBA and has told her uncle that she can handle the sale of his business and in the process, save him a bundle. On paper, everything sounds fine, but as it turns out the lack of experience gives this business owner less than optimal results.
Let’s take a look at a few problems that recently arose with our nameless, but successful, business owner and his well-meaning and smart, but inexperienced niece.
Error #1 No Confidentiality Agreements
One problem is that the business owner and his niece don’t use confidentiality agreements with prospective buyers. As a result, competitors, suppliers, employees and customers all learn that the business is available for sale. Of course, learning that the business is for sale could cause a range of problems, as both employees and suppliers get nervous about what the sale could mean. Ultimately, this could undermine the sale of the business.
Error #2 Incorrect Financials
Another problem is that the inexperienced MBA was supposed to prepare an offering memorandum. In the process, she compiled some financials together that had not been audited. While on paper this seemed like a small mistake, it failed to include several hundred thousand dollars the owner took. He simply forgot to mention this piece of information to his niece. Clearly this mishap dramatically impacted the numbers. Additionally, this lack of information would likely result in lower offers as well as lower bids, or even decrease overall prospective buyer interest.
Error #3 Failing to Include the CFO
A third key mistake in this unfortunate story was a failure to bring in the CFO. The niece felt that she could handle the financial details, but in the end, her assumption was incorrect. The owner and the niece failed to realize that prospective buyers would want to meet with their CFO, and that he would be involved in the due diligence process. In short, not bringing the CFO on board early in the process was a blunder that greatly complicated the process.
The problem is clear. Selling a business, any business, is far too important for an amateur. When it comes time to sell your business, you want an experienced business broker with a great track record. Again, there is no replacing experience.
Copyright: Business Brokerage Press, Inc.
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Why Deals Fail: Unrealistic High Asking Prices Are Usually The Culprit
A recent post from Peter Siegel founder at BizBen.com with a few simple but important ideas on why businesses do not sell.
The unfortunate truth is that approximately 50 percent of all California small business for sale transactions fall through. Failed transactions can happen for a variety of reasons, i.e. the seller has poor record keeping abilities, the business location has an unattractive lease, and even a lack of motivation for the owner to get a deal done, etc. While many of those reasons have led to failed deals, the most common reason that deals fall through is because the seller has listed their initial asking price much too high.
When a business owner lists their business for a price that seems otherwise unreasonable to potential buyers, it ultimately scares off the majority of those people who were genuinely interested in buying the business. Business owners who have invested a lot of time and money into their company want to get top dollar for their hard work, even if it means valuing their business where they believe future profits would have taken them, or in the ballpark of what their business was worth before the recession.
If a business owner has their business priced too high and begins negotiations with a potential buyer who is willing to buy the company for much less than the listed price, it is important to keep an open mind and work toward understanding why people aren’t willing to pay the full asking price for their business.
As a seller, you may have come to your asking price without having your business properly valued, and may need to reevaluate your stance on your price and seek professional assistance.
As a potential business buyer, it is critical to be able to support your value of the company you are interested in with hard facts. Analyzing a profit and loss income statement from the previous 3 years is an excellent place to start and is among the numerous things that will play into the process of valuing the business.
After an offer is made, both parties must work together to understand where the other side is coming from and understand that everything is negotiable. If you aren’t willing to budge or negotiate, you’ll never get a deal done. Both parties should develop a report with one another to show good faith and support their reasoning for prices in a way that doesn’t scare the other party out of a deal. Neither party should become excitable or get offended by the other person’s offer / purchase agreement, but rather strive to make a deal that benefits both sides.
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SageWorks Accounting Says These Types Of Small Businesses Have The Best Return On Equity
Around the Web: A Month in Summary
A recent article posted on Forbes.com entitled “Small Business Owners Are Retiring, And Millennials May Not Fill The Gap On America’s Main Street” uses the closing of a 235-year-old hardware store to prove a startling fact: the Millennial generation may not be suited to take over small business ownership like the generations before them. In the case of Elwood Adams Hardware, which has seen a multitude of owners over the last almost two and a half centuries, the current owner simply couldn’t find a buyer.
While student loan debt and an inclination to pursue work in the gig economy may be factors in this unwillingness to take on small business ownership, their age may actually be the driving factor. The article mentions that the sweet spot for entrepreneurship is typically the 40’s, so it may take some time to truly see if millennials are suited for small business ownership.
Click here to read the full article.
A recent article from the Axial Forum entitled “Five Due Diligence Pitfalls and How to Avoid Them” outlines some common mistakes and pitfalls that are made during the due diligence process and gives tips on how to navigate the due diligence waters. The pitfalls include:
- Missed Opportunities
- Pointless Provisions
- Red Flags at the 11th Hour
- Poor Communication
- Leaving Money on the Table
Avoiding these five things won’t guarantee success, but doing so can definitely help give an owner the best chance at success. Buying a business is not an easy process, but knowing what to expect, what to avoid, and how to maximize the value of a dollar can go a long way.
Click here to read the full article.
A recent article posted on Divestopedia.com entitled “The Investment Banking Landscape: Different Types of M&A Firms” gives an overview of the different types of M&A firms as well as how they can be useful in different situations. Owners interested in selling should know how each type of firm works and how each could be of use to them during the sale of their business. The following represent these different types of firm:
- Boutique Investment Firms
- Regional Investment Banks
- Bulge Bracket Investment Banks
- M&A Advisory Firms
- Business Brokerage
Each of these types of M&A firms has its own benefits and drawbacks, so it is very important for an owner to understand and explore the options available to them before settling on one.
Click here to read the full article.
A recent article posted on BizBuySell.com entitled “Small Business Transactions Reach Record High As Buyers Shrug Off Amazon Effect” explores business transaction data from the third quarter of 2017. As outlined by the report, closed transactions numbered 2,589 in the third quarter, up 24% from the same time period last year. This quarter continues the overall trend of quarter-over-quarter growth in reported transactions going back two years.
Increases in median revenue and cash flow of sold businesses as well as a decrease in the median time to sell a business show a strengthening small business sector and an improving overall market. Although retail has taken a hit from the “Amazon Effect,” retail transactions are actually up 23% since this time last year. Read the full report by clicking the link below.
Click here to read the full article.
A recent article posted on BizJournals.com entitled “Closely-held Businesses Head Toward a Slippery Slope” explores a startling truth about small businesses in the United States: around 60 percent of owners will likely retire within the next 10 years. On the surface, this may sound unimportant or irrelevant to the small business world. But just beyond the surface lies the fact that almost 70 percent of successions fail. But still, what does this mean for the small business sector?
Finding a suitable well-trained successor will be of absolute necessity within the next 10 years for these 60 percent of retiring owners. Failure is inherently more common than success post-transition, so finding qualified individuals to take over will be paramount to continued small business success in the United States.
Click here to read the full article.
Copyright: Business Brokerage Press, Inc.
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Can Corporate Social Responsibility Increase Your Business Value?
If you are unfamiliar with CSR or corporate social responsibility, you are certainly not alone. In the coming years, you’ll be hearing a lot about CSR. In this article, we’ll look at CSR and how, when implemented with sincerity, it can positively impact your company and its operation.
Building Your CSR Locally
One of the key ways that you can build your CSR is to think about ways to help your community. Contributing to local community programs, for example, is a great place to start. Everything from personal involvement to direct financial support can help build your company’s reputation within your community.
Your Connection to the Environment
A second way to build your CSR is to show that your company is thinking about its impact on the environment. Recycling is important but so is using eco-friendly packaging and containers. Additionally, embracing low-emission and high mileage vehicles is another good step as this lowers your company’s carbon footprint.
Advertising and Good PR
A third area to consider is how your company interacts with the marketplace. Using responsible advertising, business conduct and public relations is a savvy move. Likewise, providing fair treatment of your shareholders, suppliers and vendors and contractors will all help to improve your CSR.
Yet, one of the single most important areas of corporate social responsibility occurs in the workplace. The advent of social media has helped fuel the dispersal of information. If your business isn’t treating its employees in a fair manner and/or has unsafe work conditions or unfair employment practices, the word will eventually get out. There has never been a more important time to treat your employees well.
Embracing CSR serves to increase shareholder and investor interest. In short, it is expected. Socially-conscious companies are considered smart and stable investments. A company that has fully embraced CSR will find greater buyer interest and even a higher selling price when the time comes to sell. Most buyers want excellent customer loyalty with no skeletons hiding in a company’s closet. They also are seeking happy and loyal employees, low employee turnover and for a company to have a good reputation within a community. CSR helps achieve all of these goals and more.
Ultimately, corporate social responsibility works to create additional value. When you invest in CSR, you are investing in achieving a higher selling price and making your business more attractive to sellers. Summed up another way, you can’t afford not to think about this topic.
Copyright: Business Brokerage Press, Inc.
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It’s Time To Embrace CSR (Corporate Social Responsibility)
If you are unfamiliar with CSR or corporate social responsibility, you are certainly not alone. In the coming years, you’ll be hearing a lot about CSR. In this article, we’ll look at CSR and how, when implemented with sincerity, it can positively impact your company and its operation.
Building Your CSR Locally
One of the key ways that you can build your CSR is to think about ways to help your community. Contributing to local community programs, for example, is a great place to start. Everything from personal involvement to direct financial support can help build your company’s reputation within your community.
Your Connection to the Environment
A second way to build your CSR is to show that your company is thinking about its impact on the environment. Recycling is important but so is using eco-friendly packaging and containers. Additionally, embracing low-emission and high mileage vehicles is another good step as this lowers your company’s carbon footprint.
Advertising and Good PR
A third area to consider is how your company interacts with the marketplace. Using responsible advertising, business conduct and public relations is a savvy move. Likewise, providing fair treatment of your shareholders, suppliers and vendors and contractors will all help to improve your CSR.
Yet, one of the single most important areas of corporate social responsibility occurs in the workplace. The advent of social media has helped fuel the dispersal of information. If your business isn’t treating its employees in a fair manner and/or has unsafe work conditions or unfair employment practices, the word will eventually get out. There has never been a more important time to treat your employees well.
Embracing CSR serves to increase shareholder and investor interest. In short, it is expected. Socially-conscious companies are considered smart and stable investments. A company that has fully embraced CSR will find greater buyer interest and even a higher selling price when the time comes to sell. Most buyers want excellent customer loyalty with no skeletons hiding in a company’s closet. They also are seeking happy and loyal employees, low employee turnover and for a company to have a good reputation within a community. CSR helps achieve all of these goals and more.
Ultimately, corporate social responsibility works to create additional value. When you invest in CSR, you are investing in achieving a higher selling price and making your business more attractive to sellers. Summed up another way, you can’t afford not to think about this topic.
Copyright: Business Brokerage Press, Inc.
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The Risk Of Sharing Exit Plans With Employees When Selling Your Business
One of the core principles of creating a more valuable business is ensuring it can run without you by getting managers to think like owners.
The theory goes that empowered employees are the best positioned to solve your company’s thorniest issues, as they are the ones closest to the problems. In theory, people feel more like they are part of a bigger cause and this has the potential to contribute positively to a company’s culture. Of course, there is a risk sharing exit plans with employees when selling your business.
American Data Company
Being too open with employees can also backfire. To illustrate, let’s look at the example of American Data Company, founded by Josh Holtzman in 2003. Holtzman had built his consulting business up to more than $3 million in revenue by 2011 when he came up with the goal of building it to be a $15- million business. Holtzman knew that a $15-million business would have the scale to provide his employees with more opportunities and a better exit multiple if he ever wanted to sell.
Fifteen Cubed—The Goal of Getting to $15 Million
To galvanize his team around the idea of getting to $15 million, Holtzman came up with a catchy concept he dubbed “Fifteen Cubed”. The idea was that his team would help him build American Data to $15 million in annual revenue by the year 2015 and, if successful, he would share 15% of the proceeds of the sale with his staff as part of a phantom stock option program.
Holtzman announced the goal and bought Fifteen Cubed bracelets for each of his employees to wear as a reminder of their collective goal and how they stood to gain personally if they were able to achieve their common goal.
Initially, the program was received positively, but a year after the announcement, American Data had failed to grow. Another year went by and still, American Data was stuck at $3 million to $4 million in revenue.
Suddenly, the prospect of hitting $15 million looked like a long shot. Ultimately, the only way Holtzman could hit the goal was to merge his company with a much larger one, which is what he did when he swapped his equity in American Data for a minority stake in Magnet 360, a consulting company about five times bigger.
The merged companies exceeded $15 million in combined sales and Holtzman’s employees were able to participate in Magnet 360’s phantom stock option program, even though their portion of the proceeds was diluted when American Data merged with Magnet 360. It was a good outcome for all involved, but not quite the home run Holtzman had imagined when he first announced the $15 million revenue goal.
Keeping Employees in the Know
Being open with employees can be a great energy boost when things are going well. Employees see the charts and graphs all moving up and to the right and that can contribute to a positive vibe in the office. But just like using leverage when buying a house can boost results in a good market and magnify mistakes when things turn down, being open has the potential to backfire dramatically if you don’t reach your projected numbers.
As an entrepreneur, you can handle a high degree of ambiguity and you probably have an abnormally high degree of optimism. Just remember the people who work for you have chosen not to be entrepreneurs and for some of them, there may be such a thing as too much information.
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