Financial Management for the Closely Held Business, presented by Tri Counties Bank
Tri Counties Bank locally in the central valley is presenting four 2-day Business Financial Management seminars in Grass Valley, Sacramento, Chico, and Redding in September and October. Here’s a brief summary and for more information on attending click here.
“Businesses face tough challenges and unique opportunities. The financial success or failure of a business lies in its owner’s ability to manage through the challenges and capitalize on the opportunities. Now you can learn to proactively control the finances of your company through business-tested financial management techniques and maximize profits through more informed decision-making.
This two-day seminar explains in simple, clear language what financial management is and why it can greatly improve your profitability. We guarantee that you will walk away with tangible tools that you can put to use immediately in your own company.”
September 15-16, 2015 Grass Valley
September 29-30th, 2015 Sacramento
October 13-14th, 2015 Chico
October 27-28th, 2015- Redding
To learn more and register on line click here.
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August Stock Market… Did you miss the perfect time to sell your business?
August was a rollercoaster ride for stockholders. Triple digit wins followed by even larger losses left the average investor reeling and were a good reminder that markets move in both directions.
Valuations of privately held business have also been somewhat turbulent of late. The average offer extended to users of The Value Builder System was 4.2 pretax profit in Q1, 2015, but dropped to 3.9 in Q2.
Does that mean you have missed the opportunity to sell your business at the peak?
Maybe. But should you care? Probably not.
The thing many of us forget is that when you sell your company—possibly your largest asset and the biggest wealth-creating event of your lifetime—you have to do something with the money you make.
These days, that means you’ll have to turn around and invest your windfall into an asset class that is arguably somewhat bubbly in historical terms. The stock market has more than doubled since 2009. The price of residential real estate has been growing at a rate of 1 percent per month in many major centers. The same trend can be seen in many markets that offer exclusive beach houses or ski chalets.
Who Is Richer: Samantha or Scott?
Indulge us in a hypothetical example. Let’s look at two imaginary business owners, each running a company generating a pretax profit of $500,000. Let’s imagine that Samantha sold her business into the teeth of the recession for three times her pretax profit back in 2009. She would have walked with $1.5 million pretax to invest in the stock market.
Now let’s imagine business owner Scott who decides to try and time the market. Scott waited out the recession and sold his business last month for four times pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got four times profit instead of Samantha’s three times. But when we take a closer look, Samantha would probably be better off today. Assuming she had invested her $1.5 million in the stock market back in 2009, when the Dow was trading below 7,000 points, she would now have more than $3 million, or a third more than Scott, who waited and sold at the “peak.”
Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you’re going to hide the proceeds of a sale under your mattress, you’re probably buying into the same market conditions from which you’re selling out.
A better approach is to optimize your business against the eight things acquirers look for when they buy a business, regardless of what’s happening in the economy overall.
Find out how you score on the eight factors that drive your company’s value by completing the Value Builder questionnaire here.
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Determining Your Sell By Date when Selling Your Business
Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company.
The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how most people think of starting and selling a business: as something akin to a 4 x 100-meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?
But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.
Here’s how to backdate your exit:
Step 1: Pick your eject date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.
Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.
Step 2: Estimate the length of your earn out
When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future — if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.
The average earn out these days is three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: + 1-5 years
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.
Estimate: + 3 years
Step 5: Figuring out when to sell
The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. So the sooner you start, the better.
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What Serious Buyers Look for in Buying a Business
Obviously, serious buyers want to carefully look at the financials of a company under consideration and all of the other major aspects of the company. However, there are a few other areas that the serious buyer will investigate that sellers may overlook.
The Industry – The buyer will want to take a serious look at the industry itself, the customers, the suppliers, the competition, etc. This investigation will cover the strengths, weaknesses, threats from competition, and opportunities of the potential acquisition. With the growth of the “big box” retailers, much power has shifted from the manufacturer to the retailer. A manufacturer may want to increase prices, but if Wal-Mart says no, it’s a very powerful no.
Discretionary Costs – Some sellers will reduce their expenses in discretionary areas such as advertising, public relations, research and development, thus making for a higher bottom line. However, these cuts will hurt the future bottom line, and smart buyers will take notice of this.
Obsolete Inventory – This is another area that buyers take a serious look at and that can impact the purchase price. No one wants to pay for inventory that is unusable, antiquated or unsalable.
Wages and Salaries – A company may be paying minimum wages, or offering few or low-cost benefits, a limited retirement program, etc. These cost-saving devices will make the bottom line look good, but employee turnover may create expensive problems later on. If the target company is to be absorbed by another, compensation issues could be critical.
Capital Expenditures – The serious buyer will take a very close look at machinery and equipment to make sure they are up to date and on a par with, or superior to, that of the competition. Replacing outdated equipment can modify projections and may affect an offering price.
Cash Flow – Serious buyers will take a long look at the cash flow statements and the areas that affect them. The buyer wants to know that the business will continue to generate positive cash flow after the acquisition (i.e.: after servicing the debt and after paying a reasonable salary to the owner or general manager).
Other areas that sellers overlook, but that the serious buyer does not are: internal controls/systems, financial agreements with lenders, governmental controls, anti-trust issues, legal matters and environmental concerns.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreThings To Consider If You Want To Keep The Family Business In The Family
A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering
selling the business:
- You may have to consider a lower price if maintaining jobs for family members is important.
- Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy.
- Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
- All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
- Confidentiality in the sale of a family business is a must.
- Meetings should be held off-site and selling documentation kept off-site, if possible.
- Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.
Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisers. They can also move the sales process along as quickly as possible and assist in negotiations.
Keeping it in the Family
It’s hard to transfer a family business to a younger kin. Below are some statistics regarding family businesses.
- 30% of family businesses pass to a second generation.
- 10% of family businesses reach a third generation.
- 40% to 60% of owners want to keep firms in their family.
- 28% of family businesses have developed a succession plan.
- 80% to 95% of all businesses are family owned.
SOURCE: TED CLARK, NORTHEASTERN UNIVERSITY CENTER FOR FAMILY BUSINESS
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreLiving the 80/20 principle will make your business more valuable
I am sure most of you are familiar with the 80/20 principle. 80 percent of results come form 20% of your efforts. Author Richard Koch has written a number of books on how this principle applies to life and business. In a recent seminar put on by well known marketer Perry Marshal, Richard Koch explains in this short 1m minute video how as a business owner “working hard” is typically bad for him/her and usually bad for the business.
Richard uses the phrase “getting off the hamster wheel” or more importantly as a business owner needing to make the decision to “get off the hamster wheel” and how this decision can make your business more valuable. In this 2m video Richard’s gives 3 reasons business owners should make the decision to get “out of the business.”
1- You will enjoy life more and be happier, allowing you to do things outside of the business.
2- It will increase the value of your business – by getting out of the business and thinking a different way. This is based on observations of owners that are most successful are those that have done very little in the business but set things up for the organization perform.
3- Have no value of equity– can not sell the business. To make the business sellable you have to get out of the business and be able to deliver results with out you being there.
In a previous posting we discussed this very important topic in bringing more value to your business.
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
Source: Perrymarshal.com
Read MoreCommon Reasons for Selling your Business and Why an exit strategy is important
It has been said that the sale of a business is usually event driven. Very few owners of businesses, whether small or large, wake up one morning and think, “Today I am going to sell my company.” It is usually a decision made after considerable thought and usually also prompted by some event. Here are a few common “events” that may prompt the decision to sell:
Boredom or “Burn-out” – Many business owners, especially those who started their companies and have spent years building and running them, find that the “batteries are starting to run low.”
Divorce or Illness – Both divorce and illness can cause a rapid change in one’s life. Either of these events, or a similar personal tragedy, can prompt a business owner to decide that selling is the best course of action.
Outside Investors – Outside investors may include family, friends, or just plain outside investors. These outside investors may be putting pressure on the owner/majority owner in order to recoup their investment.
No Heir Apparent – In this scenario, no family member has any interest in the business; and the owner has not groomed his or her successor. Unfortunately, in this event the owner often continues to run the business until he is almost forced to sell.
Competition is Around the Corner – In this scenario, the owner would have been better off selling prior to competition becoming an issue.
A “Surprise” Offer is Received – This may be about the only reason not truly event driven; an unsolicited offer is presented that is too good to pass up.
Everything is Tied Up in the Company – The owner/ founder sometimes becomes aware that everything he or she has is tied up in the business. In other words, all the eggs are in one basket.
Should Have Sold Sooner – Owning a small to midsize company (or even a large one) is not without its risks. A large customer goes under, suppliers decide to increase their prices, trends change, business conditions change, etc.
Surveys indicate that many small company owners do not have an exit strategy; so, when an event does strike, they are not prepared. Developing an exit strategy doesn’t mean the owner has to use it. What it does mean is that a strategy is ready when the owner needs it.
A professional intermediary can supply a business owner the real world information necessary not only to develop a plan, but also to know how to implement the plan when it becomes necessary.
© Copyright 2015 Business Brokerage Press, Inc.
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Six ways you can increase business value from your vacation this summer
Summer is here, and although it may seem strange, now may be the perfect time to increase the value of your business.
The most valuable businesses are the ones that can survive without their owner. A buyer will pay a premium for a company that runs on autopilot and levy a steep discount for a business that is dependent on its owner.
This summer, consider taking an extended break from your business to see how things will run when you’re not in the building. It’s likely that some things will go wrong, but use those errors as the raw material for making your business operate more independently of you – and therefore more valuable.
Here is a six-step plan for profiting from your vacation time this summer:
Step 1: Schedule your vacation plus one day
Whatever day you plan to start working again after your holiday, tell your staff you’ll be back one day later. That way, you’ll have a full day of uninterrupted time to dedicate to understanding what went wrong in your absence.
Step 2: Bucket the mistakes
When you return, make a summary of the things that went wrong and categorize them into one of three buckets:
- Mistakes: errors where there is a right and wrong answer;
- Bottlenecks: projects that had difficulties because you weren’t there to provide your feedback;
- Stalled projects: initiatives that went nowhere while you were gone because you’re the person leading them.
Step 3: Correct the mistakes
The first and easiest place to start is to simply correct the mistakes that were made. Usually mistakes are due to a lack of training rather than outright negligence. The right answer may be crystal clear in your head but not immediately obvious to your staff. Write up some procedures for next time the employees face the same situation. Make sure your procedures are clear, and share them with your team so everyone has them (a file sharing service like Google Drive or DropBox can be a helpful repository for your instructions).
Step 4: Unblock your bottlenecks
If you’re being asked for your personal input on projects, there’s probably going to be a bottleneck if you’re not around. Make sure your staff is clear on the projects where you need to have a say and the projects where you don’t. Some employees may wrongly think that you need to approve all decisions. Make it clear when you want them to act alone and when you still need to have a say.
Step 5: Re-assign stalled projects
The hardest part of making your business less dependent on you is dealing with projects that get stalled when you’re away. Start by asking yourself if you’re the right person to lead the project in the first place. As the owner of your business, projects often fall in your lap by default, rather than because you’re the best person to lead them. Categorize your stalled projects into two groups:
- a) Strategic projects you need to lead; and
- b) Non-strategic projects you are leading by default.
Hang on to the strategic projects, but delegate the non-strategic projects to someone on your team who is better suited to drive them forward.
Step 6: Give every employee a blank check
At Ritz Carlton Hotels, they give every employee discretion to spend – without approval from their general manager – up to $2,000 on a guest. The $2,000 figure is a large enough number to make the message clear: front line employees should act first, make the customer happy, and ask questions later. Many employees know how to make a customer happy but lack the confidence to act. Giving employees some spending authority will speed up the resolution of customer issues and empower your team to do the right thing when you’re not there. Maybe $2000 isn’t your number but come up with something that works for your business.
The sunshine is beckoning, so go ahead and take a vacation – if you follow the six steps here, you may end up relaxed, with a tan, and a more valuable company.
Want to learn about increasing the value, selling your business, or what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreWhy Subscribers Make Your Business More Valuable
Why are Amazon, Apple and many of the most promising Silicon Valley start-ups leveraging a subscription business model?
Subscribers not only provide steady revenue; they make your business more valuable in the eyes of an acquirer. In a traditional business, customers buy your product or service once and may or may not choose to buy again; but in a subscription business, you have “automatic” customers who have agreed to purchase from you on an ongoing basis. Ie. Recurring Revenue. Let’s look closer.
Recurring revenue—the hallmark of a subscription business—is attractive to acquirers and makes your business more valuable when it’s time to sell. How much more valuable? To answer that, one has to first look at how your business will be valued without a subscription offering.
The most common methodology used to value a small to midsize business is discounted cash flow. This methodology forecasts your future stream of profits and then discounts it back to what your future profit is worth to an investor in today’s dollars, given the time value of money. This investment theory may sound like MBA talk, but discounted cash flow valuation is something you have likely applied in your personal life without knowing it. For example, what would you pay today for an investment that you hope will be worth $100 one year from now? You would likely “discount” the $100 by your expectation for a return on investment. If you expect to earn a 7 percent return on your money each year, you’d pay $93.46 ($100 divided by 1.07) today for an investment you expect to be worth $100 in 12 months.
Using the discounted cash flow valuation methodology, the more profit the acquirer expects your company to make in the future—and the more reliable your estimates—the more your company is worth. Therefore, to improve the value of a traditional business, the two most important levers you have are: 1) how much profit you expect to make in the future; and 2) the reliability of those estimates.
At SellabilityScore.com, one can see the effect of this valuation methodology. Since 2012, this methodology has been used to track the offers received by business owners who have completed the Sellability questionnaire. During that time, the average business with at least $3 million in revenue has been offered 4.6 times its pretax profit. Therefore, a traditional business churning out 10 percent of pretax profit on $5 million in revenue can reasonably expect to be worth around $2,300,000 ($5,000,000 x 10 percent x 4.6).
Then compare the value of a traditional company with the value of a subscription business. When an acquirer looks at a healthy subscription company, she sees an annuity stream of revenue throwing off years of profit into the future. This predictable stream of future profit means she is willing to pay a significant premium over what she would pay for a traditional company. How much of a premium depends on the industry, and some of the biggest premiums today go to companies in the software industry. You may be a customer to some of them like dropbox, evernote, or teamwork. Now let’s look at a few business examples utilizing the recurring revenue model outside the software industry.
From Alarm Systems to Prescriptions to Mosquitoes
Security businesses that monitor alarm systems and charge a recurring monthly monitoring fee to do so are worth about twice as much as security businesses that just do system installations. Retail pharmacies with a large pool of prescriptions for drugs that people take every day, like Lipitor and Lozol, command a premium over a traditional retailer because customers re-up their pills on a regular basis, creating a recurring revenue stream for the pharmacist.
Even tiny companies are worth more if they have subscription revenue. When my colleagues over at the Sellability Score analyzed very small businesses with less than $500,000 in sales, they found that the average offer these small businesses attract is 2.6 times pretax profit.
Compare that to the average Mosquito Squad franchise. Mosquito Squad is a Richmond, Virginia-based company that offers to keep bugs off your patio by spraying your backyard regularly with a proprietary chemical recipe approved by the Environmental Protection Agency. Mosquito Squad franchisees target affluent homeowners with an average home value north of $500,000 who entertain in their backyard and don’t want to be bothered by mosquitoes. Mosquito Squad operates on a subscription basis. You subscribe to a season of spraying, which includes 8 to 12 sprays, depending on how buggy it is where you live.
Mosquito Squad is a franchise business, and the impact of its recurring revenue model on its valuation is remarkable. According to Scott Zide, the president of Mosquito Squad’s parent company, Outdoor Living Brands, Mosquito Squad franchises that changed hands over the most recent five-year period had revenue of $463,223 and sold for 3.7 times their pretax profit. That’s a 42 percent premium over the traditional value of a company with less than $500,000 in sales, and it’s because Mosquito Squad operates on a recurring subscription model and 73 percent of its annual spraying contracts renew each year.
Whether you plan to build a subscription-based software application or the simplest personal services business, having recurring revenue will boost the value of your most important asset.
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreValuing A Business: Some Difficult Issue with Business Valutions
Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.
Here are some issues that must be considered when arriving at a value for the business:
Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.
Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.
Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.
Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.
ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.
Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.
Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
© Copyright 2015 Business Brokerage Press, Inc.
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