Things 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 MoreThe Confidentiality Agreement
When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don’t want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.
The following are some of the questions that a seller should expect a confidentiality agreement to cover:
- What type of information can and can not be disclosed?
- Are the negotiations open or secret?
- What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
- What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
- Which state’s laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
- What recourse do you have if the agreement is breached?
Obviously, executing an agreement does not mean a violation can’t occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.
While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.
A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes “common ground” between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: pippalou via morgueFile
Read MoreBizBen Index reports California Business For Sale Deal Count Best In Five Years
In a recent article by BizBen 5120 California businesses sold in the first four months of 2015. This is the best calendar year start in the last 7 years! And in April alone 1193 business’s sold which is the most in April since 2010.
According to the article the top reasons for the improved “business for sale” results are:
- Improved access to purchase loan money
- Optimism by both Buyers and Sellers
- More creative deal solutions such as “earn outs” and “alternative financing”
A few statistical highlights of business’s sold by county include:
LA County up | 12.36% |
Orange County up | 6.5% |
Santa Clara County up | 17.9% |
San Francisco County up | 44% |
Sacramento area up(Sac, Placer, Butte, El Dorado Hills, Nevada, Yolo) | 24.1% |
To read the entire BizBen article click here.
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 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.
Read MoreBusiness Sales Highlights from the BizBuySell Quarter 1, 2015 Insight Reports
BizBuySell recently released their Insight Reports for the 1st Quarter of 2015 with some very positive news. Overall “business sales” were up 6% vs. 1st quarter 2014. This level of performance is continuing a 2-year trend in business sales. Below are a few additional summary items from BizBuySell’s reports.
- Median Cash Flow for sold businesses reached a record high since 2007 of $104,000.
- Why the increase- baby boomers continue make the step to retirement, and buyers are seeing more options and access to capital from lending institutions
- Median revenue was $442,000 up from $400,000 representing a 10.5% increase.
- The average asking price was $225,000 up from $199,000, a 13% jump.
- Average sale price was $200,000 up from $175,000, up 14.3%.
- Service businesses sold lead the charge up 18% over the 1st quarter of 2014.
- Retail revenue was $537,500 vs. $437,783, up 22.7%.
- Cash flow for the retail sector averaged $99,355 up from $89,907, a 10.5% increase.
- Cash flow multiples for all businesses averaged 2.27 up from 2.21
To help show a picture of what happened in the 1st quarter of 2015 for California below is a chart showing the number of business’s listed and the average cash flow multiple. We also added a column using $200,000 cash flow as an example to show a California market comparison.
California Highlights | # listed | Cash Flow Multiple | Hypothetical 200kCash Flow x Multiple = Listing Price |
Contra Costa-Alameda-Solano, CA | 203 | 2.69 | $538,000 |
Sacramento–Arden-Arcade–Roseville, CA | 275 | 2.52 | $504,000 |
San Diego-Carlsbad-San Marcos, CA | 356 | 2.57 | $514,000 |
San Francisco-Oakland-Fremont, CA | 316 | 3.02 | $604,003 |
San Jose-Sunnyvale-Santa Clara, CA | 157 | 3.12 | $624,006 |
Sentiment in the market place is stated as positive for the rest of 2015. Let’s hope that’s the case. To read the full report click on BizBuySell Quarter 1 2015 Insight Reports.
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 MoreCommercial Lending for Small Business Buyers
Commercial lending for small business buyers has improved over the last few years. What’s your best option as a buyer… SBA, 401k, family & friends… check out this recent article with tips for buyers from Bob House, General Manager of Bizbuysell.
Read MoreImportant Business Succession Planning language, by Colleen Watters Attorney at Law
In my experience, many business owners have not included language in their Business Succession Plan to address the needs of the business should the owner(s) become incapacitated or pass away.
If the business formation is a sole proprietorship and the owner utilizes Schedule C for tax purposes, simply listing the business on the Schedule A of their Trust can be sufficient. If the business is valuable, then a discussion regarding business entity formation is important, and assigning the business to the owner’s trust may be appropriate.
Planning techniques are likely to have transfer tax considerations that must be evaluated by an attorney and a CPA. Changes in tax laws, as well as the business owner’s estate value, may require ongoing reevaluation and potential adjustments to the plan by outside advisors.
As the “baby boom” ages, understanding a variety of approaches to planning for business exits and succession planning will grow in importance. Approaching these strategies as a process and integrating a team of legal, tax, accounting, insurance, and financial professionals may help tax and legal professionals address the multitude of situations their clients may face.
When a business owner wants to pass his or her business on to children, they should be certain the children want to continue to operate the business before gifting it to them.
How children relate must be considered as well. If children cannot work amicably, a busniess may not be the proper forum to attempt to force them to work together. Family behaviors and personalities can be an important part of this decision that organizational psychologists and other management professionals specialze in consulting on business family dynamics and succession planning.
Whether the next generation wants to be involved in the business and whether they will treat the business as a “sandbox” to play in or a “golden goose” to be nurtured and valued must be considered before the decision to pass on a busniess is made.
This article was contributed by Colleen Watters, Attorney At Law, a dedicated estate planning and probate lawyer.. She can be reached at:
916.225.3570
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The Devil May Be in the Details
When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.
In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.
One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:
- Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
- Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
- Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
- Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
- Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
- Sellers who have unrealistic expectations for the sale price.
- Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
- Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
- Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
- Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.
Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: jppi via morgueFile
Read MoreFamily Businesses
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.
Photo Credit: naomickellogg via morgueFile
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