Important Questions Business Buyers Ask
If you are even thinking about selling your business, it’s good to know the questions the important questions business buyers ask and want answers to.
For example, the first question almost always asked by buyers is: If this is such a good business why is it for sale? How you answer this question can make or break a sale. A vague answer can discourage buyers from further consideration of your business, as they may assume the worst.
If you say you are “burned out’ or just ready to try something new – that’s fine. If you’ve owned and operated the business for 10 to 15 years, buyers will most likely accept your reason for sale and continue their investigation. However, if you’ve only owned and operated the business for two years or less, a prospective buyer may find it concerning that you are already burned out or ready for something new.
If you’re sick, be open about what the problem is; otherwise buyers will think you are just sick of the business. The worst thing a seller can do is to fudge an answer or not provide a completely honest answer. Buyers will, most likely, see right through the given reason for sale and walk away. So, even if you really are tired of or just plain hate running your own business, be up front and explain why. Honesty is always the best policy.
It is also a good policy to engage the services of a professional business broker. We have been through many transactions and can help a prospective seller deal with the reason for sale as well as the other questions a buyer may have. Here is a brief list of other questions buyers often ask:
• Why should I buy an existing business rather than start one myself?
• How are businesses priced?
• What should I look for?
• What does it take to be successful?
• What happens if I find a business I want to buy?
• Do I need outside advisors?
In addition, buyers often want answers to some more specific questions such as:
• How long has the business been in business?
• How long has the present owner owned the business
• How much money is the business making?
• Are the books and records readily available?
• Will the new owner help me learn the business?
These and many other questions are ones that we as business brokers deal with every day, equipping you to help prepare honest and useful answers. While all of these questions are important, the question that creates the biggest stumbling block and one of the simplest to be proactive on is having “books and records readily available.” If your records are not up to date or not easily understandable buyers will move very quickly to the next business they are looking to purchase.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreBusiness Sales Shifting to a Seller’s Market Q3 2015
The 2015 3rd Quarter IBBA and M&A Source Market Pulse Survey is out with some interesting findings. “This quarter’s report continues to see the pendulum shift to a seller’s market across all deal sizes. While buyers still hold the upper percentage for transactions valued at $1 million or less, the percentage is shrinking.”
Below are a few highlights from the report:
- Companies with strong earnings and good accounting and management records are wanted.
- Buyers are increasingly market educated and therefore know about more opportunities that are coming to market. They remain patient, but ready to act when a strong company is on the market.
- Retirement remained the leading reason that business owners went to market, which is understandable since baby boomers continue to retire in increasing numbers.
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The casual reader of this information might assume there was a stronger shift to a buyer’s market as the quantity shifts; however, the findings indicate that the market is slowly becoming a sellers’ market especially as transactions increase in size.
- Business owners who are selling now are ‘ahead of the curve’ and are getting rewarded with very strong valuations. Eventually, as more and more baby boomers seek to retire and put their business on the market, there will be an oversupply of sellers and the market will most likely swing back to a ‘buyer’s market.
- The majority of small business buyers (under $1 million deal size) made the acquisition to ‘buy a job’. Typically, these buyers are already employed and are looking for a compelling reason to leave that security and run a business of their own. The buyers of larger businesses, on the other hand, are making synergistic purchases to add depth to their existing business.
- An increasing number of existing business owners are expanding through acquisition and want to thoroughly compare the potential acquisition against their current company. Since these buyers want to understand the ability to integrate the company into their own, they expect timely and accurate information to make these decisions.
Click here to download the full report summary.
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Top 10 Ways Selling Your Business Can Go Wrong
I came across this article from Axial that does a good job illustrating some of the pitfalls or challenges that can cause a deal to go sideways when trying to sell a business. Here are a brief description of the top ten ways selling your business can go wrong. To read the entire article click here.
1. Unrealistic Value Expectations
The number one reason deals fail to close is because a seller’s valuation expectations are too high.
2. Unclear Story Elements
Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.
3. Quality of Earnings
Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm to continue its due diligence.
4. Length of Time
Every deal has a life of its own and its own momentum. Recognizing the ebb and flow of the deal momentum is critical to deal success
6. Customer/Vendor Concentration
If a significant amount of revenues is concentrated in a few customers, or if critical supply chain raw materials are concentrated in one vendor, the buyer’s perception of risk is elevated substantially.
7. Renegotiating Terms of the Deal
Renegotiating the terms, conditions, structure, and representations and warranties of a settled deal can be a deal killer
8. Lack of Robust Internal Controls
Frequently, the buyer’s due diligence process will reveal sloppiness (or worse) in internal controls (e.g., weak collection processes for aged receivables, manufacturing error rates, aberrations in the financial statements, regulatory filing inconsistencies).
9. Reaching for the Last Dollar
It is completely understandable that sellers who have put everything into their business want to get every dollar they can out of their business.
10. Inadequate Advisors
Selecting a quality deal team is critical to deal success. Business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreSmall Business Transactions Down Slightly From 3rd Quarter 2014 reported by BizBuySell
As reported in BizBuySell’s recent Q3 2015 Insider’s Report the number of business transactions in the 3rd quarter of 2015 are down. This is compared to the markets record high level in 2014. Bob House, Group GM of BizBuySell.com andBizQuest.com said “After a very active 2014, this year’s small drop in transactions should be viewed as a stabilization of the market rather than a trend in the opposite direction. Overall, the buying-selling environment remains very robust.”
Below are some notables from the report. To view the entire report click here.
- Small Business transactions down 9% compared to 3rd quarter 2014 totaling 1814 business’s changing hands.
- Financial stability of business’s listed grew 4% to $450,000 in average revenue.
- Retail industry saw the biggest decline at 17% fewer transactions
- Pacific region down 22% in business sales transactions
- The median revenue of small businesses has been on a steady incline since mid-2012, leading to higher sale prices upon exit.
- BizBuySell Buyer-Seller Confidence Index reported a Seller Confidence Score of 62, up after two consecutive years at 56.
Regional Business Listed Data*
California Highlights | # listed | Cash Flow Multiple | Hypothetical 250kCash Flow x Multiple = Listing Price |
Contra Costa-Alameda-Solano, CA | 189 | 2.75 | $687,500 |
Sacramento–Arden-Arcade–Roseville, CA | 212 | 2.85 | $712,500 |
San Diego-Carlsbad-San Marcos, CA | 401 | 2.50 | $625,000 |
San Francisco-Oakland-Fremont, CA | 363 | 3.17 | $792,500 |
San Jose-Sunnyvale-Santa Clara, CA | 162 | 2.96 | $740,000 |
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Small Business For Sale Listings Reach Six Year High per BizBuySell’s 2nd Quarter 2015 Insight Report
BizBuySell recently released their Business For Sale Insight Reports for the 2nd Quarter of 2015 stating growing supply & Demand continues high transaction trend. Overall “business sales” were up 12% vs. 2nd quarter 2014. This level of performance has not been seen since 2009. Below are a few additional summary items from BizBuySell’s reports.
- Median small business asking price grew 13% in the past year, while sale price increased 12%.
- Manufacturing businesses led the recent growth spurt with a 29 percent uptick from the same period last year.
- Business listings in the restaurant (12 percent), service (11 percent) and retail (9 percent) industries also experienced year-over-year supply growth.
- The median revenue of sold businesses increased to $450,000 this quarter (the highest on record since report inception in 2007).
- The median cash flow rose slightly to 102,995 from $100,000 at the same time last year.
- California saw large increases in the number of small businesses on the market.
- San Jose (up 64 percent)
- Sacramento (up 42 percent)
- San Francisco (up 31 percent)
- San Diego (grew by 18 percent)
- Los Angeles (7 percent increase)
To help show a picture of what happened in the 2nd 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 | 187 | 2.85 | $570,000 |
Sacramento–Arden-Arcade–Roseville, CA | 252 | 2.82 | $564,000 |
San Diego-Carlsbad-San Marcos, CA | 389 | 2.53 | $506,000 |
San Francisco-Oakland-Fremont, CA | 342 | 3.10 | $620,000 |
San Jose-Sunnyvale-Santa Clara, CA | 184 | 3.04 | $608,000 |
“There will always be some outliers, but this quarter’s data confirms that small business listings, transactions and financials are all continuing on a great trend,” Bob House, Group GM of BizBuySell.com and BizQuest.com said. “Nationally, the transaction volumes, key financial indicators and economic environment during the first half of 2015 point to another robust business-for-sale market in the second half of the year.”
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 MoreWhat 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 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 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
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