Are you tempted to re-sell someone else’s product to boost your topline revenue?
On the surface, becoming a distributor for a popular product can appear to be a simple way to grow your sales—simply find something that is already proven to be successful elsewhere and negotiate the rights to sell it in your local market.
While distributing someone else’s product may be a relatively easy way to grow your topline, all that revenue growth may do little for your company’s value. A typical distribution company will be lucky to sell for 50% of one year’s revenue, whereas if you control your product or service—and the brand that embodies them—you should be able to do much better.
How Nike Became One of the World’s Most Valuable Companies
For an example of the dangers of not owning your own products, take a look at the evolution of Blue Ribbon Sports into Nike Inc. As Nike co-founder Phil Knight describes in his recent autobiography Shoe Dog, the company started off by negotiating the exclusive rights to sell Tiger running shoes in the United States. Knight’s company was called Blue Ribbon Sports and he imported the shoes from Onitsuka, a Japanese company.
Despite their exclusive agreement with Blue Ribbon, Onitsuka started to court other American dealers. When Knight protested the obvious breach of their contract, Onitsuka threatened a hostile takeover of Knight’s business or to shut him down outright. Knight’s company was tiny at the time and so deeply reliant on Onitsuka for supply, he could do virtually nothing to enforce their agreement.
Given its dependence on Onitsuka, Knight’s company would have scored close to zero out of a possible 100 on what we call The Switzerland Structure, a measure of your company’s reliance on a supplier, employee or customer. The Switzerland Structure is only one of eight value drivers we measure, but abysmal performance on any one factor can be a significant drag on the value of your business. Similar to having a high customer concentration, having all your eggs in only a few “supplier baskets” can have a real impact on the value of your business from a buyers lens.
Onitsuka’s snub became Knight’s impetus to start Nike, which gave him control of his marketing, supply and product development. Instead of simply re-selling someone else’s shoes, Nike developed their own designs and contracted the manufacturing of their products to other factories. By owning its own products and brands, Nike has become one of the world’s most valuable companies and regularly trades north of 20 times earnings.
To see how your business performs on The Switzerland Structure and the other seven factors that drive your company’s value, take 13 minutes and complete the Value Builder questionnaire now.Read More
- Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow– keeping your eye on the business is extremely important as buyers are looking to purchase successfully operated businesses. If your business slides so will your offers.
- Starting off with too high a price with the assumption the price can always be reduced- a proper valuation should be done to determine the best price to not leave any money on the table, yet not too high where buyers do not show any interest.
- Assuming that confidentiality is a given- proper steps can and should be taken to keep the sale of your business confidential but we are dealing with people and things happen. Proper steps will help reduce the risk and a business broker can help put these in place.
- Failing to plan ahead to sell / deciding to sell impulsively– business owners should really plan ahead 1-2 years plus when selling their business. Truly it is never too early to start planning.
- Expecting that the buyers will only want to see last year’s P&L– typically the last 3 years financials will need to be provided, and sometimes more. This is one of easiest and most overlooked items- you MUST keep your books accurate and up to date.
- Negotiating with only one buyer at a time and letting any other potential buyers wait their turn– theres a saying in the business sales industry- “one buyer is no buyer.” A broker can help manage this process to attract multiple buyers and offers at the same time.
- Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time- naturally transition time is very important in the buyers eyes. Buyers simply will move on to another business where the seller will help with the transition improving the odds of success after the purchase. This is also a negotiation “term” to go along with the sale price.
- Not accepting that the structure of the deal is as important as the price– simply put… “You can’t separate the price from the terms.” Along with every offer not only will the price be different but so will the terms.
- Trying to win every point of contention- negotiating is just that… negotiating. Deals get done when both sides are will to compromise to reach a common goal- the sale of the business.
- Dragging out the deal and not accepting that time is of the essence– The 2 biggest items that kill deals are “time” and “surprises.” Think of it as a tennis match… as each offer or counter offer is made… you have “received the ball,” the idea is to quickly “return the ball” to the other player and not leave the ball in your court. This will help determine if a deal can be made and in a timely fashion saving time for all parties.
Ensuring that your employees stay on course during your ownership transition should be one of your key areas of focus. There are many key steps that you should take during this delicate time. Let’s explore the best tips for keeping your employees engaged throughout the entire ownership transition process.
Step 1 – Establish and Implement a Training Program Early On
If you are selling your business, then be certain that you train replacements early on in the process. Failure to do so can result in significant disruptions. Additionally, if you are buying a business it is of paramount importance that you are 100% confident that there are competent people staying on board after the sale.
Step 2 – Address Employee Concerns
No matter what your employees say or how they act, you must assume that they are worried about the future. After all, if you were them wouldn’t you be concerned at the prospect of a sale? The best way to address these concerns is to meet with employees in small groups and discuss their concerns.
Step 3 – Don’t Make Drastic Changes
Above all else, you want a smooth and fluid transition period. A key way to ensure that this time is as trouble-free as possible is to refrain from making any drastic changes before or after the transition. Remember the sale of the business is, in and of itself, shocking enough.
You don’t want to add yet more disruption into the process by making changes that could be confusing or unsettling. In other words, keep the waters as calm as possible. Drastic changes could lead to employees quitting or worst of all, going to work for a competitor.
Step 4 – Focus on the Benefits
If possible focus on the benefits to your employees. It is your job as the new business owner to outline how the sale will benefit everyone. Don’t let your employees’ imaginations run wild with speculation. Unfortunately, this is exactly what happens when employees and management feel as though they are not receiving any information about the sale. So don’t be mysterious or cryptic. Instead provide your employees with information, and keep the focus on how the changes will benefit them both personally and professionally.
Implementing these four steps will go a very long way towards helping to ensure a smooth transition period. Transition periods can be handled adeptly; it just takes preparation and patience.Read More
It’s more interesting to begin by asking: Can a business be sold without the use of a business broker? The undisputed answer is obviously yes. Many businesses still sell through private parties. Sellers hire brokers because they believe the broker will do a better job than they would.
Key functions of a broker
Business valuation: Fair market value is what a willing buyer will pay a willing seller, period. Without selling a number of businesses in a particular area, a broker couldn’t possibly know what fair market value is for a business. Without this experience it’s simply theory. The right broker will know the value based on experience, and work with local valuation experts to assist in the process.
Confidentiality: Brokers protect the seller and buyer in every possible way, even though the selling process requires the sharing of information. Using a good broker is the optimal way to ensure confidentiality.
Packaging and marketing: Quality brokers have expertise and know what makes a business attractive to a buyer. They can therefore identify strong selling points for each business, which a seller might not have considered. After all, selling a business is just that… Selling! Packaging and marketing are critical to the successful sale of a business.
Finding prospective buyers: Brokers should be constantly marketing to buyers through websites, direct mail, phone solicitation, and networking. This results in a large database of interested buyers of all sorts.
Buyer qualification: Brokers screen prospective buyers in several ways. They obtain documents such as credit reports and financial statements, as well as interview buyers regarding credentials and experience. Sellers do not want to waste time with buyers who may not have the needed experience or are not serious buyers.
Consultation: A broker works with owners throughout the process regarding all aspects of the sale, including the terms of sale, financing issues, non-compete and other contract issues, customer retention, and whatever else is needed to make the process run smoothly.
Negotiations: Brokers provide important third-party negotiation skills to ensure that the deal gets done under terms that are satisfactory. This is one of the most underappreciated aspects of what a good broker provides and could fill an entire book of its own. This is where the broker either pays for himself or costs the seller money.
Financing: Successful brokerage firms have access and expertise in obtaining financing for the buyer so that the seller can receive cash at close if the business and buyer qualify. A broker can also provide guidance and valuable experience with regard to seller financing issues when necessary.
Large Pools of Buyers: It is simple Economics 101: Sellers can’t get the best deal from one or two potential buyers they met at an industry seminar. The larger the pool of potential buyers, the better the chance of getting not only the right price and terms, but the best fit for your clients and staff.
There is a reason some brokers successfully sell many businesses each year, while others don’t. Some work hard and produce results while others merely list businesses and wait. Selling a business is not a simple process. It’s a complex, legally binding transaction with potential repercussions far into the future.
Randy Hendershot 916.993.5433 ext 5
3017 Douglas Blvd, Suite 300, Roseville, CA 95661Read More
In order to get top dollar for your business, it is necessary to prepare for the sale well in advance. In short, a tremendous amount of strategy and preparation goes into a successful sale. The amount you ultimately receive for your business is directly tied to how well you prepare.
At the top of the list of making sure that your business is attractive to potential buyers is to make certain your business is as well positioned in the market as possible. Of course, this is often easier stated than done. Here are some of the best ways to make sure your business is optimally positioned.
Tip One – Start Positioning Your Business Well in Advance
Selling your business isn’t something you should just do one day. You should start positioning your business at least one year before the closing.
Quite often, experts say business owners should always operate as though a sale is on the horizon. This makes a great deal of sense on one hand. If you ever experience an unexpected turn of events and need to sell, then you will certainly be ready. Another reason that this advice is solid is due to the fact that operating as though a sale is on the horizon helps you make certain that your business is running as effectively and efficiently as possible. This also helps with your short and long term decision making.
Tip Two – Always Think About Growth
Another way to ensure optimal position in the market is to always stay focused on growth. Asking yourself what steps you can take to grow your business in both the short term and the long term is a prudent move. You should always know what it takes to launch a new growth stage. As unusual as it sounds businesses can even foster growth by acquisition if well planned. This can show faster results than organic growth helping to foster new markets, add needed employee talent, and decrease the impact of fixed costs.
Tip Three – Customers, Lots of Customers/Clients
You don’t want a prospective buyer to see that you have only one or two key customers or clients. Understandably, this situation should make a buyer quite nervous. It comes across as extreme vulnerability. Having many varied customers or clients is a step in the right direction. Make sure to have an understanding of your customer concentration percentage. As a general rule your business should not have any one customer with over 15% of your total revenue.
Tip Four – Be Ready for Due Diligence
Whatever you do, don’t overlook due diligence. Neglecting or waiting to prepare for the buyer’s due diligence stage until the eleventh hour is quite risky. Have all of your financial, legal and operations documents ready to go. A failure to properly handle due diligence could derail a deal or even reduce the amount you receive. One of the easiest items that will have the most impact on value is the readiness and accuracy of your financials. Invest the time and money to have a professional account/CPA keep your records accurate and up to date.
Tip Five – Understand Your Business’s Strengths and Weaknesses
Every business has strengths and weaknesses. Don’t attempt to hide your weaknesses or overplay your strengths. Be transparent! There is no such thing as a perfect business! Many times a weakness can be turned into a positive in the buyers eyes. As an example, if your marketing efforts have not been consistent yet you have a nice growth curve, imagine a buyer proficient in marketing and what he/she could do to affect future growth.
A business broker is an expert at handling investors and even writing a business plan that you can hand to potential buyers.
Think about boosting your market position while simultaneously increasing the odds that you receive top dollar for your sale. Instead of rushing, take the time to prepare and work with a business broker to achieve the best market position and sale price possible. Planning leads to increase value and a much smoother transaction.Read More
Thinking Vs. Doing: A Consistent Dilemma for business owners.
The train conductor vs. the thinker
Your role as a CEO/Business owner can be divided into two buckets: one for managing and the other for thinking.
The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.
When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.
The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.
Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.
The most valuable companies
The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.
For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, it has been discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.
Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.
Finally, in a recent survey of merger and acquisition (M&A) professionals, they were asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.
In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their business.
To take the 13 minute Value Builder survey and find out your Value Builder Score Click here.Read More
Quite often sellers don’t give much thought to whether or not they are ready to sell. But this can be a mistake. The emotional components of both buying and selling a business are quite significant and should never be overlooked. If you are overly emotional about selling, then this fact can have serious ramifications on your outcomes. Many sellers who are not emotionally ready, will inadvertently take steps that undermine their progress.
Selling a business, especially one that you have put a tremendous amount of effort into over a period of years, can be an emotional experience even for those who feel they are more stoic by nature. Before you jump in and put your business up for sale, take a moment and reflect on how the idea of no longer owning your business makes you feel.
Emotional Factor #1 – Employees
It is not uncommon for business owners to form friendships and bonds with employees, especially those who have been with them long-term. However, many business owners are either unaware or unwilling to face just how deep the attachments sometimes go.
While having such feeling towards your team members shows a great deal of loyalty, it could negatively impact your behavior during the sales process. Is it possible you might interfere with the sale because you’re worried about future outcomes for your staff members? Are you concerned about breaking up your team and no longer being able to spend time with certain individuals? It is necessary ultimately to separate your business from your personal relationships.
Emotional Factor #2 – Do You Have a Plan for the Future?
Typically, business owners spend a great deal of their time and energy being concerned with their businesses. It is a common experience that most owners share. Just as no longer being with your employees every day may create an emotional void, the same may also hold true for no longer running or owning your business.
Your business is a key focal point of your entire life. No longer having that source of focus can be unnerving. It is important to have a plan for the future so that you are not left feeling directionless or confused. What will you do after you sell your business and how does that make you feel? Before you sell, make sure that you have something new and positive to focus on with your time.
As business owners there are 3 important future factors to consider “before” you sell:
- Identity – what will be your new identity after selling?
- Structure– what will your days weeks look like after you have sold?
- Purpose– what will your new focus?
Emotional Factor #3 – Are You Sure?
Are you sure that you can really let your business go? At the end of the day many business owners discover that deep down they are just not ready to move on. Are you sure you are ready for a new future? If not, perhaps it makes sense to wait until you’re in a more secure position.
Addressing these three emotional factors is an investment in your future well-being and happiness. It is also potentially an investment in determining how smoothly the sale of your business will be and whether or not you receive top dollar.Read More
Have You Discovered Your Recurring Revenue Model?
When it comes to the value of your business, what happened in the past is much less important than what is likely to happen in the future.
One of the most important ways you can shape the future of your business is to create some recurring revenue. Recurring revenue comes from those magical sales you make without really trying. Good examples of recurring revenue models include ongoing service contracts, subscriptions, and memberships – basically any sale situation the customer has to proactively opt out of, instead of in to.
Recurring revenue is critical for the value of just about any small business, and it is equally import for the world’s largest businesses.
Why ICD bought Porto Montenegro
If you’re looking for a fun example of why recurring revenue matters, take a look at The Investment Corporation of Dubai (ICD) and their acquisition of Porto Montenegro Marina and Resort. If you happen to be the heir to a European royal dynasty or are a Silicon Valley billionaire, you’ve probably parked your boat in Porto Montenegro (ok that’s maybe not too may of us). Along with 450 berths for the world’s largest super yachts, there’s a 5 star hotel, ultra exclusive residential properties and 250 high-end boutiques to indulge just about any fancy.
Porto Montenegro is the brainchild of Peter Munk, who is best known as the founder of Barrick Gold Corp. Munk fell in love with the natural beauty of the Adriatic coastline and saw an opportunity to buy an old naval ship yard and transform it into one of the world’s most exclusive travel destinations.
So why on earth would ICD, the principle investment arm of the Dubai government, be interested in buying a glorified parking lot in the middle of an old naval base?
Well it turns out that super yachts need a lot of regular maintenance. In fact, the average super-yacht owner spends 10% of its value every year on repairs and maintenance. ICD wanted the steady flow of recurring revenue from maintenance contracts with the well-heeled owners who moored their yacht at Porto Montenegro.
Tomorrow vs. Yesterday
Porto Montenegro is a billion-dollar reminder that recurring revenue is important for large companies, but creating an annuity stream can be even more important for smaller businesses. It can be tempting to celebrate the large project wins or a big sale to a one-off customer, but when it comes to valuing your business, acquirers may discount those as aberrations and focus on the steady flow of your recurring business.
There are a number of “recurring revenue models” that may be of value to your business. To learn more about increasing the value of your business and The Value Builder System click here.Read More
The team at Valuebuilder.com recently analyzed the latest data from users of The Value Builder System™ and the findings present an interesting snapshot of the current value of privately held businesses. Below are some of the highlights:
The Business Liquidity Index (BLI) has dropped to its lowest point on record
Each quarter, we measure the proportion of business owners that received an offer to buy their business and express the proportion as an index, 100 being the average. The BLI slipped from 90.9 to 81.8 for the quarter ending March 31, 2016, showing that, compared to the previous quarter, a smaller proportion of business owners had received an offer to buy their business.
Average offer multiple slipped to 3.55 times pre-tax profit
Moving in lockstep with the BLI, the average offer the users of The Value Builder System received in the last quarter dropped from 3.64 times the pre-tax profit in Q4 of 2015 to 3.55 in Q1, 2016. When we isolate larger companies with at least ten million in annual revenue, the average offer multiple goes up to more than 5 times pre-tax profit. The BLI and average offer multiple usually move in the same direction, since very active markets tend to drive up offer multiples and when less offers are made, multiples go down.
Our latest analysis includes data from more than 20,000 users of The Value Builder System from around the world. Of the business owners surveyed, 96% had revenue (annual turnover) of less than $20,000,000, while 4% had revenue in excess of $20,000,000. Findings are considered statistically accurate +/-0.81%, 19 times out of 20.
The latest data shows a slight softening trend in the market for privately held businesses. Therefore, if you’re planning to sell your business in the next few quarters, we recommend you do everything possible to maximize its value, focusing on the eight factors business buyers care about most.
Have you set a goal for your company this year?
If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate. Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone. But growth can come at a steep price and can even detract from your ability to build your personal wealth.
The Alternative to Growth at All Costs
The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:
- You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
- Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
- Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
- You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.
Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Value Builder Score.Read More