Outlined below are a few unexpected aspects of the business exit process that can pop up and often create issues. Sometimes they severely impact the turnaround time of a sale.
If you can understand these potential issues better, you will be better prepared to try to circumvent them.
1. Do You Have Time on Your Side?
It’s helpful to use an intermediary who will assist with the filtering of prospects vs. “suspects.” However, the inclusion of yet another party, in addition to both the business seller and potential buyers, increases the amount of time required to navigate the process.
Sellers are typically unaware of the time and documentation needed to compile the required Offering Memorandum. Once completed, the seller must provide both the intermediary and potential buyer more time to review and propose meetings and pricing. In the interim, owners are faced with the challenge of keeping their business thriving.
2. Trying to Do Too Much
It’s not surprising when a company owner is also its founder that individual is typically used to making all of the decisions. That’s why business owners in the midst of selling will soon find themselves challenged with the desire to fully be a part of both the selling process and the running of the business.
Delegation to someone else, such as the Sales Manager, can be truly invaluable. Think of your top people as extremely valuable resources. They may have first-hand knowledge regarding additional concerns such as competition and potentially interested acquirers. Bringing in trusted employees to be part of the sales process can be tremendously beneficial. But many important items should be considered “before” speaking to any employees about your exit. In some cases, it may be best to hold off telling employees until after the sale.
3. Delays Due to Stockholders
When mid-sized, privately held companies are supported by minority stockholders, these individuals must be included in the selling process—however small their share may be. The business owner will need to firstly obtain their approval to sell by using the sale price and terms as influencers. Of course, issues such as competing interests, pricing disagreements, and even inter-family concerns may cause conflict and further delay the process.
4. Money Issues
Once sellers decide upon a price that they would like to see, it is sometimes difficult for them to accept or even consider anything less. After all, a business owner likely created the company and may have a strong emotional attachment.
Another factor that often interferes with a successful sale occurs when sellers instantly turn down offers because they don’t meet with their desired asking price. There’s a say in the business sales industry- “You can’t separate the “price from the terms.”
That’s when the intermediary can often come in to salvage the deal. A business broker often serves as a negotiator. He or she can work out a deal that is structured in a manner that works for both sides.Read More
BizBuySell.com’s 4th quarter report showing 2016 was a strong year for small business transaction counts
Below is an excerpt from BizBuySell.com’s 4th quarter report showing 2016 was a strong year for small business transaction stats.
Improved business financials have helped make 2016 a hot market for business sales.
“San Francisco, CA – BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported today that the annual small business transaction count reached record levels in 2016, topping 2015’s totals by 8.6 percent and 2014’s previous high by 4.6 percent. The full results are included in BizBuySell’s annual and Q4 2016 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.”
Here are a couple key stats from the 2016 report:
- A total of 7,842 closed transactions were reported in 2016, the highest yearly total of small business sales since BizBuySell first started tracking data in 2007.
- The median revenue from each business transaction grew 5.2 percent from $449,462 in 2015 to $472,798 in 2016.
- Median cash flow also increased, up to $107,551 from $102,000 the year prior.
- The median asking price remained flat from 2015 at $225,000, while the median sale price increased a mere half a percentage point to $200,000.
|Asking Price to Cash Flow (avg)|
|Contra Costa-Alameda-Solano, CA||3.01|
|San Francisco-Oakland-Fremont, CA||2.91|
|San Jose-Sunnyvale-Santa Clara, CA||2.84|
- 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.
Imagine you’re a farmer and you’ve been tending to your crops all year. It’s harvest season and finally time to collect the spoils of your labor.
You start harvesting your crops only to find out that pesky rodents have been quietly eating away at your fields. You’re devastated as you come to the realization that much of what you have been working so hard to cultivate has already been taken.
Feeling like there is not much field left to harvest is what acquirers and investors are trying to avoid as they evaluate buying your business. Metaphorically speaking, acquirers want to know that if they buy your business, there will be plenty of fresh farmland left for them to till.
Investors call it your company’s “addressable market” and it is one of the main factors buyers will look at when they evaluate the potential of acquiring your company.
Business 101 tells us we should strive for market share so we can control pricing. Market share is a worthy goal if your objective is to maximize your profits. However, if your primary objective is to increase the value of your company, you want to be able to communicate that you have relatively low market share across the entire addressable market. In other words, there is plenty of field left to plough.
Consider the following ways you might expand the way you are currently thinking about the addressable market for what you sell:
Demographics involve segmenting a market by objective measures like gender, income, age and education level. Marriott is a hotel chain but they have created a variety of brands to address the various demographic segments they want to serve. Ritz Carlton is a Marriott brand that appeals to well-heeled travelers, but if all you want is a basic room, you could opt for a Courtyard Marriott. It’s the same company, but they have expanded their addressable market by focusing on different demographic segments.
Psychographics involve segmenting your market according to the way people think. Toyota produces the Prius, which gets 50 miles per gallon and is a favorite among environmentalists. Toyota also produces the thirsty Tundra pickup truck and, at just 15 miles per gallon, attracts a different psychographic segment.
Success in your local market is good but if you want to really boost the value of your company in the eyes of an acquirer, you need to demonstrate that your concept crosses geographic lines. McDonald’s has more than fourteen thousand locations in the United States but they have also demonstrated that the golden arches can draw a crowd in other markets. McDonald’s has nearly three thousand stores in Japan, two thousand in China and more than a thousand locations in each of the European countries of Germany, Canada, France and the United Kingdom.
You don’t actually have to become a global giant like Marriott, Toyota or McDonald’s to increase your company’s value but you do need to be able to communicate that your concept could work in other markets and that there is still good land left to plough.Read More
Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal setting up your business so that it can thrive and grow without you?
A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take. When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company.
Here are five ways to set up your business so that it can succeed without you.
- Give Them A Stake In The Outcome
Jack Stack, the author of The Great Game of Business and A Stake In The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.
- Get Them To Walk In Your Shoes
If you’re not quite comfortable opening up the books to your employees, consider a simple management technique where you respond to every question your staff bring you with the same answer, “If you owned the company, what would you do?” By forcing your employees to walk in your shoes, you get them thinking about their question as you would and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems.
- Vet Your Offerings
Identify the products and services which require your personal involvement in either making, delivering or selling them. Make a list of everything you sell and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach employees and give a lower score to anything that requires your personal attention. Commit to stopping to sell the lowest scoring product or service on your list. Repeat this exercise every quarter.
- Create Automatic Customers
Are you the company’s best salesperson? If so, you’ll need to fire yourself as your company’s rainmaker in order to get it to run without you. One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis.
- Write An Instruction Manual For Your Business
Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types called Standard Operating Procedures (SOPs). These are a set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.
You-proofing your business has enormous benefits. It will allow you to create a company and have a life. Your business will be free to scale up because it is no longer dependent on you, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.Read More
What are their needs and how best can you meet them? Understanding your buyer’s motivation increases the chances of a successful negotiation.
What Appeals to Most Buyers?
When it comes to selling a business, you likely will not know your buyer personally. This means that you will not know what they value most, how exacting their standards will be, and how easy or challenging they will be during negotiations. That’s why it is imperative to err on the side of caution and act in such a way that would appeal to most buyers.
Ensuring that your business is in strong financial health means that your business will be appealing to both a corporate executive as well as an individual buyer with a leadership/managerial background. Keep in mind that individuals who buy businesses will want a strong ROI, and often they will want the responsibilities that accompany that investment to not interfere too greatly with their current lifestyle.
Playing into Emotions
In general, buyers tend to be the most excited at the beginning of the sale process. It is at this point that you can expect your buyer’s passion to be its strongest. As a result, the first stages are when you want to keep your presentation and approach the most realistic. The reason is that once the surge of passion has worn off, your buyer may otherwise feel that you have tried to oversell your business.
Being Forthcoming with Information
It is quite common that you will not at first know if your buyer has previous experience in your market. As a result, you shouldn’t assume that they understand anything about your business or industry. In short, it is definitely in your best interest to be very honest about your business and what is involved in running it. If there are issues that they will invariably discover, then it is best to go ahead and disclose those issues early on as it establishes trust and goodwill.
Another area to consider is what a buyer may expect of you after the sale. A buyer who already possesses a background in your niche would already be very familiar with the ins and outs of your industry. Having you around after the sale may not be viewed as necessary or beneficial.
However, with that said, the exact opposite may also be true. You may be dealing with a buyer who is in dire need of your expertise. These factors could be of critical importance in what you offer your buyer in terms of your availability. Again, that’s why it’s best to not make assumptions and make sure your terms would appeal to a wide variety of backgrounds.
An Investment of Value
Invest the time to understanding your buyer’s motivation. The more you understand what it is that your buyer wants out of the transaction, the greater your chances of focusing on the areas of your business that best match those expectations.
When it comes to the motivations and concerns that prospective buyers may have, a business broker can add a new level of understanding. The value that your broker adds to the process of selling a business is difficult to overstate.Read More
The majority of business sales include some form of seller financing. Typically, seller financing is when the seller provides a loan to cover part of the purchase price. The rest of the purchase price is covered by the down payment or often other financing sources are used as well. Summed up another way, the seller is essentially acting as a bank for the buyer.
When sellers offer financing, it often also helps them achieve a higher final sale price. Sellers who are not open to seller financing will likely limit their possibilities.
Performing Due Diligence
When a seller opts for seller financing, it is necessary to do much of the work that a bank would usually perform, for example, checking a potential buyer’s credit report, financial statements and other key financial information. After all, if you opt to offer seller financing, then you’ll want to ensure that your buyer will not default.
Usually contracts allow for the seller to take back a business in 30 to 60 days if financing fails. In this way, the buyer can avoid a potentially serious business problem.
There are often other contractual stipulations as well. A common clause for businesses involving inventory is that new owners need to maintain a certain level of supplies during the payment period.
Providing Benefits for Both Parties
It should also be noted that seller financing is of considerable interest to buyers. Sellers looking to attract as much attention to their business as possible will want to consider this route. Offering this type of financing sends a very clear message. When a business owner is open to seller financing, he or she is stating that he or she has great confidence that the business will generate both short term and long term revenue. That level of confidence speaks volumes to buyers about the health of the business.
What Due Terms Typically Look Like?
In terms of the length of seller financing, 5 to 7 years is typical. The issue of how much a seller is expected to finance is another issue that draws considerable attention. While there are no steadfast rules as to what percentage seller’s typically finance, it is common for sellers to finance up to 60% of the total purchase price.
Finally, seller financing does have a good deal of paperwork and points to consider. Opting to work with an attorney or business broker is absolutely essential to protect all parties involved.Read More
Buyers and sellers alike love recurring revenue, but what is it exactly that makes it so attractive? Recurring revenue is generally viewed as a very good factor as it indicates positive cash flow, the potential for growth, business success and business stability. Let’s take a closer look at how it can benefit you.
Show You’re in Demand
Businesses, including IT companies, are valued higher if they can show recurring revenue, such as monthly subscriptions, SaaS subscriptions, or a transaction that consistently occurs. If your business is centered on a subscription based platform and you have high subscription levels, then you can expect keen interest from prospective buyers.
If you want to show a prospective buyer that your business is a good bet, then recurring revenue is a great place to start. Recurring revenue indicates that you have ongoing consumers and that means ongoing revenue. But recurring revenue indicates something else as well, namely, it indicates that your business is providing a consistent service that is consistently in demand.
Take the Pressure Off Buyers
Buyers like predictability. Recurring revenue means that a buyer knows that he or she can buy a business and count on income from day one.
Sellers can often forget that most buyers get nervous when they are making any kind of business buying decision. The power of recurring revenue is, in part, psychological as it allows buyers to realize that there will be revenue no matter what. Even if they do little to develop the business, cash will flow in. In other words, the psychological value of recurring revenue is that it takes much of the pressure off.
Examining Your Annual Recurring Revenue
If your business has a strong annual recurring revenue or “ARR”, then you should place a good deal of focus on this fact. Many feel that a company’s ARR number is a powerful indicator of a company’s overall health.
Ultimately, recurring revenue indicates a great deal about your company. High recurring revenue doesn’t just mean that you have a reliable source of income every period. It indicates that your business is providing a service that is needed and valued. Strong recurring revenues also indicate that your business is doing many things correctly and that your goods and/or services are of such a caliber that you are generating repeat business.
Visibility and Transparency
Savvy buyers also value visibility and transparency. Thanks to this kind of consistent income, it is easier for buyers to plan for and manage future expenses and increase a business’s overall stability.
Part of properly showcasing your business is to emphasize your business’s recurring revenues if they do indeed occur. A seasoned business broker can be an invaluable ally in helping you reveal your business in the best light possible.Read More
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
Are you stuck trying to figure out how to create some recurring revenue for your business? Here’s how one business owner quadrupled the value of their business in three moves.
You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.
Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.
Steward set about to transform her business into a more valuable company and made three big moves:
- Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.
Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime.
90% of her customers switched from hourly billing to the Angel Watch program.
- Doubling Rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.
- Survivor Clause
Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.
Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.