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
- Strongest Growth in businesses selling that are valued at $5M-$5M
- Buyers market for businesses valued under $1M, over the $1M mark is a Seller’s market
A common question in the realm of buying and selling businesses is, “Is it possible to sell your business to a competitor?” The short answer is yes, it is quite possible and rather common. That stated, selling to a business competitor is different than selling to a buyer who is completely new to the industry. The two types of buyers should not be treated the same way, as there are various differing variables.
A Competitor Can Be a Great Buyer
One reason is that a competitor may indeed be the right party to buy your business, is that they usually have an excellent understanding of how your business and your industry works. They may also enter the negotiation process already understanding the value of your business, and this can serve to speed up the process.
Always Proceed with Caution
Competitors, however, must be approached carefully. Unfortunately, there have been many cases where competitors acted as though they wanted to buy in order to acquire access to inside information. That’s why sensitive information like client lists and other “secrets” shouldn’t be shared until the sale is complete and the money is literally in the bank.
Working with a business broker is always a prudent move when it comes to buying and selling businesses; however, when working with a competitor is involved a business broker is even more important than normal. A business broker can act as something of a shield in the process, helping to ensure that you don’t reveal too much prized information until the sale is 100% complete.
Negotiate from a Place of Knowledge
Further, a business broker understands how much your business is worth and can back up that valuation. Having this information before discussing a potential sale with a competitor is of great importance.
Be Prepared to Accept Certain Legal Conditions
Finally, don’t be surprised if your competitor asks you to sign a non-compete or for you to stay on as a consult after he or she has acquired your business. This is a prudent step and one that makes tremendous sense. If you were buying a business from a competitor wouldn’t you want to make certain that the competitor didn’t simply “set up shop” somewhere else a few months or even a couple of years later? Likewise, tapping your expertise is another prudent move for your former competitor.
Summed up, selling your business to a competitor is a potentially great move, but it is also an opportunity that absolutely must be explored with extreme caution. Never divulge critical information to your competitor until the deal is finalized.Read 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
Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.” Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.
Neglecting the Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business. At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball. Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits. A potential buyer could become concerned if the business flattens out or falls off.
Solution: For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history. This is no time to be overly cost conscious. The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.
Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family. The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.
Solution: By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.
Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached. It happens, perhaps more frequently than not. The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.
Solution: Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach. Involving senior management can also prevent information leaks.
Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively. According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs. With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.
Solution: Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some. Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important. If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.
Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction. Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets. If the owner is selling real estate, an environmental study is necessary. If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction. These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.
Solution: The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.
Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run. However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.
Solution: If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.
Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time. The potential buyer probably will have a similar set of expectations.
Solution: Decide ahead of the negotiation which are the very important items and which ones are not critical. In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.
Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end. For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time. It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties. What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months. If it does, this means that the deal is dragging and is unlikely to close. The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.
Solution: Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost. The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.Read More
Microsoft’s recent $26.2 billion acquisition of LinkedIn provides an illustrative example of a strategic acquisition – the type of sale that usually garners the most gain for the acquired company’s shareholders.
You may be wondering what a billion-dollar acquisition has to do with your business, but the very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.
The financial vs. strategic buyer
A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.
One might argue that Microsoft overpaid for LinkedIn given that LinkedIn only generated a few hundred million dollars in EBITDA last year, meaning the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings.
But earnings are not the only thing strategic acquirers care about when they go to make an acquisition.
Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The Redmond-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.
Take Microsoft Office for example. Many businesses have started to use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office 365.
In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a sales person and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect.
Now you can make small talk about where they went to school, the previous jobs they have held and know the scope of their current role – all without ever leaving Outlook.
Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your company is likely smaller than LinkedIn, the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.Read More
If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary. You probably have wondered what you could expect from him or her. It works both ways. To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you. By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:
• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second. It takes this kind of partnering to get the job done. You have to return all of his or her telephone calls promptly and be available to handle any other requests. You, other key executives, and primary advisors have to be readily available to your intermediary.
• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary. Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale. Only they can provide the necessary information.
• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer. An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc. The lines of communication must be kept open.
• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers. They will need to know just what is required, and expected, from such visits.
• You will rightfully expect the intermediary to develop a list of possible acquirers. You can help in several ways. First, you could offer the names of possible candidates who might be interested in acquiring your business. Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.
• Keep your intermediary in the loop. Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents. Now is not the time to assume that the intermediary’s job is done. It may just be beginning as the details of financing are completed and final deal points are resolved. The intermediary knows the buyer, the seller, and what they really agreed on. You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.
• Be open to all suggestions. You may feel that you only want one type of buyer to look at your business. For example, you may think that only a foreign company will pay you what you want for the company. Your intermediary may have some other prospects. Sometimes you have to be willing to change directions.
The time to call a business intermediary professional is when you are considering the sale of your company. He or she is a major member of your team. Selling a company can be a long-term proposition. Make sure you are willing to be involved in the process until the job is done. Maintain open communications with the intermediary. And, most of all – listen. He or she is the expert.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