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|
|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|
Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.
A leading CPA firm conducted a survey that revealed:
- 65% of business owners do not know what their company is worth;
- 75% of their net worth is tied up in their business; and
- 85% have no exit strategy
There are many obvious reasons why a business owner should get a valuation of his or her company every year such as partnership issues, estate planning or a divorce; buy/sell agreements; banking relationships; etc.
No matter what the reason, the importance of getting a valuation cannot be over-emphasized:An astute business owner should like to know the current value of his or her company as part of a yearly analysis of the business. How does it stack up on a year-to-year basis? Value should be increasing not decreasing! It might also point out how the company stacks up against its peers. The owner’s annual physical hopefully shows that everything is fine, but if there is a problem, catching it early on is very important. The same is true of the business.
Lee Ioccoca, former CEO of the Chrysler Company said in commercials for the company, “Buy, sell or get-out-of-the-way,” meaning standing still was not an option. One never knows when an opportunity will present itself. An acquisition now might seem out of the question, but a company owner should be ready, just in case. A current valuation may be as good as money in the bank when that “out of the question” opportunity presents itself.
One never knows when a potential acquirer will suddenly present itself. A possible opportunity of a lifetime and the owner doesn’t have a clue what to do. Time is of the essence and the seller doesn’t have a current valuation to check against the offer. By the time it takes to gather the necessary data and get it to a professional valuation firm, the acquirer has moved to greener pastures.
Having a company valuation done on an annual basis should be as secondary as the annual physical – it really is the same thing – only the patients are different.
© Copyright 2015 Business Brokerage Press, Inc.Read More
Business owners who want to sell their business are often told by business brokers and intermediaries that they will have to consider financing the sale themselves. Many owners would like to receive all cash, but many also understand that there is very little outside financing available from banks or other sources. The only source left is the seller of the business.
Buyers usually feel that businesses should be able to pay for themselves. They are wary of sellers who demand all cash. Is the seller really saying that the business can’t support any debt or is he or she saying, “the business isn’t any good and I want my cash out of it now, just in case?” They are also wary of the seller who wants the carry-back note fully collateralized by the buyer. First, the buyer has probably used most of his or her assets to assemble the down payment and additional funds necessary to go into business. Most buyers are reluctant to use what little assets they may have left to secure the seller’s note. The buyer will ask, “what is the seller not telling me and/or why wouldn’t the business provide sufficient collateral?”
Here are some reasons why a seller might want to consider seller financing the sale of his or her business:
- There is a greater chance that the business will sell with seller financing. In fact, in many cases, the business won’t sell for cash, unless the owner is willing to lower the price substantially.
- The seller will usually receive a much higher price for the business by financing a portion of the sale price.
- Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at 8 percent carried over nine years will actually double the amount carried. $100,000 at 8 percent over a nine year period results in the seller receiving $200,000.
- With interest rates currently the lowest in years, sellers usually get a higher rate from a buyer than they would get from any financial institution.
- Sellers may also discover that, in many cases, the tax consequences of financing the sale themselves may be more advantageous than those for an all-cash sale.
- Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
Certainly, the biggest concern the seller has is whether or not the new owner will be successful enough to pay off the loan the seller has agreed to provide as a condition of the sale. Here are some obvious, but important, factors that may indicate the stability of the buyer:
- How long has the buyer lived in the same house or been a home owner?
- What is the buyer’s work history?
- How do the buyer’s personal references check out?
- Does the buyer have a satisfactory banking relationship?
Advantages of Seller Financing for the Buyer
- Lower interest
- Longer term
- No fees
- Seller stays involved
- Less paperwork
- Easier to negotiate
© Copyright 2015 Business Brokerage Press, Inc.Read More
In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart. There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into floodwaters and “sink” the sale.
What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of causality began to emerge. The following is a compilation of situations and factors affecting the sale of a business.
The Seller Fails To Reveal Problems
When a seller is not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Even though this may seem a tall order, sellers must be as open about the minuses of their business as they are about the pluses. Again and again, business brokers surveyed said: “We can handle most problems . . . if we know about them at the start of the selling process.
The Buyer Has Second Thoughts About the Price
In some cases, the buyer agrees on a price, only to discover that the business will not, in his or her opinion, support that price. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of prime importance that the business be fairly priced. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts for themselves.
Both the Buyer and the Seller Grow Impatient
During the course of the selling process, it’s easy–in the case of both parties–for impatience to set in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process takes time. However, it shouldn’t take so much time that the deal is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process. Most are not. A business broker is aware of most of the competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team.” Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar, but these people may not have the experience to bring the sale to a successful conclusion.
The Buyer and the Seller Are Not (Never Were) in Agreement
How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along–they just thought they were. Cases of communications failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.
The Seller Doesn’t Really Want To Sell
In all too many instances, the seller does not really want to sell the business. The idea had sounded so good at the outset, but now that things have come down to the wire, the fire to sell has all but gone out. Selling a business has many emotional ramifications; a business often represents the seller’s life work. Therefore, it is key that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should quelled or resolved. Some sellers enter the marketplace just to test the waters; to see if they could get their “price,” should they ever get really serious. This type of seller is the bane of business brokers and buyers alike. Business brokers generally can tell when they encounter the casual (as opposed to serious) category of seller. However, an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller is a good seller.
Or…the Buyer Doesn’t Really Want To Buy
What’s true for the mixed-emotion seller can be turned right around and applied to the buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to drag their feet as they draw closer to the “altar.” This is especially true today, with many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.
And None of the Above
The situations detailed above are the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, and unforeseen environmental problems. However, many potential deal-breakers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.
A Final Note
Remember these components in working toward the success of the business sale:
- Good chemistry between the parties involved.
- A mutual understanding of the agreement.
- A mutual understanding of the emotions of both buyer and seller.
- The belief, on the part of both buyer and seller, that they are involved in a good deal
There’s an old saying that “Time and Surprises” will kill a deal. The key is for both the seller and buyer to keep this in mind and be as transparent and keep the deal moving along best you can.
In a recent article on Axial, 5 simple but important tips are mentioned to consider before selling your business. With the main message being Plan, Plan, and Plan now! No matter when a business owner is going to exit their business it’s NEVER TOO LATE to start planning. Of course there are many items to consider but this list of 5 can have a large impact on the sale of a business.
- Early in the process, consult key decision-makers and those who will be affected by the deal.
- Determine whether and for how long you would like to continue to work after the sale.
- Organize your documents in advance.
- Determine whether you want a partial or total exit.
- Have realistic expectations of value.
For more details on these 5 items please click here to check out the full article. If you’re interested in learning about your selling options, getting a professional business valuation, or learning about the Value Builder System, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Tri Counties Bank locally in the central valley is presenting four 2-day Business Financial Management seminars in Grass Valley, Sacramento, Chico, and Redding in September and October. Here’s a brief summary and for more information on attending click here.
“Businesses face tough challenges and unique opportunities. The financial success or failure of a business lies in its owner’s ability to manage through the challenges and capitalize on the opportunities. Now you can learn to proactively control the finances of your company through business-tested financial management techniques and maximize profits through more informed decision-making.
This two-day seminar explains in simple, clear language what financial management is and why it can greatly improve your profitability. We guarantee that you will walk away with tangible tools that you can put to use immediately in your own company.”
September 15-16, 2015 Grass Valley
September 29-30th, 2015 Sacramento
October 13-14th, 2015 Chico
October 27-28th, 2015- Redding
To learn more and register on line click here.
August was a rollercoaster ride for stockholders. Triple digit wins followed by even larger losses left the average investor reeling and were a good reminder that markets move in both directions.
Valuations of privately held business have also been somewhat turbulent of late. The average offer extended to users of The Value Builder System was 4.2 pretax profit in Q1, 2015, but dropped to 3.9 in Q2.
Does that mean you have missed the opportunity to sell your business at the peak?
Maybe. But should you care? Probably not.
The thing many of us forget is that when you sell your company—possibly your largest asset and the biggest wealth-creating event of your lifetime—you have to do something with the money you make.
These days, that means you’ll have to turn around and invest your windfall into an asset class that is arguably somewhat bubbly in historical terms. The stock market has more than doubled since 2009. The price of residential real estate has been growing at a rate of 1 percent per month in many major centers. The same trend can be seen in many markets that offer exclusive beach houses or ski chalets.
Who Is Richer: Samantha or Scott?
Indulge us in a hypothetical example. Let’s look at two imaginary business owners, each running a company generating a pretax profit of $500,000. Let’s imagine that Samantha sold her business into the teeth of the recession for three times her pretax profit back in 2009. She would have walked with $1.5 million pretax to invest in the stock market.
Now let’s imagine business owner Scott who decides to try and time the market. Scott waited out the recession and sold his business last month for four times pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got four times profit instead of Samantha’s three times. But when we take a closer look, Samantha would probably be better off today. Assuming she had invested her $1.5 million in the stock market back in 2009, when the Dow was trading below 7,000 points, she would now have more than $3 million, or a third more than Scott, who waited and sold at the “peak.”
Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you’re going to hide the proceeds of a sale under your mattress, you’re probably buying into the same market conditions from which you’re selling out.
A better approach is to optimize your business against the eight things acquirers look for when they buy a business, regardless of what’s happening in the economy overall.
Find out how you score on the eight factors that drive your company’s value by completing the Value Builder questionnaire here.
- By September, we could reach a trillion dollars in proposed deals for the summer, beating out the previous seasonal high in 2007.
- A significant portion of this summer surge is being led by corporate buyers who are scooping up acquisition targets and borrowing like rates may rise tomorrow to fund current or future deals.
- In June and July 933 deals came to market.
- While historically August can prove to be a quieter month, the momentum to date is leading many to believe that a summer slowdown is nowhere in sight and that we could be headed for one the most active years on record for dealmakers.
In recent blogs we have also reported the positive trend in California for business sales as well. These current trends begs the question… “is now the best time to sell my business?” Naturally it’s impossible to predict the future but the market is showing positive signs for sellers looking to exit their business. And with the retiring baby boomer trend continuing to heat up some predict the increased volume of business’s for sale will create more of a buyer’s market in the years coming ahead. It’s never too early to have to starting discussing the proper exit for anyone’s business.
Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company.
The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.
That’s probably how most people think of starting and selling a business: as something akin to a 4 x 100-meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?
But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.
Here’s how to backdate your exit:
Step 1: Pick your eject date
The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.
Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.
Step 2: Estimate the length of your earn out
When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future — if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.
The average earn out these days is three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.
Estimate: + 1-5 years
Step 3: Calculate the length of the sale process
The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (a mergers and acquisitions professional, investment banker or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.
Estimate: + 1 year
Step 4: Create your strategy-stable operating window
Next you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.
If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.
Estimate: + 3 years
Step 5: Figuring out when to sell
The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.
It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. So the sooner you start, the better.
Increase the value of your company by training others in your area of expertise.
It can be tough to grow a service business. Clients are typically buying your expertise, and if all you have to sell is time, the size of your business will always be limited by the number of hours in your day.
One way to scale up your service business is to launch a training division to teach others what you know. That’s what Nancy Duarte did when she found herself run ragged trying to grow Duarte, a Mountain View, California-based design studio.
Duarte’s specialty was creating high-impact presentations (her firm created the slides Al Gore used in the movie The Inconvenient Truth), but the work was tough to scale. She found herself spinning various plates and hoping none of them would fall to the ground. Finally she realized she was exhausted and no longer enjoying her job. She still loved the business but hated the constant demands on her time and energy.
In an effort to pull herself out of individual projects, she sat down and documented her methodology and from there created an internal training course so her employees could learn the Duarte way of creating presentations.
Once she had taught her own staff to handle the development of the presentations, she turned her philosophy and her approach into a book that was published in 2008 under the title Slide:ology – The art and science of creating great presentations. Her most recent book, Resonate: Present visual stories that transform audiences, was published in 2010). Having created a platform with the books, Nancy launched her training division, which offers corporate on-site workshops—her facilitators go to large companies to teach the employees how to make better presentations.
Due in large part to the training division, Duarte has scaled up her service business to the point where she now employs 82 people.
As business owners, we all know we should be documenting our systems for others to follow, but somehow writing our owner’s manual always takes a backseat to serving the next customer or fighting the next fire. Maybe what we need to do is stop thinking of writing down our process as an internal chore and instead focus on launching a training division. That way, the job of documenting our system goes from a textbook-boring task to the raw material needed to launch a revenue-generating business division. If your looking for a platform to use in creating your systems, check out this book “Work the System” by Sam Carpenter. Easy read and really helps break down the basics of the process to systemizing your business.Read More