Selling your business… when it’s TOO LATE
Recently I had a conversation with an owner of a Machine Shop who was clearly “exhausted, done, and going to retire.” He stated as soon as his new boat arrives in 2 months “My wife and I are out-a here.” The problem… there was no exit strategy other than the possibility of passing down the commercial building he owns to his two daughters.
After a short discussion here’s the story: revenues had been on a slide the last couple years, employees had not been replaced when happily retiring from the business, and as calls came in from repeat customers the words “no we can’t commit to your project” became common place. All this combined with only a couple months to find a buyer I had to share with the owner it was too late and there really wasn’t much to sell other than the real estate. He admitted “Yep, I should have planned a year or so ago for retirement and I would have had a better outcome.”
Having a well thought out Exit Strategy Plan including truly understanding the value of your business well in advance pays dividends when you are ready to sell your business and move on to the next chapter in your life.
Simply put the BEST time to sell your business is by Capitalizing on the Business Life Cycle while your business is at its peak or close to it with many business performance graphs with lines moving “up and to the right.”
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreTwo Similar Companies… Big difference in Value- Why?
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:
- The Market
- Management/Employees
- Uniqueness/Proprietary
- Systems/Controls
- Revenue Size
- Profitability
- Regional/Global Distribution
- Capital Equipment Requirements
- Intangibles (brand/patents/etc.)
- Growth Rate
There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:
- Are the company’s projections believable?
- Where is the growth coming from?
- What services/products are creating the growth?
- Where are the customers coming from to support the projected growth – and why?
- Are there long-term contracts in place?
- How reliable are the contracts/orders?
The difference in value usually lies somewhere in the company’s growth rate!
© Copyright 2015 Business Brokerage Press, Inc.
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreWhat a Study of 14,000 Businesses Reveals About How You Should “Not” Be Spending Your Time
In an analysis of more than 14,000 businesses, a new study finds the most valuable companies take a contrarian approach to the boss doing the selling.
Who does the selling in your business? Many business owners are personally involved in doing the selling. Is your business is a whole lot more profitable when you do the selling vs. the months when you leave the selling to others?
If so… that makes sense because you’re likely the most passionate advocate for your business. You have the most industry knowledge and the widest network of industry connections.
If your goal is to maximize your company’s profit at all costs, you may have come to the conclusion that you should spend most of your time out of the office selling, and leave the dirty work of operating your businesses to your underlings.
However, if your goal is to build a valuable company—one you can sell down the road—you can’t be your company’s number one salesperson. In fact, the less you know your customers personally, the more valuable your business.
The Proof: A Study of 14,000 Businesses
We’ve just finished analyzed our pool of Sellability Score users for the quarter ending December 31. 14,000 business owners were asked if they had received an offer to buy their business in the last 12 months, and if so, what multiple of their pre-tax profit the offer represented. We then compared the offer made to the following question:
Which of the following best describes your personal relationship with your company’s customers?
- I know each of my customers by first name and they expect that I personally get involved when they buy from my company.
- I know most of my customers by first name and they usually want to deal with me rather than one of my employees.
- I know some of my customers by first name and a few of them prefer to deal with me rather than one of my employees.
- I don’t know my customers personally and rarely get involved in serving an individual customer.
2.93 vs. 4.49 Times
The average offer received among all of the businesses we analyzed was 3.7 times pre-tax profit. However, when we isolated just those businesses where the owner does “not” know his/her customers personally and rarely gets involved in serving an individual customer, the offer multiple went up to 4.49.
Companies where the founder knows each of his/her customers by first name get discounted, earning offers of just 2.93 times pre-tax profit.
Example with $500,000 annual pre-tax profit:
Multiple Offer
Owner knows each of his/her customers by name 2.93 $1,465,000
Survey average 3.70 $1,850,000
Owner does “not” know his/her customers by name 4.49 $2,245,000
When Value Is the Enemy of Profit
Who you get to do the selling in your company is just one of many examples where the actions you take to build a valuable company are different than what you do to maximize your profit. If all you wanted was a fat bottom line, you likely wouldn’t invest in upgrading your website or spend much time thinking about the squishy business of company culture.
How much money you make each year is important, but how you earn that profit will have a greater impact on the value of your company in the long run.
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreIs Now the Time To Sell Your Business?
Have you been thinking about selling your business but just can’t decide if now is the best time? Do you find yourself repeatedly analyzing the economic situation and wishing you had a crystal ball? There are positive signs and there are negative signs….
If you’re still up in the air and can’t quite decide whether or not to hit the eject button in deciding if it’s time to sell your business, here are six reasons you might want to consider getting out now.
- You’re less interested in fighting the good fight
A lot of business owners took the Great Recession in the teeth. If you’ve got your business stabilized and the prospect of possibly having to fight through another recession leaves you panic-stricken, it could be time for you to get out.
2. The worst is behind you
Let’s say you were mentally ready to consider selling a few years ago and then 2008 hit and 2009 was bad, and in 2010 and 2011 you made cuts and adjustments, so now you’re starting to see some profit and revenue growth. With your numbers going in the right direction, now might be just the right time to make your move.
- The tax man is coming
Governments around the world are looking for money to fund the cost of an aging population. At some point this will mean increased taxes.
- Nobody is lucky forever
If you’re lucky enough to be in a business that actually benefits from a bad economy, congratulations… you’ve probably just had the four best years of your business life. But no cycle lasts forever and right now might be a great time to take some chips off the table.
- The coming glut
As a business owner, demographics are not on your side. As the baby boomers start to retire in droves, we’re going to have a glut of small businesses coming on the market. That’s great if you’re buying; but if you’re a seller, you may want to avoid the flood and head for higher ground now. I am sure you have heard… but 10,000 baby boomers are retiring each day and this will continue for the next 16 years.
- The closing window
Since 2008, it’s been tougher for private equity companies to raise money; so many firms had their last successful round of fundraising a number of years ago. Many of these funds have a five-year window in which to invest or they have to give the money back to the people who gave it to them. Some boutique private equity firms will make investments in companies that have at least one million dollars in pre-tax profits (larger private equity firms will not go below $3 million in EBITDA); so if you’re in the seven-figure club, you could get a bidding war going for your business among private equity buyers keen to invest their money before they have to give it back.
Want to learn what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreWhat’s so special about “The EBITDA Million Dollar Mark”
If you’re wondering when is the right time to sell your business, you may want to wait until your company is generating $1 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
What’s so special about the million-dollar mark?
The EBITDA million dollar mark is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.
Since businesses are often valued on a multiple of earnings, getting to a million in profits means you’re not only getting a higher multiple but also applying your multiple to a higher number.
For example, according to our research at www.SellabilityScore.com, a company with $200,000 in EBITDA might be lucky to fetch three times EBITDA, or $600,000. A company with a million dollars in EBITDA would likely command at least five times that figure, or $5 million. So the company with $1 million in EBITDA is five times bigger than the $200,000 company, but almost 10 times more valuable.
There are a number of reasons that offer multiples go up with company size but one of the main reasons has to do with Private Equity Groups (PEGs) as they make up a large chunk of the acquirers in the mid market. The value of your company will move up considerably if you’re able to get a few PEGs interested in buying your business. But most PEGs are looking for companies with at least $1 million in EBITDA. The million-dollar cut-off is somewhat arbitrary, but very common. As with homebuyers who narrow their house search to houses that fit within a price range, or colleges that look for a minimum SAT score, if you don’t fit the minimum criteria, you may not be considered.
If you’re close to a million dollars in EBITDA and getting antsy to sell, you may want to hold off until your profits eclipse the million-dollar threshold, because the universe of buyers—and the multiple those buyers are willing to offer—jumps nicely once you reach seven figures.
Want to learn what your Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read More10 Things That Make Your Business More Valuable Than That of Your Industry Peers
The value of your company is partly determined by your industry. For example, cloud-based software companies are generally worth a lot more than printing companies these days.
However, when we analyze businesses in the same industry, we still see major variations in valuation. So we dug through the data available to us from our partners at The Sellability Score and we found 10 things that will make your company more valuable than its industry peer group.
- Recurring Revenue
The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer. Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable than those of your competitors.
- Something Different
Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable than a company that sells the same commodity as everyone else in their industry.
- Growth
Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your industry overall.
- Caché
Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry. If you are the darling of your industry trade media, expect to get a premium acquisition offer.
- Location
If you have a great location with natural physical characteristics that are difficult to replicate (imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate), you’ll have buyers who understand your industry interested in your location as well as your business.
- Diversity
Acquirers pay a premium for companies that naturally hedge the loss of a single customer. Ensure no customer amounts to more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.
- Predictability
If you’ve mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who doesn’t have a clue where their next customer will come from.
- Clean Books
Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more. You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.
- A 2iC
Companies with a second-in-command who has agreed to stay on post sale are more valuable than businesses where all the power and knowledge are in the hands of the owner.
- Happy Customers
Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.
Like a rising tide that lifts all boats, your industry typically defines a range of multiples within which your business is likely to sell for; but whether you fall at the bottom or the top of the range comes down to factors that have nothing to do with what you do, but instead, how you do it.
Want to learn what your Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read More
One Hidden Thing That Drives Your Company’s Value
You already know that your company’s revenue and profits play a big role in how much your business is worth.
Do you also know the role cash flow plays in your valuation?
Cash vs. Profits
Cash flow is different than profits in that it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge $10,000 upfront for a service that takes you three months to deliver, you recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work.
But since you charged upfront, you get all $10,000 of cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two checks: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations like payroll, rent, etc.
The trick is that both checks are drawn from the same bank account. Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you for your company.
The inverse is also true.
If your company is a cash suck, an acquirer is going to calculate that she needs to inject a lot of working capital into your business on closing day, which will deplete her resources and lessen the check she writes to you.
How To Improve Your Cash Flow
There are many ways to improve your cash flow – and therefore, the value of your business. One often overlooked tactic is to spend less on the machines your company needs to operate.
In the restaurant business, for example, there is an often repeated truism that it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and – with all of the typical optimism of a new entrepreneur – pays cash for a brand new commercial kitchen complete with fancy stove, commercial grade walk-in coolers, etc., as well as all new dish ware, pots and pans, thus depleting his cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy.
Then along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the shiny new equipment from owner number one’s creditors for 70 cents on the dollar, figuring she has made a wonderful deal. But the outlay of cash is still too great and she too is out of business within a year.
It’s not until the third owner comes along that the location actually survives. He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.
The moral of the story is: find a way to reduce the cash you spend on equipment, however you can. Can you buy your gear used on sites like eBay? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent instead of buying?
Profits are an important factor in your company’s value but so too is the cash your company generates. We call this phenomenon The Valuation Teeter Totter and it is one of the eight key drivers of the value of your company. Curious to see how you’re performing on all eight drivers? Get your Sellability Score here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
Read More
3 Value-Wasting Mistakes to Avoid When Hiring a Professional Business Broker
And How to Achieve Success by Hiring the Right Business Broker for Selling Your Business
What This Report is About
Have you ever uncovered an opportunity you’d love jump into but found yourself too busy to make it happen?
It takes time, focus and talent to prepare, package, market and process a successful business sale…if you hope to achieve favorable results.
You may be tempted to hire away the problem, and if done right, leveraging OPT (Other People’s Talent) can be a real win. But, as you’ve probably heard, it can turn into a real bummer when the buyers don’t roll in, your business is “on the market” for an extended period or offer prices are low.
I wrote this guide to help you avoid three business sale-killing pitfalls of a bad relationship with a professional business broker… And how to get the most out of this most crucial partner in the sale of your business.
For instance, the choices made about how to position the business for sale, the listing price and marketing strategy to potential buyers can make or break a successful sale. You’ve worked hard building your business, developing customer and vendor relationships and generating profits, isn’t it worth careful consideration when choosing how to sell it?
Carefully identifying what parts of your company will be most valuable to a buyer, knowing how to determine the price and detailing how to “package” the business in a way that puts it in the best light and makes a strong appeal to prospective buyers are all critical but can be tricky!
If you are too busy running your current business to invest the time it takes to really focus on selling it, maybe it’s time to bring in a “hired gun” to help you realize (and maximize) the value you know is there.
But Jeez, you say…How do you do that without getting taken to the cleaners?
You don’t want to have all your hard work building your business go to waste.
But you also don’t want to go out and try to sell your business on your own while continuing to manage the business, work with buyers, negotiate the deal and oversee due diligence all while keeping everything confidential from employees and customers.
Relax, you can sell your business and realize the profits you deserve from leveraging a good business brokers talent to save you time and increase the chances of a successful sale, all while you focus on running your business. Or your life. Gee, what a concept!
The 3 Mistakes to Avoid…
Mistake #1: The Sellers Lens
We all have our own unique “lens” that we see the world through. This lens is not “fixed” but changes depending on the situation. As business leader Stephen Covey stated, “We must look at the lens through we see the world, as well as the world we see, and that the lens itself shapes how we interpret the world.”
This is true of how a buyer looks at your business…through a buyers lens, which is very different than a sellers lens.
Hiring somebody who doesn’t understand buyers and how to position your business so that buyers gets excited can result in little interest in your business. There are many small details that contribute to getting a buyer to look at your business.
Very often creating that buyer interest involves looking at your business from a fresh perspective and knowing how and what buyers look for. Success in selling a business is about taking the time to understand a business and then translating the opportunity so it is easily understood by buyers.
Look for a business broker who takes an active interest in the story of your business, asks lots of questions creates profiles of perfect buyers and has the ability to tell you what excites these kind of buyers.
Mistake #2: Thinking You Can Just Answer Some Questions, Send In Some Documents And Let Your Broker Handle It From There…
A trust must be established between you, the owner, and your business broker. This includes feeling comfortable about their personality, the way they communicate, their experience and approach used to sell your business.
The process of selling your business will most probably include some stressful periods and certainly there will be times when important decisions need to be made.
One of the benefits of working with a business broker is having someone involved in the process who you feel comfortable with candidly discussing your needs, desires, options, etc. This can help avoid broken transactions that result from your broker not taking the time to fully understand your perspective.
Mistake #3 – One Size (Does Not) Fit All
No two businesses are the same. Therefore, no two businesses should be sold the same way.
When discussing your business with a potential broker if you get the feeling they sell businesses pretty much the same way ask yourself “how is my business going to stand out from the 1,000’s of businesses for sale?”
The answer: “It won’t”
Ask your prospective broker to explain their approach to packaging and marketing businesses for sale. Look for a broker who doesn’t use the same approach for every business and understands the difference between simply putting together a generic write-up and financials versus creating a package that brings your business to life.
Every business is unique and every business should be sold with a customized approach. This is a little unconventional because it takes the broker extra time but can have a huge impact on your bottom line.
All the best!
~ Randy Hendershot
For more information…
To discover how Randy Hendershot can help you achieve the goal of selling your business and have fun in the process visit: EvoBizSales.com
Or call 916-993-5433 x5, email Randy@evobizsales.com
(Ask about a Business Valuation)
Read MoreWhen to Sell Your Business: Capitalizing on the Business Life Cycle
If you’re a business owner, you know the dream; buy or start a business, work hard to develop it, and watch it grow into something you’re proud of.
Then, once the business runs smoothly without your constant input or you’ve found someone you trust to manage it, you’ll finally be able to enjoy the freedom that comes with being your own boss! When you’re finally ready to retire or move on, you’ll sell your business and the profits from the sale will fund your retirement, provide a down payment on your next business purchase…
But there’s a problem with this way of thinking. By not taking into account the natural life cycle of a business, you can rob yourself of that nice payout…or even worse not be able to sell at all.
The Life Cycle of a Business
All businesses have a life cycle – they grow, mature, and eventually decline or re-invent themselves. How long this cycle takes depends on the structure of the company and the owner(s), but at some point all companies go through the following stages:
GROWTH STAGE: During the growth stage, the owner(s) are infusing the business with energy, ideas, and money. There are new procedures, products, and customers, and often new employees and suppliers. Profits start out low but keep rising, improving the value of the company.
MATURITY/STABILIZATION STAGE: This is where the owner(s), and the business, naturally reach a leveling-off point. The owner(s) have reached the limit of what they can do to grow the business. This can happen for any number of reasons: market saturation, competition, a changing customer base or sometimes simply the owner(s) wanting to work less. Whatever the cause, the maturity stage marks a period of stability and predictable day-to-day operations.
FORK IN THE ROAD: RE-POSITION OR DECLINE
DECLINE STAGE: The business enters a decline phase as the owner begins to back away from the business. This usually happens because they lose interest, start retirement, are burned out, face financial difficulty, or experience health issues. At this stage, when the business loses ground there’s no big effort to bring it back. No one is actively trying to recover lost customers or investing in updated equipment. After all, the plan is to sell, so why keep putting money into it?
OR….
RE-POSITION STAGE: If the owner has the energy, desire and capital they must think about the business as a “start-up”. The product/service, marketing and procedures are modified to meet the changing market conditions. The “former” business is history, the “new” business is now back in the Growth Stage…requiring a roll up the sleeves mentality. The thing that gets most businesses in trouble when they decide to go through the Re-Position stage is the difficulty in looking at the business with a fresh perspective (“hard to see the forest through the tree’s”).
Why Selling Your Business at the Wrong Time Devalues Your Business
As you can see from the above scenario, many business owners sell during the DECLINE phase, when the value is actually at its lowest! And while the owner still sees the worth of the business based on the work and money they invested in the past, a potential buyer only sees dropping sales, poor customer retention, and outdated equipment.
That’s why the longer it takes to finally make the sale, the more money you lose. Because once your business is in the decline phase, you’re faced with a difficult decision: selling it at a reduced price because it’s no longer a growing or stable business, or investing money and effort to “bring it up to speed” and make it more attractive to buyers. Either way, you pay (with time, money & energy).
How to Use the Business Life Cycle to Your Advantage
How do you avoid ending up in this difficult position? By selling your business when it’s at its prime (during the growth or maturity stage), or being prepared for the sale way ahead of time.
Many business owners have made enormous profits by selling their business in the growth stage (think start-ups that were acquired by major companies). You can also make a healthy profit from a mature business that’s showing consistent profits and stable operations.
If this sounds appealing to you and you’re comfortable selling your business at this stage, it’s wise to get the process started as soon as possible. Doing the groundwork early makes you prepared to accept a great opportunity or to sell quickly if your circumstances change (more on this in a future post).
If you’d rather be involved with your business right up until you retire, you can still see good profits as long as you plan ahead.
There are actually many ways you can run your business with transferred or shared ownership that lets you exit in stages rather than all at once. It requires planning well in advance, and understanding how to structure the deal but these options can let you retire at your own pace and still make a significant profit.
Whichever way you decide to go, knowing how to identify each stage of a businesses’ life cycle and pre-planning your exit strategy to meet your long-term needs are the keys to making sure you get back more from your business than you put into it.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
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