Keeping it simple — 5 Tips to Consider Before Selling Your Business
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
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August Stock Market… Did you miss the perfect time to sell your business?
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.
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Determining Your Sell By Date when Selling Your 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.
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Scale Up Your Service Business to Increase your Business’s Value
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 MoreSmall Business For Sale Listings Reach Six Year High per BizBuySell’s 2nd Quarter 2015 Insight Report
BizBuySell recently released their Business For Sale Insight Reports for the 2nd Quarter of 2015 stating growing supply & Demand continues high transaction trend. Overall “business sales” were up 12% vs. 2nd quarter 2014. This level of performance has not been seen since 2009. Below are a few additional summary items from BizBuySell’s reports.
- Median small business asking price grew 13% in the past year, while sale price increased 12%.
- Manufacturing businesses led the recent growth spurt with a 29 percent uptick from the same period last year.
- Business listings in the restaurant (12 percent), service (11 percent) and retail (9 percent) industries also experienced year-over-year supply growth.
- The median revenue of sold businesses increased to $450,000 this quarter (the highest on record since report inception in 2007).
- The median cash flow rose slightly to 102,995 from $100,000 at the same time last year.
- California saw large increases in the number of small businesses on the market.
- San Jose (up 64 percent)
- Sacramento (up 42 percent)
- San Francisco (up 31 percent)
- San Diego (grew by 18 percent)
- Los Angeles (7 percent increase)
To help show a picture of what happened in the 2nd quarter of 2015 for California below is a chart showing the number of business’s listed and the average cash flow multiple. We also added a column using $200,000 cash flow as an example to show a California market comparison.
California Highlights | # listed | Cash Flow Multiple | Hypothetical 200kCash Flow x Multiple = Listing Price |
Contra Costa-Alameda-Solano, CA | 187 | 2.85 | $570,000 |
Sacramento–Arden-Arcade–Roseville, CA | 252 | 2.82 | $564,000 |
San Diego-Carlsbad-San Marcos, CA | 389 | 2.53 | $506,000 |
San Francisco-Oakland-Fremont, CA | 342 | 3.10 | $620,000 |
San Jose-Sunnyvale-Santa Clara, CA | 184 | 3.04 | $608,000 |
“There will always be some outliers, but this quarter’s data confirms that small business listings, transactions and financials are all continuing on a great trend,” Bob House, Group GM of BizBuySell.com and BizQuest.com said. “Nationally, the transaction volumes, key financial indicators and economic environment during the first half of 2015 point to another robust business-for-sale market in the second half of the year.”
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 MoreExpect the Unexpected when Selling Your Business
According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes an owner into selling a business. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:
How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.
How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.
Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.
How important is confidentiality?
This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.
Read MoreMaking The Decision To Sell Your Business
Making the decision to Sell your business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.
- Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
- No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
- Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
- Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
- Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
- An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”
There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”
Copyright 2015 Business Brokerage Press, Inc.
Read MoreThings To Consider If You Want To Keep The Family Business In The Family
A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering
selling the business:
- You may have to consider a lower price if maintaining jobs for family members is important.
- Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy.
- Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
- All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
- Confidentiality in the sale of a family business is a must.
- Meetings should be held off-site and selling documentation kept off-site, if possible.
- Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.
Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisers. They can also move the sales process along as quickly as possible and assist in negotiations.
Keeping it in the Family
It’s hard to transfer a family business to a younger kin. Below are some statistics regarding family businesses.
- 30% of family businesses pass to a second generation.
- 10% of family businesses reach a third generation.
- 40% to 60% of owners want to keep firms in their family.
- 28% of family businesses have developed a succession plan.
- 80% to 95% of all businesses are family owned.
SOURCE: TED CLARK, NORTHEASTERN UNIVERSITY CENTER FOR FAMILY BUSINESS
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreLiving the 80/20 principle will make your business more valuable
I am sure most of you are familiar with the 80/20 principle. 80 percent of results come form 20% of your efforts. Author Richard Koch has written a number of books on how this principle applies to life and business. In a recent seminar put on by well known marketer Perry Marshal, Richard Koch explains in this short 1m minute video how as a business owner “working hard” is typically bad for him/her and usually bad for the business.
Richard uses the phrase “getting off the hamster wheel” or more importantly as a business owner needing to make the decision to “get off the hamster wheel” and how this decision can make your business more valuable. In this 2m video Richard’s gives 3 reasons business owners should make the decision to get “out of the business.”
1- You will enjoy life more and be happier, allowing you to do things outside of the business.
2- It will increase the value of your business – by getting out of the business and thinking a different way. This is based on observations of owners that are most successful are those that have done very little in the business but set things up for the organization perform.
3- Have no value of equity– can not sell the business. To make the business sellable you have to get out of the business and be able to deliver results with out you being there.
In a previous posting we discussed this very important topic in bringing more value to your business.
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
Source: Perrymarshal.com
Read MoreBizBen Index reports California Business For Sale Deal Count Best In Five Years
In a recent article by BizBen 5120 California businesses sold in the first four months of 2015. This is the best calendar year start in the last 7 years! And in April alone 1193 business’s sold which is the most in April since 2010.
According to the article the top reasons for the improved “business for sale” results are:
- Improved access to purchase loan money
- Optimism by both Buyers and Sellers
- More creative deal solutions such as “earn outs” and “alternative financing”
A few statistical highlights of business’s sold by county include:
LA County up | 12.36% |
Orange County up | 6.5% |
Santa Clara County up | 17.9% |
San Francisco County up | 44% |
Sacramento area up(Sac, Placer, Butte, El Dorado Hills, Nevada, Yolo) | 24.1% |
To read the entire BizBen article click here.
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
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