The Importance of Having a Dominant Position in the Market

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.

 

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.

 

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.

 

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.

 

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!

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.

 

Copyright: Business Brokerage Press, Inc.

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Are You Emotionally Ready to Sell?

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.

 

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.

 

Copyright: Business Brokerage Press, Inc.

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Learn the Dynamics and Save the Deal

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.

Copyright: Business Brokerage Press, Inc.

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Selling: What Does An Intermediary Expect From You

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.

Copyright: Business Brokerage Press, Inc.

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Family-Owned Businesses Do Have Choices

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Family-owned businesses do have some options when it comes time to sell.  Selling the entire business may not be the best choice when there are no other family members involved.  Here are some choices to be considered:

Internal Transactions

  • Hire a CEO – This approach is a management exit strategy in which the owner retires, lives off the company’s dividends and possibly sells the company many years later.
  • Transition ownership within the family – Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
  • Recapitalization – By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
  • Employee Stock Ownership Plan (ESOP) – Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset.  ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

  • Third party sale – The process could take six months to a year to complete.  This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after the closing.
  • Complete sale over time – The owner can sell a minority interest now with the balance sold after maybe five years.  Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
  • Management buy-outs (MBOs) – Selling to the owners’ key employee(s) is an easy transaction and a way to reward them for years of hard work.  Often the owner does not maximize the selling price, and usually the owner participates in the financing.
  • Initial public offering (IPO) – In today’s marketplace, a company should have revenues of $100+ million to become a viable candidate.  IPOs receive the highest valuation, but management must remain to run the company.

Source: “Buying & Selling Companies,” a presentation by Russ Robb, Editor, M&A Today

 

Copyright: Business Brokerage Press, Inc.

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Who Is Today’s Buyer?

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It has always been the American Dream to be independent and in control of one’s own destiny. Owning your own business is the best way to meet that goal.  Many people dream about owning their own business, but when it gets right down to it, they just can’t make that leap of faith that is necessary to actually own one’s own business.  Business brokers know from their experience that out of fifteen or so people who inquire about buying a business, only one will become an owner of a business.

Today’s buyer is most likely from the corporate world and well-educated, but not experienced in the business-buying process.  These buyers are very number-conscious and detail-oriented.  They require supporting documents for almost everything and will either use outside advisors or will do the verification themselves, but verify they will.  A person who is realistic and understands that he or she can’t buy a business with a profit of millions for $10 down is probably serious.  They must be able to make decisions and not depend on outside parties to do it for them.  They must also have the financial resources available, have an open mind, and understand that owning one’s own business means being the proverbial chief cook and bottle washer.

Today’s buyers are usually what might be termed “event” driven.  This means that the desire to own their own business is coupled with a need or reason.  Maybe they have been downsized out of a job, they don’t want to be transferred, they travel too much, they see no future in their current position, etc.  Many people have the desire, but not the reason.  Most people don’t have the courage to quit a job and the paycheck to venture out on their own.

There are the perennial lookers.  Those people who dream about owning their own business, are constantly looking, but will never leave the job to fulfill the dream.  In fact, perspective business buyers who have been looking for over six months would probably fit into this category.

Business brokers spend a lot of time interviewing buyers.  Here are just a few of the questions they will ask. The answers they receive will determine whether or not the prospective buyer is serious and qualified.

  • Why is the person considering buying a business?
  • Has the person ever owned their own business?
  • How long has the person been looking?
  • Is the person currently employed?
  • What kind of business is the person looking for?
  • Is he or she flexible in the kind of business?
  • What are the most important considerations?
  • How much money is available?
  • What is the person’s timeframe?
  • Does the person’s experience match the type of business under consideration?
  • Who else is involved in the purchase decision?
  • Is the person’s spouse positive about owning a business?

There are other questions and considerations, but those cited above reveal the depth of a buyer interview.  Business brokers want to work only with buyers who are serious about purchasing a business.  They don’t want to show a business to anyone who is not qualified, which is simply a waste of their time and the seller’s time.

 

Copyright: Business Brokerage Press, Inc.

 

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Why Deals Fall Apart — Loss of Momentum

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Deals fall apart for many reasons – some reasonable, others unreasonable.

For example:

• The seller doesn’t have all his financials up to date.
• The seller doesn’t have his legal/environmental/administrative affairs up to date.
• The buyer can’t come up with the necessary financing.
• The well known “surprise” surfaces causing the deal to fall apart.

The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum.

This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don’t notice the waning or missing momentum.  Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it.

Let’s say a buyer can’t get through to the seller.  The buyer leaves repeated messages, but the calls are not returned.  (The reverse can also happen, but for our example we’ll assume the seller is unresponsive.) The buyer then calls the intermediary.  The intermediary assures the buyer that he or she will call the seller and have him or her get in touch.  The intermediary calls the seller and receives the same response. Calls are not returned.  Even if calls are returned the seller may fail to provide documents, financial information, etc.

To the experienced intermediary the “red flag” goes up. Something is wrong. If not resolved immediately, the deal will lose its momentum and things can fall apart quite rapidly. What is this hidden element that causes a loss of momentum? It is generally not price or anything concrete.

It often boils down to an emotional issue. The buyer or seller gets what we call “cold feet.” Often it is the seller who has decided that he really doesn’t want to sell and doesn’t know what to do.  It may also be that the buyer has discovered something that is quite concerning and doesn’t know how to handle it. Maybe the chemistry between buyer and seller is just not there for one or the other of them. Whatever the reason, the reluctant party just tries to ignore the proceedings and lack of momentum occurs.

The sooner this loss of momentum is addressed, the better the chance for the deal to continue to closing. Because the root of the problem is often an emotional issue, it has to be faced directly. An advisor, the intermediary or someone close to the person should immediately make a personal visit. Another suggestion is to get the buyer and seller together for lunch or dinner, preferably the latter. Regardless of how it happens, the loss of momentum should be addressed if the sale has any chance of closing.

 

Copyright: Business Brokerage Press, Inc.

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Personal Goodwill: Who Owns It?

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Personal Goodwill has always been a fascinating subject, impacting the sale of many small to medium-sized businesses – and possibly even larger companies. How is personal goodwill developed? An individual starts a business and, during the process, builds one or more of the following:

• A positive personal reputation
• A personal relationship with many of the largest customers and/or suppliers
• Company products, publications, etc., as the sole author, designer, or inventor

The creation of personal goodwill occurs far beyond just customers and suppliers. Over the years, personal goodwill has been established through relationships with tax advisors, doctors, dentists, attorneys, and other personal service providers.  While these relationships are wonderful benefits, they are, unfortunately, non-transferable. There is an old saying:  In businesses built around personal goodwill, the goodwill goes home at night.

It can be difficult to sell a business, regardless of size, where personal goodwill plays an integral role in the business’ success. The larger the business, the less likely that one person holds the key to its profitability. In small to medium-sized businesses, personal goodwill can be a crucial ingredient.  A buyer certainly has to consider it when considering whether to buy such a business.

In the case of the sale of a medical, accounting, or legal practice, existing clients/patients may visit a new owner of the same practice; they are used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. However, if existing clients or patients don’t like the new owner, or they don’t feel that their needs were handled the way the old owner cared for them, they may look for a new provider. The new owner might be as competent as, or more competent than, his predecessor, but chemistry, or the lack of it, can supersede competency in the eyes of a customer.

Businesses centered on the goodwill of the owner can certainly be sold, but usually the buyer will want some protection in case business is lost with the departure of the seller. One simple method requires the seller to stay for a sufficient period after the sale to allow him or her to work with the new owner and slowly transfer the goodwill. No doubt, some goodwill will be lost, but that expectation should be built into the price.

Another approach uses some form of “earnout.” At the end of the year, the lost business that can be attributed to the goodwill of the seller is tallied.  A percentage is then subtracted from monies owed to the seller, or funds from the down payment are placed in escrow, and adjustments are made from that source.

In some cases, the sale of goodwill may offer some favorable tax benefits for the seller. If the seller of the business is also the owner of the personal goodwill, the sale can essentially be two taxable events. The tax courts have ruled that the business doesn’t own the goodwill, the owner of the business does. The seller thus sells the business and then also sells his or her personal goodwill. The seller’s tax professional will be able to give further advice on this matter.

 

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Copyright:Business Brokerage Press, Inc.

 

The Three Ways to Negotiate

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Basically, there are three major negotiation methods.

1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”

2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.

3. This for that. Both buyer and seller have to find out what is important to each.  So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm.  The buyer may want to move the business.

There is an old adage that advises, “Never negotiate your own deal!”

The first thing both sides have to decide on is who will represent them.  Will they have their attorney, their intermediary or will they go it alone?  Intermediaries are a good choice for a seller.  They have done it before, are good advocates for their side and they understand the company and the seller.

How do the parties get together in a win-win negotiation?  The first step is for both sides to work with their advisors to settle on the price and deal structure positions.  Both sides should be able to present their side of these issues.  Which is more important – price or terms, or non-monetary items?

Information is vital to a buyer.  Buyers should keep in mind that the seller knows more about the business than he or she does.  Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal.  Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.

Bob Woolf, the famous sports agent said in his book, Friendly Persuasion: My Life as a Negotiator, “I never think of negotiating against anyone.  I work with people to come to an agreement.  Deals are put together.”

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Copyright: Business Brokerage Press, Inc.

Due Diligence — Do It Now!

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Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a buyer’s perspective in performing due diligence as part of an annual review of the business.  Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door.

This process, when performed by a serious acquirer, is generally broken down into five basic areas:

• Marketing due diligence
• Financial due diligence
• Legal due diligence
• Environmental due diligence
• Management/Employee due diligence

Marketing Issues
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry.  For example, here are just a few questions concerning the market that due diligence will help answer:

• What is the size of the market?
• Who are the industry leaders?
• Does the product or service have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What’s the downside and the upside of the product/service?  What is the risk and potential?

Financial Issues
Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? and (2) Are the seller’s claims supported by the figures?  If the answer to both is yes, the following should be carefully reviewed:

• The accounts receivables
• The accounts payable
• The inventory

Legal Issues
Are contracts and agreements current? Are products patented, if necessary?  How about copyrights and trademarks?  What is the current status of any litigation?  Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see and would it be acceptable?

Environmental Issues
Not too long ago this area would have been a non-issue.  Not any more!   Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate.  Possible acquirers – and lenders – are really “gun-shy” about these types of problems.

Management/Employee Issues
What employment agreements are in force?  What family members are on the payroll? Who are the key people?  In other words, who does what, why, and how much are they paid?

Operational Issues
The company should have a clear program covering how their products are handled from raw material to “out the door.” Service companies should also have a program covering how services are delivered from initial customer contact through delivery of the services.

The question is, do you give your company a “physical” now, or do you wait until someone else does it for you – with a lot riding on the line?

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Copyright: Business Brokerage Press, Inc.