There is no doubt about it, it can be exciting to buy a new business.  However, in the process, it is very important that you don’t become unrealistic about future growth.  Keep in mind that in the vast majority of cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling. 

Richard Parker’s recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business” seeks to instill a smart degree of caution into prospective buyers.  Parker notes that when evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized.  In particular, Parker cautions those buyers who are buying into an industry that they know nothing about; those individuals should be very careful. 

When buying into an industry where one has no familiarity, there can be a range of problems.  The opportunities that you see may not have been tapped into by the existing owner for a range of reasons.  You couldn’t possibly guess what these reasons might be without more of a knowledge base.  Since you are an outsider, you likely lack the proper perspective and understanding.  In turn, this means you may see growth opportunities that may not exist, as the seller may have already tried and failed.  Summed up another way, until you actually own the business and are running it on a day to day basis, you simply can’t make a proper assessment of how best to grow that business.

The seductive lure of growth shouldn’t be the determining factor when you are looking for a business.  A far more important and ultimately reliable factor is stability.  The real question, the foundation of whether or not a business is a good purchase option, is whether or not the business will maintain its revenue and profit levels once you’ve signed on the dotted line and taken over.  You want to be sure that the business doesn’t have to grow to remain viable.

As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine.  What is not fine is assuming that you can greatly grow the business.  Of course, if new buyers can achieve that goal, that is great and certainly icing on the cake.  But don’t depend on that growth.

In the end, everyone has some ideas that work and some that don’t.  You may take over a business and, thanks to having a different perspective than the previous owner, are able to find ways to make that business grow.  But realize that many of your ideas for growing the business may fail completely. 

A professional business broker will be able to help you determine what business is best for you.  A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.

Copyright: Business Brokerage Press, Inc.

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Goodwill, simply stated, is the difference that exists between a business’s tangible assets and the purchase price.  Goodwill can also be looked at as encapsulating all the hard work that the seller has put into the business while building it.  That stated some do confuse goodwill value with the going-concern value, and this should clearly be avoided.  The going-concern value deals with the concept that the business will continue to operate instead of being liquidated.  Going-concern value is built around the idea that the business has ongoing value and is not ready for liquidation.

What is Goodwill? 

The M&A Dictionary deems goodwill as an intangible and fixed asset, one that can be carried on “as an asset on the balance sheet, such as a recognizable company or product name or strong reputation.  When one company pays more than the net book value for another, the former is typically paying for goodwill.” 

In other words, goodwill is not one-dimensional in nature, but instead, encompasses a range of worth that includes such variables as reputation and long-term relationships.  This often denotes a deeper value and indicates potential hidden strength within the business.  For example, a strong reputation and a plethora of long-term clients and business relationships can imbue a business with both enhanced stability and longevity.

Some Prime Examples

Determining goodwill can be a complex process as it is necessary to include an array of diverse factors.  Factors used in determining goodwill can range from having a loyal customer base and a strong reputation to the overall health of the local economy, being in a recession-resistant industry and having a good location.  Other key factors such as strong management, skilled employees and low employee turnover are further examples of goodwill. 

Other examples of goodwill can be a little more concrete in nature.  A business with technologically advanced equipment, a custom-built factory, royalty agreements, and effective advertising campaigns can also have high levels of goodwill.  Copyrights, patents, trade secrets, proprietary designs, and name recognition can all be powerful company assets that can be entered into the overall equation.

Changing Rules Regarding Goodwill

In the past, many companies were built largely around hard assets such as machinery.  But today’s industry titans are increasingly built around intellectual property, an array of patents and trademarks and even brand names.  Accountants have had to adjust to this new reality when determining value. 

New rules and standards were created by the Federal Accounting Standards Board (FASB) in 2001.  Under these new rules and standards, goodwill may not be written off.  Now, both public and private companies must include their intangible assets and this, not surprisingly, includes goodwill.  Importantly, goodwill must be valued by an outside expert.

Ultimately, goodwill is more complicated today than in the past.  Working with an experienced business broker is an excellent way to demystify the goodwill process and help to determine the true value of any business.

Copyright: Business Brokerage Press, Inc.

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Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements.  A failure to adhere to this essential contract can lead to a myriad of problems.  These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere.  Needless to say, issues such as these can stand in the way of a sale successfully going through.  Maintaining confidentiality throughout the sales process is of paramount importance.

Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace.  There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.

By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process.  Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale. 

Today, these contracts have evolved and now cover an array of potential seller concerns.  A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.

Creating a solid confidentiality agreement is serious business and should not be rushed into.  They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential.  Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed. 

A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company.  Every business and every situation is different.  As a result, confidentiality agreements must be tailored to each business and each situation.

 When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality.  The last thing any business wants is for its confidential information to land in the hands of a key competitor.  Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.

Copyright: Business Brokerage Press, Inc.

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Selling a business is more than a big decision, as it is also quite complex.  Finding the right buyer for a business is at the heart of the matter.  In the recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons outlines that selling a business is a multifaceted process with a lot of moving parts.

A central variable for those looking to sell a business is to have a coherent and well thought out exit strategy in place.  She points out that at the top of your to-do list should be selling your business the right way, and that means having a great exit strategy in place.  In fact, many experts feel that you should have an exit strategy in place even when you first open your business.

Another key variable to keep in mind is that, according to Gibbons, only an estimated 20% to 30% of businesses on the market actually find buyers.  This important fact means that business owners, who usually have a large percentage of their wealth tied up in their businesses, are vulnerable if they can’t sell.  It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.

This article points to author Michael Lefkowitz’s book “Where’s the Exit.”  This book outlines what business owners need to do to get their business ready for their exit.  Updating your books, ensuring that a good team is in place and ready to go and taking steps to “polish the appeal of your brand” are some of the important topics covered. 

Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.”  Mentioned are three key variables that must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.

In the end, working with a business broker is the fastest and easiest way to check off all three boxes.  An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers.  Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business. 

In her article, Gibbons supports the fact that working with a business broker is a smart move.  Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.

Copyright: Business Brokerage Press, Inc.

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Quality employees are essential for the long-term success and growth of any business.  Many entrepreneurs learn this simple fact far too late.  Regardless of what kind of business you own, a handful of key employees can either make or break you.  Sadly, businesses have been destroyed by employees that don’t care, or even worse, are actually working to undermine the business that employs them.  In short, the more you evaluate your employees, the better off you and your business will be.

Forbes’ article “Identifying Key Employees When Buying a Business”, from Richard Parker does a fine job in encouraging entrepreneurs to think more about how their employees impact their businesses and the importance of factoring in employees when considering the purchase of a business. 

As Parker states, “One of the most important components when evaluating a business for sale is investigating its employees.”  This statement does not only apply to buyers.  Of course, with this fact in mind, sellers should take every step possible to build a great team long before a business is placed on the market.

There are many variables to consider when evaluating employees.  It is critical, as Parker points out, to determine exactly how much of the work burden the owner of the business is shouldering.  If an owner is trying to “do it all, all the time” then buyers must determine who can help shoulder some of the responsibility, as this is key for growth.

In Parker’s view, one of the first steps in the buyer’s due diligence process is to identify key employees.  Parker strongly encourages buyers to determine how the business will fair if these employees were to leave or cross over to a competitor.  Assessing if an employee is valuable involves more than simply evaluating an employee’s current benefit.  Their future value and potential damage they could cause upon leaving are all factors that must be weighed.  Wisely, Parker recommends having a test period where you can evaluate employees and the business before entering into a formal agreement.

It is key to never forget that your employees help you build your business.  The importance of specific employees to any given business varies widely.  But sellers should understand what employees are key and why.  Additionally, sellers should be able to articulate how key employees can be replaced and even have a plan for doing so.  Since, savvy buyers will understand the importance of key employees and evaluate them, it is essential that sellers are prepared to have their employees placed under the microscope along with the rest of their business.

Copyright: Business Brokerage Press, Inc.

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Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

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Selling your business doesn’t have to feel like online dating, but for many sellers this is exactly what it can feel like.  Many sellers are left wondering, “What exactly do buyers want to see in order to buy my company?”  Working with a business broker is an excellent way to take some of the mystery out of this often elusive equation.  In general, there are three areas that buyers should give particular attention to in order to make their businesses more attractive to sellers.

Area #1 – The Quality of Earnings

The bottom line, no pun intended, is that many accountants and intermediaries can be rather aggressive when it comes to adding back one-time or non-recurring expenses.  Obviously, this can cause headaches for sellers.  Here are a few examples of non-recurring expenses: a building undergoing foundation repairs, expenses related to meeting new government guidelines or legal fees involving a lawsuit or actually paying for a major lawsuit.

Buyers will want to emphasize that a non-recurring expense is just that, a one-time expense that will not recur, and are not in fact, a drain on the actual, real earnings of a company.  The simple fact is that virtually every business has some level of non-recurring expenses each and every year; this is just the nature of business.  However, by adding back these one-time expenses, an accountant or business appraiser can greatly complicate a deal as he or she is not allowing for extraordinary expenses that occur almost every year.  Add-backs can work to inflate the earnings and lead to a failure to reflect the real earning power of the business.

Area #2 – Buyers Want to See Sustainability of Earnings

It is only understandable that any new owner will be concerned that the business in question will have sustainable earnings after the purchase.  No one wants to buy a business only to see it fail due to a lack of earnings a short time later or buy a business that is at the height of its earnings or buy a business whose earnings are the result of a one-time contract.  Sellers can expect that buyers will carefully examine whether or not a business will grow in the same rate, or a faster rate, than it has in the past.

Area #3 – Buyers Will Verify Information

Finally, sellers can expect that buyers will want to verify that all information provided is accurate.  No buyer wants an unexpected surprise after they have purchased a business.  Sellers should expect buyers to dig deep in an effort to ensure that there are no skeletons hiding in the closet. Whether its potential litigation issues or potential product returns or a range of other potential issues, you can be certain that serious buyers will carefully evaluate your business and verify all the information you’ve provided.

By stepping back and putting yourself in the shoes of a prospective buyer, you can go a long way towards helping ensure that the deal is finalized.  Further, working with an experienced business broker is another way to help ensure that you anticipate what a buyer will want to see well in advance.

Copyright: Business Brokerage Press, Inc.

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When it comes time to sell a business, not everything goes as planned.  You may be one of the lucky ones and find that selling your business is a streamlined process with only a few unexpected occurrences.  But most CEO’s looking to sell a business find they can expect the unexpected.  Let’s take a closer look at some of the top surprises CEO’s experience during the sale process.

Unexpected Occurrence #1 – Surprisingly Low Bids

CEO’s looking to sell their businesses need to be ready for almost anything.  One of the larger surprises that CEO’s face are surprisingly low bids.  Don’t let low bids shock you.

Unexpected Occurrence #2 – A Huge Time Commitment

CEO’s have to make sure that everything from an offering memorandum to management presentation and suggestions to potential acquirers are ready to go.  The offering memorandum is considered the cornerstone of the selling process and is typically at least 30 pages in length.

Most business intermediaries expect the potential acquirers to submit their initial price based on the information contained in the memorandum.  Management presentations are also time consuming, but it is common to have these presentations ready before the final bids are submitted.  Ideally it is best for the CEO to show the benefits involved in combining the acquirer and the seller as well as the future upside for selling the company.

Unexpected Occurrence #3 –The Need for Agreement from Other Stakeholders

You, as the CEO, are able to negotiate the transaction, but the sale isn’t authorized until certain shareholders have agreed and done so in writing.  Until the Board of Directors, shareholders and financial institutions who may hold liens on key assets, have agreed to the deal, the deal simply isn’t finalized.  Often this legal necessity turns out to be an issue that gets in the way of a successful deal.

Sellers can take their “eye off the ball” during the time-consuming process of selling a company, however, this can be a serious mistake.  CEO’s must understand that potential acquirers will be examining monthly sales reports with great interest.  If potential acquirers notice downward trends they may want to negotiate a lower price.  No matter how time consuming the sales process may be, CEO’s have to maintain or even accelerate sales.

Ultimately, there can be a wide array of surprises awaiting a CEO who is looking to sell a business.  Avoiding these kinds of issues is often, but not always, a matter of excellent preparation.  However, it is vital that they keep in mind that even with the very best preparation and diligence, there can still be surprises when selling a business.

Copyright: Business Brokerage Press, Inc.

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