If you have read some of our recent posts, we have focused on management and strategy techniques you can implement to improve your business. The advice is designed to cater to many different businesses in different industries.
Quality specialists such as a valuation expert, transactional attorney, an experienced business CPA, and a quality intermediary will help you focus on implementing these types of techniques in the best manor for your specific business.
Each plays a different yet essential role in making sure you get the best deal possible. To summarize:
Valuation Expert: Assesses the value looking at detailed history, projections, market conditions, and relevant comparative sales to determine the likely market sales price. If done properly this can be a valuable informational piece and sometimes a valuable negotiating tool.
CPA: Assist in organizing business records to ensure consistency and transparency so buyers will be comfortable they are getting quality information. If the buyer is not comfortable the offer will be crimped. CPA’s also provide detailed tax advice on how to structure the transaction to reduce tax burden.
Transactional Attorney: Their role is to inform you of the risks of your transaction and to protect you through carefully constructed written documents to the fullest extent possible. We have all heard attorney horror stories yet a quality attorney is helpful in any deal.
Intermediary: This is the sales and marketing team. They create value by identifying the most synergistic market for your business and then proceeding to generate prospects from that market and convert them to buyers. They make the deal and keep the process moving forward.
A proper team will enhance your sales price, reduce your downside risk, lower your taxes, and allow you to stay involved in running your business so profits and moral stay high. This is the best way to obtain an increased sales price for your business.
Tuesday, October 10, 2006
Tuesday, September 26, 2006
Tie up Loose Ends
Every business has multiple legal relationships that allow the business to operate. The most important of these legal relationships are reflected in important agreements such as leases, franchise agreements, bank notes, insurance policies and so on.
Do your best to make sure that each of these agreements is current. Make sure the provisions are reasonable. Most important, for things like leases, make sure that you have adequate time remaining and that it is reasonably transferable. If your business is location dependent you may not have a business to sell without three to five years left on your lease.
In a related issue if you have any pending lawsuits against you, try to settle them. Lawsuits spell uncertainly and disruption and carry a perceived risk far greater than the actual risk. If you can settle them that risk and the reduction in your sales price is gone.
Do your best to make sure that each of these agreements is current. Make sure the provisions are reasonable. Most important, for things like leases, make sure that you have adequate time remaining and that it is reasonably transferable. If your business is location dependent you may not have a business to sell without three to five years left on your lease.
In a related issue if you have any pending lawsuits against you, try to settle them. Lawsuits spell uncertainly and disruption and carry a perceived risk far greater than the actual risk. If you can settle them that risk and the reduction in your sales price is gone.
Tuesday, September 12, 2006
Maintain Employee Moral
Anyone who thinks emotion is not a part of sales has forgotten about the last time they bought a new car. Were you “thrilled”, “upset”, “mistreated”, or what? This is emotion.
The final transaction has to make sense from an accounting standpoint in order to get financed. Yet emotion provides the drive so everyone in the process solves the problems and gets to closing.
Your people are your most important asset. If they are enthusiastic and motivated they are worth more than if they are lifeless and depressed. While we understand the importance of confidentiality we like to do plant tours when people are working. Businesses are more impressive when they are alive with people.
Your employees attitude will be felt by a buyer (whether they know it or not) and will translate into a higher or lower offer.
We are big believers in having employees work in their areas of strength. No one thinks anything of the fact that athletes spend 100% of their time in a very narrow specialty that they excel in, yet the common logic with business employees is that everyone should be cross trained. Certainly a few people need to be cross trained but encourage everyone to do the work they excel at.
Our last thought on employees is cut your staff down to fighting size. Too many employees reduce profitability and often reduce motivation. If your business has slowed down or you have installed labor saving technology, yet the staff is the same, they are all worrying about who is going to be let go. They are creating work and worrying that they will get caught. Solve the worry. If you don’t the buyer will. You can do it humanely and in all likelihood increase the value of your business.
The final transaction has to make sense from an accounting standpoint in order to get financed. Yet emotion provides the drive so everyone in the process solves the problems and gets to closing.
Your people are your most important asset. If they are enthusiastic and motivated they are worth more than if they are lifeless and depressed. While we understand the importance of confidentiality we like to do plant tours when people are working. Businesses are more impressive when they are alive with people.
Your employees attitude will be felt by a buyer (whether they know it or not) and will translate into a higher or lower offer.
We are big believers in having employees work in their areas of strength. No one thinks anything of the fact that athletes spend 100% of their time in a very narrow specialty that they excel in, yet the common logic with business employees is that everyone should be cross trained. Certainly a few people need to be cross trained but encourage everyone to do the work they excel at.
Our last thought on employees is cut your staff down to fighting size. Too many employees reduce profitability and often reduce motivation. If your business has slowed down or you have installed labor saving technology, yet the staff is the same, they are all worrying about who is going to be let go. They are creating work and worrying that they will get caught. Solve the worry. If you don’t the buyer will. You can do it humanely and in all likelihood increase the value of your business.
Monday, August 28, 2006
Freshen Up Your Facilities
Just like you cleaned up your house before you put it on the market you need to clean up your business. Auto shops are the absolute worst about this. That old transmission that has been sitting outside your door may work great to clean the bottom of your boots but it is not going to help you sell.
Look at the entire operation with the eyes of someone who has walked in for the first time. Is it clean and organized? Are the colors and carpets still in style? Are there coffee stains on the carpet and places where the walls have turned grey from wear?
We cannot conclusively state that anyone has ever bought a business because it was attractive and organized but many businesses got the “drive-by” and never looked at again because they were a mess.
Look at the entire operation with the eyes of someone who has walked in for the first time. Is it clean and organized? Are the colors and carpets still in style? Are there coffee stains on the carpet and places where the walls have turned grey from wear?
We cannot conclusively state that anyone has ever bought a business because it was attractive and organized but many businesses got the “drive-by” and never looked at again because they were a mess.
Sunday, August 13, 2006
Clean up Your Balance Sheet
In most circumstances price is determined from the income statement and operating results. Yet few people understand how a balance sheet can make or break a sale. The balance sheet contains the assets (think bank accounts) and liabilities (think debts). More assets than necessary usually will not increase the value of the business. For this reason we advise business owners to liquidate unnecessary equipment and inventory. They take up space, add to the clutter, and will not increase the sales price. (Yes real estate and some intellectual property will increase the price but those are exceptions.)
All businesses need to make capital investments. Some need to make substantial capital investments. You must keep making reasonable investments so you can keep running your business efficiently until it does sell. For instance, a plumbing contractor owns ten trucks and replaces two each year. This type of investment probably should continue even with a hoped for sale in the next year or two. On the other hand, the same plumbing contractor should probably not move to a new facility that is going to require $200,000 in one time fit-out charges. This investment is unlikely to be recovered in a short timeframe. Additionally, if he takes on debt to make the improvements the entire debt will have to be paid or offset against the purchase price. This will greatly reduce the seller’s proceeds from the sale.
The last area to talk about is inventory. Many business owners have not taken inventory in years. They estimate the cost of goods sold based on past history, this year’s purchases, their gut feelings or other logical or illogical method. This can cause several problems. First, if inventory is accumulating over time, you might be making more money than you think because your income has been understated which means your valuation will be low. Second, you may end up giving away inventory because many inventory adjustment clauses state that the buyers will not pay for “stale” inventory. This may be inventory over two years old, inventory that is out of season or inventory items negotiated piece by piece. Again, just like other excess assets, sell extra inventory before the buyer comes into the picture. Anything you get for it is likely to be more than a seller will pay.
All businesses need to make capital investments. Some need to make substantial capital investments. You must keep making reasonable investments so you can keep running your business efficiently until it does sell. For instance, a plumbing contractor owns ten trucks and replaces two each year. This type of investment probably should continue even with a hoped for sale in the next year or two. On the other hand, the same plumbing contractor should probably not move to a new facility that is going to require $200,000 in one time fit-out charges. This investment is unlikely to be recovered in a short timeframe. Additionally, if he takes on debt to make the improvements the entire debt will have to be paid or offset against the purchase price. This will greatly reduce the seller’s proceeds from the sale.
The last area to talk about is inventory. Many business owners have not taken inventory in years. They estimate the cost of goods sold based on past history, this year’s purchases, their gut feelings or other logical or illogical method. This can cause several problems. First, if inventory is accumulating over time, you might be making more money than you think because your income has been understated which means your valuation will be low. Second, you may end up giving away inventory because many inventory adjustment clauses state that the buyers will not pay for “stale” inventory. This may be inventory over two years old, inventory that is out of season or inventory items negotiated piece by piece. Again, just like other excess assets, sell extra inventory before the buyer comes into the picture. Anything you get for it is likely to be more than a seller will pay.
Monday, July 24, 2006
Improve Profitability Through Closing
Anyone who has run a business for a while has learned that overhead rarely increases as fast as sales go up and NEVER falls as fast as sales drop. For this reason a 10% decrease in sales can result in a 50% decrease in profits which can translate to a 50% decrease in business value. For instance, XYZ Retail Stores sells clothing. In 2004 sales were $1,000,000. The cost of goods sold was $500,000 and the operating costs were $400,000 leaving a profit of $100,000. Using an overly simplified valuation technique of multiplying the profit by 3 the value is $300,000. If in 2005 sales drop to $900,000 the cost of goods sold should be $450,000 (unless you bought too much inventory and then the result could even be worse) and if it is like most retailers the operating costs are going to still be very close to $400,000 making the profit $50,000. Now using the 3 multiplier the value is $150,000. The owner lost $150,000 of business value when he lost $100,000 of sales.
While this is oversimplified the basic logic and approximate result is the same as is likely to be found in a complex detailed valuation. Usually the price is based somewhat on a three or five year average, but the last year or two will weigh significantly more than the earlier years. Too many owners rest on their laurels because “I didn’t really need the money, but the business could have earned it”, or “we figured we were going to sell anyway, so why put in the extra effort.”
Of course, the good news is that if profits are increasing that will increase your sales price. It also improves your negotiating position because as results keep improving over time the price can go up.
Our experience is if you want to get paid for it at the time of sale, earn it now. Buyers are very skeptical. They want to pay for what you have done not for the “opportunity.” The opportunity is why they are buying a business instead of simply taking a job.
While this is oversimplified the basic logic and approximate result is the same as is likely to be found in a complex detailed valuation. Usually the price is based somewhat on a three or five year average, but the last year or two will weigh significantly more than the earlier years. Too many owners rest on their laurels because “I didn’t really need the money, but the business could have earned it”, or “we figured we were going to sell anyway, so why put in the extra effort.”
Of course, the good news is that if profits are increasing that will increase your sales price. It also improves your negotiating position because as results keep improving over time the price can go up.
Our experience is if you want to get paid for it at the time of sale, earn it now. Buyers are very skeptical. They want to pay for what you have done not for the “opportunity.” The opportunity is why they are buying a business instead of simply taking a job.
Monday, July 10, 2006
Build A Sales and Marketing Process
Sales and marketing is the most important system in at least 90% of the businesses we look at. It is also one of the biggest weaknesses in many companies. Certain industries such as construction subcontracting are very dependent upon relationships. An owner with a few good relationships can build a fairly large volume business. This is great until it is time to sell. Then prospective buyers will view the high risk of loosing major clients negatively. This reduces the value of the business.
On the other hand, some businesses build lead generation systems that are not personality based. They are based on advertising, word of mouth, direct mail, location, or other technique that has been proven to work in the past. The leads are given to trained salespeople who know how to close a reasonable percentage of the prospects. These systems are tracked and fine tuned to improve performance. Auto dealerships, software companies, distributors, and many other businesses use these techniques to improve their business and increase the transferability of the business.
Wouldn’t you feel more comfortable with a sales system that is independent of the owner and proven over time? If there is any way possible in your industry to build an independent system do so. This will increase your business value
Friday, June 30, 2006
Trend Data - Implement and Record Essential Business Systems
Start today and implement this important management procedure.
For instance, a large contractor had a 7 person estimating department. As work was performed it was always personally reviewed by a senior staff member who carefully critiqued the format and the accuracy of the work. This way junior staff learned how to perform the work so that anyone could pick up any file and understand what needed to be done to complete the file, what assumptions were made to find a price, and in the end a summary of bids showing the lowest price.
For a small business the written record of the systems can be fairly brief and augmented by some cross training and oversight. As the business grows more comprehensive manuals are needed to ensure consistency of work product, treatment of staff, and other matters.
A related problem is when all paths lead to the owner. Many owners delegate the grunt work, such as the estimating above, but never give authority to anyone to make a decision. For instance the owner may not allow even small contracts to be awarded in his absence. Develop a quality management team that effectively implements your systems and test them by taking a long vacation. If your business cannot run without you expect to spend considerable amount of time after closing doing the training you should have done beforehand.
Monday, June 12, 2006
Improve Your Business Value – Know Your Key Numbers and Track Them
Every business can be improved. For the best results, remember the 80/20 rule. 80 percent of what you work on is not that essential. The other 20 percent is the key. We recommend you determine and work on the 20 percent that will dramatically improve your business.
Every successful business person we have ever worked with has a shorthand business management system that allows them to track the business in real time.
Small business owners often have an old green accounting ruled book where they post these critical numbers. Larger business owners have summary reports straight from the computer or compiled by trusted staff to track the most critical details.
An example of this was done by the owner of a title insurance and settlement shop we know. Weekly he would track the following items; newly opened cases, total backlog, and settled cases by unit and dollar amount. Just based on those few numbers, he knew financially where the business was at all times.
This information allows you to make adjustments as soon as market changes appear instead of months later when the checkbook is finally tied into the historical (meaning already old) accounting data.
Every industry has these critical numbers that provide an effective shorthand way for experienced operators to know what is going on. If you do not know the system used in your industry, ask a friendly competitor how they do it. If they will not tell you, go to a national convention and ask competitors across the country that are not competing head to head with you.
Every business can be improved. For the best results, remember the 80/20 rule. 80 percent of what you work on is not that essential. The other 20 percent is the key. We recommend you determine and work on the 20 percent that will dramatically improve your business.
Every successful business person we have ever worked with has a shorthand business management system that allows them to track the business in real time.
Small business owners often have an old green accounting ruled book where they post these critical numbers. Larger business owners have summary reports straight from the computer or compiled by trusted staff to track the most critical details.
An example of this was done by the owner of a title insurance and settlement shop we know. Weekly he would track the following items; newly opened cases, total backlog, and settled cases by unit and dollar amount. Just based on those few numbers, he knew financially where the business was at all times.
This information allows you to make adjustments as soon as market changes appear instead of months later when the checkbook is finally tied into the historical (meaning already old) accounting data.
Every industry has these critical numbers that provide an effective shorthand way for experienced operators to know what is going on. If you do not know the system used in your industry, ask a friendly competitor how they do it. If they will not tell you, go to a national convention and ask competitors across the country that are not competing head to head with you.
Thursday, April 06, 2006
Emotion and the Business Sale Process
You don’t let emotion get in the way of clear thinking, do you? Of course you do. Think about how upset you got the first time someone did not pay you for your services. Or how uncomfortable that employee discrimination lawsuit made you feel. Or many of the other unfortunate things that happen when you have a business.
Think about how excited you made your first big sale. Or when you found the perfect location or many of the wonderful things that have happened as you built your business.
This is emotion plain and simple.
Emotion is an important part of any business business sale transaction. Properly channeled emotion provides the energy and drive to get the transaction done. Emotion can be used in negotiations to your advantage or disadvantage. You cannot completely separate yourself from your emotions when you are selling the business you have spent a major portion of your life building.
Be aware of your emotions as you go through the business sale process. Try not to let them get in the way of getting your transaction completed. That is why we stress that you make sure selling your business is the right thing to do before you begin. We highly recommend that you spend time reflecting on this decision. Review it with your trusted advisors. Make sure it is what you want and need. You will still wake up sweating in the middle of the night convinced that you are doing the wrong deal, but you will get over that sick feeling much quicker.
Never discount emotions. They are the unspoken half of every transaction.
Think about how excited you made your first big sale. Or when you found the perfect location or many of the wonderful things that have happened as you built your business.
This is emotion plain and simple.
Emotion is an important part of any business business sale transaction. Properly channeled emotion provides the energy and drive to get the transaction done. Emotion can be used in negotiations to your advantage or disadvantage. You cannot completely separate yourself from your emotions when you are selling the business you have spent a major portion of your life building.
Be aware of your emotions as you go through the business sale process. Try not to let them get in the way of getting your transaction completed. That is why we stress that you make sure selling your business is the right thing to do before you begin. We highly recommend that you spend time reflecting on this decision. Review it with your trusted advisors. Make sure it is what you want and need. You will still wake up sweating in the middle of the night convinced that you are doing the wrong deal, but you will get over that sick feeling much quicker.
Never discount emotions. They are the unspoken half of every transaction.
Thursday, March 09, 2006
Thin, No Very Thin Markets
The number of prospective buyers for most privately held businesses is very thin. Often the buyers are limited to only several likely competitors and several investment groups or corporate refugee buyers.
For this reason it is very important to have all your ducks in a row when you start talking to prospects. You don't want a single real prospect to needlessly develop a bad impression. The financial statements should be cleaned up. A sales prospectus should be well thought out and complete. The documents necessary to start due diligence should be in hand. Your pricing structure and potential financing sources (whether mezzanine, SBA, or seller take-back) should be prearranged.
This way when one of the likely buyers expresses interest you can get started on the right foot and keep the momentum moving forward. Nothing can kill a deal faster than the perception that you are not interested because you are not responsive.
For this reason it is very important to have all your ducks in a row when you start talking to prospects. You don't want a single real prospect to needlessly develop a bad impression. The financial statements should be cleaned up. A sales prospectus should be well thought out and complete. The documents necessary to start due diligence should be in hand. Your pricing structure and potential financing sources (whether mezzanine, SBA, or seller take-back) should be prearranged.
This way when one of the likely buyers expresses interest you can get started on the right foot and keep the momentum moving forward. Nothing can kill a deal faster than the perception that you are not interested because you are not responsive.
Wednesday, February 15, 2006
Important Questions When Selling Your Business
If you are considering selling or transferring your business, please take a moment to consider these important questions:
- Have you looked at how this transaction will affect your personal estate, your family and your key employees?
- Did you know that only 11% of businesses sell for full value? Have you looked at ways to improve the value of your business and discover its true worth?
- Do you know how to reach all potential buyers? Preserve the deal through the due diligence phase? Bring the sale to completion?
Selling your business is complex and difficult. Selling it alone is down right dangerous. Get help from competent accountants, attorneys, and intermediaries. Of course we recommend Harvest Associates as an intermediary.
Thursday, January 26, 2006
Selling Your Business, What is Fair to Those People Close to You?
When selling a business, as in the rest of life, if you don't know what you want you are sure not to find it. Our next several posts will involve balancing all of the factors you must plan for when selling your business. Solving this riddle is the essence of a successful business succession and exit plan.
Knowing what you want involves balancing many competing interests. The first area we will talk about is determining what is fair for the people closest to you.
Spouse:
Most couples have talked about how they will handle the sale of the business for years. In most cases the spouse is fairly straight forward since downstream financial support is usually the main issue.
Children:
One of the most difficult situations is deciding what is fair treatment for your children. Each child has different interests and abilities. Some will work in the business and some may not. Sometimes a child will want to run the business after you retire but just does not have the ability. These are all difficult decisions. They take great soul searching. Each situation is different and depends on the people involved and the underlying business. In the end you must do what you think is right.
Key Employees:
These can make great buyers. If they are not interested in buying their commitment to stay with the business for at least a year or more after a sale can greatly enhance value. You need to think about this and work out something fair to all.
We advise that you start talking about these issues to these key people in your life at least 5 years prior to your projected sale/retirement. By making it clear that you are planning for the somewhat distant future you can begin gauging interest and possible solutions without the upset that an immediate decision "sprung" on people can cause. www.harvestbusiness.com
Knowing what you want involves balancing many competing interests. The first area we will talk about is determining what is fair for the people closest to you.
Spouse:
Most couples have talked about how they will handle the sale of the business for years. In most cases the spouse is fairly straight forward since downstream financial support is usually the main issue.
Children:
One of the most difficult situations is deciding what is fair treatment for your children. Each child has different interests and abilities. Some will work in the business and some may not. Sometimes a child will want to run the business after you retire but just does not have the ability. These are all difficult decisions. They take great soul searching. Each situation is different and depends on the people involved and the underlying business. In the end you must do what you think is right.
Key Employees:
These can make great buyers. If they are not interested in buying their commitment to stay with the business for at least a year or more after a sale can greatly enhance value. You need to think about this and work out something fair to all.
We advise that you start talking about these issues to these key people in your life at least 5 years prior to your projected sale/retirement. By making it clear that you are planning for the somewhat distant future you can begin gauging interest and possible solutions without the upset that an immediate decision "sprung" on people can cause. www.harvestbusiness.com
Wednesday, January 18, 2006
Why New Franchises Sell Better than Existing Businesses with Poor Financials
We are frequently asked by business sellers why a new franchise with no actual financial history will sell before an established business with good revenues but poor overall financial performance. Selling a new franchise is like selling a dream. It is a dream that is backed up by other successful performances, proven systems, and a qualified central management team. Yet the buyer’s future operation is still only someone’s vision. There is no historical financial performance that clouds the stellar possibilities with the reality of average or below average performance. The ugly possibilities remain tucked away. Because of this the untested new franchise appears to have much less risk than a poorly performing established business.
A business with poor financial performance is in a difficult spot. The normal due diligence process involves looking at financial performance before any other aspect of the business. The ugly possibilities take front and center. For this reason a “good” business with poor financial performance will be seriously looked at by very few qualified buyers.
On the other hand a business with well performing financials clearly has less risk than a new franchise. It is proven. Cash flow has been established. A buyer’s conservative accountant can review the information and come up with a valuation that is in the range of what will be paid for the business.Available third party financing follows this trend. A successful existing business is quite easy to finance through the SBA or sometimes local lenders.
A new franchise is fairly easy to finance through the same routes when demographic factors justify the operation. Yet when we get to poorly performing existing businesses the only financing is from the buyer or seller’s pockets. Generally there are few third party sources. New franchises sell before financially challenged existing businesses because of the perception that there is less risk associated with the purchase. The way to capture the buyer before they purchase a new franchise is to reduce the buyer’s risk. Unfortunately this is usually a combination of lower price and seller financing.
A business with poor financial performance is in a difficult spot. The normal due diligence process involves looking at financial performance before any other aspect of the business. The ugly possibilities take front and center. For this reason a “good” business with poor financial performance will be seriously looked at by very few qualified buyers.
On the other hand a business with well performing financials clearly has less risk than a new franchise. It is proven. Cash flow has been established. A buyer’s conservative accountant can review the information and come up with a valuation that is in the range of what will be paid for the business.Available third party financing follows this trend. A successful existing business is quite easy to finance through the SBA or sometimes local lenders.
A new franchise is fairly easy to finance through the same routes when demographic factors justify the operation. Yet when we get to poorly performing existing businesses the only financing is from the buyer or seller’s pockets. Generally there are few third party sources. New franchises sell before financially challenged existing businesses because of the perception that there is less risk associated with the purchase. The way to capture the buyer before they purchase a new franchise is to reduce the buyer’s risk. Unfortunately this is usually a combination of lower price and seller financing.
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