The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make. Buying a business can lead to great financial success or great financial failure. This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.
In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business. The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability.
Appeal Vs. Viability
Not surprising, the most important variable for most prospective owners is that the business is indeed viable. Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster.
As Carins points out, “Do you want to make money or do you want to fulfill a dream?” Sometimes those two variables can intersect, but not always and not often. In the end, it is vital to know whether a given business is, in fact, potentially lucrative.
However, as Carins points out, it is also important that you choose a business that you will enjoy. Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative. Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.
Considering Hidden Costs
The second factor that Carins looks at is the issue of “hidden costs.” One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook. Due diligence is amazingly important. For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.
The third factor examined in Carins article is “Getting a second opinion.” For Carins, getting a second opinion is actually linked to due diligence. He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well. Additional opinions can help one see angles that might otherwise be missed.
Again, buying a business is complicated and will take up a good deal of one’s time and mental energy. Your friends and relatives, understand your personality and your wants and desires. Their input can be particularly beneficial.
Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.” Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.
The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”
Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.
Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements. Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.
Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest. In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.
Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.
Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced deal-maker. Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .
The facts in the above story are true!
The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney.
If you’ve never bought or sold a business before, then the factors that drive and influence business valuations likely seem a bit murky. In a recent Divestopedia article from Kevin Ramsier entitled, “A Closer Look at What Drives and Influences Business Valuations,” Ramsier takes a closer look at this important topic.
Business brokers and M&A advisors play a key role in helping business owners understand why their business receives the valuation that it does. No doubt, the final assessed value is based on a wide array of variables. But with some effort, clarity is possible.
In his article, Ramsier points out that “value means different things to different buyers” and that the “perceived value depends on the circumstances, interpretation and the role that is played in a transition.” It is important to remember that no two businesses are alike. For that reason, what goes into a given valuation will vary, often greatly.
Looking to EBITDA
Ramier points to several metrics including return on assets, return on equity and return on investment. Another important valuable for companies with positive cash flow is a multiple of EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.” EBITDA is widely used in determining value. On the flip side of the coin, if the company in question has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.
Primary Drivers to Consider
Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation. In total there are 25 different variables listed, which underscores the overall potential complexity of accurately determining valuation.
In the Primary Drivers of Valuation list, Ramsier includes everything from the size of revenue and revenue stability to historical and projected EBITDA as well as potential growth and margin percentages. Other variables, ones that could easily be overlooked, such as the local talent pool and people training are also listed as variables that should be considered.
Support for the Business Owner
The bottom line is that determining valuation is not a one-dimensional affair, but is instead a dynamic and complex process. One of the single best moves any business owner can make is to reach out to an experienced business broker. Since business brokers are experts in determining valuation, owners working with brokers will know what to expect when the time comes to sell.
Before you begin your business, you should be thinking about how you will hand that business over to someone else. No one runs a business forever. Whether you sell your business or let a relative inherit it, at some point you will need to step away.
When you finally do separate from your business, it is critical that you are certain that it is worth handing over. In his January 2019 article in Forbes magazine entitled “Make Sure Your Business is Worth Handing Over,” author Francois Botha dives in and explores this very topic.
In this article, Botha emphasizes that family businesses should not “fall into the trap of prioritizing job creation for their children.” Instead, that the priority should be to perpetuate the business. Botha cites the co-founder and chairman of The Leadership Pipeline Institute, Stephen Drotter, who feels that the main goal of any business needs to be its suitability.
Drotter established five principles designed to assist family businesses as they seek to prepare for succession. The first principle is to “Identify and Fix Your Problems.” Current ownership should deal promptly with any business problems before passing a business on to a new generation.
The second principle Drotter covers is to “Adjust Your Management to the Strategic Evolution of Your Business.” Businesses evolve from the creation of a product to sell to focusing on sales, marketing and distribution to finally addressing a plateau in sales which facilitates the need for multi-functional management.
The third principle cited by Drotter is “Talk to Your People About Them.” In this principle, communication with employees is key. Getting to know and understand employees is vital.
“Be on the Lookout for Talent Everywhere,” is the fourth principle. There is no replacement for skilled and motivated employees, and you never know where you may find them.
Finally, the fifth principle, “Provide Development” emphasizes that “almost everything is learned, and somebody often taught that which is learned.” Employee skill must be seen as a key priority.
Making sure that a business is ready for transition to the next generation involves careful preparation and a good deal of advanced planning. The sooner that you begin asking the right kind of thoughtful questions about the current state of your business and what will benefit it moving forward, the better off everyone will be.
There is no denying the fact that life is much, much easier when one can find the right buyer for his or her business. Buying or selling a business can be a stressful affair, but much of that stress can be eliminated by getting the right support.
The Concept of the “Right Buyer”
In the recent Inc. article entitled, “How to Find the Right Buyer for Your Business and Avoid Negative Consequences,” Bob House builds his article around a relatively simple and straightforward, but powerful, concept. House’s notion is, “the right buyer is worth more than a big check.”
House correctly points out that far too many sellers become fixated on exiting their business and grabbing a big pay day. In their focused interest in the sum they will receive, these sellers ignore a range of other important details. In part, sellers often miss the single greatest variable in the entire process: finding the most qualified buyer. The simple fact is that if sellers want to reduce their long-term stress, then there is no replacement for finding the most qualified buyer, as the wrong buyer can be “headache city!”
Plan in Advance
As House points out, it is only prudent to determine what you want out of a buyer well before you put your business up for sale. For example, if you don’t want to offer financing, then that is a decision you need to make well before you begin the process.
Additionally, House wisely places considerable interest on pre-screening potential buyers. Pre-screening is a great reason to work with an experienced and proven business broker who can assist with the process. As a business owner your time is precious. The last thing you want are a lot of window shoppers wasting your time.
Keep Your Focus on Your Business
Remember, while your business is up for sale, you still have to run your business. Quite often, business owners have difficulty running their business and navigating the complex sales process simultaneously. The end result can be disastrous, as revenue can drop and business problems can arise.
Working with a business broker means that you are dramatically reducing your potential stressors throughout the sales process. A business broker will ensure that potential buyers are pre-screened and that only serious buyers are brought to you for consideration.
Currently, the market conditions are great for sellers. If you are considering selling, now is the time to find a business broker and jump into the market!
Does your business have real, long-lasting longevity or is your business a temporary entity that will vanish the second you stop working on it? In his insightful article in The Business Journals entitled, “Are You Living for Today as a Business Owner or Building Value?” author Kent Bernhard asks a very important question of readers, “Are you a lifestyle business owner or a value accelerator?”
Many business owners have never stopped to ask this very important, yet basic, question regarding their businesses. So, let’s turn our attention to this key question that all business owners must stop and ask at some point.
As Bernhard points out the core issue here is how a given business owner defines the idea of success for him or herself. As Chuck Richards, the CEO of CoreValue Software notes, “At the end of the day, a lifestyle business is just a job.”
Richards goes on to note that this is fine for many people. But if this is the case, it is a choice that one is making. Therefore, lifestyle business owners should be aware that they are, in fact, clearly making a choice.
Business owners who are lawyers, consultants and accountants often fall into the category of those with a “business as a job.” They fail to accumulate enough assets for their business to really be more than a job. Summed up in another fashion, the business generates enough revenue to provide a comfortable lifestyle. However, it does not have the infrastructure or equity to remain profitable, or even in existence, once they walk away. As the owner and operator of the business, they are vital to its very existence. This means that the business only has value so long as the owner is working in the business on a regular basis. As a result, the owner may never really be able to exit the business.
As Bernhard points out, “To build a business as an asset, you have to become a value accelerator who looks beyond whether the business’ profits are sufficient to maintain your lifestyle. It means looking at the business as an entity outside yourself.” Those who fall into the value accelerator category, focus on figuring out creating value for the business as a financial asset that can operate independently.
Making sure that your business can continue on without you means that you have to build it, and that involves having a coherent and focused plan. Plan in advance and know how you will exit your business. To ultimately create value for the business entity itself, a plan must be in place that allows for your successful exit.
Finding the money to start your own small business can be a challenge. Over the decades, countless people have turned to the Small Business Administration (SBA) for help. A recent Inc. Magazine article, “Kickstart Your Business Dreams with SBA Lending,” by BizBuySell President, Bob House, explored how SBA lending can be used to the buyer’s advantage.
The article covers the basics of an SBA loan and who should try to get one. House notes that the SBA doesn’t provide loans itself, but instead facilitates lending and even micro-lending with a range of partners. The loans are backed by the government, which means that lenders are more willing to offer a loan to an entrepreneur who might not typically qualify for one. The fact is that the SBA will cover 75% of a lender’s loss if the loan goes into default.
Entrepreneurs can benefit tremendously from this program. In some cases, an SBA loan even means skipping the need for collateral. SBA loans can be used for those looking to open a business, expand their existing business or open a franchise.
House points out that getting an SBA loan has much in common with receiving other types of loans. For example, it is necessary to be “bank ready.” By “bank ready,” House means that all of your financial documentation should be organized, clear to understand and ready to go.
Next, a buyer would need to check that he or she qualifies, find a lender and fill out the necessary SBA forms. In order to be eligible for an SBA loan, it is necessary that the business is a for-profit venture and that it will do business in the United States. Once the necessary forms have been submitted, it can take between 2 to 3 months for an application to be processed and potentially approved.
The simple fact is that the SBA helps thousands of people every year. If you are looking to buy a business or expand your current business, then working with the SBA could be exactly what you need. Of course, business brokers are experts on what it takes to buy. Working with a broker stands as one of the single best ways to turn the dream of owning a business into a reality.
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.
The first step towards successfully selling a business is finding a qualified business broker to work with. Sellers should also ask themselves an array of important questions. A recent article, “7 Questions to Answer Before Selling Your Business,” published by Good Men Project, has a great overview of questions sellers should answer before moving forward.
Author Troy Lambert believes that at the top of the list is one very simple and powerful question, “Are you ready?” For example, your financial reports should be ready to show.
The second question is, “What’s it worth?” Determining what a business is worth means you’ll need a professional business valuation. A great deal can go into evaluating your business and you need an expert to help you determine that value.
Third, Lambert believes that prospective sellers should ask themselves, “How’s the health of my industry?” He emphasizes that honesty is key here for a variety of reasons. If your industry is in a transition period, for example, then it might be better to wait until a better time to sell.
The fourth question on Lambert’s list is, “How long will it take?” In short, you need to remember that selling a business can take a long time. Successfully selling your business may even mean that you have to stay on and work with the new owner during a transition period.
The fifth key question is, “Who is my buyer?” You don’t want to waste a lot of time with potential buyers who are simply not a good fit. Finding the right buyer for your business helps to ensure that a deal will be finalized.
Sixth, Lambert wants sellers to think about how they will get paid. Are you willing to finance part of the deal? What about balloon payments over time? Understanding, before you put your business on the market how you want to be paid and how flexible you can be in terms of payment is essential.
For most sellers, selling a business will stand as the largest financial decision of their lives. With this realization comes more than a little pressure.
Considering the enormity of the decision, having good advice is simply a must. A seasoned and experienced business broker understands what it takes to buy and sell a business. Working with a business broker is an easy and efficient way to begin the process of selling your business. Brokers know what it takes to successfully sell a business and can help you answer these questions and many more.
The number of small business transitions continues to be strong for the first quarter of 2019. In fact, despite a small decline, small business transitions remain at historically high levels.
Looking at the Statistics
According to a recent BizBuySell article entitled, “Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers and Sellers,” now is still very much the time for both buying and selling a business. It is true that the number of businesses sold in the first three months of 2019 dropped by 6.5% when compared to 2018. Yet, it is important to keep in mind that the number of completed transactions remains very strong. Likewise, inventory is increasing, with a 6.1% increase in listings in Q1 of 2019 when compared to the same period in 2018.
While the market is indeed strong, the BizBuySell article did note that some experts feel that there are signs that the market could become more challenging moving forward. In part, this is due to the prospect that interest rates and financing could become increasingly challenging and more expensive. These factors indicate that now is a smart time to both buy and sell a business.
Likewise, the financials of sold businesses in Q1 remains strong. In fact, the median revenue of sold businesses jumped 6.5% when compared to Q1 2018. Now, the median revenue stands at $540,000. However, cash flow continues to hover around the $100,000 for five years in a row.
What are the Top Regions?
Currently, the top markets by closed small business transition are Miami-Fort Lauderdale-Miami Beach, Los Angeles-Long Beach-Santa Ana, New York-Northern New Jersey-Long Island, Tampa-St. Petersburg-Clearwater and Dallas-Fort Worth-Arlington. The top markets by median sale price are Charlotte-Gastonia-Concord, San Francisco-Oakland-Fremont, Denver-Aurora and Dallas-Fort Worth-Arlington.
A Consistently Strong Market
Overall, the experts at BizBuySell believe that the market remains very strong and active. They believe that the wave of retiring baby boomers looking to exit their businesses, historically low interest rates and the rise of the next generation of entrepreneurs are helping to fuel a great deal of activity.
According to Matt Coletta, Co-Founder and Managing Partner, M&A Business Advisors, “We are seeing more quality businesses coming on the market with good, clean books than I have seen in my 25+ years in the business.”
If you are considering buying or selling a business, then now is an excellent time to jump in. Working with a business broker is a great way to ensure that you find the right business for you at the right price.