Is Your Business Really Worth Handing Over to the Next Generation?
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.
10 Questions Everyone Should Ask Before Signing on the Dotted Line
Before buying any business, a seller must ask questions, lots of questions. If there is ever a time where one should not be shy, it is when buying a business. In a recent article from Entrepreneur magazine entitled, “10 Questions You Must Ask Before Buying a Business”, author Jan Porter explores 10 of the single most important questions prospective buyers should be asking before signing on the dotted line. She points out to remember that “there are no stupid questions.”
The first question highlighted in this article is “What are your biggest challenges right now?” The fact is this is one of the single most prudent questions one could ask. If you want to reduce potential surprises, then ask this question.
“What would you have done differently?” is another question that can lead to great insights. Every business owner should be an expert regarding his or her own business. It only makes sense to tap into that expertise when one has the opportunity. The answers to this question may also illuminate areas of potential growth.
How a seller arrives at his or her asking price can reveal a great deal. Having to defend and outline why a business is worth a given price is a great way to determine whether or not the asking price is fair. In other words, a seller should be able to clearly defend the financials.
Porter’s fourth question is, “If you can’t sell, what will you do instead?” The answer to this question can give you insight into just how much bargaining power you may have.
A business’ financials couldn’t be any more important and will play a key role during due diligence. The question, “How will you document the financials of the business?” is key and should be asked and answered very early in the process. A clear paper trail is essential.
Buying a business isn’t all about the business or its owner. At first glance, this may sound like a strange statement, but the simple fact is that a business has to be a good fit for its buyer. That is why, Porter’s recommended question, “What skills or qualities do I need to run this business effectively?” couldn’t be any more important. A prospective buyer must be a good fit for a business or otherwise failure could result.
Now, here is a big question: “Do you have any past, pending or potential lawsuits?” Knowing whether or not you could be buying future headaches is clearly of enormous importance.
Porter believes that other key questions include: “How well documented are the procedures of the business?” and “How much does your business depend on a key customer or vendor?” as well as “What will employees do after the sale?”
When it comes to buying a business, questions are your friend. The more questions you ask, the more information you’ll have. The author quotes an experienced business owner who noted, “The more questions you ask, the less risk there will be.”
Business brokers are experts at knowing what kinds of questions to ask and when to ask them. This will help you obtain the right information so that you can ultimately make the best possible decision.
Obtaining a Fair Market Value for Your Business
Divestopedia published a rather insightful article, “Letting the Market Bridge the Valuation Gap.” In this October 2018 article, Dave Kauppi dives in and explores how fair market value can be used as a way for business owners to “bridge the gap between the valuation they feel they deserve and that which they’re likely to receive.” This, of course, increases the chances of a deal actually taking place. Let’s turn our attention to some of the key points in Kauppi’s informative article.
Understanding the Reality of Selling a Business
One key point is that only a low percentage of businesses actually sell on their first attempt. The article points out that a mere 10% of businesses that are for sale are actually sold three years later; this is a simply brutal fact. Few facts, if any, help underscore the value of working with a business broker more than this point. Selling a business can be difficult under even the best of circumstances. The process is complex, and most sellers have never actually sold a business before.
Divestopedia believes that it is critical for business owners to have realistic expectations regarding valuation. As the article points out, the market doesn’t care “how much money you need for retirement,” or how much you’ve invested.
Four Points to Consider
According to the article, it is important that business owners understand that a few business characteristics will ultimately drive the sale. There are four key factors to consider: contractually recurring revenue, durable competitive advantage, growth rate and customer concentration.
There is a lot packed into these four points, but here are a couple of big takeaways. In terms of customer growth, if a large percentage of your business is derived from a single customer, then that is going to be seen as a problem. As Divestopedia points out, if your company is dependent and partially dependent on a single customer, then you can expect a lot of pressure for you, as the business owner, to stick around a lot longer to ensure that this key customer isn’t lost. If intellectual property, such as software, is involved, then things can get even more complex. In the end, determining value in technology-based companies can be more challenging.
In the end, working with a seasoned business broker, one that understands valuation and how best to get there, is a must. You want to receive the best possible price for your business. An experienced business broker will help you understand how to navigate the complex process of determining a price. However, and most importantly, a business broker will help you achieve a fair market value, so that your business doesn’t remain unsold for years.
Three Easy & Effective Ways to Negotiate
Far too many prospective business buyers and sellers overlook just how important negotiations can be. But they can also be tricky. In general, there are three approaches to negotiations. Thinking through your negotiation strategies well before the time to buy or sell is a savvy and prudent move.
Negotiation Tactic #1 Take It or Just Leave It
In this negotiating tactic, the buyer makes an offer and the seller makes a counter-offer, then both sides leave it there. If the deal works fine. If it doesn’t work, that’s fine too.
It is usually smart to step back and ask yourself if you are comfortable with this approach. Sometimes a small degree of flexibility can go a long way towards turning a proposed deal into a reality.
Negotiation Tactic #2 Maybe Consider Splitting the Difference
Another negotiating tactic is to simply offer to split the difference. This tactic is pretty straightforward and it demonstrates a good deal of flexibility; however, the financials may not always make sense for both sides.
As always, it is important to think about all the factors involved in allowing a deal to fall apart, such as how much time will it take to find another buyer or another business to buy? Showing a willingness to split the difference is often seen as a goodwill offer that can facilitate further negotiations within an environment of lower emotional intensity.
Remember, as long as the two sides are talking, a deal may be reached. But when communication ceases, then the deal is definitely finished and not in a good way.
Negotiation Tactic #3 Negotiation from What is Most Important to Each Party
Understanding what is most important to both parties is usually critical for a successful deal. Important areas can range from allowing a relative to stay with the business to moving the business to a new location. Not all key points are directly linked to money, and it is vital to understand this all-important negotiating fact.
Negotiation Tactic #4 Bring in a Pro
In negotiations there is an old adage, “Never negotiate your own deal.” Emotions can run high when it comes to buying or selling a business and then there is the problem of perspective. Buyers and sellers are often lack the perspective that an outsider can bring.
Opting for help and guidance from someone who buys and sells businesses for a living, can be a huge step in the right direction. Through a professional business broker, it is possible to not only establish a fair price but also address the array of intangibles that can go into buying and selling a business.
At the end of the day, deals are put together piece by piece, and skill is involved in the process. Working with others is at the heart of successful negotiation, and that means taking into consideration what the other side wants and what the other side needs.
Copyright: Business Brokerage Press, Inc.
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Red Flags are Not a Pretty Sight
When it comes to selling a business, sellers simply must pay attention to red flags. Problems can always pop up, and that’s why they need to keep their eyes open.
Rarely does a “white knight” ride in and rescue a business with no questions asked. And if this were to happen, you should be asking, “Why?” Until a deal is officially inked, sellers need to evaluate every aspect of a transaction to make sure something isn’t happening that could wreck the deal.
Common Red Flags to Watch For
One example would be having a company express interest in your business but you are never able to directly contact key players, such as the President or CEO. The reason that this is a red flag is that it indicates that the interest level may not be as great as you initially hoped.
A second red flag example would be an individual buyer, with no experience in acquisitions or experience in your industry, looking to buy your business. The reason that this second example could prove problematic, is that even if the inexperienced buyer is enthusiastic as the deal progresses, he or she may become nervous upon learning what a deal would actually entail. In other words, the specifics and the reality of owning a business, or owning a business in your industry, could come as a shock to an inexperienced buyer.
Both of these examples above are examples of early-stage red flags. But what about issues that pop up at later stages? The simple fact is that red flags can come at any stage of the selling process.
A good example of a middle-stage red flag is when a seller is denied access to the buyer’s financial statements, which is of course essential to verify that the seller is able to actually make the acquisition. A final-stage red flag example is an apparent loss of momentum, as the buying and selling process can be a long one.
Business Sellers Need to Protect Their Assets
Sellers are usually very busy and don’t have time to waste; this is doubly true for owner/operators of businesses, as the time they invest with a prospective buyer is time that could be spent doing something else.
All too often, businesses begin to run into trouble when they place their business on the market. If this trouble negatively impacts the bottom line, then the business can become more difficult to sell and the final sale price will likely be lower.
That’s why it is so essential that sellers protect themselves from buyers that are not truly interested or are simply not a good fit. Working with a business broker is an easy and highly effective way for sellers to protect themselves from buyers that are simply not the right fit. A broker helps to “weed out” unfit candidates.
While red flags are never good, that doesn’t mean that a red flag means a deal is a definitely at an end. Especially with the guidance of an experienced business broker, many of these issues can be overcome.
In the end, if you, either as a buyer or seller, suspect that there is a problem, then you should take action. The problem will not simply go away. The single best way to deal with a red flag is to tackle it head on as soon as you recognize it.
Copyright: Business Brokerage Press, Inc.
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Buying? Selling? Seven Key Points to Consider
Buying or selling a business is one of the most important decisions that most people ever make. Before jumping in, there are several points that should be taken into consideration. Let’s take a moment to examine some of the key points involved in buying or selling a business.
Factor #1 – What are You Selling?
Whether buying or selling a business it is important to ask a few simple questions. What is for sale? What is not included with the buyer’s investment? Does the sale price include any real estate? Are vital assets, such as machinery, included in the sale price?
Factor # 2 – What are the Range of Assets?
It is very important to understand the range of assets that are included with a business. What is proprietary? Are there formulations, patents and software involved? These types of assets are often the core of the business and will be essential for its long-term success.
Factor # 3 – Evaluating Assets for Profitability
Not all assets are created equally. If assets are not earning money or are too expensive to maintain, then they should probably be sold. Determining which assets are a “drag” on a business’s bottom line takes due diligence and a degree of focus, but it is an important step and one that shouldn’t be overlooked.
Factor # 4 – Determining Competitive Advantage
What gives a business a competitive advantage? And for those looking to sell a business, if your business doesn’t have a competitive advantage, what can you do to give it an advantage? Buyers should understand where a business’s competitive advantage lies and how they can best exploit that advantage moving forward.
Factor # 5 – How Can the Business Be Grown?
Both buyers and sellers alike should strive to determine how a business can be grown. Sellers don’t necessarily need to have implemented business growth strategies upon placing a business up for sale, but they should be prepared to provide prospective buyers with ideas and potential strategies. If a business can’t be grown this is, of course, a factor that should be weighed very carefully.
Factor # 6 – Working Capital
Some businesses are far more capital intensive than others. Understand how much working capital you’ll need to run any prospective business.
Factor # 7 – Management Depth
Businesses are only as good as their people. It is important to ask just how deep your management team is, how experienced that team is and what you can expect from that team. How dependent is the business on the owner or manager? If the business may fall apart upon the leaving of the owner or a manager, then this is a fact you need to know.
Buying or selling a business is often more complex than people initially believe. There are many variables that must be taken into consideration, including a range of other factors not discussed in this article ranging from how financial reporting is undertaken to barriers of entry, labor relationships and more. Due diligence, asking the right questions and patience are all key in making your business a more attractive asset to buyers or for finding the right business for you.
Copyright: Business Brokerage Press, Inc.
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