Is It Time to Become a Business Owner? 3 Questions to Ask Yourself.
Many people know that owning a business isn’t for them. But for others, the appeal and lure of owning their own business can be powerful indeed. If you are uncertain as to whether or not this path is for you, there are a few simple questions you can ask to gain almost instant clarity. In this article, we will explore those key questions and help you determine if owning a business is in your future.
1. Are You Dedicated to Growing Your Income?
Quite often people like the idea of making more money, at least in the abstract. But when presented with what it takes, many people realize that they don’t want to do what is involved. Owning and operating a business can be a lot of work and it’s not for everyone. Yet, those who embrace it can find it rewarding in a variety of ways.
Being a business owner is radically different than being an employee. As an employee, you simply don’t exercise much control. Summed up another way, your financial fate is clearly in the hands of someone else: your employer.
However, owning a business means that you can take steps to control your own financial destiny. You can make decisions that will, ultimately, boost the success of your business and in turn increase your own income.
As an important note, statistics from 2010 show that the longer you own your business the more money you, as the business owner, will make. It is typical for those who have owned a business for ten years or more to earn upwards of six figures per year. If you have had more than one year of experience in running an organization, the yearly salary will likely range from $34,392 to $75,076. However, if you’ve owned your business for more than a decade, you will likely earn more than $105,757 per year.
While there are no guarantees, owning a business can be a path to growing one’s income and wealth.
2. Would You Like Greater Control Over Your Life?
Many opt to start their own business because they want more control. Business owners realize that unless they own their own business their financial fates rest in the hands of someone else. Some people are comforted with this feeling or don’t see a way around it and others are not so comfortable with the realization. If you want greater control over your life, then owning a business might be for you.
Owning a business increases the amount of control a business owner has over his or her life in many ways, not just financial. For example, business owners have more control over how they spend their time, where they work, when they work and who they work with on a daily basis. Instead of being part of a business, you help create, mold and shape it. Clearly, this is a lot of work and it isn’t for everyone, but again the rewards can be diverse and great.
3. What is Your Personality Like?
Owning a business translates to great control, but that control comes with a degree of risk. In the end, you’ll have to determine how comfortable you are in dealing with risk. As a business owner the “buck” stops with you. You’re risking your time, effort and, of course, money. You also don’t get a paid vacation, sick days or any of the other benefits so often associated with being an employee.
Other traits identified during a study by the Guardian Life Small Business Research Institute showed there are other ideal personality traits for business owners. These traits include collaboration, curiosity, focus on the future, and being self-fulfilled, tech savvy and action oriented.
Thinking about these three key questions is the perfect place to start when contemplating opening a business. Additionally, working with a business broker can help you gain clarity and determine if owning a business is right for you.
Copyright: Business Brokerage Press, Inc.
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Examining the Mind of the Serious Buyer – 5 Points to Consider
Are you looking for a way to perfect your presentation? Understanding what the typical serious buyer wants will help you get your business ready for selling.
Let’s turn our attention to looking at what these types of individuals and entities really want. After all, your time is precious.
1. An Interest in the Industry
First, prospective buyers will want to have a better understanding of your industry. Any serious buyer will want to understand the industry as a whole, as well as your existing customers, prospective customers and the strengths and weaknesses of your business. Key factors, such as threats from competition, will also be a major factor for prospective buyers.
2. Seeking Knowledge about Discretionary Costs
Secondly, expect buyers to take a long look at discretionary costs. Sellers will often look to reduce their expenses in a range of discretionary areas including advertising, research and development and public relations; this is done to help make a business appear more attractive to a buyer. However, it is important to note, that a savvy prospective buyer will notice reduction in discretionary expenses.
3. Inquiries about Wages and Salaries
Wages and salaries is another area that receives attention from buyers. If your business is paying minimum wage or offers a limited retirement program then employee turnover is likely to be high. Buyers may be concerned that employee stability may be low, which, of course, can potentially disrupt business.
4. Questions about Cash Flow and Inventory
No serious buyer will ignore the issue of cash flow. Any prospective buyer will want to know that the business they are considering buying will continue to generate profits both now and in the future.
Inventory is another area that will not be ignored. If your business is carrying a large amount of antiquated, unsalable or simply unusable inventory, then expect that to be factored into a prospective buyer’s decision-making process. It is best to disclose such inventory instead of hiding it, as it will be discovered during due diligence.
5. Seeking Capital Expenditure Details
Finally, capital expenditures will be examined by buyers. You can expect buyers to carefully evaluate machinery and equipment to ensure that there will be no expensive surprises looming on the horizon.
These give areas are definitely not the only areas that buyers will explore and investigate. Everything from financial agreements and environmental concerns to government control will be examined in depth. You should invest some time thinking about the situation from the perspective of a buyer, as this will help you discover many potential problems and try to secure viable workarounds. Working closely with a business broker is another way to ensure that you can successfully anticipate the needs of buyers.
Copyright: Business Brokerage Press, Inc.
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Is Now the Right Time to Sell Your Company?
Like many things in life, timing can be everything when it comes to selling your company. Every day more and more baby-boomers are now reaching retirement age. Soon, the market will likely be flooded with companies looking to sell.
According to a 2016 survey of business brokers, 54% plan to exit in the next ten years. We may be on the verge of a massive wave of businesses hitting the market. Getting out in front of that wave could be in your best interests. Now very well may be the time to sell.
Are You Suffering from Burnout?
If you’ve been running your business for many years, it is quite possible that you are suffering from burnout. This issue is remarkably common with business owners and it is also very dangerous. Owners suffering from burnout don’t invest as much of themselves and their creative energy into their businesses, and that has a range of implications.
Everything from losing customers to failing to keep up with the competition are all possibilities when an owner feels ready to throw in the towel. The end result is that owners, through poor decisions and inaction, can inadvertently decrease the value of their businesses. Combine this fact with the fact that a wave of businesses may soon be hitting the market and selling may start looking more and more attractive.
Jump into a Strong Economy
Further, today’s strong economy means that new and unexpected competitors may soon enter the picture. It is difficult to predict how the marketplace may change in the coming years, but a strong economy means both more opportunities for existing businesses and the potential for greater competition.
Interest rates have remained at historic lows and that could definitely help you sell your business. Working with an experienced business broker is one way to test the waters. You may determine that now is the perfect time to sell your business. There are many factors involved in selling your business, and a skilled broker can help you look at the overall situation at hand and determine when it is the right time to sell.
Copyright: Business Brokerage Press, Inc.
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How Your Employees Can Boost Profits and Values
The simple fact is that without employees, you don’t have a business. Given the tremendous importance of your employees, it is important to step back and reflect on the value associated with keeping those employees happy.
There is a direct relationship between happy employees and happy customers. A happy employee takes steps to ensure that your customers are satisfied. This approach in turn leads to a higher level of customer retention and helps in attracting new customers. On the flip side, unhappy employees can be quite dangerous to your company’s bottom line.
The hiring process is a key process for the health of your business and should never be overlooked or treated as a secondary process within your business. Cultivating happy employees begins at this point. Hiring can and will either make or break your business.
Offering great pay and benefits is only one important factor in keeping employees happy. A more overlooked important factor is to appreciate the contributions that employees make. If employees feel as though they are being overlooked or not appreciated, their overall happiness level will falter. Many owners unnaturally expect their employees to have the same dedication to their business that they do, and this can lead to problems.
Your employees realize that they don’t own the business. As a result, most are only willing to invest so much of themselves, their talents and their abilities into your business. Taking steps to keep your employees engaged, such as showcasing that their talents are appreciated, will help keep employees invested and happy. Research has also revealed feeling happy will make them more productive. A few years ago, Fortune Magazine wrote an article that cited a UK study connecting employee happiness and productivity. It’s definitely worth a look.
Being a positive owner is a gigantic step in the right direction where cultivating happy employees is concerned. Being a good role model is at the heart of having happy employees. It is vital that you reward people with praise and bonuses for jobs well done and fire employees that are consistently negative or failing to perform their respective duties. Special touches, such as giving employees their birthdays off, can go a long way towards cultivating the kind of climate that leads to increased satisfactions. And don’t forget, your team’s satisfaction will increase your bottom line.
When it comes time to sell a business, you can be sure that prospective buyers will be interested in your level of profits. In this way, the investment you make in the happiness of your employees can be returned many fold.
Copyright: Business Brokerage Press, Inc.
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The Importance of the Term Sheet
The value of the term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.
What is a Term Sheet?
Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”
Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?
Creating the Right Environment
A good term sheet can help keep negotiations on target and everyone focused on what is important. Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics. The main goal should be to maintain a “win-win” environment.
At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment. Using the information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.
Make Sure Your Term Sheet Has the Right Components
In the end, a term sheet is basically a preliminary proposal containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.
Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.
Copyright: Business Brokerage Press, Inc.
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3 Easy and 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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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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Who Exactly Owns Personal Goodwill and Why Does it Matter?
Personal goodwill can have a profound impact on both small and medium-sized businesses. In fact, it can even impact the sales of larger companies. Ultimately, understanding how personal goodwill is cultivated is of great value for any company.
During the process of building a business, a founder builds one or more of the following: a positive personal reputation, a personal relationship with key players such as large customers and suppliers and the founder’s reputation associated with the creation of products, inventions, designs and more.
What Creates Personal Goodwill?
Personal goodwill can be established in many ways, for example, professionals such as doctors, dentists and lawyers can all build personal goodwill with their clients, especially over extended periods of time. One of the most interesting aspects of building personal goodwill is that it is essentially non-transferable, as it is invariably attached to and associated with, a particular key figure, such as the founder of a company. Simply stated, personal goodwill can be a powerful force, but it does have one substantial drawback. This is as the saying goes, “the goodwill goes home at night.”
How Does It Impact Buying or Selling a Business?
Buying a business where personal goodwill has been a cornerstone of a business’s success and growth presents some obvious risks. Likewise, it can be difficult to sell a business where personal goodwill plays a key role in the business, as a buyer must take this important factor into consideration. Certain businesses such as medical, accounting or legal practices, for example, depend heavily on existing clients. If those clients don’t like the new owner, they simply may go elsewhere.
Now, with all of this stated, it is, of course, possible to sell a business built partially or mostly around personal goodwill. Oftentimes, buyers will want some protection in the event that the business faces serious problems if the seller departs.
Solutions that Work for Both Parties
One approach is to require the seller to stay with the business and remain a key public face for a period of time. An effective transition period can be pivotal for businesses built around personal goodwill. A second approach is to have some form of “earn-out.” In this model, at the end of the year lost business is factored in, and a percentage is then subtracted from monies owed to the seller. Another option is that the funds from the down payment are placed in escrow and adjustments are made to those funds. It is important to note that the courts have decided that a business does not own the goodwill, the owner of the business does.
No doubt, businesses in which personal goodwill plays a major role, present their own unique challenge. Working with an experienced professional, such as a business broker, is an exceptional way to proceed in buying or selling this type of business.
Copyright: Business Brokers Press, Inc.
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Similar Companies Can Have Huge Value Differences
Can two companies in the same industry have very different valuations? In short, the answer is a resounding, yes. Let’s take an example of two companies that both have an EBITDA of $6 million but with two very different values. In fact, Business One is valued at five times EBITDA, which prices it at $30 million whereas Business Two is valued at seven times EBITDA, meaning it has a value of $42 million.
Value Difference Checklist
- Revenue Size
- Profitability
- The Market
- Growth Rate
- Regional/Global Distribution
- Management & Employees
- Capital Equipment Requirements
- Systems/Controls
- Uniqueness/Proprietary
- Intangibles (Intellectual property/patents/brand, etc.)
There are quite a few variables on the above checklist that stand out, with the top one being that of growth rate. Growth rate is a major value driver when buyers are considering value.
Business Two, for example, with its seven times EBITDA has a growth rate of 50%, whereas Business One, with its five times EBITDA has a growth rate of just 12%.
Discovering the real growth rate story means answering some pretty important questions.
- Are the company’s projections achievable and believable?
- Where is the company’s growth coming from?
- Are there long-term contracts currently in place?
- Where is the growth originating? In other words, what services or products are driving growth? Will those services or products continue to drive growth in the future?
- How is the business obtaining its customers for the projected growth?
- How reliable are the contracts/orders?
Ultimately, finding the difference in value between two businesses, that otherwise appear similar, usually resides in growth rate. This is a factor that should not be overlooked. It is essential to know a company’s growth rate as well as the key questions to ask regarding its growth. If you are going to obtain an accurate valuation as well as understanding the valuation between different companies, this part of the process cannot be overlooked.
Copyright: Business Brokerage Press, Inc.
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There’s No Business Quite Like a Family Business
The simple fact is that family businesses are different. After all, a family business means working with family and all the good and bad that comes with it.
While an estimated 80% to 90% of all businesses are family owned, relatively few are properly planning for what happens when it comes time to sell. According to one study, a whopping 72% of family businesses lack a developed succession plan which is, of course, a recipe for confusion and potentially disaster. Additionally, there are many complicating factors, for example, studies indicate that 40% to 60% of owners of family businesses want the business to remain in the family, but only 40% of businesses are passed to a second generation and a mere 10% are passed down to a third generation.
Let’s turn our attention to a few of the key points that family business owners should consider when selling a business.
- Confidentiality should be placed at the top of your “to do” list. When it comes to selling a family business, it is vital that confidential is strictly observed.
- Remember that it may be necessary to lower your asking price if maintaining the jobs of family members is a key concern for you.
- Family members who stay on after the sale of the business must realize that they will no longer be in charge. In other words, after the sale of the business the power dynamic will be radically different, meaning that family members will now have to answer to new management, outside investors and an outside board of directors.
- Family members will want to appoint a single family member to speak for them in the negotiation process. A failure to appoint a family member could lead to confusion, poor decision making and ultimately the destruction of deals.
- When hiring a team to help you with selling your business, it is critical that your lawyer, accountant and business broker are all experienced and proven.
- Don’t hold meetings with potential buyers on-site.
- Every family member, regardless of whether they are an employee or an investor, must be in agreement regarding the sale of the company. Again, one of your primary goals is to avoid confusion.
- Family employees and family investors must be in agreement regarding the sale price or there could be problems.
Working with an experienced business broker is a savvy move, especially when it comes to selling a family business. Business brokers know what it takes to make deals happen. Being able to point to a business brokers’ past success will help reduce family member resistance to adopting the strategies necessary to successfully sell a business.
Copyright: Business Brokerage Press, Inc.
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