A Must Read Article on Having Children Take Over the Family Business
In a recent Divestopedia article entitled, “Kids Take Over the Business? 8 Things to Consider,” author Josh Patrick examines what every business owner should know about having their children take over their business. He points out that there are no modern and accurate numbers on what percentage of businesses will be taken over by the children of their owners. But clearly the number is substantial.
Patrick emphasizes as point number one that allowing a child to take over a business right after finishing his or her education could be a huge mistake. After all, how can a parent be sure that a child can handle operating the business without some proven experience under his or her belt?
Point number two is that businesses frequently create jobs for the children of owners. The flaw in this logic is pretty easy to see. This job, regardless of its responsibilities, isn’t in fact a real job. Senior decision-making roles should be earned and not handed out as a birthright. The end result of this approach could create a range of diverse problems.
The third point Patrick addresses is that pay should be competitive and fair when having children take over a business. Quite often, the pay is either far too high or far too low. This factor in and of itself is likely to lead to yet more problems.
Business growth must always be kept in mind. When having your children take over a business, it is essential that they have the ability to not just maintain the business but grow it as well. If they can’t handle the job then, as Patrick highlights, you are not doing them any favors. Perhaps it is time to sell.
Another issue Patrick covers is whether or not children should own stock. If there are several children involved, then he feels it is important that all children own stock. Otherwise, some children will feel invested in the business and others will not. In turn, this issue can become a significant problem once you, as the business owner, either retire or pass away.
In his sixth point, Patrick recommends that a business should only be sold to children and not given outright. If a child is simply given a business, then that business may not have any perceived value. Additionally, if a child or children buy the business, then estate planning becomes much more straightforward.
In point seven, Patrick astutely recommends that once a parent has sold their business to their child, the parent must “let go.” At some point, you will have to retire. Regardless of the outcome, you’ll ultimately have to step back and let your children take charge.
Finally, it is important to remember that your children will change how things are done. This fact is simply unavoidable and should be embraced.
Working with an experienced business broker is a great way to ensure that selling a business to your child or children is a successful venture. The experience that a business broker can bring to this kind of business transfer is quite invaluable.
Could the Red-Hot Market for Businesses Be Cooling Down
The economy is red hot, and that fact is translating over to lots of activity in businesses being sold. However, it is possible that this record-breaking number of sales could cool down in the near future. In a recent article in Inc. entitled, “The Hot Market for Businesses is Likely to Cool, According to This New Survey,” the idea that the market for selling business is cooling down is explored in depth. Rather dramatically, the article’s subheader states, “Entrepreneurs who are considering selling their companies say they’re worried about the future of the economy.”
The recent study conducted by Pepperdine University’s Graziadio School of Business as well as the International Business Brokers Association and the M&A Source surveyed 319 business brokers as well as mergers and acquisitions advisers. And the results were less than rosy.
A whopping 83% of survey participants believed that the strong M&A market will come to end in just two years. Perhaps more jarring is the fact that almost one-third of participants believe that the market would cool down before the end of 2019.
The participants believe that the economy will begin to slow down, and this change will negatively impact businesses. As the economy slows down, businesses, in turn, will see a drop in their profits. This, of course, will serve to make them more challenging to sell.
The Inc. article quotes Laura Ward, a managing partner at M&A advisory firm Kingsbridge Capital Partners, “People are thinking about getting out before the next recession,” says Ward. The Pepperdine survey noted that a full 80% of companies priced in the $1 million to $2 million range are now heading into retirement. In sharp contrast, 42% of companies priced in the $500,000 to $1 million range are heading into retirement. Clearly, retirement remains a major reason why businesses are being sold.
Is now the time to sell your business? For many, the answer is a clear “yes.” If the economy as a whole begins to slow down, then it is only logical to conclude that selling a business could become tougher as well.
The experts seem to agree that whether it is in one year or perhaps two, there will be a shift in the number of businesses being sold. Now may very well be the right time for you to jump into the market and sell. The best way of making this conclusion is to work with a proven and experienced business broker. Your broker will help you to analyze the various factors involved and make the best decision.
Confidentiality Agreements: What are the Most Important Elements?
Every business has to be concerned about maintaining confidentiality. In fact, it is common for business owners to become somewhat obsessed with confidentiality when they are getting ready to sell their business.
It goes without saying that owners don’t want the word that they are selling to spread to the public, employees or most certainly their competitors. Yet, there is something of a tug of war between the natural desire for confidentiality and the desire to sell a business for the highest amount possible. At the end of the day, any business owner looking to sell his or her business will have to let prospective buyers “peek behind the curtain.” Let’s explore some key points that any good confidentiality agreement should cover.
At the top of your confidentiality list should be the type of negotiations. This aspect of the confidentiality agreement is, in fact, quite important as it stipulates whether the negotiations are secret or open. Importantly, this part of the confidentiality agreement will outline what information can be revealed and what cannot be revealed.
Also consider the duration of the agreement. Your agreement must be 100% clear as to how long the agreement is in effect. If possible, your confidentiality agreement should be permanently binding.
You will undoubtedly want to outline what steps will be taken in the event that a breach does occur. Having a confidentiality agreement that spells out what steps you can, and may, take if a breach does occur will help to enhance the effectiveness of your contract. You want your prospective buyers to take the document very seriously, and this step will help make that a reality.
When it comes to “special considerations” category, this should be elements that apply to the business in question. Patents are a good example. A buyer could learn about inventions while “kicking the tires,” and you’ll want to be quite certain that any prospective buyer realizes that he or she must maintain confidentiality regarding any patent related information.
Of course, do not forget to include any applicable state laws. If the prospective buyer is located outside of your state, then that is an issue that must be adequately addressed.
A confidentiality agreement is a legally binding agreement. And it is important that all parties involved understand this critical fact. Investing the money and time to create a professional confidentiality agreement is time and money very well spent. An experienced business broker can prove invaluable in helping you navigate not just the confidentiality process, but also the process of buying and selling in general.
Goodwill and Its Importance to Your Business
What exactly does the term “goodwill” mean when it comes to buying or selling a business? Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business. In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business. It is important not to underestimate the value of goodwill as it relates to both the long-term and short-term success of any given business.
According to the M&A Dictionary, an intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market. If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.
Goodwill most definitely contrasts and should not be confused with “going concern value.” Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.
Examples of goodwill can be quite varied. Listed below are some of the more common and interesting examples:
- A strong reputation
- Name recognition
- A good location
- Proprietary designs
- Trademarks
- Copyrights
- Trade secrets
- Specialized know-how
- Existing contracts
- Skilled employees
- Customized advertising materials
- Technologically advanced equipment
- Custom-built factory
- Specialized tooling
- A loyal customer base
- Mailing list
- Supplier list
- Royalty agreements
In short, goodwill in the business realm isn’t exactly easy to define. The simple fact, is that goodwill can, and usually does, encompass a wide and diverse array of factors. There are, however, many other important elements to consider when evaluating and considering goodwill. For example, standards require that companies which have intangible assets, including goodwill, be valued by an outside expert on an annual basis. Essentially, a business owner simply can’t claim anything under the sun as an intangible asset.
Whether you are buying or selling a business, you should leverage the know how of seasoned experts. An experienced business broker will be able to help guide you through the buying and selling process. Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process. A business broker can act as your guide in both understanding and presenting goodwill variables.
The Sale of a Business May Actually Excite Employees
Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale. Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business? 3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news. Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.
Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale. She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.” As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.
Interestingly, Taylor points to something of a paradox. While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case. Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.
Here Taylor brings up an excellent point for business owners to relay to their employees. A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.
A second reason that employees may be excited with the prospect of a new owner is their potential career advancement. The size of your business will, to an extent, dictate the opportunities for advancement. However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities. As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.
Finally, selling a business could mean “new growth, energy and ideas.” Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business. This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.
There is no way around it, Taylor’s article definitely provides ample food for thought. It underscores the fact that how information is presented is critical. It is not prudent to assume that your employees may panic if you sell your business. The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.
A Look at Divestopedia’s Article, “The Myth of Fair Business Valuation”
In Divestopedia’s article, “The Myth of Fair Business Valuation: What Professional Valuations Don’t Tell You,” author Chak Reddy is quick to point out that the “type of buyer and method of sale are two important (yet often overlooked) value determinants when finding a starting price for your business.”
Reddy brings up some excellent points. One notion in particular that every business owner should be aware of is that there is “NO fair value for illiquid assets.” He points to the fact that between January 2007 and March 2008, the historic Bear Stearns went from a value of $20 billion dollars to just $238 million. In a mere 14 months, Bear Stearns lost most of its value.
Additionally, the article points to the fact that business owners often suffer enormously from “dramatic valuation compression.” In Reddy’s view, this compression is the direct result of poor planning and a failure on the part of business owners to select the right advisory teams.
Reddy believes that professional valuations can be quite lacking. He feels that they are “contingent on multiple assumptions,” and that the valuations are only as good as the assumptions upon which they are based. In other words, professional valuations can be limited and flawed. In particular, he points to the fact that two of the most important factors in valuations, future growth rate and operational synergies are “highly subjective and no two views on these topics are likely to be identical.” Summed up another way, valuations are inherently a matter of opinion and perspective. Reddy feels that a seller will be “lucky” if the real sales price comes within 10% to 20% of the professional valuation.
In the end, as always, it is the market that determines value. It is the acquirer who will determine the value more than any other factor. The perception of the buyer will play a key role in the process and, further to the point, no two buyers will perceive the business exactly the same way. In other words, valuations can be tricky and certainly do involve a personal element of the individual who is appraising the business’ value. Adding to this point, Reddy states, “From our experience, the type of buyer and the type of sale skew the valuation to such an extent that it is unwise for a business owner to not be familiar with these variables and their impact before the beginning of the sales process.”
Ultimately, finding the right buyer is essential and this is where a business broker can prove simply invaluable. And finding that right buyer may take time.
5 Big Questions to Consider when Financing a Business Sale
How should the purchase of a business be structured? This is a point that you’ll want to address early in the sale process. For most people, buying or selling a business is one of the most, if not the most, important business decision that they will ever make. For this reason, it is vital not to wait until the last minute to structure your deal. Let’s turn our attention to the most significant questions that you need to answer when entering the sales process.
Table of Contents:
1. What is My Lowest Price?
The first question you should ask yourself is, “What is the lowest price I’m willing to take?” If an offer is made, the last thing you want is to be sitting around trying to decide if you can take a given offer at a given price. You need to be ready to jump if the right offer is made.
2. What are the Tax Implications?
Secondly, you’ll want to seriously consider the tax consequences of any sale. Taxes are always a fact of life and you need to work with a professional, such as an accountant or business broker, to understand the tax implication of any decision you make.
3. What are the Interest Rates?
The third factor you want to consider is interest rates. If you get a buyer, what is an acceptable interest rate for a seller financed sale?
4. Are there Additional Costs Involved?
A fourth key question to ask yourself is do you have any unsecured creditors that have not been paid off? Additionally, you’ll also want to determine whether or not the seller plans on paying for a part of the closing costs.
5. Will the Buyer Need to Assume Debt?
Finally, will the buyer need to assume any long-term or secured debt? The issue of long term and/or secured debt is no small issue. Be sure to clarify this important point well in advance. Also keep in mind that favorable terms typically translate to a higher sales price.
Business brokers are experts at buying and selling all kinds of businesses. When it comes time to structure a deal that benefits both the buyer and the seller, business brokers can prove to be invaluable. At the end of the day, working with a business broker is one of the single biggest steps you can take to ensure that your business is sold and sold as quickly as possible.
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.
Determining Your Company’s Undocumented Value
Business appraisals are not one-dimensional. In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result. Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.
It is important to remember that while an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information. Business appraisers must understand the purpose of their appraisal before beginning the process. All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.
There Can Be Unwritten Value
Value isn’t always “black and white.” Instead, many factors can determine value. Prospective buyers may be looking at variables, such as profitability, depth of management and market share, but there can be more that determines value.
Here are some of the factors to consider when determining value: How much market competition is there? Does the business have potential beyond its current niche? Are there a variety of vendors? Does the company have easy access to its target audience? At the end of the day, what is the company’s competitive advantage? Is pricing in line with the demographic served? These are just some of the key questions that you’ll want to consider when evaluating a company.
There are Ways to Increase Both Valuation and Success
No doubt, successful businesses didn’t get that way by accident. A successful business is one that is customer focused and has company-wide values. Brian Tracy’s excellent book, “The 100 Absolutely Unbreakable Laws of Business,” notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and, of course, revenue generation. Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation. For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation and more.
No Replacement for Understanding Trends
If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow. Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.
Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential. One of the greatest assets that any company has is, in the end, its people.
Four Significant Issues You Need to Consider When Selling Your Business
The process of selling a business can be very complex. Whether you’ve sold a business in the past or are selling a business for the very first time, it is imperative that you work with an expert. A seasoned business broker can help you navigate through what can be some pretty rough waters. Let’s take a closer look at four issues any seller needs to keep in mind why selling a business.
Number One – Overreaching
If you are both simultaneously the founder, owner and operator of a business, then there is a good chance that you are involved in every single decision. And that can be a significant mistake. Business owners typically want to be involved in every aspect of selling their business, but handling the sale of your business while operating can lead to problems or even disaster.
The bottom line is that you can’t handle it all. You’ll need to delegate the day-to-day operation of your business to a sales manager. Additionally, you’ll want to consider bringing on an experienced business broker to assist with the sale of your business. Simultaneously, running a business and trying to sell has gone awry for even the most seasoned multitaskers.
Number Two – Money Related Issues
It is quite common that once a seller has decided on a price, he or she has trouble settling for anything less. The emotional ties that business owners have to their businesses are understandable, but they can also be irrational and serve as an impediment to a sale. A business broker is an essential intermediary that can keep deals on track and emotions at a minimum.
Number Three – Time
When you are selling a business, the last thing you want is to waste time. Working with a business broker ensures that you avoid “window shoppers” and instead only deal with real, vetted prospects who are serious about buying. Your time is precious, and most sellers are unaware of just how much time selling a business can entail.
Number Four – Don’t Forget the Stockholders
Stockholders simply must be included in the process whatever their shares may be. A business owner needs to obtain the approval of stock holders. Two of the best ways to achieve this is to get an attractive sales price and secondly, to achieve the best terms possible. Once again, a business broker serves as an invaluable ally in both regards.
Selling a business isn’t just complicated; it can also be stressful, confusing and overwhelming. This is especially true if you have never sold a business before. Business brokers “know the ropes” and they know what it takes to both get a deal on the table and then push that deal to the finish line.