Alternatives for Owners of Eroding Industries
Let’s assume that you own and operate a company that manufactures a product in an industry that is eroding or going downhill. What are your choices or alternatives?
- Run the company as a “cash cow,” resigning yourself to the fact that your industry is slowly declining or is no longer a growth industry. Keep what you are doing profitable even if you
have to increase prices and/or cut costs. - Increase R&D to develop new products.
- Acquire or merge with a competitor or strategic partner.
- Expand geographically.
- Diversify within the same familiar market.
- Sell the company now before there is further erosion in your industry
© Copyright 2015 Business Brokerage Press, Inc.
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Over and Above the Numbers
A close review of the financial statements is always in order when considering the acquisition or merger of a company. However, that is only part of what a buyer is acquiring. Other important assets are:
- Repeat customers or clients
- Patented product, government approvals, profitable copyrights
- Broad customer or client base (diverse & growing)
- Long-term contracts
- Recognizable brand or product name
- Experienced management team and trained work force
- Valuable intellectual property
- Proprietary products
- Profitable alliances
- Contracts/non-competes with valuable employee
© Copyright 2015 Business Brokerage Press, Inc.
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Improving Your Prospects for Selling
According to a Price Waterhouse Coopers survey of more than 300 privately held U.S. businesses that have been sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market, include:
- Improving profitability by cutting costs
- Restructuring debt
- Limiting owners’ compensation
- Fully funding the company pension plan
- Seeking the advice of a consultant or intermediary
- Improving the management team
- Upgrading computer systems/processes
© Copyright 2015 Business Brokerage Press, Inc.
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What Makes the Sale of a Business Fall Through?
There are a myriad of reasons why the sale of a business doesn’t close successfully; these multiple causes can, however, be broken down into four categories: those caused by the seller, those caused by the buyer, those that just happen (“acts of fate”), and those caused by third parties. The following examines the part each of these components can play in contributing to the wrecked deal:
The Seller
1. In some instances, the seller doesn’t have a valid reason for entering into the sale process. Without a strong reason for selling, he or she has neither the willingness to negotiate nor the flexibility to see the sale to a conclusion. Without such a commitment, the desire to sell is not powerful enough to overcome the many complexities necessary to finalize the sales process.
2. Some sellers are merely testing the waters. As detailed above, they are not at that “hungry” stage that provides the push toward a successful transaction. These sellers merely want to see if anyone wants to buy their business at the price they would like to receive.
3. Many sellers are unrealistic about the price they want for their business. They may be sincere about wanting to sell, but they are unable to be realistic about how the marketplace will value the business. The demand for their business may not be there.
4. Some sellers fail to be honest about their business or its situation. They may be hiding the fact that new competition is entering the market, that the business has serious problems or some other reason the business is not salable under existing circumstances. Even worse, some sellers do not disclose that there is more than one owner and that they are not all in agreement about selling the business.
5. A seller may decide to wait until a buyer is found and then check with their outside advisors about the tax and/or legal consequences. At this point, the terms of the deal have to be altered, and the buyer won’t agree. Sellers should deal with these complications ahead of time. Nobody likes changes–especially buyers!
The Buyer
1. The buyer may not have an urgent need or a strong desire to go into business. In many cases the buyer may begin with positive intentions, but then doesn’t have the courage to make “the leap of faith” necessary to go through with the sale.
2 Some buyers, like sellers, have very unrealistic expectations regarding the price of businesses. They are also uneducated about the nature of small business in general.
3. Many buyers are not willing to put in the hours or do the type of work necessary to operate a business successfully.
4. Buyers can be influenced by others who are opposed to the purchase of a business. Many people don’t or can’t understand the need to be “your own boss.”
Acts of Fate
These are the situations that “just happen,” causing deals to fall through. Even considering the strong hand of fate, many of these situations could have been prevented.
1. A buyer’s investigation reveals some unmentioned or unknown problem, such as an environmental situation. Or, perhaps there are financial deficiencies discovered by the buyer. Unfortunately, these should have been on the table from the beginning of the selling process.
2. The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business.
3. Problems may arise, unknown to both the seller and the buyer, with federal, state, or local governmental agencies.
Third Parties
1. Landlords may become difficult about transferring the lease or granting a new one.
2. Buyers and/or sellers may receive overly-aggressive advice from outside advisors, usually attorneys. Attorneys, in their zeal to represent their clients, forget that the goal is to put the deal together. In some cases, they erect so many roadblocks that the deal can only fall apart.
Most of the problems outlined here could have been resolved before the selling process was too far advanced. There are also some problems that could not have been avoided–people do sometimes enter situations with the best of intentions only to find out that this is not the right answer for them after all. These are the exceptions, however. Most business sales can have happy endings if potential difficulties are handled at the appropriate time.
Business brokers are aware of the various ways a deal may fall through. They are experienced in resolving issues before the business goes onto the market or before a buyer is introduced to the business. To buy or sell a business successfully, sellers should resolve any potential deal-wreckers, following the advice of a professional business broker.
Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost-effective, than the attorney who handles a general practice.
Copyright: Business Brokerage Press, Inc.
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When It’s Time to Sell, Put Your Strengths First
Putting your strengths first will help you sell your business. While this may seem obvious, a surprising number of business owners will either improperly index the strengths of their business or fail to emphasize those strengths adequately. In this article, we will examine five key business strengths that you should focus on when it comes time to sell.
Understand Your Buyer
You know your business, but you don’t necessarily know what buyer is best for it in the long run. If you’ve never sold a business before (and most business owners haven’t), then you may not know how to best position and present your business for sale.
A business broker is immensely valuable in this regard. These professionals are very good at determining which prospective buyers are serious and which ones are not. Additionally, a business broker will use their own databases of prospective and vetted buyers and try to match your business up with the prospective buyers that are most likely to be a good fit. When dealing with a buyer, a seasoned business broker will put emphasis on your strengths whenever possible.
Be Sure to Maintain Normal Operations
Selling a business can be very demanding and underscores, once again, the value of working with a business broker. A business broker will focus on selling your business so that you have more time to focus on the day-to-day of running your business.
The last thing you want is to waste your time on buyers who are not serious. Remember, if your business suffers as a result of the time you spend away from your business in the sale process, then the value of your business to prospective buyers could suffer.
Determining the Best Price
If you incorrectly price your business, you could dramatically reduce the interest. Business brokers are experts at pricing businesses and can help you determine the best possible price. Many business owners have unrealistic valuations and others may even undervalue their businesses or they fail to incorporate all aspects of their business. Working with a professional business broker can help you quickly achieve the best price. The best price possible will work to maximize the strengths of your business.
Getting Your Business Ready for Sale
There is a lot that goes into getting your business ready to sell. The simple fact is that getting your business ready to sell isn’t a one-dimensional process, but instead involves every aspect of your business. Getting your business ready to sell isn’t about making it look presentable and putting a “new coat of paint” on things, although this is a factor.
Instead it is necessary to have every aspect of your business in order. From paperwork such as tax returns, contracts and forms to a business plan and more, it is important to consider every aspect of your business. You should consider what you would want to see if you were the one looking to buy the business. Be sure to do everything possible to build up your strengths.
Confidentiality
If word gets out that your business is up for sale, there could be a range of problems. Employees, including key management, could begin looking for other jobs and suppliers and key buyers could begin to look elsewhere. In short, a breach of confidentiality could lead to chaos.
Getting your business ready for sale means factoring in the strengths and weakness of your business then fixing weaknesses whenever possible and building upon your strengths. Working with a business broker can help you address every point covered in this article and more.
The Top Three Major Legal Mistakes to Avoid During a Sale
The business sale process can be complex, which is part of the reason why it makes sense to have expert help in the form of a business broker. Legal mistakes can be very costly mistakes. A legal mistake can also bring the entire sale process to a sudden and complete halt. Let’s take a closer look at what you can do to avoid these kinds of issues when selling your business.
Major Mistake 1 – You Skipped the Non-Disclosure Agreement
Nothing quite invites trouble like skipping the non-disclosure agreement. If a deal falls through, then you have the NDA backing you up. This document ensures that the prospective buyer doesn’t tell the world that your business is up for sale. Never assume that a deal is going through until it actually is 100% complete. Buying or selling a business is a complex process with lots of moving parts. There is plenty of room for things to go wrong, and that is why you always need to have an NDA in place.
Major Mistake 2 – You Don’t Work with an Attorney
Let’s be very blunt here, if you are selling a business, then you need an attorney. Just as there is no replacement for an NDA, the same holds true for working with a lawyer. It is also vital that you properly prep your business for sale, which means getting paperwork organized and making sure that you have legally checked all your boxes. Working with an experienced and proven attorney will help you ensure that your business is ready for sale. If you’re not prepared for the deal, it can make buyers nervous.
Major Mistake 3 – You Failed to Get a Letter of Intent
A letter of intent is a valuable, and necessary, legal document. Some sellers are reluctant to use it, fearing that it will slow down the momentum of the deal. However, since this letter works to protect your interest and outlines expectations, this step should not be skipped. For example, a letter of intent details the termination fee for the buyer, meaning that the buyer can’t walk away without consequences simply because he or she is having a bad day. Importantly, a letter of intent ensures that you are only dealing with serious buyers.
Many things can go wrong while selling a business. The more prepared you are before you begin the process, the greater the chances that you will not only avoid headaches, but also be successful. Long before you put your business on the market, you should begin working with a capable business broker and attorney. Their input and advice will prove to be invaluable and help you avoid a range of costly and time-consuming issues.
Copyright: Business Brokerage Press, Inc.
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The Difficult Issues Often Attached to Valuing a Business
There is little doubt that valuing a business is often complex. In part, this complexity is due to the fact that business evaluation is subjective. The simple fact is that the value of a business is often left to the mercy of the person conducting the evaluation. Adding yet another level of complexity is the fact that the person conducting the valuation has no choice but to assume that all the information provided is, in fact, correct and accurate.
In this article, we will explore the six key issues that must be considered when determining the value of a business. As you will see, determining the value of a business involves taking in several factors.
Factor #1 – Intangible Assets
Intangible assets can make determining the value of a business quite tricky. Intellectual property ranging from patents to trademarks and copyrights can impact the value of a business. These intangible assets are notoriously difficult to value.
Factor #2 – Product Diversity
One of the truisms of valuing a business is that businesses with only one product or service are at much greater risk than a business that has multiple products or services. Product or service diversity will play a role in most valuations.
Factor #3 – ESOP Ownership
A company that is owned by its employees can present evaluators with a real challenge. Whether partially or completely owned by employees, this situation can restrict marketability and in turn impact value.
Factor #4 – Critical Supply Sources
If a business is particularly vulnerable to supply disruptions, for example, using a single supplier in order to achieve a low-cost competitive advance, then expect the evaluator to take notice. The reason is that a supply disruption could mean that a business’ competitive edge is subject to change and thus vulnerable. When supply is at risk then there could be a disruption of delivery and evaluators will notice this factor.
Factor #5 – Customer Concentration
If a company has just one or two key customers, which is often the situation with many small businesses, this can be seen as a serious problem.
Factor #6 – Company or Industry Life Cycle
A business, who by its very nature, may be reaching the end of an industry life cycle, for example, typewriter repair, will also face challenges during the evaluation process. A business that is facing obsolescence usually has bleak prospects.
There are other issues that can also impact the valuation of a company. Some factors can include out of date inventory, as well as reliance on short contracts and factors such as third-party or franchise approvals being necessary for selling a company. The list of factors that can negatively impact the value of a company are indeed long. Working with a business broker is one way to address these potential problems before placing a business up for sale.
Copyright: Business Brokerage Press, Inc.
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Around the Web: A Month in Summary
A recent article from Divestopedia entitled “To Sell Your Business, Start with the End in Mind” explains the importance of planning your exit strategy in the early stages of your business. The article points out that emotion plays a big part in humans’ decision making process, and when a potential buyer perceives that the owner has not prepared a company for sale, they associate this with uncertainty, effort and stress that will accompany rebuilding the business.
Focusing on building your company’s culture is also very important for exit planning because a well-established company culture will continue to endure after you’re gone. Creating a self-sustaining culture that involves talented employees, succession plans for key people, talent acquisition and talent retention can help your business be seen as more valuable in the future.
Click here to read the full article.
A recent article posted on BizJournals.com entitled “How to know when the ride is over and it’s time to get off” gives an overview of how to know when to exit your business and how to be prepared when the time is right. Here are 4 signs that it might be time to sell your business:
- Your health is declining or your business is negatively affecting your health
- You’ve lost your passion for the business
- Your priorities have changed and the business is no longer your top priority
- You are hesitant or unable to invest money in the growth of your business
Business owners should periodically review these factors and ask themselves if they are still the right person for the job. It’s also good to consult with a trusted advisor to start planning an exit strategy now so you’re prepared when the time comes to sell all or part of your business.
Click here to read the full article.
A recent article posted on Forbes.com entitled “Business Value And Lottery Tickets” explains how you have to be realistic about your goals for your business especially in how they relate to your exit plan in the future. Take a look at how your business is doing and then quantify your goals for your business by asking yourself questions such as “How much money do I need to have when I leave my business?”
Next, you need to figure out a plan for your business to grow enough to reach those goals. The article states three common problems that owners have in this situation:
- Relying on assumptions instead of consulting with an exit-planning advisor
- Trying to do everything instead of delegating
- Remaining stagnant instead of taking on new roles to ignite change in the business
It is also important to have a good management team in place to help you achieve your goals. It’s not luck, and you have to look at the numbers and facts to get your business where you need it to be for a successful exit.
Click here to read the full article.
A recent article from the Axial Forum entitled “How to Handle Risky Customer Concentration in an M&A Target” explains the best practices to follow if a potential acquisition has a lot of customer concentration. In many companies, it’s common for 20% of customers to account for 80% of the company’s revenue. In this case, it is vital to talk to multiple people within these important accounts and ask a variety of questions to make sure you find out how their relationship with the company is really structured.
Most importantly, you want to ask the contact how likely they would be to recommend the target company to another colleague, which in turn will help you determine the Net Promoter Score (NPS) rating of the company. The NPS is very useful because it has statistically shown that higher rated companies are more profitable, outpace their competitors, and have stronger cross-selling opportunities.
It’s a good practice to look deeper into a company’s relationships with its customers when acquiring a business that you’ll want to eventually grow.
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A recent article posted on The Standard entitled “Do you have a business you are eyeing? Consider these tips before taking the leap” explores a variety of factors to take into consideration before buying a business. Here are some things to think about when making the decision to buy:
- Evaluate yourself and make sure you have the skills to take on the specific type of business
- Find out why the business is being sold
- Carry out due diligence in screening the business so there’s no surprises along the way
- Obtain a professional valuation of the business
- Close the deal and consider using a legal officer for the final process
Always be sure to find out the good and the bad before you decide to purchase a business.
Click here to read the full article.
Copyright: Business Brokerage Press, Inc.
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Three Common Errors Caused by Inexperience
The old saying that “there is no replacement for experience” is a truism that has stood the test of time. The simple fact is that a lack of experience can dismantle your deal.
Consider the following scenario – a business owner nearing retirement owns a multi-location retail operation that is doing several million in annual sales. He interviews a well-respected and experienced intermediary and is impressed.
However, the business owner’s niece has recently received her MBA and has told her uncle that she can handle the sale of his business and in the process, save him a bundle. On paper, everything sounds fine, but as it turns out the lack of experience gives this business owner less than optimal results.
Let’s take a look at a few problems that recently arose with our nameless, but successful, business owner and his well-meaning and smart, but inexperienced niece.
Error #1 No Confidentiality Agreements
One problem is that the business owner and his niece don’t use confidentiality agreements with prospective buyers. As a result, competitors, suppliers, employees and customers all learn that the business is available for sale. Of course, learning that the business is for sale could cause a range of problems, as both employees and suppliers get nervous about what the sale could mean. Ultimately, this could undermine the sale of the business.
Error #2 Incorrect Financials
Another problem is that the inexperienced MBA was supposed to prepare an offering memorandum. In the process, she compiled some financials together that had not been audited. While on paper this seemed like a small mistake, it failed to include several hundred thousand dollars the owner took. He simply forgot to mention this piece of information to his niece. Clearly this mishap dramatically impacted the numbers. Additionally, this lack of information would likely result in lower offers as well as lower bids, or even decrease overall prospective buyer interest.
Error #3 Failing to Include the CFO
A third key mistake in this unfortunate story was a failure to bring in the CFO. The niece felt that she could handle the financial details, but in the end, her assumption was incorrect. The owner and the niece failed to realize that prospective buyers would want to meet with their CFO, and that he would be involved in the due diligence process. In short, not bringing the CFO on board early in the process was a blunder that greatly complicated the process.
The problem is clear. Selling a business, any business, is far too important for an amateur. When it comes time to sell your business, you want an experienced business broker with a great track record. Again, there is no replacing experience.
Copyright: Business Brokerage Press, Inc.
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It’s Time To Embrace CSR (Corporate Social Responsibility)
If you are unfamiliar with CSR or corporate social responsibility, you are certainly not alone. In the coming years, you’ll be hearing a lot about CSR. In this article, we’ll look at CSR and how, when implemented with sincerity, it can positively impact your company and its operation.
Building Your CSR Locally
One of the key ways that you can build your CSR is to think about ways to help your community. Contributing to local community programs, for example, is a great place to start. Everything from personal involvement to direct financial support can help build your company’s reputation within your community.
Your Connection to the Environment
A second way to build your CSR is to show that your company is thinking about its impact on the environment. Recycling is important but so is using eco-friendly packaging and containers. Additionally, embracing low-emission and high mileage vehicles is another good step as this lowers your company’s carbon footprint.
Advertising and Good PR
A third area to consider is how your company interacts with the marketplace. Using responsible advertising, business conduct and public relations is a savvy move. Likewise, providing fair treatment of your shareholders, suppliers and vendors and contractors will all help to improve your CSR.
Yet, one of the single most important areas of corporate social responsibility occurs in the workplace. The advent of social media has helped fuel the dispersal of information. If your business isn’t treating its employees in a fair manner and/or has unsafe work conditions or unfair employment practices, the word will eventually get out. There has never been a more important time to treat your employees well.
Embracing CSR serves to increase shareholder and investor interest. In short, it is expected. Socially-conscious companies are considered smart and stable investments. A company that has fully embraced CSR will find greater buyer interest and even a higher selling price when the time comes to sell. Most buyers want excellent customer loyalty with no skeletons hiding in a company’s closet. They also are seeking happy and loyal employees, low employee turnover and for a company to have a good reputation within a community. CSR helps achieve all of these goals and more.
Ultimately, corporate social responsibility works to create additional value. When you invest in CSR, you are investing in achieving a higher selling price and making your business more attractive to sellers. Summed up another way, you can’t afford not to think about this topic.
Copyright: Business Brokerage Press, Inc.
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