Prepare for Your Exit When You Launch Your Business
You’ll often hear business brokers and M&A advisors say that the right time to prepare for your exit is when you first launch. By that they mean that it’s important to always be thinking about how to optimize your business so that it is streamlined for an eventual sale. Some of the savviest entrepreneurs and business owners are also thinking about partnering with those who will ultimately want to buy their businesses, even if the prospective sale of their business is many years away. It is easy to see why so many top-level entrepreneurs feel this way, as it is prudent to plan for the outcome you want from the very beginning.
It Pays to Think Ahead
The simple fact is that in most endeavors in life, it pays to think ahead. Selling a business is no exception. The rate of businesses that are being acquired is rising significantly. In a recent study at the University of Maryland, researchers found that in the last three decades the rate of venture capital-backed startups that have been acquired has soared from 10% to 90%.[1]
Anyone building a business should build that company in such a way that it will be appealing for acquisition down the line. Thinking about who the ideal buyer might be will help you to properly shape your business operations.
Many owners have an eye on businesses that work to serve similar markets. You may also want to think about how your product and your business model work to address an overlooked need within the existing customer base of that larger entity. If you can clearly show that acquiring your company will instantly lead to new business, then much of the battle is already won. By finding customers that a business is overlooking, you have positioned your business to be an attractive target for acquisition.
Have a Success Oriented Strategy from Day One
In short, company founders must understand their customer, their product, and why a customer will want and need what they offer. Being able to attract the right talent is also important. If a successful staff is firmly in place, your business will be far more attractive to potential buyers.
Understanding from day one the path of your startup and where you want to go will make all the difference in your success. It is important to remember that it is much easier to build an acquisition friendly company from day one than it is to retrofit your existing company years down the road.
1. The Great Startup Sellout and the Rise of Oligopoly
Copyright: Business Brokerage Press, Inc.
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The Complexities of Business Valuations
Many buyers and sellers are not aware of the complexities that go into appraisals for businesses. To get the most accurate results, a business needs to be looked at from a variety of angles. When completing a business valuation, we look at everything from comparable businesses to EBITDA. There are a lot of nuances involved that are customized depending on the business at hand. Without looking at a wide range of factors, you could accidentally get less for your business than what it’s really worth.
What Will Be Important for Your Buyer?
When you’re selling a business, part of the fair market value of your business relates to benefits that your buyer will receive. Obviously, your valuation will include factors such as market share and profitability that a buyer will enjoy. But there are also less obvious factors. For example, is there potential for the business to expand beyond its current niche? What is the competition like? What about access to customers?
Current Trends
Also brought into consideration should be trends that will impact the business. These trends could be everything from trends in technology to economic or social changes. In some cases, business trends might make a business much more valuable. For example, due to the recent pandemic and fast adaptation of online conferences, companies that integrated video conferencing had a major edge over those that did not.
When business owners are aware of emerging market trends, it allows them to develop new offerings to meet current demand. In turn, this can boost business growth and increase a business valuation.
The Workforce
Recent workforce issues have definitely impacted the value of businesses across the board. If you have a strong, highly trained and dependable workforce, it will help to increase the value of your business. If your staff members are customer-facing, positive customer experiences will drive revenue growth. Further, buyers will feel more confident buying a business with a reliable roster of employees.
There are many questions that will affect your buyer and those should be considered in the price you ultimately decide upon. The savviest business owners are always thinking about trends in society and how to work with them to strengthen the value of their business. They will also consider the decisions made by their competitors and how they impacted their businesses for better or worse.
Copyright: Business Brokerage Press, Inc.
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Getting the Most out of a Partnership Agreement
As an entrepreneur and business owner, your partnership agreement stands as one of the most important business documents you will sign. Business structures can be as complicated as the people that create those businesses. Quite often, business owners create businesses with friends or loved ones and, as a result, will not have a proper partnership agreement in place.
It’s important to note that not having a partnership agreement in place is a mistake. There are too many unknowns and too many variables not to have this essential document. You need a legal framework to protect your business from the vast array of potential pitfalls that may have an impact.
The Key Elements of a Solid Partnership Agreement
At the top of the list of every partnership agreement is a clear outline and understanding of rights and responsibilities. All too often partnerships run into trouble as the rights and responsibilities of the parties aren’t clearly thought through and then outlined in a partnership agreement.
Mapping out rights and responsibilities will help eliminate problems in the future. A partnership agreement should be seen as a serious legal document. As such, it is prudent to work with an experienced lawyer in the area of partnership agreements.
What Every Partnership Agreement Should Address
At the top of the list, every partnership agreement should address how money is to be distributed and which partner(s) will receive a draw. The issue of who will contribute funds so that the business becomes operational should be very plainly spelled out in the partnership agreement. A failure to address this issue could end the business before it even gets off the ground.
Issues such as what percentage each partner will receive and who will be in charge are two additional key areas that should never be overlooked. In terms of issues that are frequently overlooked by those forming a partnership, it is common for those forming a partnership to overlook long-term issues such as what is to happen in the event of the death of a partner, what steps are to be taken to bring in a new partner, and how business decisions are made.
Without a solid partnership agreement in place, business owners may find themselves in the last place they want to be, namely, court. A lengthy court battle can weaken your business in a very wide range of ways including a hit to company morale as well as the loss of key customers and employees. A legal battle between business partners can destroy what would otherwise be a healthy and thriving business.
The time you invest in the creation of a business agreement is time and money well spent. In fact, it is safe to state that a business agreement might just turn out to be one of the greatest investments you ever make.
Copyright: Business Brokerage Press, Inc.
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What is the Best Time to Sell Your Company?
The old saying that “timing is everything,” usually applies to selling one’s business. Ultimately, every business owner will have to exit their business, and the sooner one prepares to sell, the better the final results will be.
With each passing year, more and more baby boomers are reaching retirement age. In many cases, this means that they have no choice but to sell their businesses. The time is now upon us where a simply massive number of businesses will be put up for sale.
Statistics and studies back up this claim. Studies show that people born between 1946 and 1964 make up 40% of small business owners, and about 10,000 baby boomers retire every single day. 1 Business owners who get out in front of this pending avalanche stand to benefit considerably.
There are many other good reasons to sell. Many business owners find that general burnout, and especially the burnout associated with operating a business during the pandemic, is prompting them to think about selling. Burnout isn’t just unpleasant for a business owner, but it can also be dangerous for the well-being and longevity of the business itself. An owner experiencing burnout is an owner who is unlikely to make the best decisions and seize on new opportunities. The results of burnout can be staggering and range from a loss of customers to getting caught off guard by new and existing competitors. In the end, burnout can dramatically decrease the value of a business or even destroy it.
The economy is bouncing back from the pandemic, and that can mean that right now is a great time to sell. If the covid pandemic reinforced any truism, it reminded us that the world and regional and global economies can change in a heartbeat. There are many complex variables on the table.
Simply stated, we are in a period of uncertainty, and that makes predicting the future of the marketplace harder than in recent decades. These facts, combined with the current strong economy, point towards now potentially being a good time to sell your business.
Most business owners have never sold a business before, but instead, they have spent a sizable chunk of their professional careers building up their business. As a result, most business owners don’t know what it takes to successfully sell a business. Working with a proven business broker, one with years of experience, is a smart way to evaluate your current situation and determine if now is the right time to sell your business.
Copyright: Business Brokerage Press, Inc.
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What Serious Buyers Look For
Obviously, serious buyers want to carefully look at the financials of a company under consideration and all of the other major aspects of the company. However, there are a few other areas that the serious buyer will investigate that sellers may overlook.
The Industry – The buyer will want to take a serious look at the industry itself, the customers, the suppliers, the competition, etc. This investigation will cover the strengths, weaknesses, threats from competition, and opportunities of the potential acquisition. With the growth of the “big box” retailers, much power has shifted from the manufacturer to the retailer. A manufacturer may want to increase prices, but if Wal-Mart says no, it’s a very powerful no.
Discretionary Costs – Some sellers will reduce their expenses in discretionary areas such as advertising, public relations, research and development, thus making for a higher bottom line. However, these cuts will hurt the future bottom line, and smart buyers will take notice of this.
Obsolete Inventory – This is another area that buyers take a serious look at and that can impact the purchase price. No one wants to pay for inventory that is unusable, antiquated or unsalable.
Wages and Salaries – A company may be paying minimum wages, or offering few or low-cost benefits, a limited retirement program, etc. These cost-saving devices will make the bottom line look good, but employee turnover may create expensive problems later on. If the target company is to be absorbed by another, compensation issues could be critical.
Capital Expenditures – The serious buyer will take a very close look at machinery and equipment to make sure they are up to date and on par with, or superior to, that of the competition. Replacing outdated equipment can modify projections and may affect an offering price.
Cash Flow – Serious buyers will take a long look at the cash flow statements and the areas that affect them. The buyer wants to know that the business will continue to generate positive cash flow after the acquisition (i.e.: after servicing the debt and after paying a reasonable salary to the owner or general manager).
Other areas that sellers overlook, but that the serious buyer does not are: internal controls/systems, financial agreements with lenders, governmental controls, anti-trust issues, legal matters and environmental concerns.
Copyright: Business Brokerage Press, Inc.
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The Top 3 Reasons Why Deals Fall Through
No one likes to think about the deals that didn’t succeed. However, the fact of the matter is that sometimes things go wrong during the process and a sale doesn’t successfully close. We have pinpointed the most common reasons why this happens into three main categories. By understanding the issues that can prevent a deal from finalizing, we are able to dramatically maximize the odds of success for clients.
1. Issues with the Seller
If a seller lacks a strong reason for wanting to sell his or her business, that seller is often unable to be flexible on the terms of a deal. As a result, when complexities arise during the sales process, the seller doesn’t have the patience, commitment and/or stamina to work to overcome those issues. In many cases, a seller has presented an unrealistic price for the business and simply cannot be realistic about the true value the business will sell for on the market. Another common issue that arises with sellers is that they are not fully transparent with the potential buyer. For example, they might be neglecting to mention serious problems with the business, such as new competition on the horizon.
2. Issues with the Buyer
Just like circumstances surrounding the seller may interfere with the sale of a business, the same is true for buyers. In some cases, the buyer is just mildly interested in being a business owner. As a result, he or she doesn’t have the wherewithal to continue on and navigate the complexities that can arise during the stages leading up to a successful deal. There are other issues that often pop up with buyers as well. For example, they also may have unrealistic expectations regarding price. Some buyers are not willing to pay the fair market value for a given business. In other cases, once they find out the amount of work that will be required to make the business successful, they are unmotivated to continue.
3. Third Party Interference
In some instances, there is no issue regarding the buyer or seller. Instead, it is a third party that interferes. An example of this would be a landlord being unwilling to transfer a lease or grant a new one. Or unexpected issues with the federal or local government could cause problems. Another problem that involves a third party occurs when outside advisors, such as attorneys, overlook the fact that the goal is to put together a deal that will work. Instead, they get so caught up in protecting the best interests of their clients that they erect too many roadblocks for a deal to succeed. These types of problems are often completely unexpected by either the buyer or seller.
It is hard to argue with the fact that if a buyer isn’t really committed to selling, perhaps it is not the best choice for them in the long run. The good news is that if potential problems are handled at the appropriate stage of the deal, most business deals do come to a successful conclusion. Business brokers and M&A advisors are specialists when it comes to resolving and circumventing potential issues.
Copyright: Business Brokerage Press, Inc.
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Take Inventory of Your Company
Most business owners don’t give a second thought to the idea of going to the doctor for an annual physical. So why do they not give the same level of care and consideration to their company? The fact of the matter is that many executives literally go decades without giving their companies a “physical.” They only stop to truly evaluate their business when required by regulations or another matter forcing them to do so.
Consider an Annual Valuation
Let’s take a look at some of the reasons why business owners should get an annual valuation. The first issue concerns the curveballs life often throws at us. At any given time, you and your business could be unexpectedly hit with everything from partnership issues or life changes like a divorce to changes in bank relationships. When you keep careful track of the value of your business, you will know in advance how potential changes would affect you. Perhaps even more importantly, you will gain an understanding of the health of your business.
Monitor Business Growth
It’s critical to be aware of how your business compares from one year to the next. Are values definitely increasing? If not, you would surely want to know immediately and start making necessary adjustments. If a major problem were to surface, you would want to know about it right away so that you can take action. Otherwise, you might just let the years pass you by while this issue goes unchecked. This is the kind of data you will gain when you commit to regular valuations.
Be Prepared for the Unknown
You might feel far from ready to sell. However, you should always be ready if the situation does present itself. What if an amazing opportunity showed up on your doorstep? On the flip side of the coin, what if a life issue like illness put you in a situation where a sale was suddenly necessary? If you are not ready both mentally and with the necessary paperwork for your business prepared, you might miss out on a legitimate opportunity.
Statistics gathered from a prominent accounting firm showed that 65% of business owners do not know what their company is worth. However, at the same time 75% of the net worth of these business owners is tied up in their business. The problem with these statistics is quickly evident. Be sure to take as good of care of your business as you would take of yourself.
Copyright: Business Brokerage Press, Inc.
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Common Legal Mistakes That Sellers Make
Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
Copyright: Business Brokerage Press, Inc.
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What Will Your Buyer Be Looking For?
The buyer loves your business; it’s just what he or she has been looking for. He has reviewed your financial statements and has made an offer contingent on several items. You’ve reviewed the offer and it looks fine, so what’s next? The contingencies in the deal mean that the buyer or his or her advisors have some concerns. In larger deals, this process might be called due diligence. However, in the smaller business sale, the items of concern are usually spelled out as opposed to a general review of everything. The reason for this is that larger businesses or companies have a lot more areas of concern than the typical smaller business.
Most contingencies concern the review of financial statements and/or business tax returns. Others may involve lease issues, the seller staying on for a set period of time, or some very specific issue such as repaving the parking lot, if the landlord won’t or isn’t required to.
Unfortunately, some contingencies may be hiding other ones such as a list of fixtures and equipment included in the sale. Sounds easy on the surface, but the seller forgot that two pieces of equipment currently not in use need repair or the walnut desk in the office belongs to Grandfather Smith and is not included. Or, while reviewing the lease, the buyer discovers that the landlord requires that the business must close by 9:00 PM or some other restriction applies and was not disclosed. Deals have fallen apart over similar issues.
Most contingency problems can be resolved prior to the business being placed on the market. The seller should do all of the following:
- Check the status of all furniture, fixtures and equipment (FF&E). Remove any that are not included in the sale or are inoperable if not in use – or make repairs.
- Review any contract such as the lease, any equipment leases, and contracts that will be assumed by the buyer. Make sure there aren’t “clinkers” in them. If there are, disclose them to a potential buyer out front – and be sure your business intermediary is also aware of them.
- Be prepared to answer questions such as:
- Are there any environmental, governmental or legal issues?
- How long will you be willing to stay and work with a new buyer – at no cost?
- Will the employees stay?
- Why was last year the worst one in years?
- Why was last year the best one in years?
The list could go on and on, but sellers need to be ready. Buyers don’t like surprises. A business broker professional knows the process like a book and can be invaluable in preparing the business for the marketplace.
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How to Transfer Your Business to a Family Member
Are you thinking of transferring your business to a family member? This occurrence is fairly common, especially among small businesses. Here are some considerations that will help with your planning and decision making.
Do You Have a Good Contract?
Sometimes close family members are tempted to skip a contract, but it’s always a mistake not to have things in writing. When you create a buy-sell agreement, it helps keep things clear between the parties involved. Make sure that your documentation is thorough. It should cover a wide variety of details including the amount being paid, your continued involvement, and the business value.
Does Your Family Member Need Financing?
When it comes to selling businesses to family members, seller financing is common. You could even consider agreeing to a private annuity. This will allow payments to be spread out over many years. One benefit to providing financing assistance is that you will receive a steady stream of income along with interest on the loan as well.
You could also consider a self-cancelling clause on your installment note. This would allow debt to attach to your will in case of your untimely passing before the payments were complete.
Are You Selling or Gifting Your Business?
Gifting a business takes place more often than you might think, due to the tax benefits involved. Also, when you gift a business, you can still maintain some level of control.
The federal gift tax exemption changes every year. In 2022, the annual gift tax exclusion is $16,000. The lifetime gift exemption limit is $12 million. While you may owe some federal gift taxes if the amounts exceed the exemption limits, the good news is that after you have transferred your business, any future growth of the business won’t affect your financials.
Is Everything Accurate?
Unfortunately, many business owners have acted unethically when it comes to transferring their business to their family members. As a result, the IRS tends to give this kind of transaction extra scrutiny. You will want to ensure that all your paperwork is in proper order and highly accurate.
You may very well want to hire the services of a lawyer and accountant to assist you with this matter. Of course, a business broker or M&A advisor will also help you with the details of this agreement and figuring out what benefits you and your family members.
Copyright: Business Brokerage Press, Inc.
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