Copyright © 2017 by Guy Breading
All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review.
The author has made every effort to ensure the accuracy of the information within this book was correct at time of publication. The author does not assume and hereby disclaims any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from accident, negligence, or any other cause.
Do you have a business you’re thinking of selling?
Are you looking for a way out, so that you can begin to relax a little?
Do you need some help to achieve your goal?
For many business people, the step of selling the thing you built from scratch and poured so much of your time and effort into, is one of the most difficult you can take.
But the reality is that many business owners will have to take it one day, for a variety of reasons, and this is where Ready for Change can help you. This amazing book looks at all aspects of selling your business, from the day you make the decision, to the day you hand over the keys.
With in-depth and well-informed chapters, you can begin to answer all the important questions, such as:
• Are you ready?
• Is your business ready?
• How do you know when it’s time to sell?
• The ways you can exit your business
• Getting the financial side in order
• Valuing the business
• Where can you find the buyers?
• And much more…
Selling your business can be a huge move. But with the right help and advice it can work smoothly and efficiently.
[*Ready for Change *]provides you with that helping hand in those tentative first moves. Get your copy today and start preparing your business for the buyer of tomorrow!
Table of Contents
1: Who is this book written for?
2: Are you a baby boomer?
3: Are you ready?
4: Is the business ready?
5: How do you know when it’s time to sell?
6: Every business has a value but it doesn’t necessarily mean it is sellable.
Staging – “Limit concentrations of necessities”
Staging – “de-personalize the workspace”
Staging – “Show me the money!”
Staging – “Growth potential”
Staging – “Are YOU the business?”
Staging – “Where is the income coming from?”
7: What are the ways you can exit your business?
p((. Family member
Full exit no conditions
Part Equity Sale
Passive involvement continuing income
8: Backing out of the owner – really…yes really??
p((. So, let’s summarize…
9: Financials need to be in order
p((. Financial Statements
Seller’s Discretionary Earnings Statement
10: What equipment do you really need?
11: Have you got customer or supplier diversity?
p((. Customers Diversity
12: Cashflow is King
p((. Under Capitalized (not enough cash)
Over Capitalized (too much cash)
13: Do you have happy customers?
14: let employees be your most valuable asset
p((. No 1. Organization Chart
No 2. Job Descriptions
No 3. Cut slackers
No 4. A happy employee is a valuable employee
15: Web Presence matters…how do you look online?
p((. What information is required to list the business?
Will it be an asset or stock sale?
16: Valuing the business?
p((. So firstly “how do we value a business?
So let’s run through in a little more detail where some of the add backs could come from.
18: Where do the buyers come from?
p((. Corporate America
Private Equity Firms
E2 Investor Visa
So, who can apply for an E-2 Investor Visa?
What is the application process like for an E-2 Investor Visa?
EB5 Investor Visa
Other areas for EB5 Investors…
19: Ways buyers fund the purchase
p((. If they are an Investor Visa buyer
401k and the Corporate Career change buyer
Small Business Administration (SBA)
Good old owner finance
20: Capital Gains…. MINIMIZING the ouch!
21: Final Comments….
An encouraging trend in modern business is to really identify who your customers are…. your “avatar”? If I was to picture an “avatar” as to who this book would be best directed to, it would be as follows;
“A business owner, 45-65, retirement funds mostly in the business. Confident of their abilities as they are a self-made person, own a business that has 5 – 50 employees with a revenue of $1 – $5,000,000. Going through a seasonal change personally, children may have left home or soon to be on their way. Those that are married or in a relationship are starting to think about the future and what lays ahead. Through experience, is now wiser with much to give back to the new generation. A responsible person, still entrepreneurial in thought but not driven in the same way as they were in the early days. Someone that has found their rhythm, the days are now steady and routine. Involved in the community, probably a member of a service club. Looking to exit in the next 3 years and wants maximum return from the sale.”
So, what is all this chat about baby boomers and how do you become one?
Well you don’t become one – you are either one from birth or not. The term ‘baby boomers” arose because of the dramatic increase in birth post the world war. The baby boomer generation are classified as anyone born between 1946 and 1964. In the US that equated to approximately 76 million births.
Interestingly a recent BIG research insight found that 9% of boomers with combined household incomes over $50,000 are small business owners. That would mean possibly more than 6 million businesses in the US are in the hands of the baby boomer generation...44-62 years old!
So, as we can see, the impact on business ownership has been tremendous. These generations were exposed to revolutions of identity, culture, and lifestyles, not to mention other engagements such as war, space exploration and marketing techniques, as we had never seen before.
There are concerns that as the boomers start thinking of slowing down, and taking retirement, that there will be a tsunami of privately owned businesses that will come to market around the same time.
It is true that many are considering their options although the anticipated volume coming to the market hasn’t materialized just yet. I’m not saying it won’t happen (as we saw with the number of boomer owned businesses, some transfer must happen at some point soon), it’s just a little delayed.
There are several reasons for this. The recession from several years ago, has played a big part. As with many privately-owned businesses, the owners have their wealth tied up in the business and are only just healing the wounds and getting positive cash flow from the dark days of the recession. Many incurred extra debts to survive and so that has had an impact on the balance sheet and realizable equity in the business. It may take a few extra years to reinstate what was lost.
Furthermore, we are living longer and with that the need to have reassurance of continuing income for longer than expected. Without staying on as a consultant or some extended earnout tied to ongoing performance, the proceeds from sale, if not strategically prepared for in advance, may only keep the seller in a life to which they have been accustomed to for a few years. In which case, it may be better to figure out how to take more of a back seat and figure out a way of the business running itself.
Another delay or concern that has thrown a spanner into the works is the millennial generation are either not engaged sufficiently to have the business passed down through family, or indeed, don’t want it. Technology and relevance in the marketplace is changing at a remarkable speed and the millennials are seeing opportunity in other places.
Nevertheless… The Exit Planning Institute are projecting that over the next 12-15 years more than 8 million privately held businesses will be sold. Not all of these will be baby boomers retiring, but many will be. Either way, there will be an increase in volume which in turn may make it a buyers’ market thus reducing the prices for businesses on the market.
Proper planning and timing for your inevitable exit…whether to the next generation, third party buyer, employees or even liquidation will be essential and highly advisable to maximize what could be your greatest asset.
Deciding to sell your business is one of life’s more important and impactful decisions, and you should consider if you, your friends, family and acquaintances are ready for the journey ahead?
What brought you to this decision? Common reasons are health, burn out, or no next generation to take it on etc. Maybe your purpose has changed…children have now gone to college, maybe a parent passing or thankful of a couple of good years under your belt since the recession.
For some it could be relevance in the marketplace…Uber and other platforms are turning business models upside down and creating a lot of anxiety with business owners. Global outsourcing of talent and on demand staffing are levelling the playing field and economically providing services that cannot be competed against.
Many of the baby boomers are founders of the company they are contemplating selling and had thoughts of the next generation continuing to carry the torch and the family name into the years ahead. I know with my family, my Grandfather started the business after leaving the Police force. Eventually my father joined and I had grown up with the expectation of continuing in their footsteps. While I am in a similar business to them, I did not continue with the family business as economies and the marketplace changed. Efficiencies in ways of doing business are introduced and processes change. What seemed relevant back then might not be so much now. Technology for one is doubling every two years and revolutionizing industries.
Personality traits and motivational gifting’s can be different in the generations and don’t always lend themselves to the continuing of the family business in the way they have always been. Some children do not have the skills required to manage and run the business. It takes a special person.
“The ability to have Vision…Vision that not only presents an idea but knows how to navigate to bring that idea to fruition.”
“The ability to anticipate and see round corners…where’s the marketplace heading and how to implement adjustments to keep the company profitable and on track. “
Sometimes sons and daughters want to just spread their own wings and make an impact in the world in their own special way. It is good to have those discussions with your children to establish closure on the possibility of them wanting to take on the business and hopefully have everyone in agreement.
Look at your friends and acquaintances. Wherever the journey started in business ownership, many owners have their identity wrapped up in the business and the services that it provides to the community. Maybe some of the relationships that you have are driven by the resources that both you and that acquaintance brings to the marketplace through your business. If you are no longer able to contribute in such a tangible way, will some of those friendships start to fade? How is the sale going to impact some of the associations you belong to, will it also draw an end to those engagements?
As this journey begins, is your spouse or partner on board with the decision? For those that do not work in the business together, your spouse or partner will need to adjust to you being maybe a little bit more readily available. Which may be fine but they also will need to adjust to having your valuable input in areas that previously you have not been so much a part of. How are your days going to look as a couple?
Although it is said that as one door closes another opens, in selling your business you will want to know where you are going or at least the indication of what the next season will hold. The vacuum that may be created in not undertaking all those activities associated with your business can present a very dark black hole. With the typical adrenalin no longer going through your body as an entrepreneur and busyness of the 17 plates you normally keep spinning at any one time, this can create a vacuum of vulnerability. It is wise to take control ahead of time as to what will fill the vacuum as opposed to leaving it to chance…one thing that is guaranteed…something good or not so good will fill it. Find what your next season’s purpose is, what will the next chapter in your life hold for you.
Whatever your reason is, give clarity to it and have it readily available to recall at will. This will be your foundation to embark on the journey. There will be times of great frustration, emotions running high, seller’s remorse and other dynamics and theatrics that will come at you without warning and from all directions. It is the clarity and being able to remind yourself at a moment’s notice, why you decided to sell your business, that will keep you strong, confident, thinking rationally and passing the finish line with the greatest return and immeasurably more than you could ever have dreamed of!
How is your business currently operated? Are you as the owner involved in the day to day running of things…making sure that the i’s are dotted and the T’s crossed? Or do you have systems in place to remove you from a lot of the “IN” the business jobs to more of the working “ON” type responsibilities.
Many businesses are an extension of its owner. Suppliers over the years tend to build trusting relationships with you and prefer to negotiate and get the go ahead from you. They feel that you really understand them and your business, like no other, and it’s always been done that way. Or it’s the customers that feel that you also are the one that only “really” understands their needs and if anything has gone wrong in the past it has been because of you not being involved at some point in the process. Besides…. you have always thrown in that extra item or shaved a little off the price and that’s how it works best around here?
Do these two comments seem familiar? If they do, that is great and shows the qualities that you possess, but in the context of selling a business and transferability, it will have a negative impact both on price “beauty in the eye of the beholder” and desirability.
Don’t worry though, this is fixable and we will talk about this in the chapters to come.
In a perfect world, the exiting of our business would be planned, well ahead of time. In fact, the timing and what you want to achieve from the exit, financially and personally should have been thought of at the onset. As business owners, we should always have the destination in mind as a point to navigate the business and refer to in decisions that are made along the way.
So, timing is crucial should be planned, where you the owner are calling the shots and deciding on a timeline for maximum gain.
When we look back in time at successful entrepreneurs not only entering the marketplace but selling for greatest gain or top dollar, what common denominator seems to be significant? I would make the observation that it was all to do with timing.
A little-known company a few years prior to YouTube that launched with a similar business model only to fall into obscurity. The reason…video watching was still frustrated by poor download speeds. A couple of years later, YouTube appears, download speeds had greatly improved and a multibillion $ business emerged…. timing.
During the video rental boom of the 80’s, who ever thought that Blockbuster would cease to exist? It’s one thing to know when to get into something but it’s another to know when to get out…. timing.
Just as a surfer paddles to the ocean, is lifted by the swell and catches the wave at the perfect moment, the surfer always remembers that too soon or too late could spell disaster…timing.
In business, there is something we call the “bell curve”.
There is always a start, there is growth and then a peak will be reached. After, there is a downturn. This cycle is true whether the life cycle of the business is 1 year or 100 years. One observation is that the curve of growth and increase tends to be less inclined than the curve of decline.
In selling a business, the optimum time is just before reaching the crest of the curve. On the incline, confidence is more abundant, decisions are made without panic or fear of the future. The culture of the business and those leading it tend to convey an entity that is not bleeding so the predators cannot smell blood.
Don’t let compassion overwhelm you and let guilt creep in. Remember that while that maybe the crest of your peak approaching, that under new management the bell curve of success has every chance of starting again. Your business will provide equal possibilities of opportunity under their passion and purpose.
Be available and open to those occasions when unsolicited interest comes from a strategic buyer and with it the opportunity to negotiate at your terms and your pace.
Unfortunately, it is all too common for reasons other than brilliant strategy that the decision is made to sell. Like with many things in life, we can end up procrastinating on a decision that needed to be made and then circumstance finally pushes us into action…voluntarily but mostly forced.
When things are getting tough and the excitement is just not there anymore, you know change has to be on the horizon. Burnout and boredom do not suddenly arrive one day, more often than not the owner has seen the writing on the wall and kept suppressing it until finally one day it prompts, through a breaking event or even something not that significant, the declaration that it is time to sell.
For reasons only known to those that have truly followed their passion and put their own money on the line, the decision is still not easy to make. It can be tough to finally pull the plug and sell a business that you or previous generations before you have put so much passion and hard work into.
Often you will look back and think “was it worth it?” When you add up the hours of unpaid labor and times when budgets were squeezed and you were the first to sacrifice. Yet it gave you the opportunity to be your own boss, add to your identity in the community and the freedom to receive a few perks along the way, also to give back in ways that otherwise may not have been possible.
A business that’s on the incline of the curve tends to be an easier one to sell, all too often a business is brought to market as they have peaked at the crest and started to experience the decline.
So, what are the common events that signify you’re nearing the crest of the bell curve?
The list goes on….
Your success and legacy as an entrepreneur will be as much reflected not only on how you saw the opportunity and capitalized on it but also knowing when to close the door.
Here is a snap shot, a 60,000-ft. view of what I mean and if you read nothing else in the book and want to help another owner in the same situation as you, tear out the next few pages and pass it on!
As you consider embarking or at least exploring the idea of selling, take a good look at the journey ahead. The challenges you will face, the up’s and down’s and make sure (should you decide to sell) you believe in the process and are 100% committed until you pass the finish line.
“Business for Sale” – How you present your business to the marketplace can have a big impact on what you eventually sell it for.
There are many books out there that will give you benchmarks to value a business that in the hands of nonprofessional, can take business owners down a dark and lonely road of disappointment and frustration.
We’ve all heard figures banded about….2-3-6 x net profit, owner benefit, revenue or some other figure. If it was that easy, maybe many more businesses would sell and not the dismal, give or take, 1 in 5 that comes to market.
At the end of the day it comes down to “beauty is in the eye of the beholder”. We are very familiar with the idea of a #realtor staging your home for sale, so what about doing the same with your business and what does that look like?
We will talk about specifics a little later, however, I want you to start thinking outside of your comfort zone and creatively in ways that will present your business in its best light.
There’s probably other ways to say it but “Staging” applies to a business sale as much as residential and really is about presenting whatever you have for sale in the best light. That is where a business broker or mergers and acquisitions professionals can help.
So here are just a few of the identifiable areas that may increase the value of your business;
Perceived value in the business can come down to how it can withstand major changes that would impact sustainability.
How would losing your biggest customer impact your business? Losing one of your suppliers (or maybe you have negotiated all supplies and now only have one supplier)? Key employee leaving? Make sure that there is diversity with your customer and supplier mix and consider re-assigning some of the responsibilities of a key employee, to lessen the impact, should they decide to leave.
You truly are the superstar with big shoes to fill, however this can prove intimidating to a prospective buyer.
If the business you are selling has a bricks and mortar location consider removing those certificates, pictures of you through the years winning accolades and the many awards that you may have won that take pride of place in your office. Acquirers want to see strength in the business that will be there when they take over, not in the achievements of the owner that are in the past.
Adjusting for non-recurring revenue and expenses…. We will want to look closely at the tax returns or profit and loss statements to identify expenses that may have been incurred by you but wouldn’t necessarily be an expense to a new owner. Permissible adjustments include …depreciation and amortization. Other adjustments could be lease payments on a vehicle for a daughter in college or adjusting for above market compensation for family member employees. These together with non-recurring income deductions, will build a picture of potential income from the business.
The buyer of your business, while re-assured with previous earnings, wants to know that when you are long gone there is sufficient growth and opportunity remaining.
If all it came down to was a multiplier of a figure on a financial statement, then companies such as #Uber wouldn’t be commanding a multibillion market valuation based on the last round of investor buy in. Uber has a growth story that it can present to the market…investors are buying into what will come. What areas of expansion are yet to present themselves with Uber? How can this apply to your business? Are you in a local market but could expand to neighboring areas? Can you bring other product lines to your existing customers? Is there a growth story to share with your business?
Another area is…“How reliant is the business on you the owner?” Is it one where you have the relationships with the customers, suppliers…do employees come to you at the drop of a hat with questions and concerns etc.? If it is, you may want to consider putting operating procedures in place and look at ways to remove yourself from the hub of all activities. A business that is not reliant on the owner is a more valuable and saleable business.
You can have two businesses, both with the same revenue and net income that will sell for vastly different figures. An example of this is with two alarm companies. One derives its income from the installation of equipment and the other has income from monitoring alarms. The company with the alarm monitoring because of its predictable recurring revenue model will be valued higher than the company that operates more of a one-off transactional model. Are there ways in your company where you could incentivize, maybe through price or service? Are you able to transition some of your regular customers into this model?
These are just a few of the drivers that will impact the salability of your business. We’ll go into some of these areas a little deeper further on in the book.
Transition of ownership is going to a son or daughter and you’ve decided on when this will happen. A succession plan needs to be organized and a gradual handing over of authority implemented. While staff are not always aware of a date in the future as to when this will happen, they are never the less aware that this could be a possibility. In some inherited transitions the children may not have the total respect of the staff which can make for a rocky period. Customers and suppliers may also be used to dealing with the soon to be moving on owner. It is wise to stick a stake in the ground, set a date for transition and work towards it. After that date, there will be small fires to put out, mishaps that happen or just plain old relationships that are put out of place, but these need to be resolved by the incoming family member. They may not deal with things in the same way as you but hey, there’s a new sheriff in town and they need to establish their unique identity and you need to support them.
This maybe be the most unfortunate way to exit. Sometimes markets change and customers’ needs are no longer what they used to be. Your equipment or services may be less relevant and in demand in this ever-changing marketplace. Knowing when to pull the plug and shut up shop can be a tough, and sometimes lonely decision. In seeking opinions, it can be challenging to navigate the agendas of those you may approach. The strength and success of an entrepreneur is knowing when to play their hand and when to fold.
Liquidation will be either forced through creditors petitioning to the courts because of unpaid debt or maybe voluntarily by you.
Voluntarily is always preferable. You will have time to market the assets and hold out for the best price. With the realized funds, you can satisfy your debts and hopefully have some left over to take you into life’s next chapter.
Involuntarily will involve third parties that will start making decisions about your business on your behalf and they will expect fees. Proceeds of sale may not be what you would have obtained as timelines are different and protection of creditor’s interest is a concern of the liquidator. Suppliers will come out of the woodwork with retention of title claims if invoices remain unpaid. Net proceeds after all of this may result in you getting little to nothing out of it.
A price is agreed and it’s all cash at closing, no owner note or money held in escrow subject to future performance. A nice way to go, it’s clean and you’re on your way to pastures new and no need to look back.
Maybe you have an executive team that, if knowing that you were considering selling, maybe interested in teaming together to buy your equity. There is a great deal to be done, the transition of ownership with suppliers and customer base will probably be the smoothest. Price sometimes can be an issue if they know about the warts and all of the business. On the other hand, you may end up with an improved offer than otherwise found. Funding for these types of deal can be more readily available because of their expertise and knowledge already gained in the business. The bank may err on your side if the figures are acceptable and justifiable to cover debt service.
Letting your staff know of your intention to sell can have its challenges. Most experts would probably say not to mention anything to the staff until the checks cleared following the closing on the sale. There is justification in sharing the possibility of selling with crucial employees if there is a need for them to be involved with eventual negotiations and terms of sale.
Maybe you are not wanting to fully exit. Maybe you are undercapitalized with a need to invest in more equipment or fund continuing expansion. An investor in smaller businesses that are not publicly traded may want more control of your business in exchange for this investment. Someone must be top dog and two people on the steering wheel will inevitably lead to conflict. In considering this route, seek advice from a corporate lawyer that has experience in putting together these types of deals. These types of deals can lead to a fruitful relationship but on the other hand can set you on a journey of sleepless nights and headaches.
There is appeal to a part sale, if you are not ready to sell and see opportunity on the horizon. Also, as you consider your age and income for the future, maybe staying with the company will give you greatest return on the long run. It’s your choice…up until now you have been Captain of the ship but with other investors now scrutinizing your every move and having different visions for the way forward…life may not be so rosy.
Simply put, a company that may want to either vertically or horizontally integrate your business into theirs. Vertically, because they want to control the other components of the supply chain. Maybe they make mattresses and you make the springs. Or horizontal which indicates buying your company that is in a similar business and through maybe economies of scale, it will reduce costs.
Or maybe it’s a financial consortium looking for a better return on the marketplace for their money. Beauty is always in the eye of the beholder but these types of buyers will approach the value of your business in their own unique way. Each one will put weight on different value drivers as the acquisition will have an impact not only through your business but the others that it will be complimenting.
With businesses that are well run and have systems in place this could be an option. A lot of thought needs to be given to standard operating procedures and an operating manual to make sure that reliance on you as the owner is fully removed.
Some businesses just haven’t got sufficient cashflow to pay for an employee to replace the owner. Under new management control, priorities will be to service the debt and salaries of the working employees and when budgets need to be cut, you the owner will be first to go. When looking at the valuation on the equity you hold coupled with the return you are anticipating you need to make sure it makes sense. When you also take into consideration the risk factor associated with your remaining equity and the fact that you will no longer be running the company, it may not always work out as planned.
As you can see, there are many ways to exit yourself from the day to day running of the business, either fully or partially. In the future, we will discuss types of buyer and where do the buyers come from. Also, we will look at real examples of the different ways buyers and sellers structure deals. Surprisingly, the transition of ownership is a major concern with any buyer. Having confidence that customers, employees and suppliers will remain under new ownership can be a forceful driver into some creative deal making.
So, what can be done to make your business more sellable?
As an owner / founder, there is a good chance that the business has developed and matured from a foundation of personal principles, community understanding, cultural viewpoints, market insights gleaned through your set of lenses. Success of this business is a direct result of your vision and execution of what the business was created to provide.
So basically, in a nutshell, they can’t do without you – or so you think.
As an owner, you are undoubtedly the driving force behind the launch or acquisition of the business you›re in. However, when it comes down to exit planning, your involvement in the day to day operations will have a great impact on the value of the business…. or should I say, the ‹transferable value›.
An acquirer’s perceived evaluation of a company may be greatly impacted when there is a situation where a business relies excessively on the input of its owner without whom the smooth business operations cannot be achieved.
It can become problematic if the owners input is actually needed in say, day to day activities like supplier negotiations, employee disputes, and customer relations.
There are many processes that can be introduced and implemented to bring a perceived outcome to a desired change. The process of removing the front of stage involvement of the founder/owner can be a tumultuous journey.
Even in theory and when all reasoning points to the overwhelming benefits of a less visual owner, the process can hit roadblock after roadblock quite often even at the starting gate.
“I’ve created excellence that will lose its shine as I take a step back”…”customers that I have nurtured may look elsewhere”…”I’ve negotiated deals with suppliers”….” and this is only the tip of the iceberg…the list can go on.
However, the real curve balls to look out for are maybe not so obvious.
I know from personal experience that stepping back and empowering those around you with areas of responsibility that you may have been very much involved with, can present a dark void in your life. As owners where our business has been an extension of who we are and our identity, losing aspects to other 3rd parties can be challenging, to say the least. There are fundamental chores or tasks that had been completed that don’t always represent the long term vision. If you decide to back away from certain aspects of the business in preparation for the sale, you may find that vacuums become evident in your life.
These vacuums may have you reflecting on relationships, your purpose, and areas of avoidance that were previously suppressed. I know for me, a feeling of death overcame me, fueled I guess by the feeling of losing something.
It’s not necessarily a bad thing, as when the sale finally happens and the check is in the bank, you must face up to a new season of doing and action….so maybe it is needed preparation.
So, if there were one area of business management that would need to be in place to make this transition work and perform, without so much as a blip and a hiccup…what would it be?
An[* autopilot company, a business that is self-fulfilling is most admired by acquirers.*] An acquirer wants to know that the business has value based on its own merits and not just a vehicle of execution for the owner, in which the value of the business lies.
You should know that one of your biggest assets is your staff. Value drivers for any business like standard operating procedures and a properly written manual of operation are a must have.
This will give the impression that employees can aspire to a higher level of service by following delegated responsibility and this is a signal of a leadership team in control.
Set aside time to have your business practice reviewed if you haven’t done so yet.
[*«Beauty is in the eye of the buyer…transferable value” …as a business owner you may be the star quarterback but when it comes to selling, figure out how you can lose yourself in the sidelines and let the team shine.” *]
All arrows in the sale of your business really point to the integrity of the financials.
In any business acquisition process, the preparation and presentation of the financials will weigh heavily on the price paid for your business. Poorly kept records may prompt unnecessary thoughts in a buyer and take them on a rabbit trail of further concerns that will need to be overcome and uncertainty that may require more than just financial explanation…buyers can be an unpredictable bunch. The less confusion you can display the easier the journey.
So, what can you do?
Buyers will want to build a picture of what has gone before to help identify a trend for what is to come. Traditionally 3 years of historical income statements, balance sheets, cash flow statements, together with a year to date is sufficient, although there are some buyers in due diligence that may request up to 5 years.
We will discuss this further in the book but basically it will provide a fiscal picture of what the business will provide an owner under non-extenuating circumstances. The balance sheet and profit and loss will be numerically ‘adjusted’ to reflect the true figure of owner benefit.
Have records available to support any claims made in the statements such as bank statements and tax returns.
Be consistent in the categories used through the current and preceding years. In any valuation or buyers understanding of your business, the benefit a buyer may enjoy, when you’re long gone, will need to be clearly extracted from your profit and loss/tax returns. The tax returns may have summary classifications, wherein the profit and loss can be the source of further detailed explanation.
Buyers will be looking for add-backs, both on income and expenses. What in the financial statement did you either enjoy or incur as either an income or expense?
In a perfect world, the buyer would have most re-assurance from an audited set of books. This is where all information declared on the financial statements is verified by a third party, just like a thorough due diligence exercise. This however is a very unusual procedure for a small business mostly due to the cost and that level of outside accounting scrutiny not being required in a regular year. With larger publicly traded business and other entities that have a high level of accountability to investors or donors, then it would be more appropriate.
In the United States, there is a thriving business as it relates to storage. Storage of anything and everything. We just can’t seem to throw those “useful” items away.
In the context of a business this can mean an unnecessary ball and chain around your company’s proverbial leg.
There is therapeutic value in a clear out, not only when it’s time to sell, but this should be addressed periodically over time. This therapeutic value may not be all that apparent initially to you as a business owner, as these “things”, “comfort blankets” you have come to love. Don’t underestimate the stress that may result in this exercise and so approach it with full respect and proper planning. You as the owner may also not be the best person to review and implement all the changes that may be necessary.
Nevertheless, buyers, when they can see the wood for the tree’s, will have a clearer picture of where you are at, and what needs to be implemented or invested in to make their vision for the company come to fruition.
Something worth adding…. It is also similar to the sock that has been left on the bedroom floor that you keep walking over and never picking up…to you it’s not there but to a fresh set of eyes it could be a huge distraction.
So, what are the other areas to consider looking at?
It may look good piled up in the warehouse and you’ve always given pride of place as a value on the balance sheet, but if it hasn’t sold now and isn’t likely to in the foreseeable future, consider selling and cashing in on what value you can find. Buyers will scrutinize any inventory that is included in the sale and may not only look at it as having no value but may look at the inconvenience of clearing, dumping etc. Not only may it impact the proceeds at closing, it just doesn’t look good to buyers. If you’re selling your house, you probably will want to clear out the garage…it’s the same with a business…cluttered space never looks good wherever you are.
Is the equipment in good shape? Does it need a cleanup or a service to give it a clean bill of health? Presentation and the “doctors” report of good health will be a driver of value with a buyer.
When buyers are working on value, future capital expenditure on buying new or maintaining equipment (Cap X) is factored in. If the equipment looks rough, the mind can go to untold places assessing what may need to be invested into it to ensure future wellbeing.
Also, should you find a piece of equipment that needs replacing, maybe you can source it a little cheaper, given time and your familiarity with the industry. After all, a buyer will err on the side of caution in terms of a higher replacement cost, which in turn could impact the overall price you receive for the business.
Have a look at the processes you are following and the available technology that is out there that could make operations a little easier.
This can be a challenge as there are so many companies offering what appear to be great platforms, software only to find the subscribing part is very easy but the onboarding is more of a challenge. It may be worth bringing in someone locally, with knowledge, to help decode and discern all that is available. This journey may require an open mind as there has been some major disruption in so many areas of business that you may not be aware of. There are simply new ways of doing things! Who would have thought of UBER, Airbnb and the way they have turned their respective industries on their heads?
The plus side of taking the exploration is a view to lowering costs through employee redundancy, automation…increasing efficiency and customer response time.
Again, worth considering and if it can increase your bottom line, then it will ultimately be more $$’s in your pocket at closing!
Without customers, we do not have a business, and to a certain degree, without suppliers, that may also be the case.
As an entrepreneur building the business that you have today, any and all customers were probably well received and given the customer and levels of service that you always aspire to provide. Some of these customers have been with you for years and over time may well have offered you more business. They make a large contribution to your revenue stream.
This is all well and good but we need to look into exactly how much of your revenue stream they represent as the buyers look at this when evaluating the strength of future revenue streams.
Let me explain more…
I knew of a small manufacturer that produced socks. Business was going well, serving several customers. One of these customers was a large grocery / household retailer. This retailer was now looking at their suppliers and wanting to reduce their purchasing costs. In doing so they thought the best route to take was to identify a manufacturer and offer a large portion of their business and therefore strengthen their bargaining position.
This manufacturer was approached and offer all this extra business, was unable, or maybe too cautious to, expand and running at capacity, he decided to let go of a few of his existing customers.
Business continued to thrive and the relationship with the retailer grew…soon the retailer was asking to increase production. The manufacturer was already running at capacity and decided to stop producing for the remaining customers to meet demand of the big retailer.
Business continued to go well and then suddenly, a call came in from the retailer.
They had been approached by another manufacturer that had access to cheap labor, materials etc. and could provide the product at a fraction of the cost. Our small manufacturer could not match the price and was given notice that the work would be leaving their plant.
Suddenly there were no customers to fall back on, payroll and rent had to be met and with weeks the only option was for the business to be wound up and eventually went into bankruptcy.
The lesson here is to never allow your business to fall victim to an over dominating customer. Private Equity firms that invest in businesses as a living will look at customer concentration and many will walk away from a deal if any one customer is responsible for greater than 20% of the company’s revenue.
A buyer is looking at future revenue and the more diluted the revenue stream the greater the ongoing business has resilience to customer loss. If your business is in this situation and you are wanting to make the company as attractive as possible, then consider finding some new customers.
Supplier diversity has a similar thought process to customer diversity.
Over reliance on one supplier can leave a company too exposed to a catastrophic event should that supplier go out of business or prices increase etc. If you have developed a business model and profitability with a certain supplier, take a good look around and again, dilute this commitment and go find some others. As markets change, suppliers come and go for many reasons, your business will have the resilience to weather any storm.
It can be counter intuitive to increase suppliers or customers, especially as communications are probably easier with one, or billing is a lot more straight forward, but for some of the reasons mentioned, this area is probably one of the buyer’s greatest concerns.
When it comes to running a “tight ship”, cashflow management will make or break a business.
Buyers will look at the cash flow as the resource that will pay them a return on their investment, their debt financing, expansion and future growth.
There are undoubtedly customers out there that are good, pay well and a pleasure to deal with. There are others on the other hand that buy from you at maybe a reduced figure or with added inclusions of benefit that further drive down your margins. Maybe these customers have been with you a while and were there in the early days when any customer was a good customer, but now their relationship with you needs reviewing.
One idea is to look at what your acceptable margins are for a one-off customer and those that are regular buyers. Maybe you could lessen the impact of re-negotiating with these “not so profitable” customers by offering to maintain their “discount” if they were to provide additional commitment to you by way of a contract or terms of future buying commitment. As we have discussed…contractually committed future revenue streams are a driver of value.
Sometimes you need to introduce a proprietary tool, display, platform that complements your service or product that brings another level of commitment to what you sell.
How committed are your customers? Do they pass through irregularly or are they committed to your service and product? How do they show this commitment?
Let me explain, here is an overview of customer value as it relates to “commitment” in the eyes of a buyer from least valuable to most;[*
Whilst we are on this topic, let’s also run over the disciplines of business management as it relates to cash flow, whether you are thinking of selling or not.
I have had the “opportunity” to work with many businesses that were either in bankruptcy or subject to one of the creditor arrangements. I say opportunity because while some sadly ended up being liquidated, there were others that did not see that fate. On many occasions, we immediately sold or put a management team into place, which was pleasing to see for many reasons, not least, as it secured the future for many employees and a return for the creditors.
Having worked with everything from bars/nightclubs through to aircraft parts manufacturing plants, it has been interesting to see a pattern as to how and why some of them had reached a point of failure.
Many entrepreneurs simply underestimate the capital required to get a business up and running.
A vulnerable group are those starting or buying a cash business that has no accounts receivable such as a restaurant. It is assumed that there will be sufficient cash from day one and while there will be ‘cash’. “Murphy’s law” puts the odds on that there will be other surprise drains on reserves in those initial months.
There are a few schools of thought with how much operating expenses you should have in reserve…. some say 3 – 6 months. Others will suggest forecasting cash requirements for the 12 – 15 months by deducting projected sales from expenses. For an existing business, it will be a little easier with historic information. For a startup, remember it’s not an exact science but be conservative with predictions, particularly with sales. Expenses are a little easier to anticipate as many items are non-variable and items such as payroll and rent will form a large part.
Too much available funds can bring failure to a business…how can that happen? Decision making can become clouded, confidence can be increased with this cushion of cash. Projects that maybe wouldn’t have started on a lean budget are given the go ahead, moving to unnecessarily larger premises and hiring of extra staff that could have waited just those few more months. Maybe the business needs the boat to entertain their clients…. only to find one month that sales take a nosedive and there isn’t enough cash to sustain the committed expenses of the company. Sadly, it is all too common for many to live paycheck to paycheck and this mindset follows on into the business world.
Growth and expansion in a business is what most business owners look for, but this must be under controlled direction from the leadership team. Indications that there is trouble brewing are orders not getting fulfilled, stress with staff, quality with service or product, bills (or even worse) salaries not getting paid.
Having the infrastructure to expand is one of the value drivers of your business. Standard operating procedures need to be in place and adequate funding to cover cost of goods/service of all the new business before invoices are paid. Staffing is a large budget item for most businesses and many are taking time to re-think projects and having staffing available only when required through effective outsourcing.
You’re running a for-profit business and you need to get paid for your services in a timely manner. If you don’t, the bills don’t get paid and you might as well pack up shop.
I have always been amazed at the number of businesses that are facing bankruptcy that have a “hidden” or should I say “overlooked” stack of uncollected accounts receivable.
As a business owner, it is sometimes difficult to, on the one hand, build the relationships with customer’s secure orders and then suddenly have to wear another hat to pursue overdue invoices. You will give yourself excuses, the customers know how to pull on your heartstrings and appeal to your sympathetic side. Understandably there’s the fear of losing future orders from the customer, but nevertheless the account needs to get paid, otherwise you are just a pawn in their drama.
Be disciplined with the A/R, he who is the squeaky wheel will get paid. Consider dedicating someone other than the business owner to this task and have a policy that if unpaid for a set period with no justifiable reason, that it is outsourced to a collections agency.
What do you know about your customers’ loyalty? Do you remember when you last ran a customer survey? Do you think products and services of your business will be confidently recommended by your customers?
These days’ regular surveys called the promoter score are used on companies that are part of the portfolio of private equity firms to get customer feedback.
In using this method, a scale of 1 to 10 is used to ask customers ‘how likely are you to recommend us as a company to others’, with 1 meaning ‘not at all’ while 10 means ‘absolutely’.
Results from the survey are divided into three parts, with the ‘detractors’ placed at the bottom, the ‘passives’ in the middle, and the ‘promoters’ placed at the top. And in order to arrive at a final score for the company, the detractors would be taken away from the promoters. With this method, the score serves as a prediction for the company’s success in the future.
Many of the fastest growing companies today such as Eventbrite, are vigorously using the responses from their surveys to constantly improve and focus on what’s important. Private Equity firms regularly review their portfolio of companies to provide insight as to what’s going on and whether a business needs tweaking or should be in their investment group.
Customer feedback is predictable and therefore a true influencer to where you›re going as a company.
You shouldn’t be surprised if a buyer decides if your business is desirable by measuring the impact after conducting a similar questionnaire on your customer base.
[*“The perceived value of your service or product is dictated by your customer….no customer, no value” *]
“It should go without saying, if the person who works at your company is 100 percent proud of the brand and you give them the tools to do a good job and they are treated well, they’re going to be happy”
If you look after your employees, they in turn will take care of the customers. Without customers, there is not a business to sell.
Having said this, it is important to have the right people in place and in the right position.
Just because you have grown the business with maybe family, friends, others that have faithfully been with you for years and you have not had a problem, it doesn’t mean a buyer will look at it that way.
Make an assessment, review all staff from an organizational viewpoint. Are they in the right positions, do they reflect your business, the brand and have they the skill set for the task at hand? Look closely at responsibilities or lack thereof with certain people and ensure no overlaps or gaps in those responsibilities. Invariably if there are areas not covered, these tend to be areas where you the owner seems to shoulder these responsibilities or automation of the process is frustrated by manual decisions.
In the early days of the startup it was all hands-on deck, muck in where needed. That is fine for you as you have a grasp of all the moving parts and sometimes when growing a company, thinking “on your toes” is an essential gift.
However now it is time to consider selling to a new owner that is not privy to what has been but looking to what could be.
In an earlier chapter, we talked about this as being a driver of perceived value in a business. Clearly identifying job responsibilities through a job description will provide a buyer with a framework in which they can insert or place areas of new expansion and the future they see in the business. In doing so, financial impacts can be assessed more easily with less degree of error which possibly may reflect in a higher value to your company.
If you want to maximize the value of your business to provide for your next venture or season in life, then slackers need to be identified. Slackers may come in the form of family members or under qualified employees. Maybe you have carried an employee and challenged them less or given tasks of less importance because they have proved in the past that they just can’t handle it. They may be nice to have around or that “comfort blanket”, but if they are a drain on cash flow and sucking air without rewarding you with input, then they need to be taken off the profit and loss statement, which may mean letting go or moving to a part time position.
In valuing businesses, a lot of the time we work on multiples of “seller’s discretionary earnings”, “EBITDA”, etc and so for every $$ that is taken on an expense that can’t be added back, invariably that could mean $$$$$$$ to what you end up with in your pocket!
Now that the employees are in the right place in “the bus”, with clear job descriptions and those that were not providing value, have been either let go or given part time jobs we can talk about “employee needs”.
Without going too deeply into “Maslow’s Hierarchy of Needs”, I have never the less provided the 5-stage model of human needs below. Many business owners assume that money and financial reward is the “bee all and end all” with employees. As we can see below, it is not the case.
When preparing to sell, speak with your employees on a one to one basis, ensure that there has been nothing overlooked that can be simply rectified…maybe as much as recognizing them for good work in the past or maybe the employee is not aware of health coverage incentives or retirement contribution programs that could benefit them.
When buyers are in the due diligence stage and maybe meeting with a few employees, how they act and reflect on your leadership will be a driver of value.
These conversations need to be a part of the company’s policy and be had with employees on maybe an annual basis together with an overall review, whether or not you are considering selling.
In this day of the World Wide Web, access to information, and having an online presence is important not least when you decide to start marketing your business for sale.
Often when buyers have seen a business for sale, made inquiries through the broker, signed the confidentiality agreement and received an initial disclosure on the business, one of the first things they do is search the business name. It is important that when they do, your business is represented well.
I recently had a business that dominated their market within a small regional area, the owner benefit was good, and business had been growing year after year. Unfortunately, down the road there was a competitor a fraction of the size, with far fewer customers but had recently invested in beefing up their internet presence. When searching this type of business, the competitor would come up.
Despite receiving many inquiries on the business that was being offered for sale, a common perceived concern and suspicion from the enquirers was that they were getting out of the business because there was a new stronger player in town. The competitor gave the impression on line that they were bigger, better and taking the marketplace by storm.
Whether we like it or not, the internet is here to stay and people turn to it … so when deciding to sell your business, consider your internet presence. Social media, web site, blogging, add words etc. …and if it means outsourcing it may be a worthwhile investment!
So, what does the sales process look like?
Well you’ve got this far and are maybe ready to pull the plug and get the sales process going.
As you look out there and search the web, there appears to be many businesses for sale. Unfortunately, there is no rhyme or reason to some of the listing descriptions and values. That is not saying, of course, that hidden among them all are real comparable and genuine businesses that would be worthy of consideration.
Do not dismay or get sidetracked down some rabbit trail as you compare your business to the others. Unfortunately, statistics in business sales, those that close, are dismal. As many as 70-80% of businesses that are listed for sale will never sell and left to either remain in the current owner’s hands or liquidated.
As you have come this far in your decision to sell, I would highly recommend doing your research and engaging a competent Business Broker or M&A professional. We have talked about how the sales process will be demanding and needing to keep your hands firmly on the steering wheel of the company to get through to closing with it performing on all cylinders. But that’s not all…bringing the business to market, understanding its potential value (to various types of buyers), ensuring confidentiality, and qualifying of buyers takes experience.
In these initial steps the intermediary will want to sit down with the seller and get an understanding of the business and do his or her due diligence ahead of time. Most successful business intermediaries believe in the businesses they are selling and educate themselves with all relevant aspects. This is important because buyers are suspicious and financial statements will tell one story but often they will look to the agent for signs as to whether they think their assessment of the business is true and seek out as sense of transparency.
So, what documents will you need to gather?
With most smaller businesses that come to market, it is the assets of the business that are being sold. If there is a corporation, is will usually (but not always) remain in the hands of the seller. There are a couple of reasons for this, mostly removing potential liability from activities that may have occurred prior to new ownership. There may also be tax advantages or roll over benefits that the seller may also want to hold onto. There are situations where the selling business has approvals or contracts in place with government entities or school boards, for an example. Some of these run annually or longer and may have a criteria of minimum length of time in business. In which case, there would probably need to be a stock sale.
How you present your business to the marketplace can and will have a big impact on what you eventually sell it for.
There are many books out there that will give you benchmarks to valuing a business that in the hands of the uninitiated or nonprofessional, can take business owners down a dark and lonely road of disappointment and frustrations.
Benchmarks are almost like a tangible virtual driver of value. You can see through the comparison to other sales in your industry that the market feels a certain multiple of owner benefit. Unfortunately, price and desirability are driven by some other, not so obvious drivers.
As an owner, take a step back from the business and ask yourself “would I buy this business?” Knowing what you know now, what makes this business appealing, what in the future are the opportunities and what would I change? I know we all think our business is unique and, with more time, more money etc., we would of taken advantage of this that and the other.
The internet is littered with thousands of businesses for sale that will never find a buyer.
You only have to look at or one of the other emerging DIY platforms to get an idea of how many are out there.
When “subjective” plays into so many steps in identifying the value to a business…it’s no wonder there’s so many that remain unsold. Selling a business can be a very frustrating exercise at the best of time…. there are several reasons as to how this “subjective” view can be impacted reason.
One if not the most common reason why businesses don’t sell and explanations from buyers as to why they haven’t bought is that they are simply overpriced…. but where does the overpricing come from?
Overpricing in the eyes of the buyer can come from a “the numbers just don’t make sense”, the investment expected at acquisition will not provide either an attractive rate of return or sufficient to service debt incurred. (Small business administration has good guidelines)
Maybe it’s the insecurity driven by lack of confidence in the business because of some other drivers that play into the mind of an interested party, which we shall discuss later…
The process of valuation can be as complicated and involved as your purpose dictates. Larger acquisitions can be driven by analyst reviews, financial models, discounting future cash flows, under developed real estate, patents, intellectual properties etc.
For the purpose of this book and to give an overview, we really look at current cash flows and assess “Fair Market Value”;
“An estimate of the of a , based on what a knowledgeable, willing, and unpressured would probably pay to a knowledgeable, willing, and unpressured in the .”
There are, however, starting benchmarks for arriving at a valuation and for many, it’s a multiple of income ……but where do you find this figure? A lot of business owners are concerned that it would be the net profit on their Tax Return. For most, that would not be a true reflection, as owners, with their tax advisors will use every available accounting method to keep net income to a minimum. So maybe the net income on the profit and loss statement? This can also be distorted as there are many permissible expenses through the business that reflect the current owner’s necessities but may not be so necessary for a future owner.
An acceptable foundational starting point however, before applying any of the recommended multiples, is to see what the business can provide in real benefits to a potential buyer…. this process we call by different names but all have the same purpose… “Recasting financial statements”, “normalizing” or “adjusting”.
There are guidelines out there for how we approach this exercise and as most of our financed sales through banks happen because of the SBA (Small Business Association) involvement, we recognize that their standard is a good place to start.
We will look at the tax returns and profit and loss statements for the previous three, sometimes up to five years and current balance sheet. We then look through the financial statements and “normalize” them.
In smaller companies, we are looking for the “SDE” ‘seller’s discretionary earnings’ or ‘owner benefit’. SDE tends to be used in owner operated businesses. This means, we look at expenses that have been incurred by you, the owner, which may not necessarily be experienced by a new owner. The purpose behind this is to see what income after paying the owner will be left to service debt incurred with the purchase and/or a return on savings also used withdrawn to assist in the purchase.
This could be, excessive travel, meals and entertainment, cell phone for a family member in college, 401k contributions, insurance for a personal vehicle, company boat, one off legal fees and the list goes on. We will also want to take into consideration the owners wage and normalize any excessive wage paid to a partner that also contributes to the business but could be replaced by a lower salaried individual.
In larger companies that are not used so much as an extension of the owner’s lifestyle we still will want to normalize but first will identify EBITDA – (earnings before interest, tax, depreciation and amortization).
The idea is that we will want to correctly scrutinize the financial statements and compile a list of all conceivable add backs as this will have a major impact in determining a value to the business. The more the add backs, the higher the value.
Example: Owner receives officer compensation of $100,000, then this would be added into the seller’s discretionary earnings.
Example: Spouse/partner receives $75,000 compensation for a position that would receive an industry standard compensation figure of $45,000, then $30,000 would be added back to the seller’s discretionary earnings.
When there is a mortgage, the repayment on the mortgage is removed from the equation and the appropriate market rent in entered into its place and then as before, you would make adjustments.
The list goes on and it is critical to go through the financial statements line by line and look closely from every angle to see whether any items would be recurring in nature or applicable to a new owner. Again, an experienced business broker will be able to scan these documents and reveal items that maybe are not so apparent to you.
For every dollar “$” added back can represent multiple dollars “$$$$” at the closing table!
Understandably, one of, if not, the greatest concern for any seller is confidentiality. Relationships with employees, customers and suppliers are often built on trust. This trust did not come overnight. It often has slowly built and developed over the long haul of showing up, and doing what you say you will do. Also your involvement in decisions and for many leaders, providing an air of reassurance that you are in charge and the buck stops with you.
In deciding to sell, there is anxiety that these trusting relationships may be undermined if they find out you are selling and continuity of relationships will be compromised.
In the real world, it is difficult to keep the sale completely confidential, especially if there is not a buyer waiting in the wings. When businesses are brought to the market place, brokers will use different approaches but for the most part it would look something like this.
After receiving formal instructions to sell, the broker will prepare a single page summary of the business. It will be non-geographic specific so as to not give away location. Traditionally included is a summary of the last 3 years’ revenue, income, expenses and anticipated owner benefit. There will be an executive summary of the business to draw attention to its main selling features. So really a very broad, high level summary of the business. Brokers are very careful not to cut and paste descriptions from the seller’s websites or literature that, with a simple search of the internet, would lead an inquisitive person to identify the business for sale.
This teaser will be the simple document that will accompany advertising in the trade sites, sent out to registered buyers and other referral sources that the broker may feel will stir up some interest.
Interested parties will then respond requesting further information. While buyer qualifying is not an exact science, a good broker will have the buyer jump through a few hoops before releasing anything further.
With corporate buyers, this process will be similar, at this stage we are trying to qualify the buyer that the business as we know it could be a fit for what they are looking for. Also, that they are not just competitors’ fishing for information and that they have access to funds, one way or the other.
Some brokers at this stage will also run the information gathered on the buyer past the seller, just to make sure it’s not a nosey competitor that they know about.
Any buyer that is genuine and has every intention of following through with a purchase of a business should the right opportunity present itself, will have little objection to providing the information required. Those that don’t are not serious and will join the ranks of the many thousands of other tire kickers that waste everyone’s time.
That is a good question. For main street, under $500,000 in market value, buyers come from all walks of life.
If you were to look over all the businesses that sell, particularly the smaller ones, and then take the buyers, many buyers end up buying a business unrelated to the “space” they had originally expressed interest in.
There are many that are retiring from corporate America that a decade or two ago would have been age appropriate. However when changing seasons at 55 plus, many are seeing years of retirement and the income required to fund the 20 -30 years ahead.
It’s a little ironic as we are talking about baby boomers and exit strategy but never the less the very buyers that are active in this market are age peers of the baby boomers!
There are of course younger buyers that have been laid off or always wanted to go into business for themselves but maybe lack what it takes for the initial launch phase.
Both buyers are not always basing 100% of the decision on the profit and loss. Of course, they need to see cash flow but lifestyle and location can play a big part. Invariably there will be spouse and other family considerations.
Many businesses that are on an expansion drive and recognize that customer acquisition costs or new territory expansion is risky and costly, opt for a strategic acquisition.
Horizontal acquisition is where the acquirer is already in the prospects business and serving similar customers. Maybe they already have operations in administration or production that has capability for extra workload. Value to these buyers in a lot of cases is different than a sole acquirer with no existing business. Synergies in operations may result in a reduction in operations expenditure ratio and therefore they see extra margin for debt service or profit for further expansion.
Vertical acquisition comes into play when the acquirer feels the subject company will compliment what they are doing. Maybe not already manufacturing the widgets but supplying materials for the widgets. Again, operational costs may be positively impacted if they were to control material supply. Value to these buyers is also different than the sole acquirer.
These firms are on the hunt for opportunities that will bring rewards for their investment vehicle.
Many times, owners do not want to sell but release some equity and take more of a step back. Private equity firms thrive in these situations and very often will have experienced people to bring on board and help with the future plans of the business. They have a time frame that they will want to work with and need to continually generate rates of return to reflect the investment.
If it’s a case of selling up completely, they will also explore this option with you and as experienced deal makers, may present a buyout that works best for capital gains and other fee exposures.
Then there’s the Overseas Investor
There are 3 main categories.
Throughout the United States there is much talk about the high number of overseas investors that come looking for businesses to buy. Selling main street ($500,000 or less in value) businesses to an E2 Investor is often a great option.
Popular choices for these buyers, believe it or not, are anything and everything. It’s not so much whether it’s a restaurant, lawn maintenance, home help, towing company, private investigation agency, printing business ….We will see below that what the business does is not always the driving force but what the business offers, that is behind the decision to buy.
The investors tend to be well funded and willing to consider a wide selection of business types. The buying decision tends not to be so much on what the business does but whether it meets the criteria of the US visa issuance, has sufficient cash flow to provide for the family and provide employment.
Not everyone, only those residing in treaty countries can apply for an investor’s visa.
Processing times vary from country to country. In the past, it was common in the UK for the application from start to finish to take 6 months+ but this time has now been greatly reduced.
The amount of the investment in a business needs to be substantial and controlling of the operation. For those who are establishing new start-ups, the investments must be significant enough to not only start but also operate the business.
USCIS have made the process straightforward, there are online forms that the investor will use to complete summarized details of each of the family members, addresses overseas, and details on the business they want to buy etc.
With overseas investors, a completed business plan will also be required. The business plan will need to effectively prove that the business they are investing in will generate the adequate amount of income to support the applicant and all dependents while staying in the United States. The business plan cannot be based on a business that is marginal.
They will need to illustrate to the US Embassy that the business is real and compile a thick folder containing documents such as, tax returns, more detailed financial statements (profit and loss), copy of any property leases, and utility/telephone paid invoices, to show that the business is truly in existence. The investor will also need to provide a paper trail proof of their source of funds…where did the money come from to buy the business?
Investors will also need to provide proof of their intent to return to their country since the E-2 investor Visa does not provide a path to citizenship.
The E2 Visa is issued for an initial term 2-5 years and then be renewable thereafter, mostly for 5 year terms. As long as the business is providing for the investor and dependents, creating employment, then the Visa in theory can be renewed indefinitely.
Once all this is compiled, the investor and spouse will need to go through an interview process at the US Embassy which is required for most individuals applying for a visa into the United States.
From a seller’s perspective, there are many benefits to an overseas buyer. They tend to be well resourced and as soon as the negotiations have taken place and the application for the visa is proceeding, then they are pretty much committed to buying the business with very few buyer remorse issues.
The L1 Visa is what is called an intercompany transfer visa. Basically, a business owner from a country that has offices in the United States or wanting to expand their business into the country, can apply for a L1 visa for the transfer of qualified employees.
The transferring employee, in many cases the business owner, has to have held a managerial or executive position for at least one consecutive year in the previous 3 years.
Maybe you own a business that has 10 or more employees that without a capital injection to take it to the next level could be facing trouble times.
Or is it time for you to exit your business and hand the reins over to a new younger enthusiastic set of eyes and ears they will come in with fresh ideas and restore the company back to its former glory?
There are a number of inviting countries out there want to attract high net worth individuals. The United States is still extremely popular destination for overseas investors. So if they want to spend time in the United States under our current employment encouraging Visa system and are a high net worth individuals then the EB5 investor visa program would probably suit.
Take the Mid-West Coast of Florida, they have experienced a tremendous amount of new construction. Wonderful planned communities such as[+ Lakewood Ranch+], the new[+ University Town Center+] shopping mall, and National Rowing Association of America International Rowing destination at[+ Benderson Park+]. There are some, if not the best beaches in America at[+ Siesta Key+]. We have the world-renowned[+ IMG Academy+] for Elite Sports people, global corporations such as[+ It Works+], (famous for Disney On Ice and monster trucks), and numerous inquiries from hotel chains that are looking to develop in the area.
Not surprisingly with the quality of life they are experiencing in this and many other region’s in the country, there are growing numbers of people from all corners of the world that want to share in what we get to experience on a daily basis.
So, let’s give you a brief overview as to the EB-5 investor visa.
Entrepreneurs and their spouses with any unmarried children under 21 are eligible to apply for this visa. They need to make an investment into a commercial enterprise within the United States and plan to either create or preserve 10 jobs of US citizens or legal permanent residents.
The applicant needs to demonstrate an investment of $500,000 to $1,000,000. The lesser figure can be dependent on factors as to whether the geographical location of the investment is in a TEA (Targeted employment area) high unemployment or rural area. A targeted employment area is an area that is experiencing unemployment at least one hundred and fifty percent of the national average rate.
The troubled business is an entity that generated a net loss during the last 12 - 24 months, with the USCIS (United States citizenship and immigration service) deeming that the loss for this period must be at least 20% of the troubled businesses net worth prior to the loss.
The 10 jobs that need to be preserved or created refers to a position of 35 working hours per week per job. If there are two part-time workers with a combined 35 hours, then that would be deemed as one job.
Another popular area for the EB-5 investors are in what’s called Regional Centers. These tend to be very much larger projects where the investor intends only to have a passive involvement, an example one of these is the Marriott Hotel at LAX.
There is an old English saying, “many a slip twix cup and lip” and that goes for the sale of any business but with a good business broker working alongside an immigration Attorney, many “un-foreseens” can be “foreseen” at the outset and that greatly increases the chance of a sale going through to a satisfactory closing.
When it comes to finding buyers, one thing that I can be certain of, is that if the business is presented well, financially it makes sense and is appropriately priced, then there will be no shortage of interest.
Word of caution…. business brokers and M&A Intermediaries bring value to the table for 2 reasons.[*
So how do the buyers tend to fund an acquisition?
Well for the most part it depends on where the buyers come from. For the purposes of this book, we’re really looking at transactions that are typically anywhere up to 5 million dollars.
Overseas buyers that are coming here on an investor visa program, mostly the E2, will tend to be fairly well resourced and bringing funds from their home country. Funds may have come from selling a business, the family home or retirement savings. Borrowing for these buyers in the United States is for the most part out of their reach so they tend to close with 100% cash at closing. Although the USCIS does not require 100%, the buyer never the less needs to show that they are making a substantial investment.
Other popular routes for Stateside buyers is to use their 401k. I’m not a financial advisor and so independent verification would need to be given to anyone reading this book that wants to explore using their 401k. There are advantages to it and for many the only readily available source of saved up funds. There are agencies that have experience with this new form of packaging and options to use as collateral.
By far the most popular source of funding is through the SBA – the small business administration program. Unfortunately, many main street banks, although they market how friendly they are to the small business owner rarely finance unless they can secure it on something tangible.
That is where the SBA jumps in.
The SBA Program is designed to underwrite the loan a bank makes to limit exposure. They will consider insuring loans on businesses with or without real estate and with or without equipment, and in some cases just on cash flow. It’s an interesting program and certainly makes it possible for many businesses to sell. If it were not for the SBA program, business sales as we know it and in the quantity, we are seeing sold, may not exist in such plentiful numbers.
The SBA will look at cash flow, the assets of the company and also, just as importantly, the buyers resume. Commonly, the SBA Program can provide up to 80% of the funding on a business with a 20% input from the buyer. In some, if not all cases, the SBA will allow the seller to fund 50% of the buyer’s deposit by way of a note. The seller will not be able to call in payments or interest on the note for at least 24 months. When you look at the sale of a $300,000 business where the seller can get $270,000 dollars at closing and then just give a note for the balance of $30,000, the overall exposure to the seller is reasonable. In the size of transactions such as these, without the SBA it’s not uncommon for a seller to provide 40 - 50% owner finance and thereby expose themselves to the possibility of many sleepless nights unsure as to whether the seller will make a go of the business and pay them all the monies owed.
Earnouts are common where a buyer is concerned, that post closing, there is a good chance of customer attrition or an impact on future business through no fault of the lack of incoming buyer’s management skills.
Most earnouts involve the seller staying on in some capacity. Maybe there are concerns that existing customers would be too shaken up if there was to be a new owner suddenly. Staying on doesn’t mean 9-5pm, 5 days of the week. It could be to come in a day or two or maybe just be available at the end of the phone for a period just in case there are queries.
Because the very nature of an earnout means that there are delayed payments still to be made by the buyer to the seller, in the interest of preservation of funds yet paid, the seller would want to keep a close eye on activities.
Whilst it seems straightforward, negotiating the terms can be quite tricky. How do you compensate for loss of business, on revenue or profit? Also in any sale of business, from my experience, there can be a “new owner” adjustment and it is not uncommon for 20% of revenue of profit to be lost in the first year or two. It doesn’t matter how proficient the incoming buyer is.
An example would be a chiropractor’s, where there may just be one doctor with 300 patients. Another doctor comes in with a completely different personality and way of patient care, just as competent but a different way of going about things which some of the existing patients may not like. Thus, some leave. It would be in the interests of the incoming doctor to negotiate something with the seller to incentivize and ensure a smooth transition of patient numbers. As you can see it can be dicey.
Another real-world example was with a seller to agree to 50% at closing and the balance by way of a balloon payment at the end of 12 months. The seller agreed to stay on part time at an agreed wage and be available at all other times by phone, should there be any customer issues. The seller agreed to stay on as an officer of the company to reassure all concerned that they were still very much involved and also to comfort the insurers of the company. The buyer also proposed to share the net profits of the company with the seller at the end of the 12 months as another incentive. They used the budgets for the previous year as the accepted expenditure levels. If the buyer did not use a budget, let’s say for ‘marketing’, any funds left over could be used on another category. In order for the buyer not to have the ability to rack up unnecessary expenses to zero out the profit, the agreement laid out that if the buyer wanted to double the ‘marketing’ budget then it would come out of the buyer’s share of the profit.
When brokers meet with sellers and the part of the conversation comes up “would you consider owner financing, or at least part?” most sellers will say no. I understand this and probably during the initial conversation it is not the time to discuss this. After all who would the seller be lending to? We don’t know. It is not until we have qualified a buyer, met face to face and seen the ‘whites of their eyes’ amongst other considerations, can a seller start the journey of considering financing.
If the buyer does not have access to the SBA route and can come to the table with less than expected for an all cash close, then owner finance may at least be considered.
There is no ‘one size fits all’ and it can be down to the creativity of those involved in protecting the interest of the seller to figure a way through. Consider 1st liens on unencumbered property. Maybe placing a premium on the sale price to underwrite the increased exposure of risk. What about staying involved in the business as a pay-rolled employee (although that’s easier said than done, conflicts of managing styles can turn relationships sour very quickly). I’ve even seen it where the seller keeps a tight rein on the finances and stays on as bookkeeper, thereby ensuring that they are first in the monthly payout.
While you may not like the idea of owner finance, you can work it to your favor or at least secure your interest and compensate yourself for the added risk.
“Selling your business… Minimizing the “ouch” of Capital Gains”
Not wanting to dwell on this subject too long as there are professionals out there to guide you through the complexities of capital gains, however this is a recurring point of conversation and concern. If this is not thought out very carefully and advice sought from either an experienced Accountant / Tax Attorney or Financial Planner, it can result in quite a shock on the day of closing.
Many of you are familiar with the “1031” exchange that is used by real estate investors to defer capital gains taxes.
For those selling their business, another option to explore with your advisor is the Inland Revenue Code 453 exchange. In essence the seller “sells” to a “principal” (trust). The structure of how you withdraw proceeds is set out at the beginning and for what period of time (this is tied into the seller’s personal tax strategies). Most principals will not charge fees as they receive income on the funds invested over and above the interest that the seller is receiving. The seller may decide to have partial funds at closing, with the balance going to the principal. It is considered estate planning friendly, for example…should the seller not want their heirs to have access to all the funds on their passing, it can have a protection plan built in to avoid this. It should be noted that the 453 is illiquid and should the seller require access to the funds before the pre-agreed termination then there will be penalties.
Once again, seek guidance from a professional tax advisor that knows your situation and has sufficient knowledge to direct you along the path that is best suited for your plans for the next season in your life.
Thank you for taking the time to hopefully read the areas in this book that are of interest to you.
The baby boomer generation is a truly remarkable generational group that controls most of the countries privately held enterprises. The wealth that this represents is staggering and the transition or succession to the next generation over the next several years will be interesting to watch.
I will be here together with many other professionals that have a passion for small to medium sized enterprises to help and guide owners through to a successful exit of their business.
Those that I have professionally had the pleasure of meeting with, learning from and been a mentor or mentee, that love this business will always make themselves available to answer any questions, concerns and “what ifs”.
The decision to sell a business is rarely made overnight, it can be a process, sometimes very drawn out. It is not uncommon to initiate conversations with a broker a year or two in advance. Presentation of the business is one area, but invariably, as we talked about, there are family members and other stakeholders that may need to get onboard.
Don’t leave the decision to exit until the last moment just when you’re entering down turn of the “bell curve”, bring onboard a professional as early as you can and in that way you have a greater chance of captaining your ship into the port of greatest reward!
Are you a business owner and Ready For Change ? Are you looking for a way out, so that you can begin to relax a little? Do you have a business you’re thinking of selling? Do you need some help in achieving your goal? For many business people, the step of selling the thing you built from scratch and poured so much of your time and effort into, is one of the most difficult you can take. But the reality is that many business owners will have to take it one day, for a variety of reasons, and this is where Ready for Change can help you. This amazing book looks at all aspects of selling your business, from the day you make the decision, to the day you hand over the keys. With in-depth and well-informed chapters, you can begin to answer all the important questions, such as: • Are you ready • Is your business ready • How do you know when it’s time to sell • The ways you can exit your business • Getting the financial side in order • Valuing the business • Where to find the buyers • And much more… Selling your business can be a huge move. But with the right help and advice it can work smoothly and efficiently. Ready for Change provides you with that helping hand in those tentative first moves. Get your copy today and start preparing your business for the buyer of tomorrow!