Selling a business is more than a big decision, as it is also quite complex. Finding the right buyer for a business is at the heart of the matter. In the recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons outlines that selling a business is a multifaceted process with a lot of moving parts.
A central variable for those looking to sell a business is to have a coherent and well thought out exit strategy in place. She points out that at the top of your to-do list should be selling your business the right way, and that means having a great exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
Another key variable to keep in mind is that, according to Gibbons, only an estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners, who usually have a large percentage of their wealth tied up in their businesses, are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
This article points to author Michael Lefkowitz’s book “Where’s the Exit.” This book outlines what business owners need to do to get their business ready for their exit. Updating your books, ensuring that a good team is in place and ready to go and taking steps to “polish the appeal of your brand” are some of the important topics covered.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Mentioned are three key variables that must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
In her article, Gibbons supports the fact that working with a business broker is a smart move. Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.
The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make. Buying a business can lead to great financial success or great financial failure. This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.
In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business. The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability.
Appeal Vs. Viability
Not surprising, the most important variable for most prospective owners is that the business is indeed viable. Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster.
As Carins points out, “Do you want to make money or do you want to fulfill a dream?” Sometimes those two variables can intersect, but not always and not often. In the end, it is vital to know whether a given business is, in fact, potentially lucrative.
However, as Carins points out, it is also important that you choose a business that you will enjoy. Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative. Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.
Considering Hidden Costs
The second factor that Carins looks at is the issue of “hidden costs.” One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook. Due diligence is amazingly important. For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.
The third factor examined in Carins article is “Getting a second opinion.” For Carins, getting a second opinion is actually linked to due diligence. He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well. Additional opinions can help one see angles that might otherwise be missed.
Again, buying a business is complicated and will take up a good deal of one’s time and mental energy. Your friends and relatives, understand your personality and your wants and desires. Their input can be particularly beneficial.
Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.” Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.
The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”
Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.
Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements. Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.
Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest. In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.
Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.
Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced deal-maker. Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .
The facts in the above story are true!
The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney.
If you’ve never bought or sold a business before, then the factors that drive and influence business valuations likely seem a bit murky. In a recent Divestopedia article from Kevin Ramsier entitled, “A Closer Look at What Drives and Influences Business Valuations,” Ramsier takes a closer look at this important topic.
Business brokers and M&A advisors play a key role in helping business owners understand why their business receives the valuation that it does. No doubt, the final assessed value is based on a wide array of variables. But with some effort, clarity is possible.
In his article, Ramsier points out that “value means different things to different buyers” and that the “perceived value depends on the circumstances, interpretation and the role that is played in a transition.” It is important to remember that no two businesses are alike. For that reason, what goes into a given valuation will vary, often greatly.
Looking to EBITDA
Ramier points to several metrics including return on assets, return on equity and return on investment. Another important valuable for companies with positive cash flow is a multiple of EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.” EBITDA is widely used in determining value. On the flip side of the coin, if the company in question has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.
Primary Drivers to Consider
Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation. In total there are 25 different variables listed, which underscores the overall potential complexity of accurately determining valuation.
In the Primary Drivers of Valuation list, Ramsier includes everything from the size of revenue and revenue stability to historical and projected EBITDA as well as potential growth and margin percentages. Other variables, ones that could easily be overlooked, such as the local talent pool and people training are also listed as variables that should be considered.
Support for the Business Owner
The bottom line is that determining valuation is not a one-dimensional affair, but is instead a dynamic and complex process. One of the single best moves any business owner can make is to reach out to an experienced business broker. Since business brokers are experts in determining valuation, owners working with brokers will know what to expect when the time comes to sell.
Before you begin your business, you should be thinking about how you will hand that business over to someone else. No one runs a business forever. Whether you sell your business or let a relative inherit it, at some point you will need to step away.
When you finally do separate from your business, it is critical that you are certain that it is worth handing over. In his January 2019 article in Forbes magazine entitled “Make Sure Your Business is Worth Handing Over,” author Francois Botha dives in and explores this very topic.
In this article, Botha emphasizes that family businesses should not “fall into the trap of prioritizing job creation for their children.” Instead, that the priority should be to perpetuate the business. Botha cites the co-founder and chairman of The Leadership Pipeline Institute, Stephen Drotter, who feels that the main goal of any business needs to be its suitability.
Drotter established five principles designed to assist family businesses as they seek to prepare for succession. The first principle is to “Identify and Fix Your Problems.” Current ownership should deal promptly with any business problems before passing a business on to a new generation.
The second principle Drotter covers is to “Adjust Your Management to the Strategic Evolution of Your Business.” Businesses evolve from the creation of a product to sell to focusing on sales, marketing and distribution to finally addressing a plateau in sales which facilitates the need for multi-functional management.
The third principle cited by Drotter is “Talk to Your People About Them.” In this principle, communication with employees is key. Getting to know and understand employees is vital.
“Be on the Lookout for Talent Everywhere,” is the fourth principle. There is no replacement for skilled and motivated employees, and you never know where you may find them.
Finally, the fifth principle, “Provide Development” emphasizes that “almost everything is learned, and somebody often taught that which is learned.” Employee skill must be seen as a key priority.
Making sure that a business is ready for transition to the next generation involves careful preparation and a good deal of advanced planning. The sooner that you begin asking the right kind of thoughtful questions about the current state of your business and what will benefit it moving forward, the better off everyone will be.