Business Broker Blog

This comprehensive and practical program will provide a rich insight into the realities of selling and buying a business. You’ll explore the continuum from business inception to owner transition and exit and understand the potential to save money, secure high value for your business and achieve your objectives within reasonable cycle time.

Dates: October 13, 20, 27, November 3, 10, 17 8-9:30 a.m.

$150 RBA members | $185 Non-members

http://www.rochesterbusinessalliance.com/core/events/eventdetails.aspx?meeting=SB101310

Who should attend: those interested in buying or selling a business

What you’ll learn:

• How to thoroughly prepare your business for sale…

• How to sell it when you want to, to whom you wish and for the maximum value…

• The right time to sell your business and get what you want…

• How to maintain maximum confidentiality…

• When to tell the family and close friends you’re going to sell…

• What to tell your employees to keep their loyalty…

• How to manage the business during the sales cycle…

• How to preserve your wealth, so you can retire in style…

• How to deal with prospective buyers…

• What prospective buyers look for in a business…

• And much more.

Sessions Overview

Session 1 Introduction – the big picture Oct. 13

Introduces the subject of “Selling a Business” and provides the foundation needed for participants to grasp the required concepts and understand the terminology in order to successfully sell their business.

Session 2 Exit Plan – leaving the business in style Oct. 20

Addresses the preparations required by the business owner, in the 5 to 10 year timeframe before sale, in order to leave their business in style… sell it when they expect to, to a good purchaser for their business, and for a fully satisfying outcome for the seller in terms of the seller’s values and interests.

Session 3 Preparing for the Sale – key steps to sell Oct. 27

Examines the planning and execution required by the owner, within the 3 years prior to sale, which are required to avoid pitfalls, generate appropriate buyer candidates and maximize the seller’s net cash outcome.

Session 4 Identifying Possible Deal Structures – one does not fit all Nov. 3

Shows many possible scenarios to structure the deal and how the business owner and prospective buyer’s imagination and flexibility are required to pull off the deal and achieve a win-win situation.

Session 5 Engaging Prospective Buyers – all buyers are not equal Nov. 10

How to harness and leverage buyer psychology…developing the right rapport and getting to agreement so that you sell to whom you would want to continue running the business.

Session 6 Closing the Business Transaction – you’re not home yet Nov. 17

What’s involved in closing the business sale transaction…the vital checklist and post-sale considerations.

Conclusions – What is really important for a successful outcome?

In our experience the majority of business owners are inadequately prepared when the time comes to sell their business and transfer ownership. But, the way to ensure that the business owner maximizes the value of their business and minimize the objections raised by a potential buyer is to have squeaky-clean financials.

When a potential buyer becomes interested in your business, their first port of call is to examine your financials. This is an opportunity for you the business owner to create a favorable impression and set the tone for the buyer’s whole experience in dealing with you as the seller.

An astute buyer will often have a cadre of professional advisor’s, the most notable in the early stages of discussions with the seller, is his accountant. Any CPA worth his salt will scrutinize your financial statements, with particular attention being paid to the balance sheet.

Many business owners we encounter, pay scant attention to their balance sheet, let alone are aware of its importance at the time of the business sale. So, a few words about the balance sheet are appropriate. A balance sheet is snapshot in time of a businesses financial condition, usually at the close of an accounting period such as a month, quarter or year. A balance sheet comprises assets, liabilities, and owners or stockholders equity. Balance sheets, in conjunction with income statements, are the most important records in a businesses financial reporting system, and required by law in many countries. In addition, well-kept financials are essential in helping to determine the value of the business.

Another area that is particularly vexing for buyers is inventory. This is another balance sheet item and can be a stumbling block for the owner to sell his business, especially in a manufacturing business with large and diverse inventories of parts, especially if the inventory records are not accurate and kept up to date.  Yes, conducting a regular inventory can be burdensome, tedious, and expensive, but will pay dividends during the due diligence phase to minimize the effort required and allay the concerns of the buyer, especially if it’s a corporation. It’s hard enough to navigate this area if the inventory is all accounted for and in good order, it is virtually impossible to reach an agreement with the buyer and his team if the reverse is true.

The “for sale by owner” approach to selling valuable property is less commonly used for sale of commercial real estate and businesses than it is even used for residential real estate. From the buyer’s point of view, this usually would be more risky than buying a business when the seller is represented by a business broker.

Why could it be more risky to deal directly with the seller? There are a number of possible reasons:

- Seller does not want to spend the money to receive advice that is needed.

- A seller may think he or she may be more persuasive than a broker.

- Seller may want not to disclose certain aspects of the business. These may be

matters of regulatory compliance, tax compliance or other issues…

- A broker if retained may insist on preparation of proper financial statements or

other customary transaction steps and the seller may not want to be bothered.

So in the situation where a sale is conducted by the business owner, the buyer should exercise a much higher degree of caution. In such cases a seller, by definition cannot be neutral and may not want to be subjected to the normal processes of buyer due diligence.  In addition, this type of seller is less likely to have prepared the business for sale in a manner that would reveal the true worth of the business. The drawback to buying a business being sold in this manner is not just that the business may be poorly managed; it’s that there usually is no easy way of knowing the true business potential. Under these circumstances buying a for sale by owner business can be very risky.

It’s a Tough Challenge, Buying a “For Sale by Owner Business”

It’s not just that a business owner may deliberately attempt to overstate his or her business profits, but with poor bookkeeping or a cash based business it can be difficult to determine and understand the true earnings. As a buyer, you certainly do not want to pay money for an unprofitable business or buy one that you thought was profitable, only to later find that poor accounting was creating the “profits”.  When buying a business that is for sale by owner, the owner may have the best of intentions, but might be truly unaware of the real circumstances and value of his business. Consequently, in such cases you would likely end up paying too much, which is not a good way to start off. Further, and a very big caution:  your own good negotiating skills could help lead you to buy a business that you would never knowingly want to buy. So obviously there are better ways to proceed…

Intermediary and Businesses for Sale By Owner

You should use an intermediary such as a business broker to assist you. An intermediary can provide strategic information regarding market timing, market conditions, market price, financing options, transaction structures and other relevant information that is critical for both buyers and sellers. You need an experienced business broker to help you see what you are not seeing, or that which is hidden from your point of view. And the business broker would guide you on what to do about it the situation. Simply put, most of us need a guide dog or a guard dog when we are travelling unfamiliar territory. Buying a business is a very time consuming task for all parties and it can take countless hours of dedicated time. For a modest price that business brokers charge, there are many advantages from providing to you protection to saving you time and unnecessary frustration.

Why You Should Not Be Without  the Services of a Business Broker

Using effective representation can make the difference between closing and losing the right deal, or alternatively walking safely away from a deal that you would never knowingly want to do.  A business broker has established relationships with the many professional organizations, which are required to appropriately complete the transfer of business ownership. These relationships prove to be invaluable to sellers and buyers alike.

There are a number of skill sets that a professional business broker uses to ensure that the transaction is managed smoothly, thus benefiting both buyer and seller. Evaluation experience, market awareness, achieving proper representation of financial condition, and use of creative deal structures are a few of these skills. A business broker operates in the marketplace daily and is current with overall business supply and demand, the types and availability of financing, etc.  No other professional is in this position.

A business broker can help find attractive businesses in which you might want to invest. In addition, business brokers usually have experience with determining the fair market value for sale by owner businesses and can help estimate the fairness of the initial offer. When issues need the attention of other experts like a forensic accountant, valuation expert, or deal savvy attorney, the business broker knows how and with whom to strengthen your team.

Lastly, a business broker often has considerable experience in dealing with the type of the businesses you are seeking. You should never allow yourself to be persuaded that you do not need a business broker because the seller does not have one. Ideally, you should look for business brokers who have already dealt with a particular industry or industries you are targeting. Not always, but in certain situations, it is advisable to seek a local business broker.

Obtain Assistance Responsibly – Ask for Certifications & Qualifications

The industry certification of a business broker is very important when making an important decision to purchase a business that is for sale by owner, as a considerable amount of experience is necessary to achieve success in this situation.

Certification serves as one of the possible ways to measure the reliability and trustworthiness of a particular business broker. The International Association of Business Brokers certifies business brokers and awards the Certified Business Intermediary (CBI) to brokers who have successfully undergone rigorous training and examination. The designation demonstrates their knowledge and experience.

Your choice of a business broker can make or break your attempt to buy a business that is for sale by owner. You are encouraged to pay attention to the experience and qualifications of the particular business broker whose services you are about to use. With this in mind, purchasing a for sale by owner business with competent due diligence and under the right terms and conditions can be a rewarding and lucrative decision.

Many people aspire to be an entrepreneur, but starting up a business is not for the faint hearted. On the other hand, buying an existing business, rather than starting one from scratch, can be a sound strategy to achieve this dream. One good reason is that it puts you well ahead of the game, since the start-up phase is the most common time for a business to fail. For a start-up, “time to profitability”, either months or years, is quite unpredictable. It is largely not under the control of the business owner, but rather under the control of the potential customers. Obviously during this period, the owner is not well compensated if at all, and the business operates under a high level of stress. Unfortunately the “time to profitably” is the grim reaper for many start-up businesses.

So buying a business that has already survived this gestation period can be a great advantage. Still, like any important decision, you have to think through the pros and cons of each opportunity. You need to assess your situation and determine what you can gain through each acquisition candidate.

Advantages to consider

There are distinct benefits to buying a business that is a going concern. Consider the following advantages, questions to be asked, crucial factors to consider and assistance available before you go for it.

Customers

A large and active customer base has huge value, and you should expect to pay for it. It gives you access to immediate cash flow and an opportunity to improve on existing business relationships. An established customer base can be a strong confirmation of the business model, thus a major comfort factor, and the platform on which to build your growth.

Operations

Going concerns have been tried and tested, so you eliminate the initial grunt work in getting the processes started up. Operations, distribution, supplier relationships, knowing how to reach and satisfy customers and key personnel are in place, saving you time, money and effort. Also, if the seller is motivated to stay around during transition, that can be a valuable source of experience and advice for running the business in the new owner’s hands.

Product or Service

Products or services that have been launched into the market  garner their level of customer satisfaction, established market share and a certain level of profit. This gives you data on what works well, what needs to be improved and how the operation might be changed under your stewardship to increase sales and profits. It will provide you a platform to build on with greater opportunity to leverage your innovation and marketing efforts.

Employees

Employees are a rich source of experience, and those employed for many years are particularly useful to a new owner. They provide an invaluable source of information and knowledge regarding the industry, customer preferences and insight on running the business. Yes, there is a short adjustment period to a new owner, but often with proper transition planning, the potential energy and enthusiasm of the existing team is unlocked by the change in ownership.

Financing

When seeking funds for a start-up, it is usually difficult to show how this new business is going to grow and become profitable. Funding often comes from friends and family. This is not the case for a going concern. It has a proven track record and an existing cash flow. This makes it easier to acquire financing required for the acquisition and growth of the business. In addition, business records and personnel facilitate decision making and business planning, so you can more effectively plan for short and long-term strategy, operational needs and profitability.

Critical Success Factors

Stick to your knitting

Pick an industry you know well. It’s important to conduct very rigorous “due diligence” on all aspects of a business under consideration. This is one of the most important tasks of the business acquisition process. Does the business fall within your area of expertise and does it meet your business objectives? Evaluate the entire business carefully.

Form, fit and function

It’s tough to succeed in a business you don’t like or where you have no background experience. Choose familiar ground to decrease your risk of failure. Do your skills, interests and experience match the requirements for running the business? If they do not fit what you do well, forget it. Your skills and philosophies, both personal and business, need to be in harmony with your choice of business.

Risk versus reward

Sometimes you come across a business that can be revived if it’s unprofitable. But do not buy a turnaround, unless you have turnaround expertise. Make sure it’s profitable, or at least determine if this type of business has a solid chance of turning a profit by researching the business and industry carefully. Some businesses are inherently more risky, lack customer loyalty, vulnerable to competition, in the wrong location, or subject to structural failure. These include many categories of restaurants, used car dealerships, gas stations, commodity suppliers, contract manufacturers, etc.

It shouldn’t dissuade you if you are an experienced manager in the field, but it does mean you should be more critical in evaluating the risks.

Look for teamwork

Good people are critical to success in any business, but it’s the teamwork that adds synergy to make it happen. This is especially true if you are acquiring an add-on to an existing business. You need synergy in the key functional departments of the business. You need the total cooperation of the existing staff as they are key to a successful integration of the business processes. Try to assess the level of skills and teamwork and use this knowledge to improve the existing business.

Image is everything

All businesses have a public image, it may be good or it may be poor. An owner may not always be aware of the actual image his company has, but it is imperative for the buyer to know and verify.  A business with a tarnished image is usually something that cannot be easily turned around. A good reputation is worth its weight in gold and is one of the most valuable attributes of a business. Do thorough research, ask around and search the web for any hint that the company may have image problems. Investigate turnover of vendors, employees and customers. Ask why the owner is selling the business. Try to assess the reputation of the owner and if the businesses image is connected to the owner’s reputation.

Don’t ignore company culture

Established companies, like countries, have their own culture, and as a buyer you ignore that at your peril. You are buying an established culture, management style, and relationships with vendors, partners, channels and especially customers. No new owner changes the way things are done on day one. You will likely meet resistance. You will need to check whether the seller has good relationships with the employees and managers. And most definitely determine the business culture, its management style, its integrity and quality.

Cost, cost and due diligence

Financial records, although essential as the first indication of business health, may not reflect reality or tell the whole story. A quick check of the financial ratios will give you metrics for assessing how well the company is being managed, but you are going to need much more to establish true fair market value. Failure to conduct adequate due diligence, will put you at a disadvantage and you will most likely pay too much for the business. You do not want to sap your resources or over burden your business with debt you incur when buying the business. So caution is the keyword here.

Off balance sheet items should be explored, as these hidden items may cause severe problems in future. Likewise unaccounted losses, declining revenue, increasing ratios regarding inventories or receivables, or changes in the addressed market may signal that the business is less viable than it appears. All important contracts need to be reviewed carefully, and look for the absence of contracts if they would be needed for your business to succeed. Check for clauses regarding change of ownership. For example, often software leases are not transferable and may need to be replaced. Input price increases could occur after the business is acquired. Make sure you determine exactly what assets and liabilities are as part of the sale. Often lists and schedules are not current. What is the condition of the facilities and equipment? What is their value? Would they be considered good collateral? Is the building part of the deal or is this an optional item?  If it’s leased, under what conditions can you take over the lease?

Don’t lose sight of your goal

Acquiring a business can be complicated, and involve skills such as assessing the value of the business, determining if it is easily transferrable, understanding the tax implications, and negotiating the purchase. An acquisition should be viable, both financially and operationally.

Once you have found a business that seems to fit your criteria, the next step is the process of fully investigating the business, or due diligence. When you first show an interest in a company, you will be looking at operations and facilities, and going through financial statements. But you also need to investigate aspects of the business that you can’t see physically or just verify by talking to employees or seller.

A competent and certified business broker can guide you through the process. Other professionals like an accountant and attorney experienced in these transactions can also help ease the burden and prevent problems from arising after a purchase. There are costs to finding and researching a business, but these costs are well worth your own careful investment, thereby easing your way to a successful business acquisition.

When you are in control of the process, buying an established business can be a satisfying experience. Market factors are such that most situations are available at very reasonable values. When well matched with the purchaser, the journey ahead is likely to be very rewarding.

Frequently, we get asked by buyers, should I start up my own business or should I buy an established business. Easy question to ask, but the answer depends…let’s look at the pros and cons.

There’s no question that buying a going concern can have many advantages. If the company has a well-defined marketplace, an established business offers a sound platform to expand and further grow the business. It will have employees, customers, processes, a business model, cash flow, and inertia all in place. Further, it is easier to borrow from a bank when your company has a history and everything is a matter of record.

On the other hand, a start-up is a completely different animal and takes a different set of skills and knowledge to pull it off. You’re starting with a clean slate and imagination is required along with patience. If you have never done this before it can be a harrowing experience, as there is a plethora of details to wade through to bring your dream to a reality. But, it can be a rewarding experience for the creative entrepreneur, who may thrive on this sort of challenge.

Ultimately, it comes down to cost versus benefit, with a large dose of reality medicine. The first analysis is to ask the following key questions:

1.    Do I have the skills, experience, knowledge and patience to start up a business?

2.    What type of products or services do I want to sell?

3.    What is the nature of the start-up and where should it be located?

4.    What is the investment required to start up this business and where are those funds to come from?

Once you have answered these questions do a complete cost analysis, comparing estimated start-up costs with the acquisition costs, preferably of a business with similar profile, while forecasting which business would generate the best total return and higher profit margins. This of course is somewhat easier with a going concern, as you have factual information upon which to base your analysis. In the case of the start-up, it is less objective and more hypothetical.

If having a paycheck is a major consideration, then all the calculations in the world is not going to make much difference, as your objective can only be achieved with a pre-established company. When most people do the analysis, they realize how difficult and costly it is to start up a business from scratch and opt for a “buy” versus “build” decision.

The reason a start-up is generally riskier than an established business is the fact that it takes at least two to three years to break-even. Maintaining a steady cash-flow is often precarious, as a substantial amount of the owners time is spent building the customer base, a task a bit like trying to walk up a down escalator.

According to the U.S. Small Business Administration only 40+ percent of start-ups survive four years, which is rather starling news. Many other studies have shown at least nine out of ten start-ups not lasting beyond five years.

By now you must be asking, well I know many people who have started up their own business and have been successful. After all, the business I was contemplating buying was once a start up. Yes, that’s true, but it’s a matter of time and place, conditions are less conducive today for a startup company.

But still, there are still entrepreneurs out there with an ingenious idea and the know-how to execute it. Nothing will stop a person like this, regardless of logic or the outcome of a financial analysis.

That’s why it’s critical to compare the costs of buying versus starting up a business. Evaluate the asking price of the business you might be contemplating to determine if it’s a fair price. Spend worthwhile time with your CPA, your attorney and business broker before you commit to buying any business. Only then will you be armed with the knowledge to make an informed decision.

In a down economy it’s always challenging for any business owner to keep their business above water. The current recession is particularly stressful, as it affects most markets across the board. But, if your business isn’t growing as fast as you’d like, it may not just be the economy perhaps you may have reached a degree of saturation in your existing target markets.

When business is going well, most owners are reluctant to make any changes and rock the boat, after all, why would you want to make disruptive changes if your business is growing and profitability is on track. However, there comes a time when you have to look to new markets for growth. The following are five marketing strategies, scenarios that can be executed to create sales for your business within new markets:

Expand existing product line or service offerings.

Analyze your offerings and determine if the product or service can be applied to new markets. Plenty of brainstorming is required to identify new markets, but once this has been accomplished you can winnow them down and choose the most accessible and profitable market to enter. You can for example, identify and access new segments within your current target market, by adding new products and/or services, your business can reach customers of target markets who were otherwise inaccessible to your business using its existing product/service mix.

Create strategic marketing alliances.

It’s always advisable to tread carefully when considering forming a strategic alliance, as like any marriage or relationship, your partner must be chosen very carefully. The upside is that an alliance allows your business to sell its products and services through other existing business channels. This is an ideal way to build a distribution at a more moderate cost, as the infrastructure already exists, and your partner has the market knowledge, which you are unlikely to posses.  Your business will be able to access the new target markets that alliance partners already serve, without having to do additional marketing.

Open a new geographic location.

This is more applicable to retail operations, but can also be applied to manufacturing or services businesses. For a mature business with an identifiable market area, it may be time to consider expanding with one or more branch locations. The key to creating and successfully operating a new location is to be certain there’s a strong demand within the new target market for your business’s products and services. It takes considerable time, effort and investment to create demand where it doesn’t currently exist. Additionally, you should determine that potential customers within this new geographic location are in fact new potential customers, not just existing customers of your business.

Web-based Marketing.

If your business has a storefront or at least a geographic presence, you are known in the neighborhood. However, web marketing is an entirely different matter…it’s all about the branding…and your web brand is multidimensional. In the online world branding is far more than just transferring your print brand identity to the Web. Although graphic design and image are pertinent, your brand in the world of e-business is more largely affected by the interactive experience you provide your users. Everybody knows that the Web allows you to build one-to-one relationships with your customers’. But you need to keep in mind, the web is static and neither is your website. Google and Yahoo are constantly changing their search algorithms, so you need to constantly make adjustments. The beauty of the web though is its pervasiveness, as you can gain access to the global market. Although it’s a challenge to rely on potential customers to “find” your web site, using search engines for example, you can promote sales by forming affiliations with existing successful web businesses.

Franchise your business concept.

Franchising your business is a well tried and proven way to copy your business and sell the concept for a license or royalty fee. Franchising is the most popular system for growing a business in the United States today. According to every government survey, franchising has experienced explosive growth since the mid-70s and is expected to be the leading method of doing business in the new century. The advantages of Franchising over going into business for yourself include; you can open the business quicker, experience success sooner, develop a customer base faster, have less risk and be more profitable. Your success as a franchisee is based on the proven success of the franchisor and the success of their existing franchisees. You must check that your business can be operated in locations besides the target markets it serves; otherwise it won’t be salable. One last note, Franchising is not for everyone and not all businesses lend themselves to this concept. So plan carefully.

How many times have you heard the old adage, it’s not what you know, it’s whom you know. And as we may have suspected, although not always conceded, business life is all about making good connections.

So, when an owner contemplates selling their life’s work–their business—good connections and solid communications are keys to a much smoother process and ultimately successful transfer of business ownership. On the surface, selling a business might seem to be a straightforward task. But as we shall see, it’s challenging and there is a symbiotic relationship between all the players involved, like actors on a stage.

As a business owner begins the process of deliberation to sell his business, he may decide to communicate with his advisors, typically his attorney and accounting firm, sharing his feelings and views on the matter. However, experience shows, most owners choose to go it alone and mull over their options with little advice or council from their professional advisors. This is not recommended, as sometime during the process, it’s inevitable an owner will have to take both legal and financial advice. Clearly, the earlier an owner does this, the better will be the outcome.

Dynamics of Selling a Business

To illustrate the dynamics and connections associated with selling a business, let’s take a hypothetical company, Acme Engineering, Inc. The owner of Acme will have a number of outsourced advisors from the accounting and legal professions and occasionally, in a larger company, with certified financial planners. But, the business owner’s advisors generally operate as though–in a virtual sense–they are part of the Acme Company. Acme’s owner may also have family members and directors who could be involved in any decision to sell their business, and thereby exert a degree of influence over the owner’s decision making process. Consequently, the more people that are involved with any decision of this kind, the more complicated become the communications process.

On a day-to-day operational basis however, business owners rarely bring together all of their advisors into one room to discuss the ramifications of running the business. But, when it comes to the sale of their business, they are more inclined to do so, if the cost is not prohibitive. Often, the main reason for not consulting advisors is that the owner does not see the real and tangible connections between the professions and treats them as independent entities. So, the attorney goes about his business with little knowledge of the financial underpinnings of the company and the accounting firm is oblivious to the legal ramifications of critical business decisions. This lack of communication is ordinarily not much of a problem during the course of normal operations. However, when the business is about to be sold, communications between these professions, along with the business broker, the owner and prospective buyers is critical and paves the way for a future harmonious relationship. Read the rest of this entry »