Friendly Advice for Sellers and Buyers

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Almost daily, I encounter inadequately prepared business owners wanting to sell their business. They are totally unaware of the ordeal they face in this rather overwhelming task. Whether for emotional, financial, or operational reasons, they have given little or no thought to how they want to gracefully exit their business. Yes, there are indeed those owners who do not fit this profile and they are really a pleasure to work with. However, at least 85% are in need of help, which more often than not, they don’t realize they need…that’s our number 1 challenge…but hopefully this friendly advice will help.

Sellers and Buyer Psychology

From experience, we know it’s not easy to turn a sluggish business around and that is exactly the task we face daily. Since the banking crisis of 2008, which caused the major economic meltdown, fewer and fewer businesses are now producing the levels of profitability, that is the basis of business value. Unfortunately, the bulk of the business owner have not come to terms with the changes in buyer psychology, along with the banking institutions more onerous lending policies…then there’s the ever increasing local and federal government intervention, imposing more and more punitive taxes and legislation. As a consequence, along with their lower than average profits, small business owners still have an unrealistic expectation of what their business is worth in todays market.

Now, there’s always two sides to an equation and in this case it’s the  prospective buyer. They are not going to get off lightly either. Many respond to business for sale ad’s, having carried out little or no research or planning on exactly what business they can really afford, or even if they are adequately qualified to buy and run a business. Many prospective buyers seem to respond to ad’s on a whim and this wastes their time, the business brokers time and the sellers time. We do as much as we can to weed out the tire-kickers, but there are only so many hours in a day we can spend at this task. In the same way as there are sellers who are well prepared, so too are prospective buyers. Again, these are a pleasure to work with, as they are knowledgable and professional. They may be rather demanding, but at least their understanding of the business sales process minimizes time wastage.

Yes, It’s all About the Financials

The biggest anguish for both brokers and buyers is lack of a adequate business owner financial statements. This is especially true if there is a sophisticated buyer and an unorganized owner. Frustration mounts on both sides as the prospective buyer tries to analyze the business, with a seller whose attitude is less than understanding. Frustration is also present in reverse, with a sophisticated seller and a buyer who lacks the ability to grasp all aspects of the business. This situation is far more harmful for the intermediaries reputation, as generally the business broker is representing the seller, not the buyer….therefore, a buyer who demonstrates incompetence reflects on the broker. Yes, the broker does as much due diligence as possible with the prospective buyer, but there is a limit to how much can be found out until we are in the dynamic environment….that’s when the rubber meets the road.

Depending on the level, that is, from main-street business to mid-market business, the quality of the financial’s are either non-existent or tending to elaborately detailed…with everything else in between. As an example of competence, there’s one anecdotal story of a business owner wanting to value his business before selling. On close examination of the P&L’s statements, which incidentally were prepared by the owners wife using Quickbooks, it was noticed that the LOC (line of credit) was actually being counted as revenue.  When we brought this error to their attention, it was like trying to explain quantum physics theories to a layman. Needless, to say we never performed a valuation, as they were never able to resolve the problem and produce rational statements. I could go on and on ad-infinitum, but you get the picture. Well prepared and accurate financial statements are an essential tools in presenting the business in it best light. Trying to understand a business from faded and Xeroxed tax returns, just doesn’t cut the salt.

Inventory…the Achiles Heel of a Business

Another buyers pet peeve, is unidentified or badly recorded inventory…especially for a manufacturing company with a multitude of products and parts that have to be warehoused. Despite the availability of relatively inexpensive computer hardware and MRP and inventory software, there are still businesses doing this complex task by hand. Needless to say, this lays the foundation for plenty of arguments between buyer and seller at a later stage of the sales process, about real or imaginary inventory and its value.

Buyer and Seller Chemistry

Occasionally, a situation arises when a rather abrasive buyer meets a seller for the first time. Unfortunately, it’s always a crap shoot if people will get on or not and it turns out to be awkward and embarrassing for all the players, buyer, seller and intermediary. Another anecdotal story relates to a business owner running what we would consider to be a very well managed manufacturing business. The prospective buyer was highly qualified, both financially and experientially. The minute we all met, when we entered the firms facility…it was obvious from the rhetoric and body language, this was not going to be a good visit. It is rare that a situation like this arises, but even from the “get-go” the chemistry was not apparent. Naturally, the seller was very disappointed, as all indications on paper was that this was the perfect fit.

Main-Street Business

A pet peeve mainly for business brokers doing main-street sales is the large number of prospective buyers, who rarely if ever, talk with their bank to determine if they are credit worthy and can obtain pre-approaval for a loan. This is definitely a time waster, since the prospective buyer might make an offer contingent upon obtaining financing…then the long wait begins, as the bank turns on their lending process, which is the case of the SBA might be measured in months not weeks. Despite the fact that we demand personal financial statements from prospective buyers, this is not a good indicator that the bank will provide the prospective buyer financing.

Mid-Market Business

For businesses in this segment of the market, which typically have revenue from $2 million to $50 million range, similar challenges exist as those in Main-Street, however, the scale is different and the stakes are generally higher for both sides of the deal. Despite the duration of the process, for a whole variety of reasons, the single biggest buyer peeve is the lack of availability of due diligence data once a Letter of Intent to purchase has been filed. Now, as M&A Advisors we counsel owners regarding this process, but asking for a certain document and receiving it can be a long wait. It is highly recommended as soon as the listing has been triggered, that the owner/seller step through the due diligence list we supply and begin to compile the required data and documents, way ahead of when they are required for inspection. This takes the stress away from all concerned with the process and actually saves time and money. And who doesn’t want to save money these days…we can help.

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5 Key Ways to Selling your Business

Selling your vbusinessThe current state of the global economy, impending baby boom phenomenon, plus the geopolitical instability, is creating uncertainty for business owners considering selling their business. Since, timing is always a challenge, strategies for the sale of your business should take all theses variables into account when deciding on the time to transition.

However, even if you’re not considering selling your business at some point in the near future, it’s important to get it into shape to reap the maximum return on your investment. Here are five recommendations that will enhance your business and may even lead to higher sales and profitability to strengthen the business, which add up to increasing your odds that the business will be sold.

Clean up the balance sheet and the P&L before Selling

Unfortunately, too many business owners keep poorly documented financial records, which invariably spook many buyers, especially sophisticated buyers, such as private equity firms or corporate strategic buyers. These types of buyers always want proof of profitability and actual or potential growth prospects, which can only be shown with clean income statements and balance sheets.

One sure way to guarantee squeaky-clean books is to audit the financials for at least three years, which could be costly, but makes a business much more attractive and the cost is easily recovered when you sell. Honestly, this tactic is worth its weight in gold, as nothing turns a prospective buyer off more than sloppy bookkeeping. It’s the best investment you’ll ever make as a business owner.

Even if you’re not planning to sell your business very soon, it’s never a good idea to procrastinate. Put your financials in order, as time is of essence and being prepared is going to pay off in the long run. Unfortunately, many small-business owners have to sell their business unexpectedly due to health problems, accidents or a family member who need care, or other non-planned life events. Don’t get caught out, act today.

Don’t make yourself indispensible

Small business owners are entrepreneurs, and driven by ambition. More often than not, most owners will want to control all elements of their business, and rarely if ever delicate tasks, which they personally feel they can do better themselves.

However, any business that relies heavily on the business owner making all the operational decisions runs the risk of impacting the value of their business and thereby reducing the probability of a sale to a qualified buyer.

It is a known fact, if your business is less reliant on your efforts; you are likely to obtain a higher selling price. The more the operation is automated, the greater likelihood you’re going to garner a higher price. Automating almost every aspect of your business, from order processing to delivering customer service can add both value and increase the probability of an early sale.

It’s important that every aspect of the business is documented, as that helps to “tangibilize” the business making it easier to understand and therefore sell. Document all procedures and keep meticulous records, as this will pay dividends in the long run. You want everything to be written down in a process, as this shows order and efficiency in the mind of the buyer. Do nothing that could make a potential buyer become suspicious of your motives, which is the death knell of a deal.

Know your business value

Few business owners ever keep track of the value of their business, although this should be fairly high on their list of important tasks. Perhaps understandably, a typical business owner is so preoccupied dealing with the day-to-day business, they have precious time to spare on something as intractable as valuing their business.

Nevertheless, once a decision is made to obtain a valuation, it’s important that the business owner engage a reputable valuation firm. Cost is definitely a factor in the decision, but it should not be the overriding determinant, as quality, thoroughness and accuracy is key.

The owner should do all they can to improve “sellable cash flow”, which often means finding newer ways to increase revenue and profits. This could mean finding ways to increase guaranteed income through additional contractual commitments from customers. On-the-other-hand, investing in the business infrastructure could create extra value to a potential buyer.

Transparency is the best policy

Hide nothing…tell potential buyers everything, warts and all. Don’t varnish the truth…it will come back to haunt you as your transaction proceeds. Don’t leave any stone unturned, since if you don’t do it, a prospective buyer surely will. And this could be a painful experience, especially if the consequences are less that desirable.

If you have any skeletons in the closet, open up and be honest. Don’t let the buyer find out at the eleventh hour, this only leads to distrust and possibly a lost opportunity or worse. The longer you wait to tell “all the truths” about your business, the greater likelihood you will “queer” your deal, as prospective buyers will lose faith in your integrity and honesty.

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The End of The Journey-Transitioning

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Business owners are generally pretty competent when it comes to managing their business, but when thinking about transitioning that business they have no idea where to start. Generally, exiting their business isn’t something in their everyday experience and therefore, they don’t know what they don’t know.

Planning for Transitioning

On-the-other-hand, some may understand the exit process, but even so it’s still really difficult to know where to go for help or how to start the planning process. Although they may be aware it’s in their best interest to plan for the future, it’s always a challenge, given the day-to-day demands of running their business, so business most owners procrastinate and planning usually takes a back seat. However, starting the process early can reap enormous benefits and yield significant returns when they exit.

Giving up your Baby

It’s not easy to give up something you might have been doing for 20 to 30 years…there are pangs of fear and maybe some remorse. It’s almost like having to give up your baby, because you have nurtured it for so long it’s and integral part of your life. Tackling this task can be onerous, and very uncomfortable as you are now about to embark on the final stage of your life…retirement.

Taking that First Step

Planning how to exit and under your terms can make you feel liberated once the process is complete…but you have to take that first step. But, exiting can be very different and mean different things to different people. Personal goals vary and not everyone wants to move to Florida and sit on the beach every day or play golf five times a week. Some want free time to pursue another less stressful activity then again others may want to travel the world.

A Well Earned Retirement

So, exiting your business might feel very uncomfortable, but it’s how, as a business owner, you are able maximize the return on the investment of all of those years of hard work and ensure you can fund your well-earned retirement. You owe it to yourself you’re your family to start planning today.

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