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Wednesday, May 5, 2010
Sell A Company – How Is The Selling Price Determined?
How much are you expecting when you sell your business? I always ask this question of our clients. The answers are as different as the businesses. “We need $5 million to give us the type of retirement we want. We have invested $2 million in the product. Our investors have put in $3 million so far. It should sell for $5 million. I heard that xyz Company got $30 million for their company.” Well, my response to my clients doesn’t necessarily endear me to them, but it is the truth. The market doesn’t care. The market doesn’t care how much it cost you to develop the product or how much your investors have in or how much you need to retire or how much you think it is worth.
The market looks at what the ROI is for its investment in a company. If you are fortunate enough to have a technology that can be leveraged, the market may look at the future returns of that technology in stronger hands.
For most businesses, there are benchmarks that are often used as a starting point. The most common in a merger and acquisition situation is an EBITDA multiple. That is the gold standard for privately held companies, similar to what a PE multiple is as a business valuation metric for publicly traded stocks. One of the measures that has come into vogue on Wall Street is a PEG multiple or Price Earnings Growth. It is essentially a way to attempt to quantify the difference in PE multiples between two firms in the same industry that have a much different future growth scenario.
Buyers of businesses that are privately held attempt to ignore this factor when making their purchase offers.
One small company was in an industry characterized by slow growth of about 4%, had commodity type products and consequently very thin gross margins, and had little pricing power. This company introduced a new product that was unique, had very healthy margins, retained some pricing power, and was experiencing 50% year over year growth.
The industry benchmark valuations were at 4.5 X EBITDA. The three largest players in the industry were all interested in the acquisition and each one put out an initial bid that was, surprise, about 4.5 X EBITDA. Another factor was that our client was in rapid growth mode so a good deal of their costs were front end loaded as they launched a few big box retailers during this period. The effect of this was to depress their EBITDA performance. This made these offers even more inadequate.
The result is that we have a classic valuation gap between business buyer and business seller. This is the biggest reason that many merger and acquisition transactions do not happen. The clients are terribly disappointed and suggest that these buyers “just don’t get it.” The buyers have experience in making several acquisitions in their space and have their business valuation metrics pretty much in stone and think our sellers are being unreasonable in their expectations. Game over, right?
Not so fast. One of the most important roles of a business broker, merger and acquisition advisor or investment banker is devise a transaction value and structure that works for both parties. We pointed out to the buyers that their traditional way of looking at these transactions is appropriate for their prior acquisitions with standard growth metrics, lack of pricing power, and commodity type products. We suggest to business sellers that as a small company with a few big box retailers comprising 80% of company sales with essentially one main product, that they have a great deal of small company risk. For example, if the retail buyer from xyz Big Box Retailer changes and is replaced by a buyer that has a consolidation of vendors bias, then they could lose 30% of their business with one decision. A bigger company, however, with 30 SKU’s would be much harder to replace with a change in buyers.
We have established a platform with both buyer and seller to consider alternatives to their hard and fast valuation positions. Here is an example of a business sale transaction structure that could be a win for both buyer and seller:
1. $1,000,000 Cash at Close which is approximately a 4 X EBITDA multiple for the year 2007.
2. An Earn out (Additional Transaction Value) based on Seller Company’s Sales Revenue beginning in year 1 and ending at the end of year 5. The earnout is at risk, but is set to net the shareholders a 6 X EBITDA multiple on 2008 projected sales (sales $6 million and EBITDA margin of 16.67% or EBITDA of $1,000,000).
This is the transaction structure we are recommending to balance a low EBITDA valuation on a company that will grow revenues by 50% next year. If they don’t, then the earn out will be less. Most of the transaction value is in future performance based earn out. Our projection is that with Buyer Company cost efficiencies, Buyer Company can improve operating performance by an amount that covers the entire earn out amount and maintains or even improves Seller Company’s historical margins.
Most business buyers that approach a company with an unsolicited interest in acquiring them are bottom feeders and will attempt to buy way below the market. They will attempt to draw out the process and pursue several acquisitions simultaneously hoping that one or two sellers just cave and sell out at a discount. They may start out at a decent valuation, but as they go through their due diligence process will find one issue after another that makes them reduce their offer. They often throw out the term “material adverse change” in an attempt to justify their value reducing behaviors. Some business development directors get judged or paid bonuses on how much below the original offer they can ultimately close the deal.
What is the way to combat this bad buyer behavior? The best way is to have options. Those options are multiple interested buyers. We feel very uncomfortable when we end up with only one buyer. We have taken them through the entire marketing phase and end up with only one legitimate interested buyer. You bet that buyer recognizes the issues and the likelihood of limited interest and will attempt all of the maneuvers to drive down the buying price and terms. Our negotiating position on behalf of our seller client is severely weakened and we struggle to preserve value in spite of doing this every day. Think about how effective you will be in this single buyer scenario. We tell our prospective clients that contact us after an unsolicited offer, “When it comes to business valuation, if you have only one buyer, he is right.”
The market looks at what the ROI is for its investment in a company. If you are fortunate enough to have a technology that can be leveraged, the market may look at the future returns of that technology in stronger hands.
For most businesses, there are benchmarks that are often used as a starting point. The most common in a merger and acquisition situation is an EBITDA multiple. That is the gold standard for privately held companies, similar to what a PE multiple is as a business valuation metric for publicly traded stocks. One of the measures that has come into vogue on Wall Street is a PEG multiple or Price Earnings Growth. It is essentially a way to attempt to quantify the difference in PE multiples between two firms in the same industry that have a much different future growth scenario.
Buyers of businesses that are privately held attempt to ignore this factor when making their purchase offers.
One small company was in an industry characterized by slow growth of about 4%, had commodity type products and consequently very thin gross margins, and had little pricing power. This company introduced a new product that was unique, had very healthy margins, retained some pricing power, and was experiencing 50% year over year growth.
The industry benchmark valuations were at 4.5 X EBITDA. The three largest players in the industry were all interested in the acquisition and each one put out an initial bid that was, surprise, about 4.5 X EBITDA. Another factor was that our client was in rapid growth mode so a good deal of their costs were front end loaded as they launched a few big box retailers during this period. The effect of this was to depress their EBITDA performance. This made these offers even more inadequate.
The result is that we have a classic valuation gap between business buyer and business seller. This is the biggest reason that many merger and acquisition transactions do not happen. The clients are terribly disappointed and suggest that these buyers “just don’t get it.” The buyers have experience in making several acquisitions in their space and have their business valuation metrics pretty much in stone and think our sellers are being unreasonable in their expectations. Game over, right?
Not so fast. One of the most important roles of a business broker, merger and acquisition advisor or investment banker is devise a transaction value and structure that works for both parties. We pointed out to the buyers that their traditional way of looking at these transactions is appropriate for their prior acquisitions with standard growth metrics, lack of pricing power, and commodity type products. We suggest to business sellers that as a small company with a few big box retailers comprising 80% of company sales with essentially one main product, that they have a great deal of small company risk. For example, if the retail buyer from xyz Big Box Retailer changes and is replaced by a buyer that has a consolidation of vendors bias, then they could lose 30% of their business with one decision. A bigger company, however, with 30 SKU’s would be much harder to replace with a change in buyers.
We have established a platform with both buyer and seller to consider alternatives to their hard and fast valuation positions. Here is an example of a business sale transaction structure that could be a win for both buyer and seller:
1. $1,000,000 Cash at Close which is approximately a 4 X EBITDA multiple for the year 2007.
2. An Earn out (Additional Transaction Value) based on Seller Company’s Sales Revenue beginning in year 1 and ending at the end of year 5. The earnout is at risk, but is set to net the shareholders a 6 X EBITDA multiple on 2008 projected sales (sales $6 million and EBITDA margin of 16.67% or EBITDA of $1,000,000).
This is the transaction structure we are recommending to balance a low EBITDA valuation on a company that will grow revenues by 50% next year. If they don’t, then the earn out will be less. Most of the transaction value is in future performance based earn out. Our projection is that with Buyer Company cost efficiencies, Buyer Company can improve operating performance by an amount that covers the entire earn out amount and maintains or even improves Seller Company’s historical margins.
Most business buyers that approach a company with an unsolicited interest in acquiring them are bottom feeders and will attempt to buy way below the market. They will attempt to draw out the process and pursue several acquisitions simultaneously hoping that one or two sellers just cave and sell out at a discount. They may start out at a decent valuation, but as they go through their due diligence process will find one issue after another that makes them reduce their offer. They often throw out the term “material adverse change” in an attempt to justify their value reducing behaviors. Some business development directors get judged or paid bonuses on how much below the original offer they can ultimately close the deal.
What is the way to combat this bad buyer behavior? The best way is to have options. Those options are multiple interested buyers. We feel very uncomfortable when we end up with only one buyer. We have taken them through the entire marketing phase and end up with only one legitimate interested buyer. You bet that buyer recognizes the issues and the likelihood of limited interest and will attempt all of the maneuvers to drive down the buying price and terms. Our negotiating position on behalf of our seller client is severely weakened and we struggle to preserve value in spite of doing this every day. Think about how effective you will be in this single buyer scenario. We tell our prospective clients that contact us after an unsolicited offer, “When it comes to business valuation, if you have only one buyer, he is right.”
Earn Out Provisions | Are You Using all the Tools Available to Close Business Transactions?
Advantages and Disadvantages of Earn Out Provisions
Mitch Biggs is a Featured Business and Finance Contributor on Associated Content. This is a reprint of a previously published article.
It is important to use all tools available when selling businesses? How comfortable are you with the earn out provision? Earn out provisions have a bad name in certain circles. However, used properly, earn out provisions can mean the difference between walking a qualified buyer and closing the deal.An earn out provision is a deal structure used during business transactions (selling businesses) that delays a portion of the payment to the seller for some period that is usually tied to a fundamental business metric. First, why the bad reputation of earn out provisions? I fault the Business Broker community. Greed kills deals. Most business brokers are too worried about their commission and steer clear of earn out provisions when discussing terms with buyers and sellers. Earn out provisions are simple to structure but very difficult to execute. A properly written listing agreement will cover business brokers commission with earn out provisions. That’s a great topic for another article!
What businesses are great candidates for earn out provisions? Typically the earn out provision is a great solution when there is considerable goodwill baked into the selling price, low asset and high cash-flow businesses that are experiencing growth and when businesses have had good growth followed by a poor year due to external economic forces with aggressive growth forecasts.
Seller advantages and disadvantages using earn out provisions. The seller can start their clock ticking on their exit strategy for the business and take the business off the market. There will be full disclosure with employees about transfer of control rumors and a smooth transition with the new ownership. The disadvantage is they get part of the value at closing and then must deliver the terms of the earn out provision to be paid the balance of the business value without being the boss.
Buyer advantages and disadvantages using earn out provisions. The buyer is able to feel comfortable with the agreed upon price that is usually more in-line with company assets lenders love for financing. Any quibbling over the anticipated growth of the company is left on the seller’s shoulders to deliver as part of the earn out provision. One disadvantage of earn out provisions for buyers is that they are limited as to what they can do with the company during the earn out period. The seller must retain enough interest to meet the demands of the earn out provision.
Mitch Biggs is a Featured Business and Finance Contributor on Associated Content. This is a reprint of a previously published article.
It is important to use all tools available when selling businesses? How comfortable are you with the earn out provision? Earn out provisions have a bad name in certain circles. However, used properly, earn out provisions can mean the difference between walking a qualified buyer and closing the deal.An earn out provision is a deal structure used during business transactions (selling businesses) that delays a portion of the payment to the seller for some period that is usually tied to a fundamental business metric. First, why the bad reputation of earn out provisions? I fault the Business Broker community. Greed kills deals. Most business brokers are too worried about their commission and steer clear of earn out provisions when discussing terms with buyers and sellers. Earn out provisions are simple to structure but very difficult to execute. A properly written listing agreement will cover business brokers commission with earn out provisions. That’s a great topic for another article!
What businesses are great candidates for earn out provisions? Typically the earn out provision is a great solution when there is considerable goodwill baked into the selling price, low asset and high cash-flow businesses that are experiencing growth and when businesses have had good growth followed by a poor year due to external economic forces with aggressive growth forecasts.
Seller advantages and disadvantages using earn out provisions. The seller can start their clock ticking on their exit strategy for the business and take the business off the market. There will be full disclosure with employees about transfer of control rumors and a smooth transition with the new ownership. The disadvantage is they get part of the value at closing and then must deliver the terms of the earn out provision to be paid the balance of the business value without being the boss.
Buyer advantages and disadvantages using earn out provisions. The buyer is able to feel comfortable with the agreed upon price that is usually more in-line with company assets lenders love for financing. Any quibbling over the anticipated growth of the company is left on the seller’s shoulders to deliver as part of the earn out provision. One disadvantage of earn out provisions for buyers is that they are limited as to what they can do with the company during the earn out period. The seller must retain enough interest to meet the demands of the earn out provision.
Will Your Business Sell?
On May 5, 2010, In Sell Your Business, by Rick
Most businesses will sell. The main reason a business doesn’t sell is because the owner won’t sell… or waited way too long until things went from bad to disastrous. A business that is making a profit will sell, but only it the seller is willing to accept what the marketplace is willing to pay.
The sale of a a privately-held business involves five, what may be inconsistent, objectives:
How soon the seller want to sell
How important confidentiality is
How flexible is the price
If the seller is offering terms
How serious the seller is about selling
A seller must decide the importance of each – your answers will ultimately determine if your business will sell!
Most businesses will sell. The main reason a business doesn’t sell is because the owner won’t sell… or waited way too long until things went from bad to disastrous. A business that is making a profit will sell, but only it the seller is willing to accept what the marketplace is willing to pay.
The sale of a a privately-held business involves five, what may be inconsistent, objectives:
How soon the seller want to sell
How important confidentiality is
How flexible is the price
If the seller is offering terms
How serious the seller is about selling
A seller must decide the importance of each – your answers will ultimately determine if your business will sell!
Why Not Sell The Business On Your Own?
How many “Business For Sale” signs have you ever seen while you drive down main street or on your daily drive to work? None? Well, there are very logical reasons why you haven’t. The biggest reason is that the “Business For Sale” sign would soon be replaced with a “Going Out Of Business Sale.” Consider the following points.
First off, even if the you don’t actually hang a “For Sale” sign outside the window, trying to sell it on your own through classified ads, or, heaven forbid, by word of mouth, for instance, threatens the business‘ reputation and future. Secondly, even if the right prospective buyer comes along, do you — an owner of a privately-held company — have the required skills and knowledge in the fields of accounting, law, taxes, marketing, and more importantly, negotiating on your own behalf about perhaps your most important asset — your livelihood?
Do you, a business owner who is trying run your business on a daily basis, have the time to find, contact and liaise with potential buyers that are serious about buying your particular business? Can you maintain the confidentiality that is required to prevent damaging your competitiveness in your market area? If staff and suppliers find out that you are selling, it will affect current trading ability. Do you have any experience in selling a business? Can you remain cool and patient when a buyer is trying to negotiate a lower price, particularly if their objectives are the complete reverse of your own? Do you even know how to value your business and what it is really worth in the marketplace?
Let’s discuss the issue of primary concern when selling a business…confidentiality. The most important aspect of selling a business is confidentiality. It must be maintained throughout the entire selling process. If people find out that your business is for sale, it will be perceived in a negative light, where some, mainly your competitors, will take advantage and can cause damage to the ongoing viability of your business.
There is, of course, the proper time to disclose an impending sale. The preferable time to come clean is when the business is under contract and has entered the final stages of the selling process. By looking at the different responses by the varied types of people associated with your business to the news of your business being for sale, you will understand why confidentiality is necessary.
Customers -
If customers get wind that your business is on the market, they will most likely take about a New York minute to hike on over to one of your competitors to do business. Losing customers affects the value of the business — less sales means less profit, and less profit means less interest from prospective buyers. After all, one of the major reasons why someone would want to buy your business is because of the profit they could make.
Employees -
If employees are told that the business is up for sale, think nano-second. If you think a New York minute is fast, your employees would evacuate the premises before you can blink. They will feel insecure about their future and will seek more stable employment. Fear of new management and whether job cuts would ensue are legitimate concerns for anyone in which your business is their livelihood. If key members of staff left the business after hearing the news, it may seriously cripple the performance of your business. Consequently, not only will the value be reduced, but the chance of selling your business is significantly diminished.
Suppliers -
Your relationship with suppliers may take a turn for the worse if they are aware of your plans to sell the business. They may feel that your decision to sell is based around financial difficulties and, if you currently purchase supplies on credit, they may reconsider your position and demand cash on delivery, which may certainly have an effect on your immediate cash flow. Great businesses are sold every day. However, in general, their is a negative perception of a business when it is rumored to be for sale.
Banks -
Banks are very cautious of small businesses because of their risky nature and so it is no surprise to how they would react when they find out that yours is for sale. They may decide to put a halt on further borrowings, overdrafts or lines of credit available to you . Or, even worse, put out a call to recover any outstanding debt.
Competitors -
How would you react to news of your competitor putting their business on the market? Very positively one would assume. This is exactly how your competitors will react should they discover that you are selling your business and would take quick action to affect your sales and customer confidence. Competitors would announce it from roof tops if they could to make it known that you are selling so they can reap the harvest of new profits from your old customers.
For these reasons a business brokerage firm would be very helpful towards selling your business. In fact, they can be the essential ingredient. Let’s explain this statement further. Before you believe in the necessity of contracting with a brokerage firm to represent you in the sale of your business, it is important that you recognize the value they bring to the table.
Business brokers, in general, work on a success-based commission. They get paid when the business is sold and the deal is closed. They are your partner throughout the process and utilize unique marketing methods to achieve the goal. Not only will they find and screen prospective buyers for your business, they can value your business, settle negotiations, and help obtain. Experienced business brokers can often obtain a higher selling price because they are in tune with current trends and economic conditions in their market area and are aware of what people are looking to buy. Supply and demand plays a factor when a business is up for sale. For example, a seller’s market in Houston has existed for the past couple of years and is still ripening due to the superior economic conditions it has enjoyed over the rest of the country.
Also, potential buyers will feel more at ease speaking to brokers then they would directly to the owner and by doing so, it allows you the time to continue running the business and keeping it profitable. Most importantly, brokers will provide the confidentiality you need, saving you potential grief from the issues surrounding customers, suppliers, and competitors.
Finding a reputable broker can be done through referrals from fellow professionals such as accountants, attorneys, small business lenders, and even by word-of-mouth from people that have previously used a broker.
In conclusion, whenever a business is on the market, it must to be done in a confidential manner by someone who has done it thousands of times. Owners have good reasons for selling, and there are great businesses being sold every day. But there are negative connotations attributed to a business for sale in the general public’s eyes. They think there must be something wrong with the business. Which, of course, is not the case in most instances. Keep in mind these two statistics. The national average of businesses that actually sell once they are on the market is approximately 30%, the reasons for which a business broker could explain to you. And, only one in ten people who are looking to purchase a business, ever actually do. So, if trying to sell your business on your own fails, you may have lost customers, vendors, or employees. You don’t want to end up putting that sign on the window that says, “Going Out of Business Sale!”
Tags : Engine Tools trim Bumpers & Bumper Accessories home business idea
First off, even if the you don’t actually hang a “For Sale” sign outside the window, trying to sell it on your own through classified ads, or, heaven forbid, by word of mouth, for instance, threatens the business‘ reputation and future. Secondly, even if the right prospective buyer comes along, do you — an owner of a privately-held company — have the required skills and knowledge in the fields of accounting, law, taxes, marketing, and more importantly, negotiating on your own behalf about perhaps your most important asset — your livelihood?
Do you, a business owner who is trying run your business on a daily basis, have the time to find, contact and liaise with potential buyers that are serious about buying your particular business? Can you maintain the confidentiality that is required to prevent damaging your competitiveness in your market area? If staff and suppliers find out that you are selling, it will affect current trading ability. Do you have any experience in selling a business? Can you remain cool and patient when a buyer is trying to negotiate a lower price, particularly if their objectives are the complete reverse of your own? Do you even know how to value your business and what it is really worth in the marketplace?
Let’s discuss the issue of primary concern when selling a business…confidentiality. The most important aspect of selling a business is confidentiality. It must be maintained throughout the entire selling process. If people find out that your business is for sale, it will be perceived in a negative light, where some, mainly your competitors, will take advantage and can cause damage to the ongoing viability of your business.
There is, of course, the proper time to disclose an impending sale. The preferable time to come clean is when the business is under contract and has entered the final stages of the selling process. By looking at the different responses by the varied types of people associated with your business to the news of your business being for sale, you will understand why confidentiality is necessary.
Customers -
If customers get wind that your business is on the market, they will most likely take about a New York minute to hike on over to one of your competitors to do business. Losing customers affects the value of the business — less sales means less profit, and less profit means less interest from prospective buyers. After all, one of the major reasons why someone would want to buy your business is because of the profit they could make.
Employees -
If employees are told that the business is up for sale, think nano-second. If you think a New York minute is fast, your employees would evacuate the premises before you can blink. They will feel insecure about their future and will seek more stable employment. Fear of new management and whether job cuts would ensue are legitimate concerns for anyone in which your business is their livelihood. If key members of staff left the business after hearing the news, it may seriously cripple the performance of your business. Consequently, not only will the value be reduced, but the chance of selling your business is significantly diminished.
Suppliers -
Your relationship with suppliers may take a turn for the worse if they are aware of your plans to sell the business. They may feel that your decision to sell is based around financial difficulties and, if you currently purchase supplies on credit, they may reconsider your position and demand cash on delivery, which may certainly have an effect on your immediate cash flow. Great businesses are sold every day. However, in general, their is a negative perception of a business when it is rumored to be for sale.
Banks -
Banks are very cautious of small businesses because of their risky nature and so it is no surprise to how they would react when they find out that yours is for sale. They may decide to put a halt on further borrowings, overdrafts or lines of credit available to you . Or, even worse, put out a call to recover any outstanding debt.
Competitors -
How would you react to news of your competitor putting their business on the market? Very positively one would assume. This is exactly how your competitors will react should they discover that you are selling your business and would take quick action to affect your sales and customer confidence. Competitors would announce it from roof tops if they could to make it known that you are selling so they can reap the harvest of new profits from your old customers.
For these reasons a business brokerage firm would be very helpful towards selling your business. In fact, they can be the essential ingredient. Let’s explain this statement further. Before you believe in the necessity of contracting with a brokerage firm to represent you in the sale of your business, it is important that you recognize the value they bring to the table.
Business brokers, in general, work on a success-based commission. They get paid when the business is sold and the deal is closed. They are your partner throughout the process and utilize unique marketing methods to achieve the goal. Not only will they find and screen prospective buyers for your business, they can value your business, settle negotiations, and help obtain. Experienced business brokers can often obtain a higher selling price because they are in tune with current trends and economic conditions in their market area and are aware of what people are looking to buy. Supply and demand plays a factor when a business is up for sale. For example, a seller’s market in Houston has existed for the past couple of years and is still ripening due to the superior economic conditions it has enjoyed over the rest of the country.
Also, potential buyers will feel more at ease speaking to brokers then they would directly to the owner and by doing so, it allows you the time to continue running the business and keeping it profitable. Most importantly, brokers will provide the confidentiality you need, saving you potential grief from the issues surrounding customers, suppliers, and competitors.
Finding a reputable broker can be done through referrals from fellow professionals such as accountants, attorneys, small business lenders, and even by word-of-mouth from people that have previously used a broker.
In conclusion, whenever a business is on the market, it must to be done in a confidential manner by someone who has done it thousands of times. Owners have good reasons for selling, and there are great businesses being sold every day. But there are negative connotations attributed to a business for sale in the general public’s eyes. They think there must be something wrong with the business. Which, of course, is not the case in most instances. Keep in mind these two statistics. The national average of businesses that actually sell once they are on the market is approximately 30%, the reasons for which a business broker could explain to you. And, only one in ten people who are looking to purchase a business, ever actually do. So, if trying to sell your business on your own fails, you may have lost customers, vendors, or employees. You don’t want to end up putting that sign on the window that says, “Going Out of Business Sale!”
Tags : Engine Tools trim Bumpers & Bumper Accessories home business idea
Tuesday, May 4, 2010
What do you think about before you plan to sell your business?
March 15th, 2010
You have been thinking of retirement, no one in the family wants to take over. Now you have to decide when do you want to retire, immediately, in a month, 6 months, year or a few years down the road. The best thing that you can do is plan for your retirement with as much lead time as possible. This gives you time to plan. Do you need to improve the business, do you need to spend some money, do you need to add more in the sales department, are you about to land a new customer, are you about to lose a large customer, will the market improve and you can take advantage of the upswing or do you predict the market will decline?
If you believe that you are about to lose a major customer and they leave before you sell your business, a purchaser can walk from the purchase of your business if a material change happens between the time you receive the letter of intent to time of closing. Since it often takes 6 to 9 months to close a transaction, the loss of a customer could kill the sale of the business in this time therefore it is best not to sell the business if you are about to lose a major client in the short term.
If you are about to land a new customer who will improve sales significantly and profits, why would you sell the business before you get to see the impact of your hard work and success in landing this customer? Purchasers of a business look at several years of financial information and do not base their purchase price on future sales although some could provide a contingent payment based on keeping that new customer but it will rarely be as good as if you had the customer for years and the profit was factored into the purchase price.
If you need to reinvest some money in the business, the additional costs will drop profits. If they result in profits in a year or two time, then the expenses will drop earnings which will drop the purchase price and the benefits will be received by the new owner after the sale of the business is completed. Therefore, timing of when you spend money is very important to the timing of when you sell your business.
Filed under: Selling a business — Gary Landa @ 9:22 am
You have been thinking of retirement, no one in the family wants to take over. Now you have to decide when do you want to retire, immediately, in a month, 6 months, year or a few years down the road. The best thing that you can do is plan for your retirement with as much lead time as possible. This gives you time to plan. Do you need to improve the business, do you need to spend some money, do you need to add more in the sales department, are you about to land a new customer, are you about to lose a large customer, will the market improve and you can take advantage of the upswing or do you predict the market will decline?
If you believe that you are about to lose a major customer and they leave before you sell your business, a purchaser can walk from the purchase of your business if a material change happens between the time you receive the letter of intent to time of closing. Since it often takes 6 to 9 months to close a transaction, the loss of a customer could kill the sale of the business in this time therefore it is best not to sell the business if you are about to lose a major client in the short term.
If you are about to land a new customer who will improve sales significantly and profits, why would you sell the business before you get to see the impact of your hard work and success in landing this customer? Purchasers of a business look at several years of financial information and do not base their purchase price on future sales although some could provide a contingent payment based on keeping that new customer but it will rarely be as good as if you had the customer for years and the profit was factored into the purchase price.
If you need to reinvest some money in the business, the additional costs will drop profits. If they result in profits in a year or two time, then the expenses will drop earnings which will drop the purchase price and the benefits will be received by the new owner after the sale of the business is completed. Therefore, timing of when you spend money is very important to the timing of when you sell your business.
Filed under: Selling a business — Gary Landa @ 9:22 am
Businesses – should you grow your business or always keep it the same size?
July 30th, 2009
You have been in business for many years and now are making a comfortable living. Should you grow your business or keep it the way that it is? Growing your business has risks and it also generates additional costs. If your business grows by 20% and you are a small firm, you and your staff may be working harder and longer hours. You may not generate enough additional profits to justify hiring another staff member but you also are unable to work additional hours. As a result, you have to take on additional expenses which could include labour, rent, interest expense because you now need to carry more inventory and require a bank loan. In order to grow, you may end up going backwards and decreasing your profits before you increase them when the sales materialize from the additional effort.
What happens if your sales do not grow? Unfortunately, costs are always increasing whether it be labour, materials, rent, utilities. If you do not increase your sales, your profits will decrease over time. If your profit margins are not high enough, you may end up with losses instead of being a profitable business. As a result, all businesses need to grow the question is how big do you have to get?
Do you expand the business and own 100% of the business or do you look for acquisitions or merger candidates to grow the business to the next level. Where is your business in the life cycle – it is a young start up company, on a growth curve, a mature business or declining in sales? An important factor is how old are you and how much more work and effort do you want to put into the business. Are there heirs who will come into the business? How many years do you think it will take to get to that level that you are striving for? Will you be able to expand the business by internal growth or do you have to buy a business and acquire a competitor?
Other things that you need to consider, is it possible to expand the business even if you invest additional money into it? If you are a retail store, you are limited predominantly to the customers in your area unless you can turn your business into a destination location rather than just the local store. If you are a destination, people will come from outside the noraml sales area to your location specifically to go to your location. If business is purely by contracts, then expanding the business is contingent on successfully bidding on work but in those cases, you are in a difficult position, do you bid on work without staff or do you hire the staff who can do the work but will have nothing to do unless you win the contract? In a poor ec0nomy, are you able to hire sales people from your competitors? Are these sales people subject to a non compete clause or will you have to incur legal costs if the competitor sues you?
What is your time line for growing the business? Are you planning to retire in a year or two? If you are going to sell your business, why incur the extra costs required to expand the business? If you are going to sell the business, the additional costs may affect the selling price of the business. There are many different factors that you need to consider in your planning. Keep in mind, there are no right and wrong decisions, what works best for you, that is the decision which you have to make.
Filed under: Business strategies — Gary Landa @ 12:19 pm
You have been in business for many years and now are making a comfortable living. Should you grow your business or keep it the way that it is? Growing your business has risks and it also generates additional costs. If your business grows by 20% and you are a small firm, you and your staff may be working harder and longer hours. You may not generate enough additional profits to justify hiring another staff member but you also are unable to work additional hours. As a result, you have to take on additional expenses which could include labour, rent, interest expense because you now need to carry more inventory and require a bank loan. In order to grow, you may end up going backwards and decreasing your profits before you increase them when the sales materialize from the additional effort.
What happens if your sales do not grow? Unfortunately, costs are always increasing whether it be labour, materials, rent, utilities. If you do not increase your sales, your profits will decrease over time. If your profit margins are not high enough, you may end up with losses instead of being a profitable business. As a result, all businesses need to grow the question is how big do you have to get?
Do you expand the business and own 100% of the business or do you look for acquisitions or merger candidates to grow the business to the next level. Where is your business in the life cycle – it is a young start up company, on a growth curve, a mature business or declining in sales? An important factor is how old are you and how much more work and effort do you want to put into the business. Are there heirs who will come into the business? How many years do you think it will take to get to that level that you are striving for? Will you be able to expand the business by internal growth or do you have to buy a business and acquire a competitor?
Other things that you need to consider, is it possible to expand the business even if you invest additional money into it? If you are a retail store, you are limited predominantly to the customers in your area unless you can turn your business into a destination location rather than just the local store. If you are a destination, people will come from outside the noraml sales area to your location specifically to go to your location. If business is purely by contracts, then expanding the business is contingent on successfully bidding on work but in those cases, you are in a difficult position, do you bid on work without staff or do you hire the staff who can do the work but will have nothing to do unless you win the contract? In a poor ec0nomy, are you able to hire sales people from your competitors? Are these sales people subject to a non compete clause or will you have to incur legal costs if the competitor sues you?
What is your time line for growing the business? Are you planning to retire in a year or two? If you are going to sell your business, why incur the extra costs required to expand the business? If you are going to sell the business, the additional costs may affect the selling price of the business. There are many different factors that you need to consider in your planning. Keep in mind, there are no right and wrong decisions, what works best for you, that is the decision which you have to make.
Filed under: Business strategies — Gary Landa @ 12:19 pm
Why should you sell your business?
April 12th, 2010
You started a business for scratch 40 years ago, now you are debating what to do. Do you sell the business, do you retire, do you do something else? These are all thoughts which you have been contemplating for many years but now you want to make a decision, what should you do?
Here is a list of reasons why you should sell your business soon:
no heirs to take over the business
senior staff have been very good to you and you want to give them an opportunity to buy the business
your business is stagnating and needs new ideas
your business has matured and there is no or little upward growth available to the firm
the business outlook is grim and you see that sales and profits will drop in the future
technology or technology is currently being developed which could have a major impact on your business
you are bored and not longer enjoy working in the business
health issues of the or someone in the immediate family which needs a lot of attention
competition is increasing
business needs a large capital injection to grow to the next level
business ie a retail store needs to be refreshed with a large large capital improvement commitment
if you need to spend the money on the store today but are going to retire next year, why incur the additional costs when you will not receive the benefit
you are getting older and you find the the physical requirements of the job too grueling
the business requires a lot of additional hours to be worked to built it back up because you lost a major client and you are not willing to make the commitment
you know that you are about to lose your largest client and that will have a significant impact on revenue and profits
the market is changing and you are not able to keep up with the innovations in the market
technology is replacing equipment which you have purchased for a fraction of the cost, now you need new equipment to keep up with the competitors but still have loans on the old equipment which is not obsolete and worth only a fraction of the original cost. this happened in the printing industry and entertainment industry when digital equipment replaced older technologies.
Filed under: Selling a business — Gary Landa @ 9:07 am
You started a business for scratch 40 years ago, now you are debating what to do. Do you sell the business, do you retire, do you do something else? These are all thoughts which you have been contemplating for many years but now you want to make a decision, what should you do?
Here is a list of reasons why you should sell your business soon:
no heirs to take over the business
senior staff have been very good to you and you want to give them an opportunity to buy the business
your business is stagnating and needs new ideas
your business has matured and there is no or little upward growth available to the firm
the business outlook is grim and you see that sales and profits will drop in the future
technology or technology is currently being developed which could have a major impact on your business
you are bored and not longer enjoy working in the business
health issues of the or someone in the immediate family which needs a lot of attention
competition is increasing
business needs a large capital injection to grow to the next level
business ie a retail store needs to be refreshed with a large large capital improvement commitment
if you need to spend the money on the store today but are going to retire next year, why incur the additional costs when you will not receive the benefit
you are getting older and you find the the physical requirements of the job too grueling
the business requires a lot of additional hours to be worked to built it back up because you lost a major client and you are not willing to make the commitment
you know that you are about to lose your largest client and that will have a significant impact on revenue and profits
the market is changing and you are not able to keep up with the innovations in the market
technology is replacing equipment which you have purchased for a fraction of the cost, now you need new equipment to keep up with the competitors but still have loans on the old equipment which is not obsolete and worth only a fraction of the original cost. this happened in the printing industry and entertainment industry when digital equipment replaced older technologies.
Filed under: Selling a business — Gary Landa @ 9:07 am
How fast will the value of your business return to the levels prior to the recession?
June 19th, 2009
The last 6 to 12 months have been difficult for many businesses. Some have gone out of business, others who were large enough were able to reduce the quantity of people working for them significantly so that they were either break even or marginally profitable. The majority of companies have witnessed had significant erosion of their profits. Typically, when a buyer looks for a business, they like to see a three year history to see if earnings are sustainable and they were not the result of a one time contract. If there was one bad year, sometimes you could explain that to the buyer and he would look to the current year and the year prior to the bad year. This recession has changed a lot of things and i believe that business is now conducted differently than it was two years ago.
Will you be able to explain away one bad year or will the buyer now look at your current revenue. Clients two years ago may have closed down, reduced their business, is that a good indication of the business in the future, I do not believe so. As a result, buyers are going to want to look at revenue and expenses based on the new model – from the year 2009 and forward. If the profitability is weak for 2009 or it increased in the last 3 months of the year, it may not make a large difference on the entire year because of 9 poor months. That will mean that the first good year or earnings in the “new era” will be 2010. People will want to see if you are able to sustain or grow the business therefore they will want to value the company based on revenue for 2010, 2011 and possibly 2012. You will not be able to complete the financial statements until 2013. If it takes 6 to 12 months to sell your business, you may have to wait until 2014 until the sale of the business is completed. That is 5 years from today. If you want to retire within that 5 year period, your business may not be worth what you thought it was 12 months ago and it probably will not recover to the levels which you would like within the 5 year period.
There will always be exceptions to the above. The question will be if you want to retire within the next 5 years, when do you list your business for sale, in 2009, 2010, 2011,2012 or 2013? The longer you wait, if revenue and profits go up, the better your price will be but if revenue and profits are flat, will it make much of a difference between any of those years, probably not. The best time to leave is when you want to leave. If you no longer love what you are doing, staying in the business for another 4 years to get another $100,000 purchase price – is it worth the wait? Some will say yes, others will disagree.
Filed under: valuation of a business — Gary Landa @ 8:46 am
The last 6 to 12 months have been difficult for many businesses. Some have gone out of business, others who were large enough were able to reduce the quantity of people working for them significantly so that they were either break even or marginally profitable. The majority of companies have witnessed had significant erosion of their profits. Typically, when a buyer looks for a business, they like to see a three year history to see if earnings are sustainable and they were not the result of a one time contract. If there was one bad year, sometimes you could explain that to the buyer and he would look to the current year and the year prior to the bad year. This recession has changed a lot of things and i believe that business is now conducted differently than it was two years ago.
Will you be able to explain away one bad year or will the buyer now look at your current revenue. Clients two years ago may have closed down, reduced their business, is that a good indication of the business in the future, I do not believe so. As a result, buyers are going to want to look at revenue and expenses based on the new model – from the year 2009 and forward. If the profitability is weak for 2009 or it increased in the last 3 months of the year, it may not make a large difference on the entire year because of 9 poor months. That will mean that the first good year or earnings in the “new era” will be 2010. People will want to see if you are able to sustain or grow the business therefore they will want to value the company based on revenue for 2010, 2011 and possibly 2012. You will not be able to complete the financial statements until 2013. If it takes 6 to 12 months to sell your business, you may have to wait until 2014 until the sale of the business is completed. That is 5 years from today. If you want to retire within that 5 year period, your business may not be worth what you thought it was 12 months ago and it probably will not recover to the levels which you would like within the 5 year period.
There will always be exceptions to the above. The question will be if you want to retire within the next 5 years, when do you list your business for sale, in 2009, 2010, 2011,2012 or 2013? The longer you wait, if revenue and profits go up, the better your price will be but if revenue and profits are flat, will it make much of a difference between any of those years, probably not. The best time to leave is when you want to leave. If you no longer love what you are doing, staying in the business for another 4 years to get another $100,000 purchase price – is it worth the wait? Some will say yes, others will disagree.
Filed under: valuation of a business — Gary Landa @ 8:46 am
What is better to expand your business or keep the status quo if you want to sell your business?
May 4th, 2010
All business owners want to retire with the most money in their bank account so that they do not have to work again. Many business owners believe that their business is worth more than it actually is or more often that is the amount of that they believe they need to retire on and want their business to sell for that amount. Unfortunately the value of your business is not what you want it to be or need it to be, it is what the market will bare.
A gentlemen many years ago told me his business was worth $1 million because he had one great client that everyone would die for. That to die for client had been a client for a year and had generated $10,000 of revenue. The business for sale had revenue at the time of $600,000 make $50,000 in profit but he needed $1 million to retire and believed that someone would pay him the $1 million for his business and to get this one client. Needless to say, he could not sell the business.
Do you try to expand the business to build it to the level that you need to achieve to reach the magic retirement figure or do you do nothing and be happy with whatever your business is worth? This question will be answered by everyone differently. If you do nothing, your sales will drop over time unless since your customers are always looking for new products. Therefore doing nothing will ensure that your business is worth less when you are willing to retire. I know of a company who has not tried to get new customers for 10 years. They had a very successful business however some of the customers ran into difficult times and eventually several were sold and left the company. As a result, sales dropped to the level where this company is now losing money rather than having healthy profits which they had 10 years ago, all because they stopped expanding.
If you can try hard for one to two years so that the sales and profitability increases, this will be worth a multiple of that success when you sell the business. The question is how much effort and cost does it take to get to the next level? What are the risks, what happens if you spend more but it does not materialize in new sales and new profits, what happens if your three year plan is really five years and you want to retire in five years, you may not see the success of your efforts. These are all factors which you need to determine prior to you trying to increase sales. You will have to determine the cost of the effort in terms of time and money, will that result in higher sales and profits or what are the risks of this not succeeding? If it does not succeed, you may need to wait an additional few years to show that those were unusual expenses and not an operating expense therefore have no impact on the selling price.
Filed under: Business strategies — Gary Landa @ 9:52 am
All business owners want to retire with the most money in their bank account so that they do not have to work again. Many business owners believe that their business is worth more than it actually is or more often that is the amount of that they believe they need to retire on and want their business to sell for that amount. Unfortunately the value of your business is not what you want it to be or need it to be, it is what the market will bare.
A gentlemen many years ago told me his business was worth $1 million because he had one great client that everyone would die for. That to die for client had been a client for a year and had generated $10,000 of revenue. The business for sale had revenue at the time of $600,000 make $50,000 in profit but he needed $1 million to retire and believed that someone would pay him the $1 million for his business and to get this one client. Needless to say, he could not sell the business.
Do you try to expand the business to build it to the level that you need to achieve to reach the magic retirement figure or do you do nothing and be happy with whatever your business is worth? This question will be answered by everyone differently. If you do nothing, your sales will drop over time unless since your customers are always looking for new products. Therefore doing nothing will ensure that your business is worth less when you are willing to retire. I know of a company who has not tried to get new customers for 10 years. They had a very successful business however some of the customers ran into difficult times and eventually several were sold and left the company. As a result, sales dropped to the level where this company is now losing money rather than having healthy profits which they had 10 years ago, all because they stopped expanding.
If you can try hard for one to two years so that the sales and profitability increases, this will be worth a multiple of that success when you sell the business. The question is how much effort and cost does it take to get to the next level? What are the risks, what happens if you spend more but it does not materialize in new sales and new profits, what happens if your three year plan is really five years and you want to retire in five years, you may not see the success of your efforts. These are all factors which you need to determine prior to you trying to increase sales. You will have to determine the cost of the effort in terms of time and money, will that result in higher sales and profits or what are the risks of this not succeeding? If it does not succeed, you may need to wait an additional few years to show that those were unusual expenses and not an operating expense therefore have no impact on the selling price.
Filed under: Business strategies — Gary Landa @ 9:52 am
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