California Business Broker Blog

A recent article posted on Forbes.com entitled “Small Business Owners Are Retiring, And Millennials May Not Fill The Gap On America’s Main Street” uses the closing of a 235-year-old hardware store to prove a startling fact: the Millennial generation may not be suited to take over small business ownership like the generations before them. In the case of Elwood Adams Hardware, which has seen a multitude of owners over the last almost two and a half centuries, the current owner simply couldn’t find a buyer.

While student loan debt and an inclination to pursue work in the gig economy may be factors in this unwillingness to take on small business ownership, their age may actually be the driving factor. The article mentions that the sweet spot for entrepreneurship is typically the 40’s, so it may take some time to truly see if millennials are suited for small business ownership.

Click here to read the full article.

A recent article from the Axial Forum entitled “Five Due Diligence Pitfalls and How to Avoid Them” outlines some common mistakes and pitfalls that are made during the due diligence process and gives tips on how to navigate the due diligence waters. The pitfalls include:

Missed Opportunities
Pointless Provisions
Red Flags at the 11^th Hour
Poor Communication
Leaving Money on the Table

Avoiding these five things won’t guarantee success, but doing so can definitely help give an owner the best chance at success. Buying a business is not an easy process, but knowing what to expect, what to avoid, and how to maximize the value of a dollar can go a long way.

Click here to read the full article.

A recent article posted on Divestopedia.com entitled “The Investment Banking Landscape: Different Types of M&A Firms” gives an overview of the different types of M&A firms as well as how they can be useful in different situations. Owners interested in selling should know how each type of firm works and how each could be of use to them during the sale of their business. The following represent these different types of firm:

Boutique Investment Firms
Regional Investment Banks
Bulge Bracket Investment Banks
M&A Advisory Firms
Business Brokerage

Each of these types of M&A firms has its own benefits and drawbacks, so it is very important for an owner to understand and explore the options available to them before settling on one.

Click here to read the full article.

A recent article posted on BizBuySell.com entitled “Small Business Transactions Reach Record High As Buyers Shrug Off Amazon Effect” explores business transaction data from the third quarter of 2017. As outlined by the report, closed transactions numbered 2,589 in the third quarter, up 24% from the same time period last year. This quarter continues the overall trend of quarter-over-quarter growth in reported transactions going back two years.

Increases in median revenue and cash flow of sold businesses as well as a decrease in the median time to sell a business show a strengthening small business sector and an improving overall market. Although retail has taken a hit from the “Amazon Effect,” retail transactions are actually up 23% since this time last year. Read the full report by clicking the link below.

Click here to read the full article.

A recent article posted on BizJournals.com entitled “Closely-held Businesses Head Toward a Slippery Slope” explores a startling truth about small businesses in the United States: around 60 percent of owners will likely retire within the next 10 years. On the surface, this may sound unimportant or irrelevant to the small business world. But just beyond the surface lies the fact that almost 70 percent of successions fail. But still, what does this mean for the small business sector?

Finding a suitable well-trained successor will be of absolute necessity within the next 10 years for these 60 percent of retiring owners. Failure is inherently more common than success post-transition, so finding qualified individuals to take over will be paramount to continued small business success in the United States.

Click here to read the full article.

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It’s Time To Embrace CSR (Corporate Social Responsibility)

If you are unfamiliar with CSR or corporate social responsibility, you are certainly not alone. In the coming years, you’ll be hearing a lot about CSR. In this article, we’ll look at CSR and how, when implemented with sincerity, it can positively impact your company and its operation.

Building Your CSR Locally

One of the key ways that you can build your CSR is to think about ways to help your community. Contributing to local community programs, for example, is a great place to start. Everything from personal involvement to direct financial support can help build your company’s reputation within your community.

Your Connection to the Environment

A second way to build your CSR is to show that your company is thinking about its impact on the environment. Recycling is important but so is using eco-friendly packaging and containers. Additionally, embracing low-emission and high mileage vehicles is another good step as this lowers your company’s carbon footprint.

Advertising and Good PR

A third area to consider is how your company interacts with the marketplace. Using responsible advertising, business conduct and public relations is a savvy move. Likewise, providing fair treatment of your shareholders, suppliers and vendors and contractors will all help to improve your CSR.

Yet, one of the single most important areas of corporate social responsibility occurs in the workplace. The advent of social media has helped fuel the dispersal of information. If your business isn’t treating its employees in a fair manner and/or has unsafe work conditions or unfair employment practices, the word will eventually get out. There has never been a more important time to treat your employees well.

Embracing CSR serves to increase shareholder and investor interest. In short, it is expected. Socially-conscious companies are considered smart and stable investments. A company that has fully embraced CSR will find greater buyer interest and even a higher selling price when the time comes to sell. Most buyers want excellent customer loyalty with no skeletons hiding in a company’s closet. They also are seeking happy and loyal employees, low employee turnover and for a company to have a good reputation within a community. CSR helps achieve all of these goals and more.

Ultimately, corporate social responsibility works to create additional value. When you invest in CSR, you are investing in achieving a higher selling price and making your business more attractive to sellers. Summed up another way, you can’t afford not to think about this topic.

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You Know the Old Saying About Loose Lips? How Does It Impact You?

The saying “loose lips sink ships,” doesn’t have ancient origins. While it sounds like one of those sayings that has been around forever, the saying was actually invented during World War II. It was taken quite literally. The idea was that a lack of secrecy could lead to the loses of actual ships or other wartime deaths. So in other words, this saying was serious business. It should come as no surprise that this saying is alive and well in the business world.

Few things are more important than safeguarding your business from leaks. Leaks can, simply stated, spell disaster for your business. Leaks can be particularly damaging if you are looking to or are in the process of selling business. A leak that you are planning on selling your business can have a range of consequences. Everyone from employees to customers, suppliers and, of course, prospective buyers and competitors could all take notice and this could have ramifications.

Yet, confidentiality stands as a bit of a Catch-22 situation. Sellers want to get to the best price possible for their business and that means letting prospective buyers know that the business is for sale. The greater the number of potential buyers contacted, the greater the chances of receiving top dollar. However, the more potential buyers that know you are interested in selling, the greater the risk of a leak. Clearly, this situation represents a considerable dilemma.

As a buyer, you may discover that owners can be overly, perhaps even irrationally concerned, about leaks. It is important to remember that for most owners, the business represents their largest asset and often their greatest professional accomplishment in life. In other words, they have a lot riding on their business. It is important to remind sellers that the less time a business is on the market the lower the risk of a leak. Also, the longer the negotiations go on, the greater the risk of a leak.

Sellers should always remember to keep all important documents related to the potential sale or sale literally under lock and key. Everything should be considered confidential and only transferred to buyers in a highly secure fashion. Confidential information shouldn’t be emailed or faxed, as this makes a leak much easier. Sellers and buyers alike should remember that they shouldn’t discuss the sale or potential sale with anyone. Confidentiality should be stressed at all times.

Working with a business broker is one way to dramatically reduce the risk of a leak occurring. For business brokers, confidentiality is a cornerstone of their operations. Business intermediaries require buyers to sign very strict non-disclosure agreements. While loose lips may sink “ships,” there is no reason that your business, or the one you are interested in buying, has to be one of those ships.

Top Four Statistics You Need to Know About Ownership Transition

If you own a business, then ownership transition should definitely be a central topic in your planning. A few years ago, MassMutual Life Insurance Company conducted a very interesting and thought-provoking survey of family-owned businesses. Obviously, family-owned businesses have their own unique needs and challenges. The MassMutual Life Insurance Company survey certainly underscored this fact. While the survey was conducted a few years ago, the information it contained is more relevant and actionable than ever. Let’s take a closer look at some of the key conclusions and discoveries.

Founder Control

One of the most important findings of the survey was that a full 80% of family-owned businesses are still controlled by the founders. The survey also discovered that 90% of family-run businesses intend to stay family-owned in the future.

Lack of Leadership Plans

Leadership is another area of great interest. Strikingly, approximately 30% of family-owned businesses will in fact change leadership within just the next five years. Moreover, 55% of CEOs are 61 or older and have not chosen a successor. When a successor has been chosen that successor is a family member 85% of the time. Succession is often a murky area for family-owned businesses. A whopping 13% of CEOs stated that they will never retire.

Failure of Proper Valuations

According to the survey, valuation is another surprise area. 55% of companies fail to conduct regular evaluations, meaning that they are essentially flying blind in regards to the true value of their company. Adding to the potential confusion is the fact that 20% of family owned businesses have not completed any estate planning and 55% of family-owned businesses currently have no formal company valuation for estate tax estimates.

Lack of Proper Strategic Plans

The financials for family-owned businesses are often just murky as their succession issues. The MassMutual Life Insurance Company survey also discovered that 60% of family-owned businesses failed to have a written strategic plan and a whopping 48% of family-owned businesses were planning on using life insurance to cover estate taxes.

Simply stated, many family-owned businesses are not organized properly and are, in the process, not fully taking advantage of their opportunities. In short, family-owned businesses are frequently insular in their approach to a wide range of vital topics ranging from succession and leadership to valuation, planning and more. In the long term, these vulnerabilities may serve to undermine the business making it harder to sell when the time comes or opening it up to other problems and issues. Family-owned businesses are strongly advised to work with professionals, such as experienced accountants and business brokers, to ensure the long term profitability and continuity of their businesses.

Determining if the Deal is Right for Your Company

Mergers may seem like a step forward. But like any deal, mergers come with a degree of risk. The odds are good that you’ve heard of the massive merger between the German auto manufacturer Daimler and the American car company, Chrysler. In this deal, we see a prime example of cultural friction and how that friction can lead to serious merger problems. In the beginning, the merger was promoted as a merging of equals. However, when Daimler officers took complete control, Chrysler executives quickly left in droves.

What Was the Problem with the Deal?

Part of the problem with the merger was the management styles were completely different. It was a situation of centralized versus decentralized and rapid decision making versus decision making by committee. And there were other problems such as fostering supplier rivalries versus supplier partnerships. Adding further to an already complicated situation was the fact that the Chrysler management team received massive compensation packages whereas the Daimler management team worked with smaller salaries, yet received considerable perks.

A key aspect of mergers and acquisitions is that they are, in theory, supposed to create a synergy that produces results. When mergers and acquisitions fail to live up to their potential, it is often the overlooked factor of culture that is at the heart of those failures. If two companies don’t have the right culture to work together, then the deal can be in trouble literally before the ink is dry.

How to Tell if the Fit is Right?

The trick is thus to determine when a merger is a good fit for all involved. While there are many variables determining if a merger or acquisition is right, it can begin with something as seemingly simple as a casual dinner with the owner or CEO of the acquiring or merging company. Such a meeting can reveal much about an owner’s philosophy and how he or she runs a business.

An organic flow of information can accomplish much and do so in a short period of time. Key areas such as determining how employees of the other company will be compensated can work to reveal whether or not the corporate culture of two companies is, in fact, a good fit. There are situations when the culture of two companies is so similar that integration is relatively easy and straightforward. However, there are other situations, such as the Daimler-Chrysler example, in which a merger is doomed to be highly problematic. At the end of the day, proper communication is key to determining the long-term viability and potential for success of any merger or acquisition.

Reasons for Sale

The reasons for selling a business can be divided into two main categories. The first is a sale that is planned almost from the beginning or by an owner who knows that selling is or should be a planned event. The second is exactly the opposite – unplanned; the sale is motivated by a specific event such as health, divorce, business crises, etc. However, in between the two major reasons, are a host of unpredictable ones.

A seller may not even be thinking of selling when he or she is approached by an individual, group or another company, and an attractive offer is made. The owner of a business may die, and the heirs have no interest in operating it. A company may bring in new management who decides to sell off a division or two; or maybe even decides that selling the entire business is in the best interests of everyone.

A major competitor may enter the market, forcing an owner to elect to sell. And the competition may not just be another company. The owner of a business may realize that an external threat is such that the company will lose a competitive advantage. New technology by a competitor may outdate the way a company produces its products. Two competitors may merge, placing new pressures on a company. The growth of franchising and big box stores can promote themselves on a much larger scale than a single business, no matter how good it is. National advertising can create the perception that a large business’s pricing, inventory or service is better than the smaller competitor, even if it isn’t.

Although these issues may not push a business owner or company management to consider selling, they are certainly causes for consideration. Unfortunately, most sellers fail to create an exit strategy until they are forced to. Professional athletes want to go out on top of their game, and business owners should do the same.

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You’re Experiencing Burnout, Now What?

A large percentage of business owners are not just owners, but also operators. Owning a business can be exciting and rewarding, but it is also a tremendous amount of unending work. In the end, the “buck” stops with you. With that realization comes a significant amount of stress. It goes without saying that stress can lead to burnout.

A business with a burnt-out owner can spell doom. Even if you are lucky and have invested the time to surround yourself with an amazing team, you will only have so much time before you have to jump back in and be very proactive. Otherwise your business will begin to suffer.

Let’s face it, as the owner, you can take a vacation. But your burnout might not let you even enjoy said vacation. This is even more true if you are stuck checking your texts and your computer all day long, trying to manage things from out of town.

The First Step is Acceptance

When dealing with burnout the first, and most important step, is to admit that you are in fact, burnt out. This condition may be the result of mental and physical fatigue. While most people might not immediately connect issues, such as health and diet, with burnout, there is often a connection.

Start Taking Care of Yourself

Owning a business means work and lots of it. That may mean that you are not taking enough time or thinking enough about your own health and well-being. Consider improving your diet to include more fresh foods and reduce or even eliminate fast food, which has been proven to negatively impact health. You should also consider investing in air and water purification systems. A recent medical study showed that indoor air pollution can harm not just the lungs but even the kidneys as well.

In the end, you are the key element in the success or failure of your business. If you are suffering from aches and pains, headaches and fatigue, then you, as the heart of the business, are ultimately harming the business. Putting your health first is a way for you to safeguard the health of your business.

Consider Putting a #2 Person in Place

Many business owners have a great “right hand person” that can take over if the owner becomes sick, but that is not always the case. Keep in mind that when it comes to selling your business, having that key team member will be essential to your potential buyer. If it’s possible to start cultivating that person now, by all means do so.

You may be saying, “But I’m a health nut and I still feel burnt out.” Again, owning a business is demanding, and the years can weigh heavily. It is important, especially before burnout sets in, to step back and look for ways to streamline your operations and delegate responsibilities. Small changes can have a big long-term impact. Additionally, streamlining your operations will make your business more attractive when it comes time to sell.

In the end, if taking a vacation, streamlining your operations, and improving your health regime doesn’t yield big results, it might be time to consider selling your business. There is no rule that states that you must operate your business until retirement. Don’t be afraid to walk away if necessary.

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Invest in Creating Happy Employees & You’ll Be Rewarded

The time, effort and money you invest in keeping your employees happy is well worth it for your bottom line. Oftentimes business owners fail to consider the fact that unhappy employees can, and do, negatively impact every aspect of their operation.

Your employees are your front line in dealing with your customers. If your employees are not pleased, don’t kid yourself, it shows. Unhappy employees not only negatively impact the overall experience of your clients but can also make customers worry that something is wrong with your business. Whether fair or not, many customers may believe that a lack of employee happiness reflects on you as a business owner.

Some owners believe that their employees should share their dedication to the business; this is the wrong approach. At the end of the day, the business belongs to the owner(s) and not the employees. Business owners should refrain from becoming irritated or angry because employees do not match their own levels of enthusiasm. Instead, business owners should strive to help employees become as invested as possible. But at the same time, they need to always remember that employees realize that they don’t own the business.

Every business is different, and what it takes to create happy employees, of course, varies. Determining the best way to facilitate employee happiness is a prudent step. Take the time to evaluate your business and the role of your employees in it. At first, this may sound like quite the challenge, but determining what can help foster employee happiness is as easy as placing yourself in the shoes of your employees.

What would make you happier if you were an employee? Massive pay increases may not be in the cards. But still there are low cost or even free “upgrades” that you can implement. Periodically rewarding employees for a job well done with gift certificates or half-days off can go a very long way in building employee morale. When it comes time for you to potentially sell your business, you want a prospective buyer to see a lot of happy and enthusiastic employees. After all, isn’t this what you would want to see if you were buying a business?

Also consider requesting anonymous employee feedback. If you are having trouble figuring out how to solicit this feedback, you can hire a third-party company to assist you. When you read feedback from your staff, you will most likely be shocked and surprised what you learn.

Ultimately, there is no replacement for respect and kindness. Many business owners worry about employees taking advantage of them and may take an overly harsh attitude towards employees as a result. As long as employees realize that you have high standards and expect employees to uphold those standards if they want to keep their jobs, you shouldn’t have any significant problems. Employees know when they are valued and appreciated. They will, in turn, pass on this feeling of appreciation and value to your customers.

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Keys to Improving the Value of Your Company

The first key is to have your accountant take a look at your accounting procedures and make recommendations on how to improve them. He or she may also help in preparing financial projections for the coming year(s). Getting your company’s financial house in order is very important in establishing the value of your firm.

The second key is to review the reputation, image, and marketing materials of your company. Certainly, the quality of your product or service is paramount, but how your firm presents itself to customers, clients, suppliers, etc. – and the outside world – is also very important. The appearance of your facilities and customer services – beginning with how people are treated on the telephone or in the waiting/reception area – are the kind of first impressions that are critical in dealing with your customers or clients. Don’t forget about the company’s Web site; in many cases, it is the initial introduction or “first impression” of your company. Now may also be the time to update your marketing materials. The image of a company can help create a happy workforce, improve customer service, and impress those that you deal with – all of which can increase the value.

A third key is to get rid of outdated assets and inventory. Sell off any extra assets such as unused or outmoded equipment and get rid of old or stale inventory . The proceeds can be used to update the business. If there are any assets that should not be included in the value of the company, such as personal vehicles or real estate, you might want to separate them from the assets of the company or removed them from the company title. This is especially important if you are considering placing the company on the market. A prospective purchaser expects everything they see to be included in the sale. If you have an expensive item like a fish tank for example in your office and you plan on keeping it, make sure it is excluded or deleted from any list of company furniture, fixtures, and equipment when selling the business.

Another important key is to resolve any pending items. For example, if the company has a trademark on any of the important products, and the paperwork for registering is sitting on someone’s desk, now is the time to complete the filing. Trademarks, patents, copyrights, etc., can be very valuable, but only if they have been properly recorded and/or filed.

Contracts, agreements, leases, franchise agreements, and the like should be reviewed. If they need to be extended, take the appropriate action. A contract with a customer has value and if it is scheduled to expire soon, get it renewed now? The same is true for leases. Favorable leases for a long period of time can be a valuable asset and the determining factor to complete a successful deal. Do your key employees have employee agreements? Get all this in order ahead of time to avoid surprises or delays.

The key factors outlined above not only build value, but they make your business more attractive to the marketplace. If you are considering selling your company, these key issues will come back many-fold in the selling price. Don’t focus on saving nickels and dimes to only lose thousands in value. A professional Business Broker / Intermediary can help with other factors that can greatly influence the value of your business.

One other hidden benefit of building the value of your company is that you never know when the Fortune 500 Company will come “knocking at your door” with an offer that you can’t refuse. At that point, it’s probably too late to work on some of the issues mentioned above.

The Key Ingredient to Selling Your Company

Business Appraisers, before beginning an assignment, like to know the purpose of the appraisal. Usually the assignment demands “bullet proof” documentation: comparables, EBITDA multiples, projections, discount rates, etc. Unfortunately, in situations where the purpose of the valuation is to establish a selling price, the business appraiser really doesn’t understand the business elements – or, since these business elements don’t figure into the numbers, they are largely ignored. However, they do have value; in some cases, significant value to a buyer.

Valuing these business elements requires that computers, adding machines and calculators be put aside. The business should be looked at from three key business elements: the Market, the Operations, and Post-Acquisition. These elements are certainly subjective, but also critically important to a prospective buyer. A buyer’s opinion of the business elements can drive the actual offering price significantly higher—or lower. In fact, the business elements such as Fundamentals and Value Drivers can impact price as much as the Financials.

Here are some important questions to consider:

Market:
Are there significant competitive threats?
Is there a large market potential?
Does the company have a reasonable market position?
Are there broad-based distribution channels?
Is there a wide customer base?
What’s the company’s competitive advantage?

Operations:
Are there significant alternative technologies?
Is sound management to remain?
Is there product/service diversity?
Are there multiple suppliers?

Many business owners feel that what prospective acquirers are looking for are quality and depth of management, market share, profitability, etc. Brian Tracy, in his book, The 100 Absolutely Unbreakable Laws of Business Success, states that the key ingredient is “a company-wide focus on marketing, sales and revenue generation. The most important energies of the most talented people in the company must be centered on the customer. The failures to focus single-mindedly on sales are the number one causes of business failures, which are triggered by a drop-off in sales.”

Tracy goes on to point out that company owners and/or presidents should observe industry trends, pay attention to what the competition is doing that works, and learn from them. Find out what is successful and what isn’t in your industry – trends are vital. It is important to understand that established and mature companies are generally just trying to protect their market share, while start-up companies are really attempting to gain or establish market share.

Tracy estimates that 80 percent of new businesses close down within the first two years, and 100 either fall off or join the top 500 companies in the U.S. because they are acquired, merged or broken-up, and even a few actually fold.

Tracy also mentions that problem solving, decision making and team (not individual) collaboration are key factors. However, as he points out, the best companies have the best people.

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