Two businesses could report the same numeric value for earnings but that doesn’t always tell the whole story.  As it turns out, there is far more to earnings than may initially meet the eye.  While two businesses might have a similar sale price, that certainly doesn’t mean that they are of equal value.

In order to truly understand the value of a business, we must dig deeper and look at the three key factors of earnings.  In this article, we’ll explore each of these three key earning factors and explore quality of earnings, sustainability of earnings after acquisition and what is involved in the verification of information.

Key Factor # 1 – Quality of Earnings

Determining the quality of earnings is essential.  In determining the quality of earnings, you’ll want to figure out if earnings are, in fact, padded.  Padded earnings come in the form of a large amount of “add backs” and one-time events.  These factors can greatly change earnings.  For example, a one-time event, such as a real estate sale, can completely alter figures, producing earnings that are simply not accurate and fail to represent the actual earning potential of the company.

Another important factor to consider is that it is not unusual for all kinds of companies to have some level of non-recurring expenses on an annual basis.  These expenses can range from the expenditure for a new roof to the write-down of inventory to a lawsuit.  It is your job to stay on guard against a business appraiser that restructures earnings without any allowances for extraordinary items.

Key Factor # 2 – Sustainability of Earnings After the Acquisition

Buyers are rightfully concerned about whether or not the business they are considering is at the apex of its business cycle or if the company will continue to grow at the previous rate.  Just as professional sports teams must carefully weigh the signing of expensive free-agents, attempting to determine if an athlete is past his or her prime, the same holds true for those looking to buy a new business.

Key Factor # 3 – Verification of Information

Buyers can carefully weigh quality and earnings and the sustainability of earnings after acquisition and still run into serious problems.  A failure to verify information can spell disaster.  In short, buyers must verify that all information is accurate, timely and as unbiased as is reasonably possible.  There are many questions that must be asked and answered in this regard, such as has the company allowed for possible product returns or noncollectable receivables and has the seller been honest.  The last thing any buyer wants is to discover skeletons hiding in the closet only when it is too late.

By addressing these three key factors buyers can dramatically reduce their chances of being unpleasantly surprised.  On paper, two businesses with very similar values may look essentially the same.  However, by digging deeper and exercising caution, it is possible to reach very different conclusions as to the value of the businesses in question.

Copyright: Business Brokerage Press, Inc.

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Listing agreements are very common when it comes to selling a business.  In order to sell a business using a business broker, a listing agreement is usually required.  In this article, we will explore this essential agreement and why it is so critical.

Signing a listing agreement legally authorizes the sale of a business.  The fact is that signing a listing agreement serves to represent the end of ownership, which for many business owners, means heading into new territory.  Quite often owning a business is more than “owning a business,” as the business represented a dream and/or a way of life.

Walking away from the dream or lifestyle represents a significant change.  For many owners this is the end of a dream.  It is not uncommon for many business owners to have started a business from “scratch,” and it is also only human to feel at least somewhat attached to the creation.  Phrased another way, walking away from a business that one has worked on and cared for is often easier said than done.  Businesses become integrated into the lives of their owners in a myriad of ways.  Walking away is usually easier in theory than in practice.

Now, on the flipside of the coin, a signed listing agreement is a totally different animal for buyers.  It represents the beginning of a dream.  The lure of owning a business may come from a desire to achieve greater personal and financial independence, a sense of pride in owning and building something, a desire to always be an owner or a combination of all three.  Buyers see the business as the next phase of their lives whereas sellers see the business as the past.

The listing agreement may seem simple enough, but what it represents is an important bridge between the seller and buyer.  It is the job of the business broker to understand and consider the situation of both the seller and the buyer respectively and, in the process, work closely with both parties.

The lives of both the buyer and the seller will change greatly once the sale is completed, but in radically different ways.  No one understands this simple, but very important fact, better and with more clarity than a business broker.

Copyright: Business Brokerage Press, Inc.

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When it comes to your deal being completed, having a signed Letter of Intent is great.  While everything may seem as though it is moving along just fine, it is vital to remember that the deal isn’t done until many boxes have been checked.

The due diligence process should never be overlooked.  It is during due diligence that a buyer truly decides whether or not to move forward with a given deal.  Depending on what is discovered, a buyer may want to renegotiate the price or even withdraw from the deal altogether.

In short, it is key that both sides in the transaction understand the importance of the due diligence process.  Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Before the due diligence process begins, there are several steps buyers must take.  First of all, buyers need to assemble experts to help them.  These experts include everyone from the more obvious experts such as appraisers, accountants and lawyers to often less obvious picks including environmental experts, marketing personnel and more.  All too often, buyers fail to add an operational person, one familiar with the type of business they are considering buying.

Due diligence involves both the buyer and the seller.  Listed below is an easy to use checklist of some of the main items that both buyers and sellers should consider during the due diligence process.

Industry Structure

Understanding industry structure is vital to the success of a deal.  Take the time to determine the percentage of sales by product lines.  Review pricing policies and consider discount structure and product warranties.  Additionally, when possible, it is prudent to check against industry guidelines.

Balance Sheet

Accountants’ receivables should be checked closely.  In particular, you’ll want to look for issues such as bad debt.  Discover who’s paying and who isn’t.  Also be sure to analyze inventory.

Marketing

There is no replacement for knowing your key customers, so you’ll want to get a list as soon as possible.

Operations

Just as there is no replacement for knowing who a business’s key customers are, the same can be stated for understanding the current financial situation of a business.  You’ll want to review the current financial statements and compare it to the budget.  Checking incoming sales and evaluating the prospects for future sales is a must.

Human Resources

The human resources aspect of due diligence should never be overlooked.  You’ll want to review key management staff and their responsibilities.

Other Considerations

Other issues that should be taken into consideration range from environmental and manufacturing issues (such as determining how old machinery and equipment are) to issues relating to trademarks, patents and copyrights.  For example, are these tangible assets transferable?

Ultimately, buying a business involves a range of key considerations including the following:

• What is for sale
• Barriers to entry
• Your company’s competitive advantage
• Assets that can be sold
• Potential growth for the business
• Whether or not a business is owner dependent

Proper due diligence takes effort and time, but in the end it is time and effort well-spent.

Copyright: Business Brokerage Press, Inc.

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A recent article published by Divestopedia entitled “The Only Valuation Method that Really Matters” explains the best method to use to value a business: the Business Buyer Valuation Method. While there are certainly other valuation methods, the author suggests that this one is the best and will bring you close to what a buyer is actually willing to pay.

Steps like determining who the most likely buyer is for your business and how this buyer may structure the transaction, among others, will help a seller build a valuation that will both make sense and be fair for a potential buyer.

Click here to read the full article.

A recent Axial Forum article entitled “Take Customer Due Diligence to the Next Level – Here’s How” identifies revenue growth as the majority driver of new value growth after a business transaction. The article outlines the vitality of due diligence within both the overall market and the customer base. One huge factor in this process involves customer due diligence, or the exploration of customer relationships with the business that is being purchased. This typically includes customer feedback, typically through interviews or surveys, and helps to educate potential new owners on things like customer satisfaction and loyalty, risks and opportunities, market growth outlook, market trends, and more.

Click here to read the full article.

A recently published Business.com article entitled “Your Five Year Plan to Build a Business to Sell” explains the steps involved in building a business for the purpose of a sale. Although many owners think that this is just a fantasy, there are actually some early steps that can be taken to help push a business toward a potential sale in the future. While the process can take several years, it truly can pay off in the end for both the seller and buyer.

One of the first and often overlooked steps in this process is to build a business in a market that is not only lucrative now, but will be in the future as well. This is much easier said than done in some instances of course, because many markets and industries are difficult to predict three to five years out, so this step should be taken with care.

The next, and arguably most important, aspect of creating an attractive business is profitability: a business that is profitable and one in which the profit is growing is the most attractive to potential buyers. Bidders want to see a business that is both making money and growing.

Other important aspects of an attractive business include keeping the business “clean” and building a corporate structure that doesn’t depend on the involvement of the owner. Clean businesses are ones that are transparent with well documented processes and transactions, as well as a problem-free workforce. An independent corporate structure is one that is able to function without the current owner as the core of the business. A business that cannot function when the owner is absent is not an attractive option for buyers.

Click here to read the full article.

A recent Forbes.com entitled “How To Make Millions Off Your Exit: 7 Entrepreneurs Worth Over $2 Billion Explain” outlines important insights for making an exit, taken directly from entrepreneurs that have started and sold businesses of their own. The list below outlines the entrepreneurs’ advice:

1. Sell to Make Your Business Grow
2. Prepare in Advance
3. Create an Expert Team
4. Sell the Potential of Your Business
5. Focus on Providing Value
6. Seek Advice
7. Actively Look for Buyers

While some of these aspects of a successful business sale may seem obvious, many are often overlooked. Another important lesson to take from this: learn from those that have experience making deals!

Click here to read the full article.

A recent BizBuySell article entitled “Top 4 Small Business Funding Methods of 2017” outlines some of the best options for funding the purchase of a small business when personal savings, loans from family and friends, or credit cards don’t quite cut it. They include:

1. SBA Small Business Loans
2. 401(k) Business Financing
3. Home Equity Lines of Credit
4. Unsecured Loans

Each of the above methods have their own pros and cons, and deciding which method is best when looking into funding options is ultimately up to the borrower. While there still several options outside this list, these are some of the most common and are widely available to applicants in a wide variety of situations.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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It is common for executives at companies to undergo an annual physical.  Likewise, these same executives will likely examine their own investments at least once a year, if not more often.  However, rather perplexingly, these same capable and responsible executives never consider giving their company an annual physical unless required to do so by rule or regulations.

Most Business Owners Don’t Know

Recently, a leading CPA firm undertook a study that was quite revealing.  In particular, this study concluded that a whopping 65% of business owners don’t know the value of their company and 75% of the surveyed business owners had their net worth tied up in their businesses.  Phrased another way, 75% of business owners don’t know how much they are worth!  Perhaps most striking of all was the fact that a full 85% of business owners have no exit strategy whatsoever.

Having Recurrent Valuations is a Must

Business owners should know what their businesses are worth at least on an annual basis.  Situations, both personal as well as in the economy at large, can change very rapidly.  A failure to have a valuation leaves one exposed if issues suddenly arise involving estate planning or divorce or even partnership issues.  These are just two examples of potential problems.

It is also vital to understand how your business compares to last year and previous years; after all, valuations should be increasing not decreasing.  A valuation can also help you understand how your business compares to other businesses.  Perhaps most importantly, an annual valuation can help you spot and fix problems.

“Buy, Sell or Get Out of the Way”

If you don’t know your valuation, then you truly don’t know where you are headed.  As former Chrysler CEO, Lee Iacocca once stated, “Buy, sell or get out of the way.”

Standing still isn’t an option.  You need to know your valuation in order to take full advantage of opportunities.  You may feel that an acquisition isn’t the right move at the moment, but that doesn’t mean you shouldn’t be ready!  Having a current valuation means you’re ready to go if opportunity does, in fact, knock!

You never know when a potential acquirer may enter the picture.  Imagine missing out on a tremendous opportunity because you didn’t have a valuation in place.  Often hot offers and hot opportunities depend on speed.  The time it takes to get a valuation could mean that the opportunity is no longer available.  An accurate annual valuation of your business provides a valuable option whether you choose to exercise it or not.

Copyright: Business Brokerage Press, Inc.

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Not every prospective buyer actually buys a business.  In fact, out of 15 prospective buyers, only 1 actually makes a purchase.  Sellers should remember that being a buyer can be stressful.  The bottom line is that buying a business is usually one of the single largest financial decisions that a person can make.  In this article, we are going to explore a few of the reasons why being a buyer can be both stressful and taxing.  Keeping a buyer’s perspective in mind will help you on the road to successfully selling your business.

A prospective buyer has many decisions to make before he or she decides to buy a business.  Many prospective buyers are employed, and that means they will have to leave their existing job in order to buy a business.  Simply stated, a buyer will have to leave the safety and security of their job and “strike out on their own.”

There are also other substantial financial concerns for buyers as well.  The majority of buyers will, in fact, have to take out loans in order to purchase a business.  Additionally, the new owner will need to execute a lease or assume the existing list.  At the end of the day there exist an array of weighty business decisions that a buyer must make.

Ultimately, a buyer has to decide whether or not he or she is ready to take a giant step and purchase a business.  This is more than just a financial decision.  The enormity of the decision to purchase a business is such that touches every aspect of a person’s life.  Owning a business can be very time consuming and demand a great deal of one’s attention.  The end result, is that buying a business has a direct impact on both one’s financial life and one’s personal life.  Owning a business can be extremely time consuming and this is particularly true for new business owners.

Prospective buyers need to weigh all the factors involved in buying a business.  Caution must be exercised.  Buyers need to step back and fully assess whether or not owning a business is right for them both on a personal and financial level.  When sellers put themselves in their buyer’s “shoes,” things begin to look a bit differently.

When it comes to buying or selling a business, the assistance of a business broker is invaluable.  A business broker understands what is involved in owning a business and can help both buyers and sellers evaluate the pros and cons of any transaction.

Business owners considering selling should realize that they have many different types of prospective buyers.  Today’s prospective business buyers are more sophisticated and diverse than ever before.  Let’s take a closer look at the different types of prospective buyers and what you should know about each of them.

1.  Family Members

Family members often buy businesses from other family members.  There are many reasons this happens.  For example, a family member is already very familiar with the business.  If a family member is treating the responsibility seriously and has prepared years in advance for the responsibility of owning the business, then selling to a family member can work.

However, there are many potential problems when it comes to selling a business to a family member.  One problem is that the family member simply lacks the cash to buy the business.  This can cause disruptions.  If the family member is unprepared to run the business, then the business can suffer a range of disruptions leading to a loss of business.  Any family member that buys a business must be ready for the responsibility.  An outside buyer usually solves all of the problems that come along with a family member buying a business.

2.  The Individual Buyer

Most owners of small to mid-size businesses like the idea of selling to an individual buyer.  Often these buyers are older between the ages of 40 and 60, and bring with them a good deal of real world business experience acquired in the corporate world.  For these buyers, owning a business is a dream come true.  Many individual buyers have the funds necessary to buy.

An individual buyer who is looking to replace a job that has been lost or downsized is often an excellent candidate.  On the downside, individual buyers quite often have not owned a business before and may be intimidated by what is involved.  At the end of the day, the individual buyer is often easier to deal with than other types of buyers.

3.  Business Competitor

It is quite common for business owners to look to their competitors when it comes time to sell.  No doubt, the approach of selling to a competitor makes sense, as a competitor already understands the business and will likely see the value.

Additionally, a buyer may see buying a similar business as an easy way to expand and increase cash flow.  That stated, it is extremely important to work with a business broker in this situation.  By going through a business broker, it is possible to have a secure confidentiality agreement in place so that the prospective buyer doesn’t learn the name of the business or other details before signing the agreement.

4.  The Foreign Buyer

Foreign buyers often have the funds they need and look at buying an existing business as a way of addressing such issues as language barrier, licensing difficulties and other problems.  Business brokers can be very helpful when working with foreign buyers, as they have experience with the obstacles a foreign buyer may face.

5.  Synergistic Buyers

A synergistic buyer is one that feels that a particular business would complement his or her existing business.  The idea is that they can combine the two businesses and in the process, lower their cost and acquire new customers.  These are just a few of the advantages for a synergistic buyer, and that is why they are often willing to pay more than other buyers.

6.  Financial Buyers

Financial buyers can come with a long list of demands, criteria and complications, but that doesn’t mean that they should be discounted.  With the assistance of a business broker, financial buyers can still be good prospective candidates.

It is, however, important to remember that these buyers want maximum leverage and are often a good option for the seller who wants to continue to manage a company after it is sold.  It is common for financial buyers to offer a lower purchase price than other types of buyers.  After all, buying the business is strictly for financial purposes and it isn’t attached to fulfilling a dream or a family tradition.  Financial buyers are looking for a business that is generating sufficient profits so as to support the business and provide a good return to the owner.

Working with a business broker can help you find the right kind of buyer for you.  Every business is different and every prospective buyer is different.  A business broker can help you navigate the possibilities so you find the right buyer for your business.

Confidentiality is a major concern in virtually every business.  Quite often business owners become a little nervous when it comes time to sell their business; after all, business owners usually want to keep the fact that they are selling confidential.  Yet, at the same time, business owners want to receive top-dollar for their businesses and sell that business as quickly as possible.  In order to sell a business quickly and receive top-dollar, it is usually necessary to present the business to a range of prospects.  The simple fact is that you can’t sell a business without letting prospective buyers know that it is for sale.

All of this adds up to one simple conclusion: you will need a confidentiality agreement when selling a business.  Let’s look at a few of the key points your confidentiality agreement should cover.

1. Type of Negotiations

First, your confidentiality agreement should cover whether or not the negotiations are open or secret and exactly what kind of information can be disclosed.

2. Duration of Agreement

Your confidentiality agreement must specify exactly how long the agreement will be in effect.  In most circumstances, it is prudent for the seller to seek a permanently binding confidentiality agreement.

3. Special Considerations

There are other considerations as well, for example, does your business hold any patents?  A buyer could learn about your inventions during a buying process so you’ll want to make sure that your confidentiality agreement protects your patent and copyright interests as well.

4. State Laws

Additionally, your confidentiality agreement must factor in different state laws if the other party is based in a state different than your own.

5. Recourse in the Case of Breach

Finally, your confidentiality agreement should outline what recourse you will have if the agreement is breached.  Having a confidentiality agreement does not offer magical protection against a violation.  However, a confidentiality agreement does ensure that prospective buyers understand the seriousness of the situation and that there are indeed severe consequences if the agreement is not followed.

It is important for all parties involved to realize that a confidentiality agreement is a legally binding agreement that is enforceable in a court a law.  Thanks to a confidentiality agreement, a seller can share confidential information with a prospective buyer or business broker so that a business can be properly evaluated.

With so much on the line, it is vital that you have your confidentiality agreement drawn up by a legal professional.  A good confidentiality agreement is an investment in your business.  It is possible for a business owner to sell his or her business and do so with some degree of confidence that information shared with prospective buyers will not be disclosed.

A recently published Divestopedia article entitled “The Top 10 EBITDA Adjustments to Make Before Selling a Business” explains common practices in adjusting EBITDA before selling a business for the purpose of helping the seller get the best value from the sale. The process of normalizing a company’s financials is often done by investment bankers before a sale to help show potential buyers the best possible version of a company’s financials with the ultimate goal of getting a higher selling price. The following adjustments are some of the best:

1. Non-Arms-Length Revenue or Expenses
2. Revenue or Expenses Generated by Redundant Assets
3. Owner Salaries and Bonuses
4. Rent of Facilities at Prices Above or Below Fair Market Value
5. Start-Up Costs
6. Lawsuits, Arbitrations, Insurance Claim Recoveries and One-Time Disputes
7. One-Time Professional Fees
8. Repairs and Maintenance
9. Inventories
10. Other Income and Expenses

Adjustments in these factors can be crucial to getting the most out of a business sale. Follow the link to read more about how each of them can affect the sale price of a business.

Click here to read the full article.

A recent article published on Axial Forum entitled “Dying is Not an Exit Strategy” speaks on the importance of having an exit strategy and succession plan. There can be nothing worse than the unexpected illness or death of a business owner without a proper plan for the business in place. These unfortunate circumstances will not only burden the family of the owner, but will likely result in the liquidation of a business at a fraction of its true value.

Three important factors to consider when planning a succession strategy include:

1. Who will run the business?
2. Who will own the business?
3. How will proceeds from a sale be distributed?

Whether or not you’re in a position to think about selling your business in the near future, it is still important to think about how you’d like to transition in the event of unexpected circumstances.

Click here to read the full article.

The recent article published in Divestopedia entitled “Who Will Buy My Company?” helps business owners understand the avenues for finding a buyer for their business. With options in selling internally, externally, or a combination of both, there are multiple paths and opportunities to finding the right buyer. Each of these paths can result in a unique outcome, so it is important for a seller to choose the one that best fits their needs.

The article identifies two important and useful steps in understanding who will want to purchase a business: identify best buyers and take an offensive approach. Having at least a general idea of who would even consider buying your business is a great first step, which can be refined with better and more pertinent information over time. Taking an offensive approach involves actively becoming a bigger presence in different communities related to the business or industry, giving a seller better insight into what potential buyers may be interested in.

Click here to read the full article.

The recent article published in Divestopedia entitled “If You’re Selling Your Company, Don’t Get Sandbagged” explains what a “sandbag clause” is and how sellers can avoid them during the transaction process. As explained by the author, sandbagging occurs when a purchaser goes through with closing a deal when they are aware of misrepresentations in a seller’s contract. This is often used as basis for an indemnity claim by the buyer after the sale.

Sellers can get sandbagged in a few different ways, with some of the more common related to the fact that the seller doesn’t know every exact detail about the daily operations of a business. Often times, a buyer can uncover some of the finer details that may have been missed in the contract, which is why it is of utmost importance for sellers to be diligent in the process. As the article suggests, having an experienced M&A lawyer may help to mitigate these risks.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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02 May

Financing the Sale of a Business 

How the purchase of a business will be structured is something that must be dealt with early on in the selling process. The simple fact is that the financing of the sale of a business is too important to treat as an afterthought. The final structure of any sale will be the result of the negotiations between buyer and seller.

In order for the sale to be completed in a satisfactory manner, it is vital that the seller answers six key questions:

1. What is your lowest “rock bottom” price? It is important for sellers to know what is the lowest price they are willing to accept before they begin negotiations. Far too often, sellers have not determined what price is their “lowest price” and this can literally cause negotiations to fall apart.
2. What are the tax consequences of the sale? Sellers often don't think about the tax consequences of the sale. Taxes will never go away and will be part of the sale regardless of when you sell. The key is to speak with a CPA, which may not be your current CPA that understands the tax liability from a sale of a business. Ask your Business Broker for a recommendation of a Business Sale CPA often referred to as a Business Transfer Specialist.
3. Interest rates are no small matter. It is important to determine what is an acceptable interest rate in the event of a seller-financed sale. Ask your Business Broker for the current market rates.
4. Have unsecured creditors been paid off? Does the seller plan on paying for a portion of the closing costs?
5. Will the buyer have to assume any long-term or secured debt?
6. Will the business be able to service the debt and still give a return that is acceptable to a buyer? This is very important to understand! A buyer will not move forward unless he or she is able to cover the debt and generate a certain amount of cash flow.

Studies after studies have indicated that there is a direct relationship between more favorable terms and a higher sales price. In particular, one study revealed that offering favorable terms could increase the total selling price by as much as 30 percent!

Business Brokers are experts in what it takes to successfully buy and sell businesses, and this is exactly the kind of insight and information that they have at their disposal. Experienced Business Brokers are able to use their knowledge of everything from current market conditions and financing strategies to the knowledge of previous sales and a given geographic region to help facilitate successful deals.

Usually, selling a business is one of the most important things that a business owner does in his or her professional lifetime. Business Brokers understand this fact, and they understand the importance of making certain that the deal is structured correctly. The facts are that the way in which a sale is structured could mean the difference between success and failure.

Structuring a deal in such a way where it is the best possible deal for both the buyer and seller, helps to ensure that a deal is successfully concluded. Working with a Certified Business Broker is one of the best way to ensure that a business will be sold.

Copyright: Business Brokerage Press, Inc.

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