25 Apr

Defining Goodwill

You may hear the word “goodwill” thrown around a lot, but what does it really mean?  When it comes to selling a business, the term refers to all the effort that the seller put into a business over the year.  Goodwill can be thought of as the difference between the various tangible assets that a business has and the overall purchase price.

The M&A Dictionary defines goodwill in the following way, “An intangible fixed asset that is carried as an asset on the balance sheet, such as a recognizable company or product name or strong reputation.  When one company pays more than the net book value for another, the former is typically paying for goodwill.  Goodwill is often viewed as an approximation of the value of a company’s brand names, reputation, or long-term relationships that cannot otherwise be represented financially.”

Goodwill vs. Going-Concern

Now, it is important not to confuse goodwill value with “going-concern value,” as the two are definitely not the same.  Going-concern value is typically defined by experts, as the fact that the business will continue to operate in a manner that is consistent with its intended purpose as opposed to failing or being liquidated.  For most business owners, goodwill is seen as good service, products and reputation, all of which, of course, matters greatly.

Below is a list of some of the items that can be listed under the term “goodwill.” As you will notice, the list is surprisingly diverse.

42 Examples of Goodwill Items

• Phantom Assets
• Local Economy
• Industry Ratios
• Custom-Built Factory
• Management
• Loyal Customer Base
• Supplier List
• Reputation
• Delivery Systems
• Location
• Experienced Design Staff
• Growing Industry
• Recession Resistant Industry
• Low Employee Turnover
• Skilled Employees
• Trade Secrets
• Licenses
• Mailing List
• Royalty Agreements
• Tooling
• Technologically Advanced Equipment
• Advertising Campaigns
• Advertising Materials
• Backlog
• Computer Databases
• Computer Designs
• Contracts
• Copyrights
• Credit Files
• Distributorships
• Engineering Drawings
• Favorable Financing
• Franchises
• Government Programs
• Know-How
• Training Procedures
• Proprietary Designs
• Systems and Procedures
• Trademarks
• Employee Manual
• Location
• Name Recognition

As you can tell, goodwill, as it pertains to a business, is not an easily defined term.  It is also very important to keep in mind that what goodwill is and how it is represented on a company’s financial statements are two different things.

Here is an example: a company sells for $2 million dollars but has only $1 million in tangible assets.  The balance of $1 million dollars was considered goodwill and goodwill can be amortized by the acquirer over a 15-year period.  All of this was especially impactful on public companies as an acquisition could negatively impact earnings which, in turn, negatively impacted stock price, so public companies were often reluctant to acquire firms in which goodwill was a large part of the purchase price.  On the flip side of the coin, purchasers of non-public firms received a tax break due to amortization.

The Federal Accounting Standards Board (FASB) created new rules and standards pertaining to goodwill and those rules and standards were implemented on July 1, 2001.  Upon the implementation of these rules and standards, goodwill may not have to be written off, unless the goodwill is carried at a value that is in excess of its real value.  Now, the standards require companies to have intangible assets, which include goodwill, valued by an outside expert on an annual basis. These new rules work to define the difference between goodwill and other intangible assets as well as how they are to be treated in terms of accounting and tax reporting.

Before you buy a business or put a business up for sale, it is a good idea to talk to the professionals.  The bottom line is that goodwill can still represent all the hard work a seller put into a business; however, that hard work must be accounted for differently than in years past and with more detail.

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19 Apr

A Deeper Look at Seller Financing When Selling A Business 

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05 Apr

Posted at 11:48h in Uncategorized by bbpadmin

The recently published Axial article entitled “How Customer Due Diligence Led to a 30% Reduction in Offer Price” explains how important the due diligence process is for a prospective buyer during a business transaction. The author goes in-depth into a case study that demonstrates how proper due diligence can save a bad deal from coming to fruition, while giving examples from the case to show the effect that due diligence can have on a sale.

In the author’s case, further research into a business that seemed to have a great track record and excellent position in the market turned out some interesting information:

1. Competitors were making progress
2. Customer service could be improved
3. Innovation was lacking
4. Customer loyalty was much lower than average

These things could have easily been overlooked without a proper vetting and due diligence process, but since the business was researched thoroughly, the buyer was able to bring down their offer price by a significant amount.

Click here to read the full article.

The recent Forbes article “When Negotiating to Buy a Business – Attitude Is Everything” illustrates how negotiations can and should be treated with care, especially in regard to the attitude of the buyer. It explains how deals can take a quick turn due to things like struggles over non-negotiable points of interest or simply a bad attitude on the part of either the buyer or seller.

Money, of course, always comes into play at some point during negotiations, which is a point of contention and heavy negotiation. Understandably, money talks can draw out a lot of emotion: sellers want to make sure they are getting what they deserve and buyers want to get a deal that will be profitable in the long-term. It is so important for both parties to have respect and to build trust in these negotiations, as a deal can fall through easily if not treated with care.

Click here to read the full article.

The recently published Axial article entitled “Selling? Look for a Buyer Who’s Walked a Mile in Your Shoes” explains the benefits of due diligence and patience when selling a business. The article outlines the sale process of the footwear brand Flojos, the pride and joy of the Lins, a couple that built the company into a $50 million+ business over their tenure as owners and operators.

After finding an M&A advisor with experience in the consumer products field, the Lins focused on finding a buyer that would understand and succeed in the business, as well as continue the legacy that they had created. They wanted a buyer that represented their business well, and after receiving a few offers, they were able to select a buyer that was able to do this.

Click here to read the full article.

A recent article in The Business Journals “3 Questions to Consider When Looking at Mergers and Acquisitions” outlines what a prospective seller should consider regarding mergers and acquisitions as a means to exit their business. The current state of the M&A market makes this option very lucrative, with record transaction numbers and valuations. But no matter the state of the market, knowing whether or not this is the best option is important. When considering a merger or acquisition, you should ask yourself:

1. Does M&A align with your company’s strategic plan and vision?
2. Have you conducted adequate due diligence?
3. Do you have a post-deal integration plan?

While time and patience are very important during this process, it is also very important to understand everything about the process, why you’re undergoing it, and what it means for your business. A merger or acquisition could mean very good things for your company if you are well prepared and know what questions to ask.

Click here to read the full article.

The recent article in Divestopedia “What Role Does Your Brand Play in a Successful M&A?” explains how a business’ brand often takes a backseat to most other business activities during the M&A process. The author explains how crucial the brand really is within the transaction process, as it represents how the new business is both perceived and received by the public and shareholders of the acquiring entity, as well as employees and customers.

Branding in consideration of employees is very important in the transaction process, as the cultures of the now combined companies may differ drastically. This makes consideration in terms of culture and structure so important for both entities to ensure the process runs smoothly and the new entity is able to move forward seamlessly.

In consideration of the customers of both entities, the transaction process should flow and occur in a way that will least affect customers. This includes seamless integration of customer service processes as well as pricing and product availability, among others.

Other stakeholders to be considered during the M&A process include investors, partners, and others that are directly affected by the sale. A brand strategy that takes into account these members’ best interests will lead to a better rate of success.

Call a Certified Business Broker / Intermediary to discuss this further. 

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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Selling a Business? Be Aware of These Four Potential Issues

We’ve outlined below a few unexpected aspects of the business sale process that can pop up.  Sometimes they severely impact the turnaround time of a sale.  But if you can understand these potential issues better, you will be better prepared to try to circumvent them.

It’s helpful to use an intermediary who will assist with the filtering of prospects vs. “suspects.”  However, the inclusion of yet another party, in addition to both the business seller and potential buyers, increases the amount of time required to navigate the process.  

Sellers are typically unaware of the time and documentation needed to compile the required Offering Memorandum.  Once completed, the seller must provide both the intermediary and potential buyer more time to review and propose meetings and pricing.  In the interim, owners are faced with the challenge of keeping their business thriving.

It’s not surprising when a company owner is also its founder that individual is typically used to making all of the decisions.  That’s why business owners in the midst of selling will soon find themselves challenged with the desire to fully be a part of both the selling process and the running of the business.  

Delegation to someone else, such as the Sales Manager, can be truly invaluable.  Think of your top people as extremely valuable resources.  They may have first-hand knowledge regarding additional concerns such as competition and potentially interested acquirers.  Bringing in trusted employees to be part of the sales process can be tremendously beneficial.

When mid-sized, privately held companies are supported by minority stockholders, these individuals must be included in the selling process—however small their share may be.  The business owner will need to firstly obtain their approval to sell by using the sale price and terms as influencers.  Of course, issues such as competing interests, pricing disagreements, and even inter-family concerns may cause conflict and further delay the process.

Once sellers decide upon a price that they would like to see, it is sometimes difficult for them to accept or even consider anything less.  After all, a business owner likely created the company and may have a strong emotional attachment.

Another factor that often interferes with a successful sale occurs when sellers instantly turn down offers because they don’t meet with their desired asking price.

That’s when the intermediary can often come in to salvage the deal.  A business broker often serves as a negotiator.  He or she can work out a deal that is structured in a manner that works for both sides.

Copyright: Business Brokerage Press, Inc.

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20 Mar

Your Company’s Undocumented Worth

The valuation is a major factor that influences the overall selling price of the property.  Business appraisals are based upon a multitude of criteria and indisputable records such as comparables, projections, discount rates, EBITDA multiples, and more.  

While the appraiser may have all the information he or she needs, the business elements might be overlooked.  That’s why it’s extremely helpful for business appraisers to first grasp the purpose of an appraisal prior to getting started.  Unfortunately, the appraiser is often unaware of additional considerations that may enhance or even devalue a business’ overall worth.  

Business owners generally agree that prospective buyers are mostly looking for quality in depth of management, market share, and profitability.  Though undoubtedly more subjective than documentation, figures, and calculations alone, information regarding key business elements such as market, operations, post-acquisition, value drivers, and fundamentals is highly valued to potential buyers.

Here are some questions to consider regarding a couple of these crucial elements:

Is there an abundance of market competition?

Does pricing reasonably align with the demographic?

Are the company goals consistent with advancing technology?

Are there various and/or global means of reach and distribution?

Does the business have more potential beyond a niche?

What’s the company’s competitive advantage?

What are the strengths and weaknesses of its competitors?

Is there a great deal of alternative technologies?

Are there various vendors?

Is the company’s location convenient to its target audience?

Successful businesses thrive due to company-wide values and consistent customer-centric efforts.  In his book The 100 Absolutely Unbreakable Laws of Business, Brian Tracy summarizes this as “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 continues by pointing out that trends may be the most pivotal consideration and bottom-line contributor to any given company’s success and, therefore, valuation.  For 2017, projected trends include the increased use of video marketing, crowdfunding as a source of product validation, nutrition and fitness tracking products, the use of e-commerce, and the acquisition and training of remote employees.  

Understanding Trends

Start-up companies are likely practicing as many current trends as possible within their limited funding in an attempt to establish market share, while mature companies are hiring millennials to keep their business hip to those same trends in an effort to protect their existing share.  Business owners would benefit from studying and ultimately executing these current trends, as well as from acknowledging the successes and mistakes of their competitors.  

Tracy suggests that daily conversations that encompass problem-solving, decision-making, and team collaboration are pivotal factors in making a company successful.  And those performing all of these necessities?  As Tracy reiterates, top companies have the best people.

Copyright: Business Brokerage Press, Inc.

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14 Mar Service Businesses Perform Highest When It Comes to Sales

Recently, Business Brokerage Press performed a survey of brokers across the country to see what sells at the highest rate, and what they discovered was very interesting.  Retail business sold at 17%, food and drink related businesses at 14%, service oriented businesses sold at 25%, auto related businesses sold at 9%, manufacturing businesses sold at 16% and distribution businesses sold at 11%.  Businesses labeled as “other” sold at 5% and professional practices at 4%.

What is a Service Business?

Looking at this gathered information, it is clear that “service type businesses” are very hot and doing quite well.  The range for what is considered a service type business is, in fact, rather broad.  It encompasses everything from a dry cleaner and hair stylist business to a massage therapy chain or dental practice.  Just so long as a business is providing a service and doesn’t fall into another category, it falls under the “service oriented” banner.

Food and Drive Businesses

One of the next key nuggets of information from the survey is that food and drink businesses tend to perform quite well too.  Food and drink businesses range from bars to sit down restaurants or fast food establishments.  The simple fact is that people need to eat, and this truth is certainly reflected in the strong performance of food and drink businesses.  The need for certain types of businesses may change with changing times and changing technologies, but food and drink remains a staple.

Eating, for example, isn’t a trend and the tradition of visiting a local bar or restaurant is very established.  In fact, some of the oldest continuously operating businesses in the world are bars and restaurants.  Those looking for a business that has some degree of built in stability and is likely to be at least partially immune to emerging trends will be well advised to consider food and drink businesses.

The Mindset of Today’s Buyers

When you are considering what types of businesses that buyers may find interesting it is important to pause and reflect on the likely profile of prospective buyers.  Today, a large percentage of prospective buyers are well educated and bring a lot of experience to the table.  In short, they are savvy and know what they want.

This combination of education and experience also means that they are open minded and potentially flexible regarding the type of businesses that they will consider.  Most prospective buyers will, in fact, be open to a wide array of potential options.  At the end of the day, the most important factor for most prospective buyers will be whether or not a business is profitable.

The majority of prospective buyers will not be making an emotional buy.  Instead, due to their combination of experience and education, they are very likely to focus on profitability above all else.  Of course, this fact underscores the importance of having your business ready to sell long before the first prospective buyer sees it.

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06 Mar

Gaining a Better Understanding of Leases

Leases and Working with Your Attorney

Whenever a small business is sold, it is common that leases play a major role.  In general, there are three different types of leasing arrangements.  (If you have any questions about your lease, then you should consult with your attorney.  Please note that the advice contained in this article shouldn’t be used as legal advice.)

Three Different Lease Options

In the next section, we will examine three of the most common types of leases.  The sub-lease, new lease and assignment of lease all function in different ways.  It is important to note that each of these three types of leases can have differing complicating factors, which again underscores the value and importance of working with an attorney.

The Sub-Lease

The sub-lease, just as the name indicates, is a lease inside of a lease.  Sellers are often permitted to sub-lease a property, which means that the seller serves as the landlord.  It is key to note, however, that the initial landlord still has a binding agreement with the seller.  Sub-leasing requires the permission of the initial landlord.

New Lease

If the previous lease on a property expires or is in need of significant change, a new lease may be created.  When creating a new lease, the buyer works directly with the landlord and terms are negotiated.  It is customary to have an attorney draft the new lease.

Assignment of Lease

Assigning a lease is the most common type of lease used when selling a business as there is typically a lease in place with time remaining.  The assignment of a lease provides the buyer with use of the premises where the business currently exists; this works by having the seller “assign” all rights of the lease to the buyer.  Once the assignment takes place, the business’s seller typically has no further rights.  Also, it is common that the landlord will have wording in the contract that states the seller is still responsible for any part that the buyer doesn’t perform as expected. This will depend on the terms and conditions of your lease so discuss it with your attorney.

Disclose All Lease Issues at the Beginning of the Sales Process

No one likes surprises.  If there is a problem with your lease, then this is something that should be disclosed in the beginning of the sales process.  Not having a stable place to locate your business can be a major problem and one that should usually be addressed before a business is placed for sale.  Buyers don’t like instability and unknowns.  Not having a firm location is definitely an issue that must be resolved.

Buyers want to see that you have made their transition from buyer to owner/operator as easy as possible.  Providing clarity of issues, such as leasing, will help you attract a buyer and keep a buyer.  Regardless of whether it is dealing with leasing issues or other key issues involved in buying or selling a business, working with an experienced Certified Business Broker can help you streamline the process and achieve optimal results.

Copyright: Business Brokerage Press, Inc.

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It is always important to try and put yourself “in the other person’s shoes” during the entire sales process. This fact is of paramount importance when dealing with prospective buyers.  Thinking like a prospective buyer could, in fact, be the difference between selling your business and not selling your business.  

It is easy to think that because everything is going smoothly with the sale of your business that the tough part is behind you.  That may be true, but then again there could still be problems ahead.  Issues can come up at a moment’s notice when either your prospective buyer or his or her advisor raises a red flag.  Additionally, the larger the business, the greater the complexity.  This translates to the greater the risk of problems arising.

The “Little Things” that Could End Up Quite Big

Financial statements are of considerable importance.  Quite often you’ll see contingencies regarding financial statements and/or business tax returns, so be ready and be organized.  Lease issues is another common category for contingencies.  Falling under the lease issue umbrella are topics such as whether or not the seller has agreed to stay on, or issues regarding the property or needs associated with the property if it is a rental.

Other common contingencies can include issues arising from equipment and fixtures that are being included with the sale.  These are areas that could be easy to overlook, but they can serve to throw a major wrench into the workings of a deal.  The so-called “little things” can cause a deal to fall apart.

3 Key Steps for Preventing Disruptions from Contingencies

Step One – Create a Comprehensive List

One easy move you can make to prevent disruptions from contingencies is to make a list of all FF&E or furniture as well as fixtures, equipment or any other items that could be included with the sale.  If an item is not included be sure to remove it entirely.

Likewise, if an item is inoperable then repair it ahead of time.  Or at the bare minimum, you could make a list of items that are currently inoperable and include those items in your list.  Remember, you don’t want a last-minute surprise or misunderstanding to jeopardize your sale.

Step Two – Check Your Leases

Problems with leases can send deals spiraling out of control.  It is a prudent investment of your time to look at things like your leases.  You’ll want to make certain that there are no issues that could be viewed as problematic.  If there are issues, then it is in the best interest of the deal that you disclose this information at the start of any deal.  After all, you don’t want to waste anyone’s time, including your own.

Step Three – Predict Questions and Have Answers Ready

The time you invest in predicting potential questions and having the answers to those questions ready is time very well spent.  You’ll look prepared and that helps build trust.

Be ready to answer questions that are likely to arise such as are you going to stay on with the business for a given period of time and what will be the cost, if any, of you doing so?  What about employees staying on?  Are there legal issues that should be considered?  Being able to answer these kinds of questions is a prudent step.

Considering the needs of your prospective buyer will help you make a sale.  In selling a business, there is no replacement for being organized and prepared. Contact an experienced Business Broker to discuss this further. 

Copyright: Business Brokerage Press, Inc.

It is no great secret that sellers often aim high.  The logic sellers use is simple, “I can always reduce my price.”  While that is true, sellers do need to remember that if the asking price is initially too high, buyers won’t even take a serious look.  In short, your selling price must be bound by reality and what the market will bear.

Pricing Does Matter

When an asking price is too high buyers will simply move on.  But in the meantime, you may have lost a qualified buyer that would have been very interested at a more realistic asking price.  Pricing isn’t a factor that should be played with, instead it should always be treated in a professional matter.

Instant Millionaire?  Maybe and Maybe Not

Some sellers want to become instant millionaires and sell their business for top dollar.  Sometimes this is warranted and sometimes the numbers don’t support lofty valuations. Every situation and every business is different.  It pays to be realistic.

Studies have shown that there is usually about a 15% difference between what sellers want and what the market will bear.  For example, when a business is over $1 million, sellers usually sell for 90% of their asking price.  Smaller businesses, valued under a million, usually sell for about 85% of their initial asking price.  (Now, that stated, it is important to keep in mind that only data on sold businesses factors into this statistic.)

Business Brokers Help Determine an Accurate and Realistic Valuation

A Certified Business Broker has considerably expertise when it comes time to calculate a reasonable asking price for a business.  They know that it is essential that they come up with a price that is fair and can be substantiated.  As a result, a Certified Business Brokers takes many diverse issues into consideration. There are about 15-20 factors that affect the value of a business. A few of the factors that Business Brokers consider are type of industry, location, competition, annual sales and profit variations, condition or age of equipment, years in business, long-term employees, if the business is financeable, just to name just a few.

Prospective Buyers Can’t Read Your Mind

An experienced Business Broker can help you determine the right value for your business and determining the right value is key.  The last thing you want is to have a valuation that is far too high as you will immediately eliminate many prospective buyers.  While you may know that you are willing to negotiate and perhaps even reduce your asking price substantially, prospective buyers do not know this fact and will perceive this as an unmotivated seller.  A realistic and appropriate asking price is of paramount importance and a Business Broker can help guide you towards the best decision on what the market will bear.

Market Forces Have the Ultimate Say

In the end, it is the market, not the seller, that determines the ultimate value of a business. Buyers today are much more educated on the process and pricing of a business. A buyer can spend a short amount of time on the internet to quickly learn what a realistic value is for a business. If the asking price is out of line, the buyer will move on to the next business. A Certified Business Broker can help in analyzing your business and providing an opinion of value.

Copyright: Business Brokerage Press, Inc.

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Since business owners are the type who know about selling — either products or services– and about making deals — haven’t they had to cope with suppliers, customers, and competitors throughout their business careers? — it’s not surprising that owners approach selling their businesses with these tried-and-true tactics and ideas.  Sellers who have spent years building a business are often unaware of how completely different the process of selling a business can be.

Savvy sellers, realizing the importance of a selling approach equal to this very important task, will depend on the guidance of a Certified Business Broker.  With professional guidance, sellers can benefit from their personal strengths instead of letting them get in the way of the selling process.  The following “strong” selling points are signposts on the road leading to a successful transaction.

Price Your Business To Sell

Sellers are good “business people;” they naturally are after the best possible price for their business.  Realistic pricing is perhaps the most important factor in selling from a point of strength.  Understanding the marketplace, up-to-the-minute and not some high mark just past or in the possible future, is key.

The pricing of a business, different from the simpler means of valuing based on goods or services, depends on industry-tested valuation techniques, with intangibles incorporated to ensure that the business will not be underpriced.  The price of a business is arrived at by a variety of factors, one of the chief of which is the intensity of a buyer’s interest or the marketplace in a particular business.

Know Your Buyer

The seller, although good at “psyching out” customers and vendors, may not be as adept at sizing up potential buyers to determine what makes them tic. Some buyers are professional window-shoppers; talking a good game but never really ready to play. There are also the buyers who would play ball — if they only knew where the action was!  First locating and then vetting buyers is a key function of a Certified Business Brokers. A Certified Business Brokers will use custom databases, well thought out advertising, professional associations and networking groups, nationally and internationally, to only name a few, all to increase the chances of selling a business for the best price and terms. 

In addition, a Certified Business Broker will determine the right buyer for the business, focusing on those prospects who are financially qualified, have the proper background as well as genuinely interested in the business for sale.  As part of the process, the Business Broker will also explore various financing options as well as address many of the necessary tasks related to selling a business. This invaluable work by a Certified Business Broker not only increases the chances of finding the best buyers, it also frees up the seller so the seller can concentrate on running the business.

Prepare Your Business for Sale

In addition to the obvious need for the business to appear clean and cared-for, there are important steps the seller must take in advance of putting the business on the market.  In most situations, a business will sell based on the numbers or cash flow.  Your Business Broker will create a clear financial analysis showing the historical cash flow and prepare statements suitable for presentation to a prospective buyer.  Remember that buyers may be willing to buy potential, but they don’t want to pay for it since they are the ones that will need to put in the capital and time.  

Business owners are accustomed to coping with paperwork, but few have had exposure to the specialized contracts and forms required both before and during the selling process. A Certified Business Broker is an expert at transaction details and will help guard against delays, problems, and premature (or inappropriate) disclosure of information. Not understanding the process can jeopardize momentum which may kill the deal. Buyers expect the process to move forward and typically don’t like delays.

Maintain Normal Operations

Another vital activity for the seller is to keep on top of the day-to-day running of the business.  When a Certified Business Broker is on hand to focus on the marketing of the business, the seller can focus on keeping daily operations on-target.  Sellers are “people people,” and may have visions of wooing buyers with their great presentation of the business.  Even if this were to happen, these sellers fail to visualize the number of buyers they would have to “woo-and-win” if handling the sale on their own. A Certified Business Broker knows how to flush out the real buyers from the tire kickers and provide buyers with the details they need to quickly evaluate the business.

Confidentiality

An adjunct to maintaining the status quo is the important task of maintaining confidentiality.  Until a purchase-and-sale agreement has been signed and an escrow with a deposit is in place, most sellers do not want to disturb (or jeopardize) the business.  A Certified  Business Broker helps by using a nonspecific “blind ad” descriptions of the business when marketing. They will also require any prospective buyer to sign a confidentiality agreements, provide a resume and show their financial capabilities to purchase the business.

To keep the sale of your business on firm ground, be sure that your “strengths” as an independent business owner aren’t actually weakening the sale.  Using these key selling points along with the expertise of a Certified Business Broker to keep the process going strong and increase the probability of selling your business for the price and terms you are looking for.  

Copyright: Business Brokerage Press, Inc.

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