What is so special about “Baby Boomer” business owners? Well, there are a lot of them. It is estimated 52 percent of businesses are owned by people between 50 and 88 years of age. This equates to 9 million businesses in the United States. Put it another way, a business owner is turning 65 every 57 seconds.
So, why is this important? Typical of most business owners, the value of their business amounts to 50 to 75 percent of their net worth (if not more); the remainder in personal real estate and financial investments. Ordinarily, the business owner has only one chance to monetize his or her largest asset through the sale of the business.
It is estimated that 11,000 people are turning 65 years old every day, with this trend continuing for the next 18 years. Being that many of these Baby Boomers are also business owners, one would suspect that every year for the next two decades more and more business owners will be wanting to sell their businesses to cash out and fund their retirements. These businesses amount to some $10 trillion worth of assets.
Yet while more and more businesses go up for sale, the audience of buyers is decreasing. Today, the highest segment of business buyers is the same Baby Boomers in the age range of 55 to 64 years old. The 80 million millennials in the U.S. make up a larger demographic, though their abilities to purchase these businesses are quite low.
Applying the law of supply and demand, there is going to be a growing inventory of businesses for sale each year, while the number of qualified buyers is decreasing each of those years. The law of supply and demand would suggest there will be pricing pressure on these businesses. In addition, overall only 1 out of 4 businesses actually sell after being put on the market; however, the success rate increases to 1 in 3 for businesses with sales of $10 million, and the sale success rate grows to 1 in 2 for businesses with sales greater than $10 million.
The PriceWaterhouseCoopers accounting firm estimates more than 75 percent of business owners have done little planning for their single biggest financial asset. It is sad to say, but business owners spend more time planning their next vacation than planning for their exit into retirement.
Business owners should start the exit planning process today. Serious consideration should be given to creating a timeframe to place the business in the best position to be sold at the highest possible valuation.
Fortunately, the window of opportunity is quite good. Current conditions of rock bottom interest rates, low inflation, historically low capital gain taxes and overall high business valuations make this an ideal time to sell a business. In real estate it is all about “location, location, location,” whereas in business it is all about “timing, timing, timing.” Now is the time to cash in.
Exit planning, however, is a process that requires a significant amount of work. Most important, business owners need to assemble a team of professional advisors to assist them in this process. The team may consist of all or some of these professionals: a business intermediary firm, CPA/accountant, business attorney, financial planner, investment advisor, insurance advisor, valuation specialist, investment banker, banker and business consultant.
Using the analogy of an actual roadmap, this process can be broken down into five exits:
Exit 1: Making the Decision to Sell
Exit 2: Exit Planning Process
Exit 3: Maximizing Business Value
Exit 4: Preparing the Business for Sale
Exit 5: The Deal Process
The actual Planning Process often includes the following seven steps:
1. Identify Exit Objectives
2. Quantify Business & Personal Financial Resources
3. Maximize & Protect Business Value
4. Ownership Transfer to Third Parties
5. Ownership Transfer to Insiders
6. Business Continuity
7. Personal Wealth & Estate Planning
There is no time better than right now to start planning an exit, whether that is tomorrow, next month, next year or the next decade. Just be careful not to miss your EXIT…else you will hear your GPS (or significant other) say, “when possible turnaround” or as my GPS would say, “you idiot, you missed your exit…proceed on this road for another 20 miles.”
This article appeared in the November 2015 edition of Traverse City Business News.Read More
Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling.
Here are three questions that potential buyers will ask:
- Why do you want to sell the business?
- What should a new owner do to grow the business?
- What makes this company different from its competitors?
Then, there are two questions that sellers must ask themselves:
- What is your bottom-line price after taxes and closing costs?
- What are the best terms you are willing to offer and then accept?
You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy.
The best way to prepare your business to sell, and to prepare yourself, is to talk to a professional intermediary.
© Copyright 2015 Business Brokerage Press, Inc.Read More
Normalized Financial Statements – Statements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner’s compensation and benefits need to be restated to reflect a competitive market value.
Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company.
For example, legal fees used for litigation purposes would be considered a one-time expense. Or, consider a new roof, tooling or equipment for a new product, or any expensed item considered to be a one-time charge. Obviously, adding back the money spent on one or more of these items to the profit of the company increases the profits, thus increasing the value.
Using a reasonable EBITDA, for example an EBITDA of five, an add back of $200,000 could increase the value of a company by one million dollars. Most buyers will take a hard look at the add backs. They realize that there really is no such thing as a one-time expense, as every year will produce other “one-time” expenses. It’s also not wise to add back the owner’s bonuses and perks unless they are really excessive. The new owners may hire a CEO who will require essentially the same compensation package.
The moral of all this is that reconstructed earnings are certainly a legitimate way of showing the real earnings of a privately held company unless they are puffed up to impress a lender or potential buyer. Excess or unreasonable add backs will not be acceptable to buyers, lenders or business appraisers. Nothing can squelch a potential deal quicker than a break-even P&L statement padded with add backs.
© Copyright 2015 Business Brokerage Press, Inc.Read More
“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”
From: Selling Your Business by Russ Robb, published by Adams Media Corporation
Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!
The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.
The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.
Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.
The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.
A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.
One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?
An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?
The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.
© Copyright 2015 Business Brokerage Press, Inc.Read More
The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.
A Buyer Profile
Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.
His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyers now want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one’s own business, the buyer must be able to make that “leap of faith” necessary to take the plunge. Once that has been made, the buyer should review the following tips.
Importance of Information
Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don’t overlook a “gem” of a business because you don’t or won’t take the time it takes to find the information you need to make an informed decision. Try to get an understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.
Negotiating the Deal
Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his “story” may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.
Since you can’t expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don’t try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure–don’t obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.
Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. The seller will be teaching you the business and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.
The responsibility of investigating the business belongs to the buyer. Don’t depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the “leap of faith” necessary to achieve business ownership. Outside professionals normally won’t tell you that you should buy the business, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: “no.” You will want to get your own answers–an important step for anyone serious about entering the world of independent business ownership.
The Letter of Intent has been signed by both buyer and seller and everything seems to be moving along just fine. It would seem that the deal is almost done. However, the due diligence process must now be completed. Due diligence is the process in which the buyer really decides to go forward with the deal, or, depending on what is discovered, to renegotiate the price – or even to withdraw from the deal. So, the deal may seem to be almost done, but it really isn’t – yet!
It is important that both sides to the transaction understand just what is going to take place in the due diligence process. The importance of the due diligence process cannot be underestimated. 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.”
Prior to the due diligence process, buyers should assemble their experts to assist in this phase. These might include appraisers, accountants, lawyers, environmental experts, marketing personnel, etc. Many buyers fail to add an operational person familiar with the type of business under consideration. The legal and accounting side may be fine, but a good fix on the operations themselves is very important as a part of the due diligence process. After all, this is what the buyer is really buying.
Since the due diligence phase does involve both buyer and seller, here is a brief checklist of some of the main items for both parties to consider.
Figure the percentage of sales by product line, review pricing policies, consider discount structure and product warranties; and if possible check against industry guidelines.
Review names, positions and responsibilities of the key management staff. Also, check the relationships, if appropriate, with labor, employee turnover, and incentive and bonus arrangements.
Get a list of the major customers and arrive at a sales breakdown by region, and country, if exporting. Compare the company’s market share to the competition, if possible.
Review the current financial statements and compare to the budget. Check the incoming sales, analyze the backlog and the prospects for future sales.
Accounts receivables should be checked for aging, who’s paying and who isn’t, bad debt and the reserves. Inventory should be checked for work-in-process, finished goods along with turnover, non-usable inventory and the policy for returns and/or write-offs.
This is a new but quite complicated process. Ground contamination, ground water, lead paint and asbestos issues are all reasons for deals not closing, or at best not closing in a timely manner.
This is where an operational expert can be invaluable. Does the facility work efficiently? How old and serviceable is the machinery and equipment? Is the technology still current? What is it really worth? Other areas, such as the manufacturing time by product, outsourcing in place, key suppliers – all of these should be checked.
Trademarks, Patents & Copyrights
Are these intangible assets transferable, and whose name are they in. If they are in an individual name – can they be transferred to the buyer? In today’s business world where intangible assets may be the backbone of the company, the deal is generally based on the satisfactory transfer of these assets.
Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.
Buying a Business – Some Key Consideration
- What’s for sale? What’s not for sale? Is real estate included? Is some of the machinery and/or equipment leased?
- Is there anything proprietary such as patents, copyrights or trademarks?
- Are there any barriers of entry? Is it capital, labor, intellectual property, personal relationships, location – or what?
- What is the company’s competitive advantage – special niche, great marketing, state-of-the-art manufacturing capability, well-known brands, etc.?
- Are there any assets not generating income and can they be sold?
- Are agreements in place with key employees and if not – why not?
- How can the business grow? Or, can it grow?
- Is the business dependent on the owner? Is there any depth to the management team?
- How is the financial reporting handled? Is it sufficient for the business? How does management utilize it?
According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:
How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.
How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.
Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.
How important is confidentiality?
This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.
A recent survey revealed that the average time between listing and sale was 9 months.
Why does it take so long to sell a business? Price and terms are the biggest reasons. Not over-pricing the business at the beginning of the sales process is a big plus, as well as structuring the transaction to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period from listing to closing.
Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is also key.
Here is the basic information that a prospective acquirer will want to review:
- Copies of the financials for the past three years.
- A copy of the lease and any assignments of the lease from previous sales.
- A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
- A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
- Copies of any other documentation pertaining to the business.
- Supporting documents for patents, copyrights, trademarks, etc.
- Sales brochures, press releases, advertisements, menus or other sales materials.
In addition, here are some of the questions that buyers may have. A prepared seller should have ready answers as well as the information to support them.
- Is the seller willing to train a new owner at no charge?
- Are there any zoning or local restrictions that would impact the business?
- Is there any pending litigation?
- Are any license issues involved?
- Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
- What about the employee situation? Are there key employees?
- Are there any copyrights, secret recipes, mailing lists, etc?
- What about major suppliers or vendors?
A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business. Using the services of a professional business broker can also greatly reduce the time period. They are knowledgeable about the current market, how to market a business and how to best advise a seller on price and terms. They can also recommend professional advisors, if a seller doesn’t have them already. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.Read More
Owners are often asked, “do you think you will ever sell your business?” The answer varies from, “when I can get my price” to “never” to “I don’t really know” to everything in between. Most sellers may think to themselves when asked this question, “I’ll sell when the time is right.” Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, “it is a good idea to sell your horse before it dies.”
Four Ways to Leave Your Business
There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don’t have enough cash, or interest, to purchase the business. And, like offspring, they may not be able to manage the entire business. (3) Selling the business to an outsider is always a possibility. Get the highest price and the most cash possible and go on your way. (4) Liquidate the business – this is usually the worst option and the last resort.
When to Start Working on Your Exit Plan
There is another old adage that says, “you should start planning to exit the business the day you start it or buy it.” You certainly don’t want to plan on misfortune, but it’s never to early to plan on how to leave the business. If you have no children or other relative that has any interest in going into the business, your options are now down to three. Most small and mid-size businesses don’t have the management depth that would provide a successor. Furthermore liquidating doesn’t seem attractive. That leaves attempting to find an outsider to purchase the business as the exit plan.
The time to plan for succession is indeed, the day you begin operations. You can’t predict misfortune, but you can plan for it. Unfortunately, most sellers wait until they wake up one morning, don’t want to go to their business, drive around the block several times, working up the courage to begin the day. It is often called “burn-out” and if it is an on-going problem, it probably means it’s time to exit. Other reasons for wanting to leave is that they face family pressure to start “taking it easy” or to move closer to the grandkids.
Every business owner wants as much money as possible when the decision to sell is made. If you haven’t even thought of exiting your business, or selling it, now is the time to begin a pre-exit or pre-sale strategy.
There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.
The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?
The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.”
Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.
Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.