Not All Buyers Are Created Equal: The Mindset of the Serious Buyer

Just as every person is different, the same invariably holds true for buyers. No two buyers are the same. Further, no two buyers have the same mindset, emotional makeup, or approach to business. The simple fact is that buyers opt to buy businesses for a very wide range of reasons. The bottom line is that it is up to business brokers and M&A advisors to find serious buyers so as not to waste everyone’s time. In this article, we will examine how we zero in on serious buyers.

A serious buyer, one that wants to achieve success and isn’t just window shopping, will want to understand both the business they are considering buying and the industry as a whole. Consider this rough analogy for a moment. Someone serious about winning a game will work to understand the rules before jumping in and playing. You’ll want to look for a buyer who wants to understand the strengths and weaknesses of a business. He or she will also want to comprehend the strengths and weaknesses of competitors as well as potential industry wide problems both now and in the future.

Savvy business people realize that wages and salaries make up a huge percentage of the typical business’s operating cost. A serious buyer will endeavor to understand not just the wages and salaries of employees, but also additional related costs. These can include retirement related costs, the cost of training new employees, the rate of employee turnover and more. Smart buyers are looking for stability throughout the business, and that includes its employees.

The kind of buyers you want to attract are the ones that are not just “thinking about buying” a business. You’ll want to only deal with buyers who have carefully thought through what it means to buy a business. A key aspect of buying a business, as simple as it sounds, is to fully understand what is being sold. For example, serious buyers will dive in and understand capital expenditures. They will also examine and evaluate machinery and equipment so that they understand what kinds of equipment might need to be repaired or replaced. Replacing and repairing equipment can mean substantial costs. That’s why quality buyers can be expected to evaluate all equipment extremely carefully.

Buyers who understand what it means to buy a business will even go beyond evaluating the stability of employees and the state of machinery and equipment. You can expect a serious buyer to want to know if there are any environmental concerns, they will check and evaluate the lease, and they will want to inspect the state of all buildings. They will want to know who the key clients and key suppliers are and determine if those relationships are stable or if they put the business at long term risk.

At the end of the day, the kind of buyer that you’ll want to work with is a buyer who is proactive. Quality buyers will be accessing every aspect of a business to determine its long-term viability. A buyer who goes far beyond “kicking the tires” is exactly the kind of buyer you want.

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Important Factors to Consider in Your Lease

Owning and operating a business can be rather demanding and that means from time-to-time details can slip through the cracks. All too often, businessowners don’t fully comprehend their leases and this can lead to a variety of problems. For example, if your business location is a key part of your success, it is incredibly important that you are well aware of all the essential points in your lease. Many businesses, ranging from restaurants and service businesses to retail stores, can be very location sensitive. 

Don’t Let Key Details Slip by You

Regardless what kind of business you own, it is vital that you understand every aspect of your lease. You may even have to get an attorney involved to help you understand the implications of the minor points. A failure to do so could translate to the failure of your business.

The Length of Your Lease

The length of your lease tops our list of lease related factors you need to understand. While there are many variables that will affect you, in general, the longer your lease the better. It should come as no surprise that a longer lease gives your business an increased level of stability.

Exit and Exclusivity Clauses

If you are negotiating a lease, it is prudent to include an option for getting out of the lease. Just as having a longer lease provides you with greater flexibility, the same holds true for being able to exit your lease if the need arises.

A lease is not a one-dimensional document, just as your location is not one-dimensional either. The location in which your business is located matters. If you are signing a lease to locate your business in a strip mall or shopping mall, you should try to have written into your lease agreement that you are the only business of your type that will be located in the mall. After all, the last thing you want is to see a similar business opening up nearby.

Transferring Your Lease 

Negotiating a long lease and having a way out of your lease are critically important, but so is being able to transfer your lease. At some point in the future, you may need to sell your business. For this reason, it is in your interest to have a clear understanding of how, and under what circumstances, you can transfer your lease to a new owner.

It is important to discuss the possibility of selling your business with the landlord before going to market to understand if the lease will be able to convey.  While the landlord cannot restrict the sale of your business, you could get left holding a personal guarantee in order for the lease to remain in place for the remainder of the existing lease term.  Then the new owner would be left to negotiate the lease renewal on their own.

Assignment of Responsibilities 

Rounding out our list of key factors to consider for your lease are what you are responsible for and what the landlord is responsible for handling. If you as the business owner are to shoulder responsibilities related to the property, then those responsibilities should also be clearly outlined in the lease.

There is no doubt there are many variables involved in owning and operating any business. The physical location of your business should be among your top concerns. You should do everything possible to understand your lease. When signing a new lease, try to negotiate a lease that will be as helpful to you as possible. 

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3 Warning Signs for Sellers to Be Aware Of

If you’re getting ready to sell your business, you’ll want to be on high alert for potential warning signs that could potentially derail the deal. Of course, time is of the essence when it comes to finalizing your deal. Why spend time negotiating with a buyer who is either not really interested or is simply not qualified to buy? Let’s take a look at some of the top buyer warning signs.

1. Lack of Buyer Experience

When it comes to individual buyers, you’ll want to see if they have experience in your industry. If a prospective buyer is not knowledgeable about your business, they might initially seem very excited but then get cold feet once they dive in and learn more about the industry.

The same can be said for a potential buyer who has never purchased a business before. If you’re dealing with a newbie, you’ll want to feel confident that this individual understands the ins and outs of buying a business before you dedicate too much time to their deal. After all, the process of buying a business can be long and complicated. Inexperienced buyers might find that they no longer want to continue progressing once they get a better idea for what is involved.

2. Undisclosed Financial Information

Along similar lines, you’ll want to work with a buyer who is open about their financials. If you are denied access to financial statements, you will have no way to verify that this buyer is actually equipped to purchase your business.

3. Early Communication Issues

Another common red flag to watch for is that a company says they are interested in buying your business, but the company’s actual decision makers are uninvolved in the communication. If a company is legitimately interested in purchasing your business, you will be communicating with a key player like the President or CEO.

Protect Your Interests

When your business is on the market it is a very important time to make sure that things stay consistent. If a legitimate buyer sees dips in sales or quality of your offerings, it could put a future deal on the line. That’s why you will want to protect your time by not wasting it with buyers who are not a good fit or who lack a high level of interest. Along the way, be sure to trust your intuition. If you sense something might be “off” with a potential buyer, this might very well be the case.

When you work with a business broker or M&A advisor, it will offer you a high degree of protection against falling into a rabbit hole when you should be focusing on keeping your business running as successfully as possible. Your brokerage professional will carefully vet buyers to ensure that they are actually viable candidates.

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When It Comes to Selling Your Business, Let Others Do the Heavy Lifting

While brokerage professionals are working to sell your business, it’s important for you to keep running things in a smooth and seamless manner. In countless cases, sellers have made the mistake of letting things slide simply because they are distracted while trying to sell. You’ll want to make sure things remain the same, as prospective buyers will otherwise start to become nervous. Be sure to keep the premises in tip top condition. Things such as operating hours and inventory levels should remain unchanged. After all, if sales and earnings decrease, that will raise a red flag for buyers.  

Business brokers and M&A advisors will help tremendously with various details and events that will take place during the sales process. From start to finish, they will keep their eye on the prize so that you have the time and energy to focus on running your business. The same holds true for other professionals who may help you, such as attorneys and CPAs. 

Get Professional Advice on Pricing

You may have a pre-established figure in your mind of what your business is worth and how much you expect to make when you sell. However, the truth is that you will only receive what the market will allow. That’s why it’s so important to get a professional valuation before you decide on a price. If you set too high of a price on your business, it will only slow down or even halt your journey towards successful results. 

Keep Things Confidential

Until your sales transaction is completed, you’ll also want to make sure the highest standards of confidentiality are held. If your vendors and employees know that you are selling, it could lead to circumstances that are detrimental to the value of your business. For example, key employees could seek employment elsewhere and/or vendors could terminate contracts. 

Decide On Your Strategies 

Will you be willing to stay on in some capacity? In many cases, this decision can help increase what you receive for your business. Buyers will often pay more when a seller stays on for a designated period of time as they see this as a reduction in their risk. Would you be willing to offer seller financing? Again, buyers will see this as a sign that you believe in the future success of the business. 

Prepare in Advance

It’s always best to prepare when you are not experiencing external pressures. You never know when life could take its toll and force you to sell. That’s why so many sellers start preparing years in advance by taking actions such as cleaning up paperwork, handling litigation and/or environmental issues, and organizing documents. 

Selling a business can be highly distracting for business owners. That’s why most reach out to a business broker or M&A advisor. In fact, the best policy is for business owners to start talking to brokerage professionals quite a few years in advance. That way they can make sure everything is optimized for positive results. 

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Takeaways from the Latest BizBuySell Insight Report

Whether you are thinking of buying or selling a business, it’s worth taking a look at the quarterly BizBuySell reports. The findings from these publications are taken from analysis of sales and listing prices of approximately 50,000 businesses across the United States. The report covers the statistics of sales prices and successful transactions. It also discusses the trends that are at play. Regardless of your role in the business world, these trends likely will have some sort of impact on you. 

A Boom for Sellers 

The latest BizBuySell report, which covers Q4 of 2021, found that now is a very positive time for sellers. Q4 actually surpassed the pre-pandemic numbers of the fourth quarter of 2019. Of course, this is a major shift away from the sales numbers in 2020. It is typical to see transitions dip in the fourth quarter; however, 74% of brokers stated that their sales were steady during this time period. Experts say that this strength has carried into early 2022. 

Other notable sales statistics include the following:

  • 8,647 closed transactions were reported in 2021, an increase from 7,612 in 2020
  • Sales prices increased 16% year-over-year 
  • Median cash flow grew 10% year-over-year

Buyers are Looking for Quality

In terms of what buyers are currently looking for, 60% of surveyed buyers indicated that strong financials were simply a “must have” when they were considering a business. This number is in stark contrast to 18% of buyers who responded that discounted opportunities were a top consideration. 

Labor Shortages a Factor

The BizBuySell report also discussed the prevalent factor of labor shortages. In fact, 64% of owners surveyed say that this issue has impacted them. Business brokers agree that labor shortage is currently the largest problem for small businesses. Another corresponding issue is that of supply chain disruptions, which 75% of the business owners responding to the survey said had an impact on them. 

A More Balanced Landscape

In the survey, brokers were asked if they believed that owners were more or less likely to sell their business in 2022 versus 2021. The general trend was towards brokers believing that there would be more businesses sold this year as compared to last year. Last year, the view was that buyers had the edge over sellers. However, now it seems as though brokers feel that the landscape has shifted and become more balanced overall.

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What You Need to Know About Family Businesses

Family businesses are critical to both the US and World economies. In fact, in the US alone, there are approximately 5.5 million family owned and controlled businesses.[1]  While much of the world’s wealth is a byproduct of family-owned businesses, the fact is that most are not actually prepared to sell in a way that will profit the owners for their life’s work.

Many owners of family businesses care deeply about the legacy that they built and want it to remain in their family or with someone that will continue it with the same mission, vision, and values on which it operates. This is often difficult as the owners lack an established succession plan or exit strategy.

Studies show that about one-third of family owners never even plan to retire. As a result, they have no succession or exit plan in place. In some cases, the business is forced to form a strategy by default when the business owner becomes burned out, disabled or worse, passes away. This is clearly not the best path when it comes to maximizing profits.

Pros and Cons of Conveying Your Business to Family Members

According to Businessweek.com, the average lifespan of a family-owned business is 24 years.  About 40% of family-owned businesses are successfully passed down to a second-generation with only about 13% passed down to a third generation. [2] With the fourth generation and beyond, the survival rate is 3% or less.  Regardless of whether a family business owner intends to convey their business to a third party or have it remain in the family, it is important to maintain confidentiality and have the proper documentation in place for a successful transition.

There are disadvantages that need to be considered if you plan to sell your business to a family member. One key disadvantage is that a family business owner will typically receive less value for their business than engaging the sale with an independent third party.  Selling to an independent third party can often force a family business owner to also paradoxically agree to a lower value in an effort to negotiate the retention of jobs and incomes for the family members they wish to remain with the business after the sale.  It is important to prepare the remaining family members that they will have to accept the fact that they now answer to new ownership and management with the business.

Handling Multiple Owners and/or Decision Makers

If there are multiple owners and/or decision makers in the family-owned business and the business is being sold to a third party, it is important to appoint one family member to represent the negotiations. Having multiple decision makers at this critical step in the process of conveying the business to a third-party owner can lead to numerous issues and headaches for both the buyer and seller. Many times, multiple decision makers cause failure in the ability to transition the business to third-party ownership, as the parties involved have competing priorities with the sale of the business that prevents satisfying everyone involved in the process.  Keep in mind that all family members must be in consensus with the price, terms and sale of the business or it will never happen. This fact can be true even if the family members involved are just employees or active/passive investors in the business. Disagreements among family members often derail the possibility of a deal happening.

Obtaining Outside Assistance

To increase your probability of success with conveying a family-owned business to future generations or new independent ownership, having a third-party guide you through the process who is not emotionally involved like the various family members involved, can be critical in making the deal happen. That’s why a variety of professionals including business brokers, M&A advisors, lawyers, and accountants should be brought in to help.

This article highlights just a few of the myriad of issues and process involved in conveying your business to new ownership once you decide it is time to retire or move on to a new venture.  If you are just beginning or actively considering transitioning your business to new ownership, please do not hesitate to reach out to us for advice and assistance.

[1] https://www.gvsu.edu/fobi/family-firm-facts-5.htm

[2] https://www.johnson.cornell.edu/smith-family-business-initiative-at-cornell/resources/family-business-facts/

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Justifying Your EBITDA

All too often a business owner decides to sell, only to learn a number of harsh realities. For example, oftentimes a business owner discovers that their lack of financial data represents a major problem. The simple fact is that prospective buyers will dive in and scrutinize every aspect of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) when looking at their perceived value of your business.  This will most likely take place through what is called a Quality of Earnings Analysis Report (Q of E). General Accepted Accounting Principles serves as the key basis and language for financial reporting (known as GAAP Accounting).  GAAP Accounting and Reports often represent a marked departure for how many companies handle their general and day-to-day accounting. The end result of all this can be a substantial shift in EBITDA as compared to what the actual number really is.

Potential buyers will ultimately receive numerous documents that outline the financial and operational health of your business during what is called the due diligence process in acquiring a business. This means that you, as a business owner, must be ready to invest a good deal of time in the process of disclosing as much accurate information as you can, in support and defense of the true and accurate EBITDA of your business. In short, preparing your business to be sold is no small affair when it comes to making sure that information is fully disclosed and in defense of the actual quality of financial and operational health to ensure the highest and best acquisition price.

EBITDA is one of the most common ways to value a business based on multiples of that number.  When engaging your business for acquisition in the open market, you should expect that any buyer or potential investor will perform a review of your income statement for adjustments in order to arrive at an adjusted EBITDA that makes sense for THEM. 

You need to be ready and fight back as to what the true Adjusted or Normalized EBITDA is, that serves as the basis for a purchase price of your business creating a value used with a multiple to negotiate a final price and terms that make sense for both parties. Miss out on the correct EBITDA for your business by $100,000 on a 3 multiple and you just gave up $300,000 in acquisition cost of your business – as an example.

There are three common EBITDA adjustments:

  1. First, items related to conversion based on a GAAP Accounting basis; this number can have a considerable range. 
  2. Second, one-time events such as legal expenses, PPP loan forgiveness, insurance settlements, unusual expenses associated with issues/growth of the business can greatly factor into an adjusted EBITDA amount. 
  3. Third, certain personal expenses a business owner takes that would typically not be part of the future cash flow of your business is another potential impact on EBITDA. 

It is important not to ignore balance sheets when it comes to representing the financial health and aspects of your business as well. Smaller businesses typically focus strictly on profit, and this factor can result in balance sheets not being reviewed as often as they should be. A balance sheet needs to be recast in a way that the potential buyer truly understands the assets and liabilities that convey in a sale. It is better to recast the balance sheet upfront to what truly conveys with the business as the end result can be items popping up during due diligence causing hiccups in deal making and negotiations. 

As an example – many times we see that business owners may park large amounts of cash in their business and on their balance sheets – over and above what is normally necessary.  The minute a potential buyer sees a $1,000,000 cash position on a business when a $60,000 working capital position is needed, they are going to want that $940,000 cash to convey with the business.  That’s fine if they are willing to pay $940,000 more for the business but not if they want the sale price of the business on a “cash free, debt fee” basis when the business conveys to stay the same with a reasonable sale price.  

The same is true with liabilities.  If you intend to convey the business without debt –  if $500,000 in liabilities is relieved from the business, the value and burden of debt on the business logically increases by an adjusted amount in cash flow that is not needed by the business moving forward.  This mathematically (and logically) increases the value of the business based on the cash flow used against the multiple used for valuation.  Relieve $100,000 debt service to the business against a 3 multiple for the value equates to an additional $300,000 in value and price that the business should sell.

There are three key points that business owners should keep in mind when they are planning on selling their business: 

  1. Make sure that managers and key employees are able to step in and run the business during the transition period. 
  2. Review your financials, and get ready for GAAP reporting requirements during due diligence with a potential acquisition. 
  3. Consider having a Quality of Earnings analysis performed with your business before going to market so you truly understand the financial health with your business.

As this article underscores, selling a business is a process with numerous moving parts. Well organized and solid financials – defensible EBITDA and operational health, represents to buyers and investors a sound and well-run business with an owner that is professional and realistic in their expectations. 

Bottom line? Even if you believe it will be years before you place your business on the market, it is never too early to begin preparing.

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The Complexities of Valuations

A lot of training and experience goes into good valuations. A variety of complex factors are involved. Plus, there are certainly some subjective elements. That means that one professional’s valuation may be different from the next. Let’s take a look at some of the factors involved when it comes to achieving an accurate valuation. 

Intellectual Property

Determining the value of IP or other intangible assets can be difficult. If the business in question has trademarks, copyrights and patents, it can be far more challenging to properly assign a value. 

Products and Services

As it turns out, businesses that only offer one product or service are far more difficult to analyze. If a company has a lot of product diversity, a professional will typically assess a higher value. The same is true for companies that have only one or two key customers. Lack of customer diversity can bring down overall values. 

Employee-Owned Companies 

If a company is partially or completely employee owned, it can lower its marketability. Many company owners do not realize that employee stock ownership plans (ESOP) can change its overall value. 

Life-Cycles and Supply Chains

In some cases, a business is nearing obsolescence due to advancements that have taken place. We often see this in technology companies. It should come as no surprise that if a business is near the end of its life cycle, this will raise potential issues during the valuation process. On a similar note, could the business be susceptible to supply disruptions? If a business is assessed as vulnerable in that area, it could also lower an overall valuation amount.

Accuracy of Data Received

Of course, the person handling the valuation must rely on the accuracy of the factual information they receive. If the numbers are off, the valuation simply cannot be as accurate.

These are just a few examples of the list of issues that can impact a valuation. If you’re trying to get an idea of what your business may be worth or if you ‘re wondering what factors might impact your valuation, reach out to our team. We’d be happy to discuss this in greater detail. 

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What Do Buyers Really Want?

When sellers get ready to put their businesses on the market, they often wonder what buyers are really looking for in an effort to make their businesses as attractive as possible. The answer to this question can seem mysterious when you are on the other side of the bargaining table. So, what are buyers typically thinking about when they make the decision about whether or not to purchase a business? It should come as no surprise that much of this is tied into earnings and stability. 

Guarantees of No Surprises

Earnings that are sustainable are very attractive to buyers. After all, it allows them to know what to expect. Buyers can then factor in if they can advance the business in a way in which it would grow faster than the current pace. If not, they at least would have the confidence to know that the business will proceed at the same rate. Of course, no buyer would want to acquire a business only to find that it only had high earnings temporarily due to a one-time contract. 

Accuracy of Information 

Along the same line of avoiding surprises, buyers will want to verify the information they receive about a business. Anything involving past, present, or future legal issues will be scrutinized along with other issues, such as pending product returns. The due diligence process is when you can expect the buyer to really dig into the details of your business. You can expect that he or she will often do so with the assistance of an attorney and accountant. 

Oftentimes, accountants or appraisers add back one-time expenses or non-recurring expenses. Buyers will want to look at the earnings and have proof of expenses that are non-recurring, such as fees for a lawsuit or heavy repairs to a building. Since this process inflates earnings, it can make it difficult for buyers to understand the actual earning potential of a business. Otherwise, those expenses would obviously throw off the true earning potential of the business.

In Closing

These are just a few of the critical considerations made by business buyers when looking at a potential acquisition. There are numerous other considerations that a buyer will make and it is important to be prepared to address those questions and potential concerns a buyer may have up front, or they will quickly lose interest and move on to other potential acquisition opportunities. Put yourself in the shoes of a potential buyer and think about the kinds of assurances you would want before buying a business.

Working with a Business Broker or M&A Advisor can be tremendously beneficial in this regard. These professionals have worked with many buyers in the past, and therefore easily see things from a buyer’s point of view. They will not only be able to help you get prepared up front when buyers begin looking at your business, but easily identify and point out areas of concern that a potential buyer may have in order to keep the journey to closing on track.

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No Replacement for Experience

When it comes time to sell your business and sign on the dotted line, you only have one opportunity to get it right. In many cases, business owners have made critical mistakes while attempting to sell their business. This kind of scenario can often occur when an owner trusts a friend or relative to help navigate the process. In some cases, business owners have even been known to try to broker their deals on their own. Let’s take a look at some common errors that have occurred during the process when experienced professionals were not brought in to assist.

Not Prioritizing Confidentiality 

We cannot understate the importance of confidentiality. When business owners try to go it alone, they often share valuable information with the wrong people, such as competitors. Or accidentally alert employees, suppliers and customers that the business is up for sale. When confidentiality is breached, unexpected and unfortunate consequences can result, such as employees looking for new work or customers switching over to work with different businesses. If any of these scenarios occur, it can devalue the business or even interfere with a sale going through properly.

Mistakes in Financial Information

If the party assisting you to sell your business lacks experience, he or she may accidentally omit preparing critical paperwork. Additionally, if the financial records are not properly audited, it could negatively impact the numbers. This could lead to lower offers and less interest from prospective buyers.

Failing to Involve Key Parties

Another error that could be caused by inexperience is neglecting to bring key parties into the deal. For example, when a business owner is guided by a layperson or trying to handle everything on his or her own, important people, such as the CFO, might accidentally not be brought into the due diligence process. While an error like this one might not necessarily kill the deal, it could lead to delays and complications. 

The bottom line is that when it comes to a large transaction like selling your business, it is time to rely upon trustworthy professionals. There is a long list of protocols and steps that lead to a deal going smoothly. Experienced business brokers and M&A advisors will make sure that all the best practices are followed and that you come out ahead in the end. 

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An Overview of Goodwill in Business Deals

Many business owners don’t understand the concept of goodwill or how to calculate it. When a buyer is willing to pay a premium price for a business, far more than the company’s assets would typically dictate, that is considered goodwill.  Any company can benefit from understanding how goodwill is cultivated and increasing it within their operations. 

What is Goodwill? 

Goodwill can be as simple as your company having an exceptional reputation and a very loyal base of customers. Often highly sought-after technology can be a part of goodwill.  In other cases, goodwill can be in the form of IP or desirable domain names. However, as you can imagine, it is difficult to put a specific price on these kinds of benefits. 

When a business involving goodwill is sold, it can be very challenging to determine a fair amount for a business, since subjective values are involved.  In some cases, it can even be overvalued by the buyer. Your Business Broker or M&A Advisor will take goodwill into account when determining a fair and reasonable company’s valuation. 

The Case of Personal Goodwill

In some cases, a company’s goodwill is personal. This is often due to a professional building personal goodwill with customers or clients. Oftentimes this is a relationship built over a period of time. In these cases, the goodwill is not necessarily transferable. The business is associated with a person who is often the founder of the company. You will typically see this kind of situation with dental and doctor’s practices and law offices.   

So how does personal goodwill impact the sale of the business? When you sell it might be natural that the buyer will want protection in case the business faces a downturn when the current management departs. 

What can work for the buyers and sellers is for the business owner to agree to stay onboard for a designated period of time.  This can help ease the transition to the new business owner.  In other cases, the buyer and seller arrange an “earn out.” Any lost business is factored at the end of the year, and then this percentage is subtracted from the amount owed to the seller. In some cases, funds are placed in escrow and adjustments are made depending on the performance of the business. 

If you are buying or selling a business that involves personal goodwill, your situation may be different from that of the majority of businesses. However, a Business Broker or M&A Advisor can guide you through the process and ensure that all parties are satisfied. 

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How to Get Ready to Sell Your Business

You may have heard the advice, “the best time to prepare to sell is when you start your business.” While this statement is far from realistic for most business owners and may even sound humorous, it does contain a certain amount of wisdom. When it comes to getting the best outcomes selling your business, preparation cannot be undervalued. 

No matter where you are in the journey of running your business, we encourage you to prepare as much as you can. With that in mind, let’s take a look at some considerations and decisions that you’ll need to make when you do get ready to sell. It’s never too early to begin pondering the answers to these questions. 

If you are involved in the day-to-day running of your business, logic would dictate that you’re quite busy and don’t have time to dedicate a lot of time towards the process of selling your business. The good news is that is one area where a Business Broker or M&A Advisor will make all of the difference. 

Brokerage professionals will perform a variety of tasks from start to finish, including negotiating and interacting with prospective buyers on your behalf.  These professionals will be able to work on many things independently and, if it is your preference, they can notify you only about the most relevant details of the transaction. On the other hand, you may want to be very involved in the process of selling. If that is the case, let your brokerage professional know. 

Regardless of how involved you are with the business and the sales process, you will want to ensure that things stay as consistent as possible when you are in the sales phase. The reason for this is that buyers will want to see consistency. Any change in operations or revenue earned could turn out to be a red flag for a buyer. 

Another item that is worth thinking about ahead of time is confidentiality. Professional Business Brokers and M&A Advisors will put utmost importance on confidentiality. When confidentiality isn’t taken seriously, leaks are very common. These could quickly interfere with the sale, whether it is due to a client/staff looking elsewhere or competitors taking advantage of the situation. Your brokerage professional will advise you of the policies and precautions that work best when it comes to preventing leaks and only revealing details about your business to prospective buyers who have been carefully vetted.

If you have partners in your business, it makes sense to bring up the discussion of a future sale well in advance. This will allow you to get on the same page about your plans for how things will be handled when the time comes. In the case that the date of the sale ends up being before you expect it to be, it will be very helpful to have already addressed these issues. 

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The Importance of Employee Happiness

Everyone knows that good employees are important for a thriving business. That’s why there has been so much emphasis on keeping employees happy. When your employees are feeling not only satisfied, but also valued, they will be more likely to keep your clients satisfied too. Your business will be more likely to thrive and grow. Of course, this works in the opposite direction as well. When your staff is frustrated and angry, their actions can drive away your customers and clients. If you are looking to sell your business for maximum revenues, it is a good idea to also maximize employee satisfaction levels.

Research from Oxford University found a link between happiness and productivity. According to their study, workers are 13% more productive when they are happy. It goes without saying that employees will be more likely to feel satisfied when they feel that their salary and benefits are fair for the work they do. If they are resentful about the compensation they are receiving for their work, this will ultimately impact their performance. 

When you think about some of the most successful companies, you realize that many of them invest substantially in supporting their employees to cultivate higher levels of employee satisfaction. For example, Google is well-known for offering a wide range of perks ranging from parental leave and paid time off to free lunches and fitness facilities. 

When it is feasible for employees to work remotely, many employers are finding that it makes sense to offer them this possibility. Not only will it help staff members to manage childcare, but also it can end lengthy and stressful commutes to work that could result in stress and anxiety. 

Research in the journal Frontiers in Psychology showed helpful interventions that are proven to increase employee happiness levels. These included training in resiliency, mindfulness, and cognitive-behavioral techniques. 

When you exhibit good leadership and act as a positive role model, your employees will likely follow suit. Employees should be acknowledged and rewarded for a job well done. In some cases, this may be a financial bonus, but in other cases it could simply be patting that employee on the back. Cultivating a positive company culture will prove to boost overall morale. This will increase success for your entire company. 

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Leases: Key Considerations That Can Make or Break a Business

Are you selling a business that involves a lease? If so, this will be a factor that has significance to a buyer when you go to complete your deal. If your business relies heavily on its location and you don’t own property, then you’ll find the lease will be quite an important consideration for your buyer. By the same token, if you’re buying a business that involves a lease, you’ll want to carefully examine this document and consider how it might impact you and your business. Let’s take a look at some important clauses and terms you’ll want to be looking for. 

Lease Transfers 

What are the terms for transfer of the lease? This is something you’ll want to know before signing on the dotted line if you think you’ll be selling at some point in the near future. 

Lease Lengths 

How long is your lease? If your buyer can confirm that there are many more years on your lease, he or she will find that to be an advantage. 

In the case of a business owner with a new endeavor, a shorter lease may actually be an advantage. That way the owner can get out of the lease if the business is not successful. 

Competitors 

If you’re planning on a lease in a shopping center, it’s essential to get in writing that the center will not accept other tenants that do what your business does. Otherwise, you’ll be constantly faced with competing with a similar business. 

Unexpected Costs

It’s also important to look for clauses that address what happens in the case of an adverse event. For example, if the property was destroyed by a fire, who will pay in the interim? 

There are other practical considerations to consider in leases that many business owners tend to overlook. For example, how are real estate taxes covered? Will you be charged a fee to cover maintenance of the property and, if so, what is it? Is someone in particular responsible for necessary repairs and who will pay for those? 

It goes without saying that you’ll also want to check out clauses impacting rent changes. Otherwise, you may face unexpected rent increases that negatively impact your business. 

Personal Guarantees 

If you are a new business owner, a landlord may ask you to personally guarantee the rent. This would be quite a different lease from one that accepts a well-established corporation as a tenant. 

As you can see, there is much more involved in a lease than just the amount of the rent. Be sure to read your lease carefully and ask questions. A Business Broker or M&A Advisor can assist you with lease terms when you are buying a business. 

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What Should You Expect from Term Sheets?

If you’re selling your business, at some point you’ll likely be presented with a term sheet. As the name suggests, this document will include the “terms” of the deal including the basic economic terms and conditions of a prospective acquisition. It is a list of conditions to be met if the sale successfully takes place, yet it is not legally binding.  

What is the Difference Between a Term Sheet and the LOI?

Both a term sheet and letter of intent (LOI) will include stipulations and lists for a buyer and seller to agree upon. The major difference is that the term sheet doesn’t require a signature, while the letter of intent does. In many cases, buyers are hesitant to sign before the due diligence stage. In this situation, you may find that the term sheet will precede the LOI. 

How Lengthy are Term Sheets?

There is no standard model or form to a term sheet. Therefore, it may be as short as one page, or it could even be five or more pages. But no matter how many pages it may be, it should explain what is being purchased and a stated price. In some cases, the information in a basic term sheet will lead to a formal letter of intent. 

What Components Should be Included? 

In addition to the price and terms, a term sheet can include other considerations relating to the purchase of the business. For example, it can include employment agreements or non-compete clauses. They can also include conditions to be met upon closing. Often the term sheet will detail plans for the buyer to conduct due diligence and gain additional information. You can expect to find everything from warranties and lists of what is included in the sale to exclusivity clauses within term sheets. 

One aspect of the term sheet that should not be overlooked is the method of payment. Typically, the payment sections are far more complex than just “cash at close.” Instead, they will describe a combination of elements including cash at closing, but also other forms of payments. In some situations, they will include details regarding a loan from the seller.  

The term sheet is quite beneficial as it can expedite the sales process and prevent serious misunderstandings. As a result, this non-legally binding document can initiate a smooth beginning to a successful deal. 

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Is Your Deal Really Done?

Once you get to the stage of your deal where you have a signed letter of intent, you may already be feeling a sense of relief that your deal is near finalization. But remember that the due diligence stage is typically yet to come. This stage includes everything from financial and legal investigations to a review of specific information regarding how a business is run. 

The due diligence process can be quite comprehensive and it often reveals some surprises. Because it is important for sellers to know what to prepare and for buyers to know what to look for, let’s examine some of the categories that are reviewed during this process.

Trademarks and Copyrights

Will assets like trademarks, patents and copyrights be transferred?  This is a point that has certainly interfered with some deals being successful. Due to the fact that trademarks, patents, and copyrights are often essential parts of a business, they cannot be overlooked. 

Products and Industry 

Due diligence will likely include analysis of product lines and the respective percentage of sales that they make up. If the business in question is a manufacturing business, then all aspects of the process will be examined. For example, buyers will be looking for age and value of the equipment, information about suppliers, etc. 

Financial Statements

It goes without saying that financial statements should be poured over during due diligence. Current statements and incoming sales should be carefully reviewed.  Review of financial information will also include balance sheets. Is there bad debt? Is there work in progress? These kinds of issues will be evaluated. 

Customer Lists

If you are selling a business, you should be prepared to share lists of major customers. Buyers may also want to compare your market share to that of your competitors. 

Key Employees

Buyers should be looking for information on key personnel, as well as data on any potential employee turnover. If you are selling a business, it’s important to try to fix any staffing problems that might interfere with a buyer’s ability to properly run the business. 

A key goal of the due diligence process is to find potential problems, such as liabilities and contractual issues. But on the upside, due diligence also includes investigation into assets and benefits. The end result should be that the selling price of the business is justified and both parties walk away satisfied. As stated above, it is very common for problems and issues to pop up during due diligence, so it’s important to stay proactive and be open to negotiation until the deal is finalized.

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Questions to Ask When Negotiating a Deal

Almost every sale of a business involves a high degree of negotiation between buyers and sellers. In this article, we share some of the questions you can ask yourself to prepare for this part of the process. After all, optimal outcomes are typically only achieved through proper negotiation strategies. Keep in mind that one of the key strengths possessed by Business Brokers and M&A Advisors is expertise and skills in negotiating deals. 

Can Both Parties Split the Difference?

If the buyer and seller can’t agree on a number, one negotiating tactic is to have them split the difference. This is a tactic that is simple to understand, and it shows both parties that the other is willing to be flexible. This reveals a good degree of goodwill and can serve to not only keep both parties talking, but also lower any pre-existing tensions. When both parties are still at the table, there is still hope that a deal can be reached. This tactic serves to continue the discussions and can often be highly beneficial.

Can the Buyer and Seller Better Understand One Another?

When it comes to good negotiations, one of the goals is for both parties to seek to understand one another. Sometimes a buyer or seller’s needs don’t even involve the numbers on paper. Instead, they may be seeking to adjust terms to make them more conducive to their overall goals. If you can keep an open mind and seek to better understand what the other party is ultimately looking for, it can go a long way in making the deal happen.

Can You Bring in a Professional?

There is an old saying that says “Never negotiate your own deal.” One of the benefits of bringing in a brokerage professional is that this third party won’t have the same level of emotional investment. This means that he or she can keep a neutral perspective and be more apt to see things from both sides. Sometimes a new perspective can work wonders. Further, a brokerage professional will understand the myriad of complex factors that must be successfully resolved before the deal is finalized. A Business Broker or M&A Advisor will have tips and techniques that can only be gained from years of first hand exposure to making deals happen. 

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How Can You Tell If a Potential Buyer is Really Serious?

When you’re trying to sell your business, the last thing you want is to waste time dealing with buyers who aren’t qualified and are unlikely to actually make a purchase. After all, you will not want to reveal details about your business to someone who may be looking to take advantage of the situation. Let’s take a closer look at how you can weed out legitimate buyers from those who are just kicking the can down the road.

Legitimate buyers will ask the right questions. They will have a keen interest in your industry and are seeking to gain more information. They will also be likely to ask intelligent probing questions about your customer base and the strengths and weaknesses of your business.

The best buyers will also ask logistical questions about your inventory and cash flow. It goes without saying they will want to know details about profits that are generated. Real buyers will also be concerned about wages and salaries. Their goal will be to ensure that your employees are taken care of and will be unlikely to quit. 

Another area that you can expect serious buyers to ask about is capital expenditures. They will evaluate any equipment and machines involved in the business. They will also likely inquire about inventory that is unusable due to the fact that it is outdated or problematic. After all, if they are truly planning to buy the business, they would inherit any headaches. 

A good rule of thumb is to imagine yourself in the shoes of the prospective buyer. What kinds of questions would you ask? If you find that a buyer is only asking the bare minimum of questions that only scratch the surface, odds are that they are not really interested. You can expect the legitimate buyer to ask about everything from environmental concerns to details about your competitors. 

The best way to evaluate buyers is to turn to the experts. Your Business Broker or M&A Advisor will have years of experience in talking to buyers and will have a leg up on evaluating who is worth your time and energy. 

Further, you would likely be overwhelmed with the process of handling buyer inquiries while you are still trying to effectively run and manage your business. A good brokerage professional will handle your incoming inquiries and only notify you of buyers who are suitable, qualified candidates. They will ensure that the highest standards of confidentiality are held along the way. 

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How to Sell and Successfully Launch Your Retirement

Many business owners are emotionally attached to their businesses, and it is easy to understand why. Typically, business owners invest not only a considerable amount of time and money into their business, but a good bit of themselves as well. Owning and operating a business often becomes part of one’s identity. However, the fact is that no one will work forever, as retirement eventually comes for almost every business owner. With this in mind, it is important to prepare for selling your business well in advance.

Brokerage professionals can take your knowledge regarding your business, and use it to help you frame your business in the best possible light. Your expertise in your business can also help a broker find ways to improve your business so that it is more attractive to potential buyers. With all of this in mind, let’s turn our attention to the key steps you should take when preparing to sell your business and transition into retirement.

Select Your Second-in-Command 

Any savvy buyer will want to know that the business is well supported by a capable team. Buyers rightfully worry about having a smooth transition period, and nothing helps dispel those fears like having a proven and capable second-in-command standing by. When selecting this important individual, it is important that you pick someone that understands how your business works and is a proven asset to its operation.

Automate, Automate and Automate

Buyers can be intimidated by taking control of a business. Having a proven second-in-command ready to assist is one smart step. Automating as much as possible is yet another prudent move. In short, you want your prospective new buyer to feel more confident about buying and operating your business.

Make a “Smooth Transition” List

As the seller, you have the critically important job of removing buyers’ fears. When you boost their confidence that they can successfully run your business, you increase the odds that your sale will go smoothly. Making a smooth transition list, which includes all the steps that you can take to improve the odds of a buyer being successful, is a smart investment of your time and effort. 

A good transition list will include information about how to work with key customers, employees and vendors. You want to ensure that your customers, employees, and vendors understand that a sale will take place, but also understand that the process will be smooth and trouble-free. Whether large or small, take any steps that you can to show buyers that the transition will be well-received.

The average business owner has, in fact, never sold a business before, and is unprepared for this very complex process. Since the process of buying or selling a business is a very complicated one, they should strongly consider working with an experienced Business Broker or M&A Advisor who can help guide them through the process. Brokerage professionals are experts at buying and selling businesses. They understand what both buyers and sellers want and need. As a result, they can help you take the necessary steps to get your business ready to be sold.

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A Guide for Determining a Reasonable Price for Your Small Business

There is a considerable difference between determining the value of a privately-held company and a publicly-held company. Topping the list of considerable differences is the fact that privately-held companies do not have audited financial statements. Let’s look at how the owners of privately held companies should proceed in establishing a reasonable price for their company.

An audited financial statement is a costly endeavor. In order to avoid the cost, many companies simply don’t go public. Of course, it should be noted that publicly held companies, as the name indicates, reveal much more about their finances than their privately held counterparts do. Privately held companies are often seen as being more mysterious whereas publicly held companies are considered more “open.”

Business owners looking to sell their business will, of course, want to address the fact that their company lacks the public information associated with publicly held companies. Providing prospective buyers with as much verified information about your business as possible is one of the fastest and easiest ways to overcome buyers’ concerns. A smart move for any business owner is to work closely with their accountant to go over the numbers and create an easy-to-understand presentation for prospective buyers. This should serve to allay many of their concerns. 

Working with your accountant is only the first step in providing prospective buyers with the information they need to feel comfortable. The second step is to work with an outside appraiser or other expert who can determine the value of your business. After that, you’ll want to decide on what your market price will be, as well as your “wish price,” or the price that you would ideally want. Third, you must know your “rock bottom” lowest price. You, as the owner, need to have this information as it will greatly facilitate and streamline all negotiations. 

When buyers are reviewing materials and working to determine what price they are willing to pay, they will look at a wide range of factors including: 

  • Product diversity 
  • The size of your customer base 
  • Potential competitors in the area 
  • Competitors on the horizon 
  • Potential disruptions to your business, such as supplier problems
  • The stability of your earnings 
  • The stability of the market 
  • Need for capital 

Different buyers may place differing levels of emphasis on certain areas, but you can be certain that the aforementioned areas will be examined with care. The process is undoubtedly rather complex. This complexity underscores the need for professional assistance.

Ultimately, the market will determine the sale price of your business. For business owners, the first and most important step is to work closely with professionals such as accountants, appraisers, Business Brokers and M&A Advisors to establish the price of your privately held business. You can count on brokerage professionals to properly organize the facts and numbers that support that price.

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