3 Steps for Achieving Pricing Power

The simple fact is that most of us want to control our own fate.  This fact is especially true for entrepreneurs and business owners.  However, the truth of the matter is that for most business owners, their fate isn’t completely in their own hands.  For example, a variety of forces can prevent businesses from establishing their own prices. 

Knowing whether or not your company has pricing power is essential and can influence a range of decisions that you may make.  Let’s take a closer look at what steps you can take to control your own pricing.

What is Pricing Power?

This economic term describes the effect of a change in a product price on the demanded quantity of said product.  Your company’s pricing power is linked to the demand for your products or services.  If you have a high level of pricing power, you can raise your prices over time and maintain your customers. 

Who Has the Greatest Pricing Power? 

It is no great secret that the Amazons, Apples, Wal-Marts and auto manufacturers of the world exercise a tremendous amount of power.  Part of this considerable, and seemingly ever growing, power resides in the fact that the size of these companies now rivals and even surpasses many nation states.  This grand level of power is unique in human history in many ways.  Along with it comes the ability to exercise an almost god-like authority over suppliers. 

Today, these ultra-powerful companies commonly dictate to vendors what prices they are willing to pay, and the quasi-monopolistic nature of these companies often leaves vendors with no choice to comply.  In short, these 900-pound gorillas are telling companies both large and small exactly how much they will pay for a given number of bananas. 

Step 1 – Providing a Branded Product or Service

If you discover that your company doesn’t have pricing power, there are steps you can take.  One step is to produce a branded product or service.  In this way, you are able to offer something of greater value than your competitors.  Through having a branded product or service, it is possible to create a higher perceived value in the minds of not just the Amazons of the world, but in the minds of consumers as well.

Step 2 – Innovating 

Another path towards achieving pricing power is through innovation.  A great example of leading the way in innovation is Apple.  While few companies have Apple’s almost ethereal resources, that is not to say that you cannot find ways to innovate within your own sphere or industry.  Small innovations can often have an outsized impact and help a business stand out from a crowded playing field.  Innovation that leads to patent production is an excellent way to gain a degree of pricing power.

Step 3 – Offering Exceptional Service

A third option for achieving a degree of pricing power is to provide what could be called “mind-blowing” service.  By providing service that is truly a cut above what the competitors can match, your company is positioned to achieve pricing power.  Providing your customers with something they simply can’t get elsewhere is a key way to setting a price that is more in line with what you desire.

There are many marketplace variables that your business can’t control.  The trick is to evaluate your business, your business’s potential and the concrete and practical steps you can take starting today to achieve pricing power. 

Copyright: Business Brokerage Press, Inc.

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John Warrilow’s The Art of Selling Your Business

John Warrilow is the founder of The Value Builder System and accomplished author.  While not a business broker himself, Warrilow has gathered considerable knowledge and expertise on the industry.  His previous book Built to Sell was listed as one of the best business books of 2011.  In this article, we will explore some of the key points in Warrilow’s latest book, which is entitled The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top.  This book was released on January 12th, 2021 and is proving to be invaluable for business owners. 

Selling When the Time is Right

One key focal point of the book is that business owners should skip trying to find the perfect “magical time” to sell their business.  Additionally, Warrilow notes, “I make the strong recommendation in the book that the best time to sell your company is not during some mysterious macroeconomic environment.  It is when someone is willing to buy it and you get an offer.  And that is because at that point, you’re in the position of strength.”

The DIY Approach 

This book reinforces the fact that business owners truly need to work with an intermediary if they are to achieve optimal results.  Warrilow even includes his six reasons for why every business owner should hire a business broker or M&A advisor.

Many business owners think that they can simply handle selling their business on their own.  But the simple fact is that business owners usually have no experience in selling a business.  Add this to the fact that selling their business is likely to be the most important financial decision the business owner ever makes, and it quickly becomes clear that business owners are doing themselves a considerable disservice when they opt to handle everything on their own.  

A Business Broker vs. a Lawyer

As Warrilow points out, oftentimes business owners think that rather than working with a business broker or M&A advisor, they can turn to a trusted lawyer who has served them in the past.  But this thinking is flawed when it comes to successfully selling a business.  As Warrilow states, “a lawyer, almost by default, is going to be very conservative as everything exposes a lawyer to risk.  And that is why using a traditional attorney is almost always a mistake.” 

If you are planning to sell your business now or in the future, a book like Warrilow’s The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top can serve as a uniquely valuable tool in your toolbox.

Copyright: Business Brokerage Press, Inc.

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Why Businesses Get Into Trouble

No two companies are quite alike, and this also means that there are many reasons why companies can fall into trouble.  While the number of variables involved in operating a company are practically endless, there are a handful of reasons why companies can fall on hard times.  Let’s take a closer look.

Lacking Focus

Companies that lack focus can often run into considerable trouble.  Not understanding their customers and what they need or want can lead to endless problems.  It is vital that companies frequently stop and assess who their customers are and whether or not they are properly servicing their needs.

Management Problems

Not too surprisingly, many companies can run into trouble because of poor management.  Management problems are not one-dimensional, but instead take a variety of shapes.  Management that isn’t focused, is incompetent, or simply doesn’t care about the business can translate into a business’s premature death. 

Under the umbrella of “management problems” also falls such missteps as poor financial controls, quality control problems, operational issues, and/or not keeping up with technological advancements.  At the end of the day, many of the problems on our list have at least some management issue missteps at their heart.

Loss of Key Employees or Clients

The loss of a key employee or a key client can spell serious trouble.  Of course, no management team can predict every eventuality.  However, when there is a loss of a key employee or client, and there is no plan for replacement, then management does shoulder at least some of the blame.  The savviest companies take steps to ensure that there are ways to replace the most important employees and clients.

Failure to Compete 

More than one business has been buried by the competition or failure to see a new wave of competition coming.  For example, countless mom and pop video rental stores were absolutely bludgeoned by the introduction of Blockbuster Video a generation ago. 

While it is true that sometimes market forces are so aligned against a business that survival is almost impossible, that is normally not the case for most businesses on a year-to-year basis.  The most effective and competent management can see the competition out on the horizon.  Or at bare minimum, they have an emergency plan in the event that the competition becomes more intense.

All too often by the time a business realizes that it is in trouble, it is already too late.  If the problems can’t be fixed, then it may be time to consider selling the business.  But such decisions must be made quickly in order to prevent additional bloodletting.

Optimally, a business is sold while it is doing well.  Regardless of whether a business is thriving or experiencing difficulties, a business broker or M&A advisor can be an invaluable ally in helping a business reach its full potential.

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Maximizing Your Time by Rating Buyer Seriousness

Your time is your most valuable commodity.  The simple fact of the matter is that many “buyers” are not truly buyers.  In contrast, they are often window shopping or acting out a fantasy of buying a business.  In other cases, they would only plan to buy if they were to find the “deal of the century.”  The last thing you want to do is waste your time trying to work out deals with people who aren’t serious or qualified buyers. 

The Plus and Minus System

The best way to find a serious buyer is to use a “plus and minus” system.  This system will help you weed out the window-shoppers from buyers that are truly worth your time. 

First, let’s evaluate factors for which you’ll want to deduct points.  If a buyer needed outside financing, then subtract 4 points.  Likewise, if a buyer has been looking for 6 months or more, you’ll want to also subtract 4 points.  If a buyer has no cash available, you should subtract 3 points.  Additionally, if a buyer is currently working in the corporate world, you should also subtract 3 points.  These are the 4 largest reasons to subtract points, but they are not the only reasons. 

Below are a few reasons to subtract 2 or 1 points from a buyer’s rating.

  • You learn the spouse is not supportive – Subtract 2
  • Prospective buyer uses a legal pad or clipboard and takes copious notes – Subtract 2
  • The buyer indicates that they are in “no rush” and want to find the perfect business – Subtract 2
  • The buyer is under the age of 25 or over the age of 62 – Subtract 1
  • The buyer is currently renting even though he or she has lived in the area for some time – Subtract 1

Factors to Add Points In

There are also many factors that would make a buyer fall onto the “plus” side.  If the prospective buyer does not currently have a job or has just resigned from their job, then add 3 points.  Likewise, if a prospective buyer acknowledges that books and records are not the only metrics by which to judge a business, add 3 points. 

Add 2 points if a buyer has enough money to buy the business and another 2 points if the buyer currently has no dependents.  If a close relative or family member currently owns or has owned a business in the past, then add 2 points.  If the buyer is between the ages of 25 and 62 add 1 point.  If he or she is a skilled worker or professional, add 1 point.  Finally, if the buyer does not consider location to be a prime consideration, add 1 point.

This streamline, straightforward and relatively simple system does work.  Use this system consistently, and you will quickly eliminate a large percentage of window shoppers.  While no system is perfect, this “plus-minus” system for accessing prospective buyers will save you countless hours and many potential headaches.

Copyright: Business Brokerage Press, Inc.

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Ownership Transition Survey Results on feedback and answers from family-owned businesses

Mass Mutual Life Insurance produced an ownership transition survey back about a decade ago.  The survey results were based on feedback and answers from family-owned businesses.  It produced some very interesting results, and is worth examining even today.  While the survey at this point is quite outdated in terms of the timeline, there are still many valuable nuggets of information to be gleaned from it.  Let’s dive in and take a closer look at the numbers and what they can tell us for 2021 and beyond.

While the Mass Mutual Life Insurance ownership transition survey had a range of important points, the one that leaps right off the page is the fact that a whopping 80% of family-owned businesses are still being controlled by their founders.  A large percentage of those founders are Baby Boomers who will have little choice but to retire in the next few years.

The survey indicated that 55% of CEOs over the age of 61 or older have yet to choose a successor.  This fact serves to emphasize the fact that a “retirement wave” will hit family-owned businesses, and this will lead to some interesting shifts and opportunities.  And while the survey indicated that 13% of CEOs state they will never retire, the reality of the situation is that ownership will eventually change hands.  Business brokers can expect to see an unprecedented wave of interest in their services.  Additionally, prospective buyers will also have a highly unique opportunity to buy established businesses.

The survey also indicated that 30% of family-owned businesses will be changing leadership within the next five years.  Of course, with that change of leadership, many possibilities open up, including the possibility of selling.  However, it is important to note that while there will be a “retirement wave” amongst the Baby Boomers, not all businesses currently owned by Baby Boomers will be placed on the market.

The survey noted that 90% of businesses currently plan on remaining family-owned, and 85% of businesses plan on having their next CEO be a family member.  However, it is important to keep in mind that even if these numbers were to hold true, that means at least 10% of businesses will be up for sale.

It is likely that this number is far higher now than when the survey was conducted due to the aging nature of the Baby Boomer population and owners looking to sell because of pandemic related issues.  Simply stated, there will be no shortage of businesses for sale in 2021 and beyond.

Another important aspect of the survey to consider is the fact that family-owned businesses are not prepared to sell.  According to the survey, 20% of family-owned businesses have not completed any form of estate planning, and 55% of family owners do not have any formal company valuation for estate tax estimates.  Combine these statistics with the fact that 60% of businesses do have a written strategic plan, and it becomes clear that family-owned businesses, especially those considering selling in the future, are most definitely in need of professional assistance.  Many family-owned businesses are ill prepared for the future and have a range of vulnerabilities.  Business brokers and M&A advisors are uniquely positioned to provide those services.

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The Importance of Owner Flexibility

You shouldn’t expect to sell your company overnight.  For every company that sells quickly, there are a hundred that take many months or even years to sell.  Having the correct mindset and understanding of what you must do ahead of time to prepare for the sale of your company will help you avoid a range of headaches and dramatically increase your overall chances of success.

First, and arguably most importantly, you must have the right frame of mind.  Flexibility is a key attribute for any business owner looking to sell his or her business.  There are many variables involved in selling a business, and that means much can go wrong.  An inflexible owner can even irritate prospective buyers and inadvertently sabotage what could have otherwise been a workable deal.

Be Flexible on Price

A key part of being flexible is to be ready and willing to accept a lower price.  There are many reasons why business owners may fail to achieve the price they want for their business.  These factors range from lack of management depth and lack of geographical distribution to an overreliance on a handful of customers or key clients.  Of course, one way to address this problem is to work with a business broker or M&A advisor in advance, so that such price issues are minimized or eliminated altogether.

Be Prepared to Compromise

In the process of selling your business, you may want to achieve confidentiality and sell your business quickly and for the price you want.  However, the fact is that most sellers find that it is possible to have confidentiality, speed, and the price you want, but not all three.  Ultimately, you’ll have to pick two of the three variables that are most important to you.

Be Patient

A third way in which business owner flexibility can boost the chances of success is to embrace the virtue of patience.  By accepting the fact that businesses can “sit on the shelf” for a considerable period of time, you are shifting your expectations.  This realization can help reduce your stress level.  The fact is that stressed out owners are far more likely to make mistakes.

Sometimes Losing is Really Winning

A fourth way in which business owners should be flexible is realizing that you and your lawyer will not win every single fight.  There will be many points of contention, and a smart dealmaker realizes that it is often better to have a good deal than a perfect deal.  You may have to make sacrifices in order to sell your company.  Simply stated, you shouldn’t expect the other side to lose every point.

At the end of the day, a savvy business owner is one that never loses sight of the final goal.  Your goal is to sell your business.  Seeing the situation from the buyer’s perspective will help you make better decisions on how you present your business and interact with prospective buyers.  Maintaining a flexible attitude with prospective buyers helps to position you as a reasonable person who wants to make a deal.  Goodwill can go a long way when obstacles do arise.

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Getting the Most Out of Confidentiality Agreements

When it comes to buying or selling a business, there is no replacement for a solid confidentiality agreement.  One of the key ways that business brokers and M&A advisors are able to help buyers and sellers alike is through their extensive knowledge of confidentiality agreements and how best to implement them.  In this article, we will provide you with an overview of what you should expect out of your confidentiality agreements.

A confidentiality agreement is a legal agreement that essentially forbids both buyers and sellers, as well as related parties such as agents, from disclosing information regarding the transition.  It is a best practice to have a confidentiality agreement in place before discussing the business in any way and especially before divulging key information on the operation of the business or trade secrets. 

While a confidentiality agreement can be used to keep the fact that a business is for sale private, that is only a small aspect of what modern confidentiality agreements generally seek to accomplish.  Confidentiality agreements are used to ensure that a prospective buyer doesn’t use any proprietary data, knowledge or trade secrets to benefit themselves or other parties.

When creating a confidentiality agreement, it is important to keep several variables in mind, such as what information will be excluded and what information will be disclosed, the term of the confidentiality agreement, the remedy for breach, and the manner in which confidential information will be used and handled. 

Any effective confidentiality agreement will contain a variety of key points.  Sellers will want their confidentiality agreement to cover a fairly wide array of territory.  For example, the confidentiality agreement will state that the potential buyer will not attempt to hire away employees.  In general, this and many other details, will have a termination date.

The specifics of how confidentiality is to be maintained should also be included in the confidentiality agreement.  Parties should agree to hold conversations in private; this point has become increasingly important due to the use of mobile phones and in particular the use of mobile phones in out-of-office locations.  Additionally, it is prudent to specify that principal names should not be used in outside discussions and that a code name should be developed for the name of the proposed merger or acquisition. 

Safeguarding documents is another area that should receive considerable attention.  Digital files should be password protected.  All paperwork should be kept in a safe location and locked away for maximum privacy when not in use.

In their enthusiasm to find a buyer for their business, many sellers have overlooked the confidentiality agreement stage of the process.  Most have regretted doing so.  A confidentiality agreement can help protect your business’s key information from being exploited during the sales process.  Any experienced and capable business broker or M&A advisor will strongly recommend that buyers and sellers always depend on confidentiality agreements to establish information disclosure perimeters.

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How to Optimize Your Chances of Selling Your Business

The simple fact is that selling your business is likely to be the single most important financial decision you’ll ever make.  With this important fact in mind, it is essential that you prepare far in advance.  Let’s dive in and take a look at some of the key items you’ll want to check off your list before placing your business on the market.

Think About Legalities

When it comes to selling a business, legal issues should be at the forefront of your thoughts; after all, selling your business does involve the creation and execution of a complex and detailed legal agreement.  There are many times in life where it is possible to cut corners, but hiring a good lawyer or law firm is not one of those times.  Moreover, you’ll want to settle all litigation, environmental issues or other issues that could potentially derail a sale.

Deal with Serious Buyers

Working with a good business broker or M&A advisor is an essential part of the selling process, as these professionals will help you to weed out “window shoppers” as well as prospective buyers who are simply not a good fit for your business.  Any serious buyer should be willing to submit a Letter of Intent.  Everyone should be on the same page as far as price and terms as well as what assets and liabilities are to be assumed.  This second point reinforces the first point.  It is essential to have an experienced lawyer helping you through various aspects of the sales process.

Be Flexible on Price

You should also be prepared to accept a lower price than you might ideally want.  There are many reasons that this may occur, ranging from a lack of management depth and a lack of geographical distribution to a dependence on a limited number of clients.  Reliance on a small number of customers and/or clients can give potential buyers pause, as it could raise concerns regarding the stability of your business.  Addressing these issues years before placing your business on the market can help you best achieve the price point you desire.  This is yet another reason to work with a business broker in advance.

Improving Your Chances for Success

In terms of achieving the price that you want for your business, there are other steps you can take.  Increasing the visibility and profile of your business is always a savvy move.  Consider attending trade shows, boost your online profile via stepping up your social media game and explore creating a coherent public relations program.

Finally, selling a business is often a waiting game.  You have to be psychologically prepared to wait a considerable period of time before your business is sold.  The fact is that most businesses do indeed sit on the shelf for a considerable period of time before they are sold.

Preparation, patience and good organization will dramatically increase your chances of selling your business and achieving an appropriate price.  The sooner you begin organizing your business and working with experienced professionals, the greater the chances of success will be.

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Insights from BizBuySell’s 3rd Quarter Insight Report

Most business buyers and sellers are wondering what 2021 and beyond will bring.  BizBuySell and BizQuest President Bob House provided a range of insights stemming from BizBuySell’s 3rd Quarter Insight Report and a survey of over 2,300 business owners. 

The simple fact is that the pandemic has most definitely had a major impact on the buying and selling of businesses.  This fact is obvious.  But diving deeper, there are a range of insights that can be gleaned. 

First, owners do understand that COVID is a massive force in business right now.  According to the survey, 68% of owners feel that they would have received a better price for their business in 2019 than in 2020.  Only 37% of respondents felt that they would receive a better price this year.  Of owners who felt that they would receive a lower price in 2020 than in 2019, 71% of these owners said that their assessment was directly tied to the pandemic and its accompanying economic impact.

A question on the survey asked owners if the pandemic had impacted their exit plans.  55% responded that the pandemic had not changed their exit plans.  Additionally, 22% said that they now planned on exiting later, and 12% stated that they planned on exiting earlier.  In short, the majority of business owners were not changing their exit plans.

On the other side of the coin, buyers are acknowledging that the present seems to be a very good time to buy.  A staggering 81% of buyers stated that they felt confident that they would be able to find an acceptable price point.  In terms of their purchasing timeline, 72% of respondents stated that they were planning on buying a business soon.  Survey follow-ups indicated that large numbers of buyers were also planning on buying in 2021.

Generational differences are playing a role as well.  Baby Boomers tend to be more optimistic than non-boomers as far as their overall views on the recovery.  43% of Baby Boomers now expect the economy to recover within the next year as compared to just 30% of non-Boomers.  House pointed out, “Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were preparing to retire, as small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle.”

Based on the information collected by BizBuySell’s 3rd Quarter Insight Report and their survey, it is clear that there is a new wave of buyers on the horizon.  The report supports the notion that the pandemic has made small business ownership an attractive option for new entrepreneurs.  Factors driving new entrepreneurs into the marketplace include everything from being unemployed and wanting more control over their own futures to a desire to capitalize on opportunities. 

Finally, House notes that 2021 could be a “perfect storm for business sales,” as 10,000 Americans will turn 65 each and every day.  This means that the supply of excellent businesses entering the marketplace will likely increase dramatically.

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Zeroing in on Goodwill

Goodwill is a term that might cause a little confusion for some.  But at its heart, it is a relatively straight-forward concept.  Goodwill is generally viewed as a term that encapsulates everything from a business’s reputation to the goods, services and products it provides.  The key idea is that there is goodwill if the business is viewed as a true and functioning business that has longevity in the marketplace. 

The Importance of Reputation

It is important to point out that many of the aspects that go into defining goodwill are not easily noted on a balance sheet.  One of those elements has already been mentioned in the form of reputation.  A good reputation is an intangible asset that is hard to put an exact dollar amount on.  Imagine that you had a choice between two businesses that were almost identical.  However, one business enjoyed a strong reputation while the other had a reputation for poor customer service and goods and services.  This decision would be an easy one for most prospective buyers.

Going Beyond the Numbers

When a buyer pays more than the recognized value of a business, goodwill usually plays a major role.  There are many variables that can be included into goodwill such as quality and track record of management; strength of the local economy; the loyalty of the customer base; good relationships with suppliers; copyrights; trademarks and patents; name or brand recognition; specialized training and knowhow.  The list goes on.  Business brokers and M&A advisors will be sure to highlight these goodwill factors to prospective buyers.  Factors that impact the longevity of a business, and its long-term potential, should not be overlooked.

The Evolving Meaning of Goodwill

In recent years, the accounting profession has changed how it deals with the concept of goodwill and how it is factored into decisions.  Since the rise of the Industrial Revolution, many large companies were built around the ownership and use of heavy equipment and machinery; however, in the last two decades there has been a shift away from tangible assets and towards intangible assets. 

Assets under the umbrella of intellectual property, including patents, trademarks, brand names and more, are now considered key aspects of goodwill.  In short, in the last twenty-years, goodwill has taken on a more complex and varied meaning.  Today, businesses are not necessarily based around massive factors and huge assembly lines.  Workers and management in the world’s largest companies 50 years ago would be hard pressed to explain the inner workings of some of today’s corporate juggernauts.

Goodwill is more complicated than ever before.  This factor serves to underscore the value, and importance, of working with an experienced, capable and proven business broker or M&A advisors.  The goodwill elements within a business need to be highlighted so that prospective buyers fully understand the business’ real value. 

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What Makes a Deal Close?

For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully.  What does it take for the sale of a business to close successfully?  Certainly there are reasons that a sale might not close that are beyond anyone’s control.  A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado.  There might be an environmental problem that the seller was unaware of when he or she decided to sell.  Aside from these unplanned catastrophic events, deals abort because of the people involved.  Here are a few examples of how a sale closes successfully.

The Buyer and Seller Are in Agreement From the Beginning

In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale.  If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line.  However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close.  This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made.  The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business.  Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when.  The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them.  Too many sales fall apart because of a misunderstanding on one side or the other.

The Buyer and Seller Don’t Lose Their Patience

Both sides need to understand that the closing process takes time.  There is a myriad of details that must take place for the sale to close successfully, or to close at all.  If the parties are using outside advisors, they should make sure that they are deal-oriented.  In other words, unless the deal is illegal or unethical, the parties should insist that the deal works.  The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves.  The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing.  Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule.  However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.

No One Likes Surprises

The seller has to be up front about his or her business.  Nothing is perfect and buyers understand this.  The minuses should be revealed at the outset because sooner or later they will be exposed.  For example, the seller should consult with his or her accountant about any tax implications prior to going to market.  The same is true for the buyer.  If financing is an issue it should be mentioned at the beginning.  If all of the concerns and problems are dealt with initially, the closing will be just a technicality.

The Buyer and Seller Must Both Feel Like They Got a Good Deal

If they do, the closing should be a simple matter.  If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.

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Turn to the Professionals for Best Results

There is a direct relationship between the asking price and the amount of cash on the table at the time of the sale.  Buyers and sellers alike should keep one fact in mind.  Most businesses involve some level of seller financing.  It is customary for both buyers and sellers to have concerns regarding this kind of financing; after all, sellers don’t want to take their businesses back from the buyer.  Buyers want to generate enough money to help the business thrive and make a living.  One proven way to ensure the successful sale of a business is to turn to the experts.

Screen out Window Shoppers

The simple and very established fact is that when you choose to work with the professionals, it can streamline the entire sales process.  Business owners are typically very busy people.  That means they don’t have time to waste with window shoppers.  They also don’t want to divulge confidential information to parties that don’t possess the means to actually follow through with a successful sale. 

Business brokers and M&A advisors know that most prospective buyers are just dreamers or will ultimately fail to qualify.  When you work with the professionals, it means that you have a shield to protect you and your valuable time.  Experienced brokers have a range of techniques that screen out unqualified candidates and match you with buyers who are the best fit. 

Maintain Confidentiality 

Anyone who has ever sold a business, or even contemplated selling a business, knows all too well that confidentiality is of the utmost importance.  Sellers need to know that the information they reveal will not spill out all over the web.  Brokers are experts maintaining confidentiality and impressing upon prospective buyers the tremendous importance of honoring the agreements they sign. 

It is important to note that leaks regarding the sale of a business can cause a range of often unexpected problems.  Key employees may get nervous about their future prospects and begin looking for a new job, competitors may begin attempting to poach employees, or customers and key suppliers may get nervous and turn to your competitors.  In short, serious buyers and sellers alike benefit from maintaining confidentiality.

Matching the right seller with the right buyer is truly an art and a science. Many factors are involved ranging from financing to psychology. When the right match is made, then it is possible to move through the process of seller financing more quickly and with fewer roadblocks or complications.  Working with a business broker or M&A advisor is the single most important step that any buyer or seller can make to help ensure that seller financing, and in fact the entire sales process, progresses as smoothly as possible.

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Successfully Navigating Seller Financing

Only a small percentage of the population is able to go through life without using some form of financing at some point.  Most people have little choice but to finance everything from their home and car purchases to their college education.  Now, with that stated, most business owners would love to receive an all-cash offer for their business.  But the reality of the situation is quite different.  The facts are that owner financing is very common, and it is sometimes the only way to put a deal together.

Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business.  It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.”  The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem. 

Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business.  It might occur to them that sellers are “jumping from a sinking ship.”  It is important that sellers keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.

Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral.  Sellers may want to have some form of outside collateral to secure the loan on their business.  While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well.  As much as buyers worry that a seller’s refusal to provide financing is a red flag, the same holds true for sellers who seek collateral.  Once again, the concern is that if the business was healthy and thriving there should be no need for collateral.  The buyer is left wondering, “What is going on here?  How worried should I be?  Why do they need collateral if this business is so great?” 

Typically, buyers are “maxed out” when buying a main street business.  They are allocating most of their available funds to the down payment on the business.  That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process.  Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.

Navigating the complex interaction between buyers and sellers is no easy feat.  It requires a careful balancing of several different skills, ranging from understanding finance to psychology.  Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.

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Four Common Seller Mistakes

Sellers are just like everyone else in that they can make mistakes.  In this article, we’ll explore some of the most common mistakes that we see along with some of the repercussions. 

1. Not Seeing the Buyer’s Point of View

The first major mistake that sellers make is that they simply fail to look at the situation from the buyer’s perspective.  One of the smartest moves any seller can make is to step back and ask themselves two key questions. 

 “What information would I expect to see if I was thinking about buying this business? 

“Would I trust the information being presented to me if I was the buyer?” 

While there are many other questions sellers can ask to help reframe their thinking, these two simple questions can orient a seller’s thinking towards a buyer’s perspective.  Additionally, investing the time to understand the buyer’s position can help avoid a range of problems and help smooth out the negotiation process.

2. Neglecting the Business During the Sales Process

Another seller mistake we see is that the seller neglects the business during the sales process.  This can have significant negative long-term consequences.  Sellers must understand that they must maintain the day-to-day operations as though the business is still theirs.  The old saying, “Don’t count your chickens before they’ve hatched,” most definitely applies to selling any business.  Business deals fall apart all the time.  This is true from small deals to corporate acquisitions. 

3. Overall Lack of Preparation 

Any seller who is truly serious about selling his or her business will have all of their documentation available and well organized.  This list would include financial records, environmental studies, business forecasts and more.  It is important to make a good impression and convey to prospective buyers that a business is well organized and ready to be sold.  Disorganization on any level could make prospective buyers worry that the business isn’t being operated in a professional manner.

4. Holding Misconceptions Around a Business’ Value

Finally, a real “deal killer” can be when sellers don’t understand (or have a mental block) concerning the real value of their business.  This issue can lead many business owners to set a price that is simply too high or even completely unrealistic.  Many sellers have put years of blood, sweat and tears into a business.  Learning that their business isn’t as valuable as they had hoped can be an emotional, psychological and financial blow all in one.  But sellers also have to adjust to the realities of what the market will bear. 

Avoiding seller pitfalls is incredibly important.  Working with a skilled and proven business broker or M&A advisor is a way for buyers and sellers alike to avoid an array of significant problems that could otherwise arise.

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Unraveling the Seller’s Predicament

Selling a business isn’t always 100% about the price.  It is not like selling a house where typically the most important factor is who places the highest offer.  In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered. 

The idea of selling to a competitor is one that seems attractive to many business owners.  After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider.  But while this point is quite valid, selling to a competitor comes with its own problems.  Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.

A second avenue that sellers will often explore is selling to a financial buyer.  A financial buyer is likely not to be a competitor.  But on the downside, a financial buyer may be unwilling to pay the seller’s price.  It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.

The highest selling price may come from a strategic acquirer.  But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller.  A strategic acquirer may not have the best interests of the company at heart.  When a strategic acquirer takes ownership, key employees and management may be replaced.  The company may even be moved.  Many owners are unprepared for the shock that may come along with a strategic acquisition.

There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business.  It is possible that the best buyer for a company could be one of its employees.  However, this option comes with risks as well.  Key employees and management may leave if the deal falls through, as they now know that the company is for sale.

Finding overlooked buyers is what business brokers do best.  Matching the right buyer with the right business is both a science and an art.  Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.

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How Should Your Company Deal with an Orphaned Product?

Keeping a product or service around that isn’t pulling its weight might prove to not be a very good idea.  You may have invested a good deal of time and resources into its development, but if that product or service is no longer contributing to your bottom line, it might be time to cut it loose.  Even if your product is pulling its weight, but doesn’t fit into your overall core business, then you should still consider getting rid of this “orphaned product.”  Let’s take a look at some of the reasons you might want to keep or remove, an orphan product from your company.

There are four main reasons why a company might want to divest itself of a product line or service completely:

  1. An orphaned product line can be a distraction that takes away from core business operations. 
  2. Funds allocated to an orphaned product could be used instead to build the core business or make improvements that are not in the current budget. 
  3. Another good reason to remove an orphaned product from your lineup is that while it could ultimately be profitable with increased resources, the funds would be better allocated elsewhere.
  4. Your orphaned product could be profitable.  Some buyers, companies and private equity groups are looking for product lines they can use to augment their existing ones.  In fact, some buyers may even want to build a new business around a given product line.

Of course, it isn’t always as simple as “pulling the plug” and moving on.  It is important to step back and consider the negative impacts of jettisoning an orphaned product, such as the fact that the product line could have key employees attached to it.  Or there could be company culture issues related to removing the product, such as causing disruption within your company.  You must also consider if the orphaned product could ultimately play a role in the sale of your company.

At the end of the day, an acquiring company may feel that the orphaned product line is a great fit for their existing distribution chain.  Additionally, your offering might fit into a new product line that the acquiring company has launched.  It is important that you evaluate every aspect of an orphaned product before making the decision to remove it from your company. 

Understanding the needs and goals of your most likely buyers should play a role in your decision making.  Working with an experienced business broker is an easy way to increase your chances of making the right decision.

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Price or Terms: The Structure of the Deal

An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”

Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”

It seems that everyone is concerned only about full price.  And yet, full price is just part of the equation.  If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved.  On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well.  Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.

Sellers should understand that both what they hope to accomplish in the sale of their business and the structure of the actual sale can dramatically influence the asking price.  Price is obviously important, but other factors may be even more important.  For example, consider a seller with health issues who needs to sell as quickly as possible.  In his case, timing becomes more essential than price.  Another seller may place more importance on her business remaining in the community.  In her case, finding a buyer who will not move the business may supersede price or certainly influence it.

Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller.  The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers.  On the other hand, sellers should also be aware how much the interest on their carry-back can add up to.  If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.

These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price.  During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.

Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.

•    Buyer Qualifications
•    Full Price
•    Amount of Cash Involved
•    Financing
•    Confidentiality
•    Commission/Selling Fees
•    Closing Costs
•    Exclusive Listing
•    How the Business is Shown
•    Advertising/Marketing
•    How a New Owner Continues the Business

By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.

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Considering Generational Strategies

When you are buying or selling a business, you might very well end up making a deal with someone from another generation.  Therefore, it only makes sense to take the time to understand that individual’s background and how that might cause behavioral differences.  It is important to understand and reflect upon where many of them are coming from and the collective experiences and trends that shaped their identities and perspectives.  At the same time, you can identify your own biases, strengths and weaknesses that may be caused by your own upbringing.

The strategies in this article originated from Chuck Underwood who is considered a leading expert in the diversity of communication styles between generations.  He is the author of a major book on the subject as well as host of the long-running “America’s Generations with Chuck Underwood” on PBS. 

Generational Sensitivity 

Underwood’s perspective is that people of each generation were molded by their unique formative years.  The decisions that buyers and sellers make will be impacted by their generation.  Mostly likely, the buyers or sellers you will be coming into contact with will be either Baby Boomers, Generation Xers and Millennials. 

Working with Baby Boomers

Baby Boomers (those born between 1946 and 1964) are a major force in the business world.  While they often possess a patriotic passion to improve the country, they were also witness to a time of great change via many movements including the civil rights and women’s movement. 

When you’re dealing with Baby Boomers, it is important to remember that they will want to build relationships and get to know you.  Common courtesy is very important to Baby Boomers.  That means they’ll expect you to show up on time and turn your phone off during meetings. 

You’ll want to keep in mind that older Baby Boomers may be experiencing hearing and eyesight loss.  As a result, you’ll want to keep your type and font size larger, and make text easy to read. 

When you’re working with your clients, it only makes sense to pay attention to the generation during which they were raised and adapt your approach accordingly.  Understanding generational differences will help you get a leg up on the competition while at the same time helping your clients achieve their goals.

What is Generation X?

Generation X (or Gen X) had a wildly different formative experience than the Baby Boomers.  Generation X is generally defined as being born from 1965 to 1980.  This generation spent its formative years from the 1970’s through the 1990’s.  In stark contrast the relatively more pleasant and optimistic childhoods of the Baby Boomers, Gen X had a rougher ride. 

America became more mobile during the time period during which Generation Xers grew up.  As a result, many children were uprooted and separated from their friends, family and hometown roots.  Growing up, these individuals witnessed a variety of scandals ranging from political and religious figures to sports figures.  Gen Xers witnessed the systematic dismantling of the American middle class and with it a general lowering of quality of life, opportunities and confidence in corporations.  In the end, Gen X was quite literally left home alone and lived as “latch key kids.”  It is no wonder that this neglected generation has some issues.

Individuals growing up during this time learned early on that they had to be ready to fend for themselves.  Since Gen Xers have been met with consistent and systematic disappointment and even wide scale institutional betrayal, this generation, on average, is more distrustful of organizations. 

Gen Xers are self-reliant and independent and one of their core values is survival of the fittest.  In his view, Gen Xers are self-focused, individualistic and want everyone to skip the nonsense and get to the point.  They have no real interest in getting to know you or playing a round of golf.

Working with Millennials

Millennials spent their formative years in the 1980s and early 90s.  They are a very optimistic and tech savvy generation.  They are also the most classroom educated generation in history.

It is also very important to note that Millennials are the most adult supervised generation in history.  So-called “helicopter parents” who work to protect their children from setbacks are the norm.  Employers find that Millennials are entering adulthood, but are still relying upon their parents to help them make decisions and even career choices.

Where Gen Xers are distrustful of the “wisdom of their elders,” Millennials actively seek out such advice.  Likewise, Millennials tend to volunteer a good deal and look for ways to solve the world’s largest problems.

You will find that Millennials will enjoy building a relationship with you.  Keep in mind these individuals tend to be quite socially conscious and they may very well expect you to agree with their views.  Additionally, there is a chance that they will have their parents involved in their business dealings. 

Keep in mind that the de facto tech addiction, or at the very least acute overreliance on technology, has led to issues with Millennials’ soft skills.  They can often lack the ability to read another person’s body language and adjust accordingly.

In the end, regardless of what generation you are working with, it is important that you continually adapt.  This will greatly increase the odds of cementing a successful deal.

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Confidential Business Reviews Should Establish Trust

When you are selling a business, your business broker or M&A Advisor will likely create a Comprehensive Business Review, or CBR.  This comprehensive document can then be presented to prospective buyers once they have signed all necessary confidentiality documentation.  It is essential that this document builds trust between both parties, as this will go a long way towards achieving a successful deal. 

Be Honest

The bottom line is that your CBR will be 95% positive.  The majority of the document will be dedicated towards selling and promoting your business.   Therefore, it only makes sense to disclose some potential problems.  When handled correctly, the disclosure of problems can actually be a strong asset. 

For example, current weaknesses of your business could become strengths in the mind of the buyer.  For example, a business with a very poor online presence represents a substantial opportunity for a buyer to improve marketing and communications.  Summed up another way, don’t be afraid to include negative information, especially if that information represents an opportunity.

Sharing Information

It is important that there is an element of trust between the parties.  Creating that sense of trust begins with the CBR’s seller section. 

Buying a business is radically different from buying a home.  When someone buys a home, they usually don’t care too much about the person who they are buying the home from.  But buying a business is usually a different experience.  Your buyer will want to feel as though they have a fairly clear understanding of who you are and what you are about. 

In the seller’s section, the buyer should get a decent idea of who you are.  Your broker or M&A Advisor will want to interview you to gain ample information to include in your CBR.  Your broker may even want to find out about your family, hobbies, interests and more.  You may even want to consider including photos of yourself and your family.  

The bottom line is that a potential buyer should be able to pick up the CBR and get a good feel for what you are like.  If no level of trust is ever established between the buyer and seller, then it will be much more challenging for the deal to be successful.

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What You Need to Know About Foreign Buyers

There is a potentially lucrative group of buyers that many sellers don’t initially think about.  We are talking about foreign buyers.  While there are some hurdles to working with these types of buyers, it is important to note that there are many huge advantages as well.  Let’s take a closer look.

How Are Foreign Buyers Different? 

At the top of the list of ways in which foreign buyers are different is that they are often seeking a visa.  Another commonality among foreign buyers, one that will surprise many, is that they may want access to the U.S. educational system. 

It is common for foreign buyers to want to buy a business so that they can get their children into a particular U.S. school district or college.  Sometimes the desire to be eligible for state tuition also plays a role in the selection of a business and the decision-making process.  In this sense, business location takes on a level of importance that it might not have for domestic buyers. 

It is important to keep in mind that there are cultural and business differences that play a role with foreign buyers.  Everything from a different use of business terminology to expectations can play a role.  This could impact negotiations. 

What About Visas and Immigration?

One of the most important things to remember is that foreign buyers are often navigating the complex world of visas and immigration.  Whether or not a visa is issued can dramatically impact whether or not a deal ultimately takes place.  This fact is often built into agreements.  For example, a purchase condition may be conditional upon visa approval.  Nonrefundable deposits may also play a role in the process.

What Do Foreign Buyers Really Want? 

Foreign buyers have been impacted by the pandemic too.  Yet, some factors remain unchanged.  Not too surprisingly, they will want to see that a business is profitable.  In this regard, you should be able to showcase profitability in a clear fashion.  You can expect foreign buyers to want to see tax returns and all the typical documentation that you’d need to provide to any buyer.

A second factor that foreign buyers are interested in is longevity.  If your business has successfully operated for decades, this will be a major advantage.  

Ultimately, most of what domestic buyers are looking for in a business will translate over to what foreign buyers are seeking as well.  With that stated, however, there are factors that are often unique to foreign buyers.  As mentioned above, navigating the often-complex visa process can add a wrinkle to the entire process.

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