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Business Broker Report 12: Selling Your Business? What Could Go Wrong?

Posted on Thu, Jan 23, 2014
businessman who made a big mistakeYour business likely represents a major portion of your net worth. Before you sell your business, team up with an experienced Business Broker or M&A Advisor. He will help you get the best price for your company and steer you clear of the pitfalls that could cause you to lose the value of your life’s work.

Here are 4 mistakes that are easily avoided when you have professional advice:

Mistake #1 – Accepting a Large “Earn-Out” Instead of Cash at Closing

A company comes to you with an offer to buy your business. They tell you what a great job you’ve done and what a great company you’ve built.  Then they tell you about their company, they wine you and dine you, and maybe even fly you out to their corporate headquarters. You begin to get comfortable with them. They seem like good guys. Then they make an offer with a very strong price, but with one hitch. Most of the purchase price is an “earn out” – paid to you only if your company reaches certain performance goals going forward. This kind of arrangement may be acceptable if you get the bulk of the purchase price, let’s say 70-80%, in cash at closing. But if the numbers are reversed and you get only a small down payment – don’t do it. Even if you continue to run the company for the buyer after closing, you’re not really in control. They call the shots. And if their decisions cause your company not to do well, you’re not going to get paid the full purchase price. It’s that simple.

Mistake #2 – Taking Stock in the Buying Company in Lieu of Cash

Similar to Scenario 1, but instead of accepting an” earn out”, you accept stock in the buying company with just a small cash down payment. This is even more dangerous than the earn-out scenario. In the earn-out scenario, you’ll at least have some control of your company after closing.  When you accept stock instead of cash, however, you are completely at the mercy of the buyer. If his company goes down, your stock goes down. And if the market tanks, as we all know it can, the value of your stock tanks as well. And what makes this scenario even worse is that the stock you received when you sold your business will often be restricted – you’ll be prohibited from selling it for a period of time after closing, typically two years. It’s a recipe for disaster.  

Mistake #3 – Failing to Maintain Confidentiality

You’ve negotiated a deal with the buyer, the purchase contract is almost finished, the buyer has secured financing and the deal is scheduled to go to closing. You decide to hold a company-wide meeting to tell your staff about the impending sale. But then something happens. The deal is called off. Now what?  Now your employees, your competitors, your vendors and your banker all know that you are trying to sell. Your employees get nervous and start looking for another job, your competitors tell your customers that you’re going out of business, your vendors put you on COD and your banker calls in your line of credit. It’s a nightmare scenario which, with the proper advice as to how to maintain confidentiality, could easily have been avoided.

Mistake #4 – Choosing the Wrong Business Broker or M&A Firm

You attend a seminar where a company promises to sell your business for three, four, five or even ten times its true value.  Back away – don’t get sucked in. This is actually a very sophisticated scam.

Companies like this put on slick presentations, but are really only interested in collecting big up-front fees, not in actually selling businesses. They claim they can create a “frenzy of buyer interest” that will “skyrocket the price to stratospheric levels.” Don’t be fooled. It’s all smoke and mirrors. They want to get you excited and then stick you with a $30-50K up-front fee. And then good luck getting your phone calls or emails returned.

Don’t learn the hard way -- if it looks too good to be true, it probably is. Stick with a reputable Broker who is willing to earn his “success fee” only when the sale of your business is completed.

You are an expert in running your business. But you’re not an expert in selling businesses.  Most business owners aren’t – they simply don’t have any experience with the process. Just as providing your product or service requires specific experience and expertise, selling your business requires a specific, but different, set of experience and expertise.

Your business very likely represents your largest personal asset. Selling your business – turning your biggest asset into dollars – is too important to be left to an amateur. You need the services of an expert – a qualified, experienced Business Broker or M&A Advisor.

For other valuable tips about selling your business and to learn more about the business sales process in general, click on the link below, visit us at www.primeinvestments.us or call us at 240 290-5000. We’ll be happy to schedule a free initial consultation and complimentary business appraisal.

There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.

  Schedule Your No-Fee Initial Consultation

 

 

Tags: M&A Advisor, M&A, selling your business, business broker

Business Broker Report 11: Is Your Competitor Really the Best Buyer?

Posted on Fri, Nov 15, 2013

big fish small fishWhen it comes time to sell their business, many owners sit down with their Business Broker or M&A Advisor and tell them that this is going to be easy – that they already know who the perfect buyer is for their business. “My competitor just down the road,” they often say “would be the perfect buyer – he already knows the business and he could just add my people and accounts. And I also sell X product or service that he doesn’t have, and he could add that to his existing offerings. It’s a perfect fit!”

Well . . . maybe. It might work. But be careful – offering your business to a competitor is fraught with peril. The risk here is that you and the buyer operate in the same marketplace. It’s a small world. You have overlapping suppliers, customers and even workers who know one another. Although your advisor will have all prospective buyers sign Non-Disclosure Agreements prohibiting them from disclosing the fact that you are selling to anyone except direct deal advisors (typically accountants and attorneys), because you are in the same market, even an inadvertent breach of confidentiality could cause you serious harm.

But is the risk worthwhile? Will the competitor pay a strong price or even an above-market price to acquire your company? We find that the answer is typically “no”. We consistently find that equity funds, individual buyers or other outside investors accept higher valuations than industry insiders. While your competition would love to acquire your clients and other assets, they generally don’t like to pay for good will – after all, they already know how to provide the goods or services you provide.

That’s not to say that selling to a competitor is never the right move - sometimes it is. For
example, if your competitor is doing a “roll-up” – aggressively acquiring a number of businesses in same the field to build a much larger company – you may be able to walk away with a good deal in hand.  Or if your business has something that your competitor desperately needs but can’t get, you may be able to leverage a strong price. But even these situations need to be handled with an abundance of caution.

What other types of buyers are there?

  1. Private Equity Funds (PE)
    PE firms are private companies comprised of groups of investors who pool money to buy and manage a portfolio of businesses. Although there are huge PE firms like The Carlyle Group or The Blackstone Group acquiring very large companies, there are also thousands of smaller PE firms that are active in the lower end of the market, buying companies that are worth between $1 million and $25 million. PE firms buy mature companies from owners who are either planning to retire, ready for a new business pursuit or who understand that professional management is needed to take their company to the next level.

    PE firms offer several advantages over traditional buyers:
  • High net worth – PE firms often don’t need to seek outside financing.
  • Experience – PE firms typically have made multiple acquisitions and decide quickly whether they will make an  offer or not.
  • Professional management – PE firms can often provide the
    management expertise the acquired company needs to realize its true potential.
  • Strong price – once a PE firm has decided to make an acquisition, it typically will make a good offer and try to get the deal closed as soon as possible.
  • Hi-net Worth Entrepreneurial Individuals
    These are individuals who have either been in business before or have the experience, skill and capital necessary to acquire and manage a business. Some will have a depth of knowledge and experience in your specific field; others will come with general business training and acumen that they can apply to manage and grow your company. An individual buyer uses his own money and/or borrows money from a lender to make an acquisition. Since he is risking his own assets, oftentimes including his home, he tends to be very careful. While it sometimes takes a bit more patience and “hand holding” to get a deal done with an individual buyer, once he is comfortable that your company represents a safe investment, the entrepreneurial individual is often the perfect buyer.

  • Companies in Related Fields or Different Geographic Markets
    These are companies seeking to grow by acquiring a company with products or service offerings related to their existing core business or by acquiring companies in their core business in new geographic markets. They offer the advantage of having some degree of knowledge of your industry while being removed sufficiently as to not be a direct competitive threat. While perhaps not as aggressive as PE firms in their valuations, these companies often will pay a strong price because the acquisition creates synergistic value above and beyond the intrinsic value of the company they are buying.

    To help choose the right buyer for your business and learn more about the business sales process in general, click on the link below, call us at 240 290-5000 or visit us at www.primeinvestments.us. We’ll be happy to schedule a free initial consultation and complimentary business appraisal.

    There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence. 

Find the Best Buyer for Your Business

 

 

 

Tags: business brokers, M&A, business broker

Business Broker Report 10: 3 Tips for Boomers Ready to Sell

Posted on Tue, Sep 17, 2013

retired man sailing

According to many Business Brokers and Mergers and Acquisitions Specialists, we're entering into a perfect storm created by baby boomers reaching retirement age and the country coming out of a recession. Boomer business owners who have wanted to retire, but have held their businesses off the market because of the recession, are now moving forward in increasing numbers.

Early in 2012, with the capital gains tax hike pending, tax considerations were the number one driver of business sales. But, according to a survey by Pepperdine University, the International Business Brokers Association and M&A Source, by the last quarter of 2012, baby boomer retirement had become the number one driver of small business sales.  In fact, according to BizBuySell.com (an online site hosting business buying and selling activity) the sale of small businesses increased 56% in the first quarter of 2013 over the first quarter of 2012.

OK. We get it. There’s going to be a lot of businesses on the market over the next few years. That being so, how do you make your business stand out from the crowd? How do you make it attractive to buyers so you can get the deal you need to get to help secure your retirement?

Here are 3 tips for getting your business in shape to sell:

 

1.     Enhance Your “Curb Appeal”

Studies have shown that a thorough detailing can add as much as 20% to the value of a used car. Whether it’s cleaning old debt off the books, getting rid of obsolete inventory, updating your IT infrastructure, or sprucing up your physical plant – updating and cleaning up your business before it goes on the market pays for itself many times over at the closing table. Buyers don’t want to buy a business that appears to have been neglected.  They don’t want to have to replace the phone system or deal with some uncollectable receivable on their first day of business. They want everything to be in place, bright and shiny and ready to help them realize their dreams.

 

2.     Start Letting Go of the Reins

Some business owners have trouble delegating – they keep their hands tight on the reins, make all the important decisions themselves and are the main point of contact with key customers.  That’s great as long as it works, but it’s not so great when it’s time to sell. Buyers will avoid or discount companies where all decision making and key customer relationships reside with the owner. If you don’t already have one, it’s important to create a strong second level of management before you put your company on the market. Start delegating decision making to your next-in-command. Transition key customer relationships to trusted managers. It may be painful for some owners to give up some control, but it will yield strong dividends at the sales table.

 

3.     Start a Relationship with an Experienced Business Broker or M&A Advisor

Even if you are not ready to sell today, it makes sense to meet with a qualified Business Broker or M&A Advisor. An experienced professional can advise you as to changes you need to make in your business to make it more attractive to buyers, educate you as to what you can expect during the process of selling, package your business to show it off in its best light to command the highest price, and guide you through potential pitfalls.

 

It can take a year or more to sell a business. To discuss your situation and start your personal planning, click on the link below, visit us at www.primeinvestments.us or call us at 240 290-5000. We’ll be happy to schedule a free initial consultation and complimentary business appraisal.

 

There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.

 

Schedule Your No-Fee Initial Consultation 

 

 

 

Tags: Appraisal, business broker, business brokers, IT, M&A, Mergers and Acquisitions, selling your business

Business Broker Report 6: How Long Will It Take to Sell My Business?

Posted on Mon, Apr 29, 2013
describe the image

Business owners tend to be “type A” personalities. They make decisions and want to see them executed – not tomorrow, not next week or next month, but NOW.

When they finally decide that it’s time to go (and it usually takes some time to reach that decision) they’re the same way. They want the deal done yesterday. But selling a business takes time. It is a delicate and complicated process that needs to be guided by a hands-on, experienced professional. Your business likely represents the bulk of your estate and the monetary value of your life’s work. You can’t rush it. You need an experienced, professional Business Broker or Mergers and Acquisitions Advisor to help guide you through potential pitfalls, avoid costly mistakes and maximize the value of your business. There aren’t second chances here. Click here to learn more about the process.

It normally takes between six months to one year to sell a business. 

The good news is that during that time, you’ll be running your business and making money. The bad news is that you will have to be patient as the process moves forward to closing.

Here’s a typical timeline of the process of selling a business:

Month 1.  Your Business Broker or M&A Advisor will give you a list of items he needs from you to write the Confidential Business Review (CBR) – the prospectus that tells prospective buyers about your business, shows your business in its best light and is calculated to help achieve the highest possible market price for your company. You will provide the requested items and your Advisor will draft the CBR for your approval. He will make any necessary changes and then finalize the document.

Months 1-2.  Your Broker or Advisor will accumulate a list of potential buyers. Buyers might be private equity funds, hi-net worth entrepreneurial individuals or other companies. He will vet the potential buyers and have them sign Non-Disclosure Agreements (NDAs). NDAs require buyers to keep all of your information confidential, including the fact that you want to sell. He will provide the CBR to potential buyers, answer their questions and follow up with you on requests for additional information.

Months 3-6. Your Broker or Advisor will develop a “pipeline” of serious prospects. These prospects will want to meet you. Your Advisor will arrange in-person or virtual meetings. If the meeting is in-person, it should be held off-site or after hours to maintain confidentiality. Some buyers will move forward; others will drop out. Your Broker will facilitate responses to requests for additional information prospects who remain interested and arrange additional meetings.

Months 4-7. Your Broker or Advisor will solicit offers from interested buyers and help you negotiate terms. Offers will typically be in the form of a Letter of Intent (LOI) – a short, non-binding document outlining the basic terms of the prospective deal. There may be multiple LOIs before you and your Advisor are satisfied that a proposed deal is right for you.

Months 5-12. Once an LOI is accepted and fully signed, it typically takes between three and six months to go to closing. During this time several things need to happen. The buyer will retain legal counsel and draft a Purchase Agreement – the formal document that defines the terms of the deal. Your lawyer will review the document and make changes that help to better protect your interests. There is normally a fair amount of back and forth negotiation before the Agreement is acceptable to both parties. There may other documents to draft and negotiate as well – Covenants Not to Compete, post-closing Employment or Consulting Agreements, Security Agreements, etc. During the early part of this period, the buyer will conduct his due diligence – his examination of the company in more detail to ensure that everything is as it is supposed to be. He may retain accountants and attorneys to help with this task. He will, if necessary, also finalize his funding. When due diligence is completed, all the closing documents are agreed to, funding is finalized and any necessary approvals are received, it is time to go to closing.

Although we have sold businesses as quickly as 90 days, we find that most businesses take 6-12 months to go to closing. Click on the button below and we’ll map out the steps you need to achieve the highest possible market price for your business. There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.

Sell Your Business With Confidence

 

Tags: business brokers, M&A, Mergers and Acquisitions, selling your business

Business Broker Report 5: Confidentiality – How Important Is It ?

Posted on Thu, Apr 18, 2013

Confidentiality – How Important Is It When You Sell Your Business?As a business owner, you are likely quite loyal to your employees. They’ve stuck with you through the tough times and helped you build your company into what it is today. You wouldn’t be where you are without them. So when it’s time to sell your business, it’s not surprising that many owners are conflicted – they feel like they are betraying their devoted employees loyalty and trust.

Some owners feel guilty about keeping the sale a secret from a trusted manager or employee, especially those individuals with whom they have close personal or working relationships. But when employees learn their company is for sale, they get nervous. It’s a natural human reaction, a normal response to an event they believe may threaten their well-being. An employee will worry the new owner won’t keep him on, so he may start looking for another job – and perhaps share his fears with other employees. This is the type of news that spreads like wildfire, often distorting or losing the truth in the process.

It’s best for everyone if news of the sale is not revealed until after the closing. This way, you control how and when the details are communicated. After the closing, your employees will have the opportunity to meet with the new management, who will assure them they are valued members of the team – which is true – and that their jobs are secure. 

And if you tell even one employee, you’ve told them all. Even a trusted manager is likely to confide in his co-workers. And then word could get out on the street. Your vendors might put you on COD, your competitors will tell your clients you’re going out of business and your banker will start calling you. Nothing good can happen from breaching confidentiality.

But how do you maintain confidentiality during the sale process? Here are some tips for keeping your deal confidential:

  1. Create a buffer zone. If buyers are communicating directly with you, you’re fielding their calls and emails at work. This may lead to premature disclosure of the sale. Use a Business Broker or M&A Advisor to provide a buffer zone between your company and prospective buyers. A Broker will protect the confidentiality of the sale by shielding you from direct contact with potential buyers. All buyer communications will go through the Broker. The Broker will only contact you using an agreed-upon confidential email or mobile number.

  2. Have all buyers sign non-disclosure agreements. Non-disclosure agreements prohibit the buyer from sharing confidential information, including the fact that you are considering selling, from anyone except his lawyers and accountants involved in the deal. They also prohibit the buyer from speaking with your employees, suppliers, vendors, etc. without your prior written approval.

  3. Conduct all meetings off-site or after hours. Unless its normal for you to have meetings with people your employees don’t know, avoid buyer meetings at your business site during business hours. Schedule meetings at your merger and acquisitions advisors office or at another convenient location such as a coffee shop or hotel lobby. If it becomes important for the buyer to see your operation, schedule the meeting in the evening or on the weekend when your employees are gone.

  4. Don’t Rush To Sell To Your Competitors. When an owner tells us that he believes that a competitor would be the natural acquirer of his business, we strongly urge caution. Buyers from your own industry are not the buyers who are most likely to pay the highest price. We consistently find that equity funds and outside investors accept higher valuations than industry insiders. While your competition would love to acquire your clients and other assets, they generally don’t like to pay for good will – after all, they already know how to provide the goods or services you provide. And selling outside your industry makes it simpler to maintain confidentiality, while even an unintentional slip or breach of confidentiality by a buyer in your industry could cause problems.  That’s not to say that selling to a competitor is never the right move - sometimes it is - but when it is, it needs to be handled with an abundance of caution.

Click here to learn more about maintaining confidentiality during the sales process or click on the button below or call us at 240 290-5000 and we’ll map out the steps you need to achieve the highest possible market price for your business. There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.

Sell Your Business With Confidence

Tags: business brokers, M&A, Mergers and Acquisitions, selling your business

Business Broker Report 4: Selling Your Business? Think Like a Buyer!

Posted on Fri, Apr 05, 2013

Selling Your BusinessYou’ve decided that the time has come to exit your company. You’ve worked hard, grown a great business, provided a stable living for your employees. But enough is enough – it’s time to go. You know what you’ve built and know what you want. You’re ready to sell. But just like in your business, it takes two parties to make a sale – a willing seller and a willing buyer.

Experienced Business Brokers and M&A Advisors agree - in order to position your company to achieve the best results when you sell, you need to think like a buyer.

Why do buyers buy businesses? To generate revenues? To own plant and equipment? To have employees? The answer is “no” to all of the above.

Buyers buy businesses in order to make money. Everything else is just a means to that end. Whether the buyer is an equity fund, a private individual or another company in your industry or a related industry, by purchasing your company the buyer is paying for the right to step into your shoes and make as much (and hopefully, more) money as you do.

While some buyers are looking for very specific types of companies to acquire, most are interested in broad categories like service, construction trades, tech or distribution, and then limit their search by geographic and size considerations.

Because buyers buy businesses to make money, it is not surprising to learn that businesses are valued largely by how much money they make.  Other factors that influence the valuation include the type of business, recent trends in the individual business and in its industry, assets and or liabilities included in or excluded from the transaction, geographic desirability and the existence of risk factors that might cause the goodwill of the company to evaporate after the sale.

Buyers avoid businesses where there is a substantial risk that the business’s goodwill - its ability to generate profits – might disappear. This could happen for one or more of the following reasons: unstable customer concentration (one or two big customers whose loss would cripple the business); lack of management structure (where the knowledge and relationships necessary to conduct the business reside exclusively with the owner); or external risk factors, such as increased competition, impending loss of a valuable location, technological obsolescence, etc.

Just like in your business, business sales - mergers and acquisitions - occur in a competitive market. Why should a buyer make a bid on your business as opposed to the many other businesses available for sale?

Here’s what you can do to make sure your business is attractive to buyers:

1. Keep your hand on the wheel. Once you commit to selling your business, it’s crucial that you continue to manage your business as if the sale were not on the horizon. It’s easy to take your hands off the wheel, your foot off the gas, and put your business on autopilot until closing. Big mistake. Nothing spooks a buyer more than getting a current sales report with lots of red numbers and downward arrows. You need to concentrate on maintaining and even growing your business, even as your Business Broker or M&A Advisor is guiding your sale forward to closing.

2. Avoid risky customer concentration. Some business owners make the mistake of structuring their company around a single client or customer who makes up 30-50% or more of overall revenue. Companies in this position face big obstacles when they want to sell. Unstable customer concentration presents a major risk to potential buyers. The buyers will want to deal with the risk of losing such a critical customer by either discounting the price or structuring the deal so that a portion of the purchase price is connected to future revenues from that customer. To protect and enhance the value of your business, it’s best to diversify your customer base so no one client accounts for more than 30% (and better yet, 20%) of total revenue.

3. Structure second-level management. Some business owners have trouble delegating – they keep their hands tight on the reins, make all the important decisions themselves and are the main point of contact with key customers.  That’s great as long as it works, but it’s not so great when it’s time to sell.  Buyers will avoid or discount companies where all decision making and key customer relationships reside with the owner. If you don’t already have one, it’s important to create a strong second level of management before you put your company on the market. Start delegating decision making to your next-in-command. Transition key customer relationships to trusted managers. It may be painful for some owners to give up some control, but it will yield strong dividends at the sales table.

To discuss your situation and to see if your business is positioned well for sale, click here or click on the button below and we’ll map out the steps you need to achieve the highest possible market price for your business. There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.

Sell Your Business With Confidence

Tags: business brokers, M&A, Mergers and Acquisitions, selling your business