Around the Web: A Week in Summary
A recent blog post from Transworld Business Advisors entitled “How Do I Buy an Established Business” provides a brief overview of the actions and considerations a prospective buyer needs to take in order to engage in the business buying process.
In regards to becoming an entrepreneur there are two main steps to becoming the owner of a new business:
Deciding to Buy a Business – Buying an established business is less of a risk than starting a new one from scratch. While most startups fail within the first five years in business, and require a few years of around the clock work to gain traction, an established business will already have gone through these rough stages and no longer carry the same level of risk.
Finding the Right Business – When you begin looking at prospective businesses for sale, it’s important to consider what is the right fit for you as the owner. Consider things like your location, skillsets, interests, schedule, and finances to narrow down the type of business you’d like to buy. You should then consider each potential business’s current financial health, liabilities, projected potential and weigh the possible risks with the benefits and opportunities it can provide.
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A recent article from Forbes entitled “10 Common Mistakes To Avoid When Exiting Your Business” provides a detailed list of the most common mistakes that business owners make when they consider retiring from their role as owner.
Since, for the majority of owners, their business is the largest asset they own, it’s imperative that exit planning is done well in advance to ensure a smooth exit that will align with the individual’s retirement goals. Unfortunately, many owners underestimate the importance of this step and transition specialists warn them against making these top ten common mistakes:
- Being too emotionally attached to the business
- Not understanding how buyers evaluate the business
- Failing to understand the importance of a committed management and leadership team
- Not preparing for life post-sale
- Not properly evaluating all exit options
- Not facing family issues head on
- Not understanding and planning for the new economy
- Not cleaning up bothersome contingencies
- Working in the business and not on it
- Being overwhelmed by all of the moving pieces in an exit
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A recent blog post from Business Enterprise Institute entitled “3 Things All Valuable Businesses Have” explains the three characteristics that are present in every valuable business.
- Next-Level Management: Every valuable company has a management team in place that can run the business without the owner involved. Even more valuable is a team that is able to take the business further than the owner themselves. This guarantees that the company will still maintain success after the owner is no longer with it.
- Operating Systems That Improve the Sustainability of Cash Flow – Written documentation of processes that anyone can follow and implement are invaluable to the future of a business and to a buyer.
- A Solid, Diversified Customer Base – Having a singular or a few customers who provide a large percentage of your revenue is high risk for any business. For the benefit and safety of the business, and for an increased value, having a diversified customer base means that if a client or two leaves then the business won’t suffer potential demise.
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A recent article from G2 entitled “The Simple Guide to Buying a Business” details the entire business buying process from why to buy an existing business to how to close the sale.
Buying an existing business can provide advantages such as existing cash flow, intellectual property and employees. In comparison to building a startup, acquiring an existing company is less risky and still provides the benefits of being an entrepreneur. The main thing you need to buy a business is money. There are multiple ways to acquire the amount of cash needed to purchase a business. Once you understand why you want to buy a business, and your options for funding, there are 7 major steps to buying a business:
- Know Your Budget
- Find the Right Business
- Do Your Due Diligence
- Negotiate the Price
- Secure Funding
- Sign the Contract
- Handle the Transition or Integration
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A recent article from Forbes entitled “Four Qualitative Factors To Consider In A Business Valuation” explains how to asses four major factors that impact the value of a business that cannot be expressed in a simple numerical value.
Unlike the business’s revenue and cash flow values, certain metrics within a company cannot be expressed and measured quantitatively. The following metrics fall within this category, and remain important in determining overall value of the business:
- Leadership – A company that is dependent upon the current owner and leadership is less valuable than one that can run without the presence of the owner.
- Personnel – Having well-trained staff that are loyal to the company and will remain after the sale is extremely valuable in a business sale.
- Customers – Who makes up the customer base greatly impacts the company’s value because it impacts how predictable the long term ability to generate revenue will be.
- Regulations – The potential threats and opportunities presented by the industry and local regulations provide valuable insight into the viability of the business and its future.
For the best results, electing the assistance of a business broker and other professional advisors when navigating a business sale is suggested.
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A recent article from Forbes entitled “Planning To Retire Or Sell Your Business? Here’s How To Prepare For Your Departure” describes the key considerations a business owner should take as they plan for their exit.
While the ideal time to begin planning for your exit is when you begin building your business, that is not always how things play out. As a business owner whose company is already in the full swing of day to day operations, the sooner planning begins, the better the outcome will be when it’s time to leave. If you do fall into this second category, follow these four steps to work your way towards the ‘door’:
- Become replaceable – Many businesses become dependent on the owner in day to day operations. Obviously this is a bad thing if you intend to not be there someday. Begin to take whatever measures necessary to ensure that the company can run smoothly either without you or with someone else at the helm, as soon as possible.
- Identify and reward your key employees – If you haven’t already, get to know your employees (their needs, desires, fears, and dreams), determine who is most necessary for successful operations and implement incentives to keep them aboard after your departure.
- Improve operational effectiveness – Evaluate everything from employee productivity to product or service quality and the offers you currently have. Make tweaks to improve the bottom line of your company’s efficiency and profitability.
- Turn your Gremlins into Gurus – Work on the fears or beliefs that as a business owner are holding you back from your greatest potential. Eliminating these, shining a light on them and allowing yourself to make improvements in areas you’ve previously avoided out of fear will do wonders for your end result.
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Tackling Growth Delusions When Buying a Business
There is no doubt about it, it can be exciting to buy a new business. However, in the process, it is very important that you don’t become unrealistic about future growth. Keep in mind that in the vast majority of cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
Richard Parker’s recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business” seeks to instill a smart degree of caution into prospective buyers. Parker notes that when evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized. In particular, Parker cautions those buyers who are buying into an industry that they know nothing about; those individuals should be very careful.
When buying into an industry where one has no familiarity, there can be a range of problems. The opportunities that you see may not have been tapped into by the existing owner for a range of reasons. You couldn’t possibly guess what these reasons might be without more of a knowledge base. Since you are an outsider, you likely lack the proper perspective and understanding. In turn, this means you may see growth opportunities that may not exist, as the seller may have already tried and failed. Summed up another way, until you actually own the business and are running it on a day to day basis, you simply can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. The real question, the foundation of whether or not a business is a good purchase option, is whether or not the business will maintain its revenue and profit levels once you’ve signed on the dotted line and taken over. You want to be sure that the business doesn’t have to grow to remain viable.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. What is not fine is assuming that you can greatly grow the business. Of course, if new buyers can achieve that goal, that is great and certainly icing on the cake. But don’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, are able to find ways to make that business grow. But realize that many of your ideas for growing the business may fail completely.
A professional business broker will be able to help you determine what business is best for you. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.
Around the Web: A Week in Summary
A recent blog post from Sunbelt Business Brokers entitled “State of the Market: Selling Your Business in 2020” provides some insight into the current state of the market as well as recommendations for business owners considering selling their business in the coming year.
There are always multiple factors that contribute to the decision to sell a business. Timing and the condition of the market are two factors that play a very heavy roll. With concerns of an impending recession and the upcoming elections, business valuations have begun to drop for small businesses while lower middle market businesses are still seeing higher than normal sale prices. If your business falls within one of the following industries, it may be a profitable time to sell:
- Manufacturing
- Construction and Engineering
- Biotechnology and Health
Regardless of the market predictions, it’s never a bad time to begin exit planning. Even if your intentions aren’t to pull the trigger on a sale in 2020, reaching out to a business broker to begin assessing your business’s exit needs is always a good thing to do.
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A recent article from Entrepreneur entitled “7 Steps to Acquiring a Small Business” details the sequence of events a first time buyer may want to follow in their quest to purchase a business.
No matter what your motivation is for becoming a business owner, there are always multiple ways to come into entrepreneurship. As a beginner, you may not always have the resources you think you need in order to enter the field. However, you may not always need them either. To purchase a profitable business, without spending your own money, follow these tips from an experienced investor:
- Identify what you want – It’s necessary to be clear on what features you’re looking for in a business. Obviously profit is one of them, but also consider your strengths, interests, the business model and industry.
- Find Motivated Sellers – A seller who is highly motivated is more likely to negotiate a lower selling price that would work to your benefit.
- Do some calculations – Verify that the business is bringing in more money than is going out consistently over the past three years.
- Connect with the business owner – For many owners, they’ve built their business from the ground up and are attached to the prolonged wellbeing of the company after their departure. Get to know the owner and help to ease their concerns about your ownership and protection of everything they’ve worked so hard to build.
- Finance the deal, sometimes with little or no out-of-pocket costs – Look for business deals that are either willing to let you pay them back over time using profits from the business or for investors who are willing to front any capital needed to close the deal in exchange for a stake in the company.
- Dive into due diligence – Clarify the plan with your lawyer, the company’s key employees and your advisors. Make sure everyone is on the same page and everything is in writing.
- Leverage the business owner through the transition – Lean on the knowledge and expertise of the business owner during the transition, and preferably have a clause specifying the length of time they will stay to help in your contract.
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A recent article from Rogerson Business Services entitled “Timing is everything – including selling your business” discusses important factors to consider regarding the status of your business as 2019 comes to a close.
There are many reasons to consider selling your business in 2020 including potential changes in the market that are well out of anyone’s control. As a business owner, the two major factors that contribute to it being the ‘right’ time to sell your business are that the market is in good condition and that you are ready to sell. The sooner you start the exit planning process the better.
If you have decided it is the right time to sell, start preparing by bringing your financial statements up to date, reporting all of your income and getting a business valuation.
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Around the Web: A Week in Summary
A recent article from Forbes.com entitled “What Is The Right Type Of Business For You To Buy?” provides helpful tips for a business owner to find the right business for them.
Buying a business can be a massive step in your life. Choosing the right business for you is incredibly important because it can br the difference between financial success and failure, and between happiness and misery. While it is a popular piece of advice to go into business doing the thing you love most, this is not always the best advice. There are certainly many things that factor into making a purchase that is worthwhile. However, the most important factor is based upon your skillsets. If you choose to purchase a business based on nothing else, buy the one that thrives based on your current expertise and what you are best at. Nothing else will factor in to your success more.
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A recent article from Lombard Odier entitled “Maintaining a comfortable lifestyle after selling a company” uses an example to explain the process for allocating assets in the most efficient manner possible in order to obtain the best return after taxes.
Making the transition into retirement as a business owner can be less straightforward than for someone who has worked for a company that they wish to retire from. When taking this step as an entrepreneur it is important to work with an experienced advisor who can help you become very clear on your post-exit needs. In order to maintain a comfortable lifestyle after the sale, it is important to consider the following things as you reallocate your current assets:
- What debts do you currently have? Can some of them be paid off or down?
- How much do you need to maintain your current lifestyle?
- What are your post-exit goals and aspirations? How does money facilitate these goals?
- What are the tax implications of the different sale structures and which one is most beneficial to your needs?
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