Around the Web

Around the Web: A Week in Summary

A recent article from Forbes entitled “Don’t Be Delusional About Growth When Buying A Business” explains the dangers of focusing on a business’s growth potential too much during the due diligence process.

From an outside perspective it is easy to look at any business and find a plethora of growth opportunities. To an inexperienced buyer this can make a business look more valuable than it is because they can see the potential it has. However, this can be a big mistake since buyers are often inexperienced in the direct industry and lack details on what the current business owner has or has not tried previously. A more effective route to making a sound purchase would mean focusing on two main factors when evaluating a business:

1. Stability – Before any business can grow it has to have a solid foundation. Take a deep look at the foundations of the business before getting excited about growth opportunities.
2. Reality of No Growth – Use your due diligence to determine what would happen if this business did not grow at all. Will you still make a reasonable profit? Does the current price and terms make sense?

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A recent article from BusinessBroker.net entitled “Keep It Confidential” discusses the importance of maintaining the confidentiality in a business sale.

Selling a business and selling a house may seem like a similar process from a distance. However, there are a few major differences between the two processes. One such difference is the importance of being discrete during the business sale process. News of the business being sold could cause valuable employees and clients leaving the business and therefore damaging its bottom line. Similarly, proprietary information regarding business operations could have detrimental effects on the business if it were to land in the hands of a competitor. For these purposes, a business for sale listing will refrain from revealing any information that could identify the exact company that is for sale, and once a buyer shows interest they will be asked to sign a non-disclosure agreement before any further information is released to them.

Given the sensitivity of a business sale, it is very important that potential buyers adhere to the non-disclosure agreement. The only individuals with whom they may share confidential information regarding the company in question are those who are on their advisory board. Regarding the sale of a running business, discretion is extremely valuable because the process is a delicate one from start to finish in order to ensure that things continue to run as smoothly as possible during and after a transition of ownership.

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A recent article from Axial entitled “Middle-Market Dealmaking Continues to Outperform” details the current state of market conditions for 2019 and provides comparisons to previous years as well as projections for years to come.

Comprising 82.4 percent of all U.S. buyouts for the past five years, the middle market continues to dominate the private equity sector. In comparison to last year, 2019 is on target to outperform 2018’s record breaking sales with an increase of 12.9 percent. Still, funds that were once abundant in the middle market are increasingly being eaten up with the swelling sizes of mega firms in the arena.

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Around the Web: A Week in Summary

A recent article from Cobb Business Journal entitled “Is cash king when selling a business?” discusses the benefits and risks of accepting a low cash offer versus an earnout structured deal with a higher end payout.

When presented with both of these options, many business owners would ask, “Which offer is the best offer?” According to a financial professional, the answer is “It depends”. The business owner needs to consider their needs and future goals as well as the risk factors involved in accepting either offer. Cash deals are a rare occurrence, but have the potential to leave money on the table. In the same turn, an earnout structure can make you more money but leaves some of your wealth and time tied up in the company.

The best response to receiving multiple offers that vary like this is to contact an advisor. A trained advisor will be able to sit down with you and weigh the needs of your particular situation in order to assist you in making the best decision for you.

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A recent article from Wilmington Biz entitled “What You May Get Wrong About Business Valuations” explains the importance of investing in a proper business valuation.

Business owners commonly misinterpret the present value of their business. Oftentimes they will hear about or see another company that they deem similar to theirs sell at a particular price and assume that their business is also worth the same. Or comparably, entrepreneurs will assume that because their company is large, bringing in commendable revenues or outwardly successful, that it’s of high value to a buyer. The reality is that there are many factors that impact the value of a business that most owners wouldn’t know to consider.

Some may be turned off by the initial investment of receiving a valuation because of this belief that they already know their company’s worth. However, a valuation is an incredibly valuable tool. Not only does knowing the value of your business give you leverage in negotiations, it also gives you insight into your business. The pillars of a valuation allow an owner to pinpoint areas for potential growth before listing, giving them the ability to list at a higher price.

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A recent article from The Irish Times entitled “Family business: to sell or not to sell? 6 questions to help you make the right decision” explores important considerations for business owners to entertain before making the decision to sell.

There are many options for exiting your business. While some owners begin their business with the intention of selling it eventually, plenty of others never plan on selling. For many family owned businesses, there’s an expectation that the business will passed on through the generations. Regardless of how you decide to sell, consider these important questions before you do:

1. Is now a good time to sell?
2. How much is my business worth?
3. What are my non-negotiables?
4. What will I do next?
5. Have I done my purchaser diligence?
6. Who will act as the negotiator?

Choosing whether or not to sell a family business is a major decision. Answering these questions thoroughly before you make your decision will help you make the best decision for your future.

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Around the Web: A Week in Summary

A recent article from BusinessBroker.net entitled “6 Common Mistakes to Avoid When Selling a Business” explains six ways in which business owners could better prepare themselves for the sale of their business by avoiding certain actions.

While it may seem like an overwhelming undertaking to sell your business, it doesn’t have to be. And regardless of when you plan to actually sell, it is never too early to begin preparing to do so. Once you do make the pivotal decision to sell, be sure to avoid these 6 common mistakes many business owners make:

1. Failure to prepare the business for sale – Potential buyers most commonly want to acquire a business that they don’t need to overhaul before they can begin running it.
2. Asking for the wrong price – A valuation that is too high can create problems during negotiations or scare away potential buyers from the start. A valuation that is too low however, leaves money on the table.
3. Not utilizing the experience of professionals – Selling your business is not the time to be a do-it-yourselfer. Save your entrepreneurial skill for running your business and allow yourself to rely on professionals to walk you through the sale process. Shouldering too much and trying to do it all can be detrimental to the value and health of your business.
4. Spending time with the wrong buyers – It’s tempting to focus energy on the first person to show interest in the business. However, a lot of time stress and headache can be saved by properly vetting all potential buyers.
5. Not maintaining confidentiality – Employees and customers learning about a potential sale too soon can potentially damage the business and its value.
6. Not addressing post-sale transitions – Make sure you are comfortable with the transition plan before you accept the offer.

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A recent article from Certified Business Brokers entitled “Will It Sell?” discusses the factors that cause a business to be considered non-saleable.

Business brokers and advisors frequently decline to take on a client because the business in question is what they consider non-salable. Giving that their job is to sell your business, it is a practice of integrity and ethics on behalf of the advisor to turn down a sale that they cannot make. Owners should be aware of what makes their business considered unsalable and prepare their business for the process before seeking out an advisor. Some of these things include:

• Having too high of expectations for a sale price
• Declining sales trends
• Dated business practices
• High customer concentration issues
• The business being dependent upon the current owner to run
• Messy or incomplete financial books and documents

Many of these items, if caught soon enough, can be repaired before going to market. However, it is a poor decision to take a business to market that has any of these red flags as they can seriously slow down the deal process. It is a common saying in the industry that “time kills all deals”. An advisor is well suited to help you prepare your business for sale if you are willing to put in the proper time and energy into creating a sellable business.

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A recent article from Exit Oasis entitled “I Want to Sell Someday… Can a Buyer Duplicate My Results?” explains the difficulties with having an owner-dependent business and explores potential solutions.

It can be tempting to do everything yourself as a business owner. The phrase “if you want something done right, you have to do it yourself” drives many entrepreneurs. However, when it comes to selling your business or building something sustainable, this mindset can cause more problems than it solves. Ultimately, if you’re the reason your business is still running, how is someone else supposed to run it? Alternatively, by building a reliable, well-trained team that can carry out day-to-day functions you create a much more scalable, sustainable and sellable business. This requires some letting go and trusting, but the payoff is worth it in the end. The other option is to build systems that meet the same purpose.

While it may not feel great to think of yourself as replaceable, if you want to sell your business you need to be. If another person cannot step in and duplicate the results that you’ve been able to achieve, then your business holds little to no value from a sale standpoint.

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Around the Web: A Week in Summary

A recent article from Inc. entitled “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability” explains four ways in which business owners could be inadvertently sabotaging their own business’s potential and worth.

Even if you never plan on selling your business, it is always a good strategy to treat your business as though you plan to. This sets you up for a mindset that is always focused on growth and puts you in the position to be worth top dollar should the circumstances unexpectedly change. If you haven’t thought about selling or if you are but haven’t taken a thorough look at your company yet, here are four mistakes you could be making that may lower its value:

1. Poor recordkeeping – Anyone evaluating your business is going to want to look through at least three years of financials. If your books are a mess, you may struggle to show growth, scalability and credibility. This is a major red flag to investors and buyers alike.
2. Delayed investment and improvements – If you stop investing in your business, you cease the ability to show how it has a promising future for growth. This will significantly reduce its value.
3. Failure to innovate – A failure to keep up with modern technology can harm your business in multiple ways, like reducing your ability to stay competitive in the market.
4. An unstable workforce – Well-trained employees and a stable workforce with low turnover contribute to a stable, smooth running business.

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A recent article from Axial entitled “The Makings of the M&A Purchase Agreement” explains the items included in a typical purchase agreement and provides some tips on how to keep the deal process running smoothly.

The purchase agreement is a more in-depth written agreement than the Letter of Intent that precedes it. Often including more detail as well as additional terms and conditions, the most common sections included in the document are:

• Definitions – This section lays out exactly what each term used throughout the document means. This avoids later confusion and disagreements regarding what certain terms include or do not include.
• Execution Provisions – This section includes what is included in the purchase price, payment mechanics, earnout targets/timing, escrows, purchase price adjustments and more.
• Representations, Warranties, and Schedules – Buyers will ask sellers to write up a section detailing certain conditions within the business and verify their veracity. These conditions can include current litigation, employee benefits, the state of taxes, financials and accounts, and more.
• Indemnifications – The purpose of this section is to determine who will be liable for issues that arise after the deal is closed.
• Interim and Post-Closing Covenants – What is expected from each party pre and post close of the sale will be laid out in detail here.
• Closing Conditions – This section will lay out the circumstances of closing the deal such as a closing date, regulatory approvals, written third-party consents such as those from a landlord and a material adverse change clause.
• Break-Up Fees – As suggested, this section details what will occur should the deal be terminated before closing.

Negotiating a purchase agreement can be stressful and tensions will inevitably arise. Going into this process, it is important to remember that everyone is simply looking to protect their best interests and to understand the basics of negotiations.

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A recent article from Exit Strategies Group entitled “Why Business Transactions Don’t Close: Signs of a Flaky Buyer/Seller” discusses the signs to look for that would suggest that a seller or buyer is likely to drop out of a deal last minute or without warning.

It is more common for a business sale not to close than it is for it to make it to completion. However, there are steps you can take to avoid working with a flighty or unreliable seller or buyer who is more likely to skip out before the deal is closed. When entering into a deal with someone, look for these signs:

1. They are untrustworthy – Do some due diligence on the other party’s character. Check references, look up past deals they’ve done, do your research.
2. The buyer seems to have financial problems – This is an obvious red flag, it’s encouraged that you ask for proof of funds for a down payment before moving along any further.
3. They are slow to act – An individual who is not quick to respond to requests for disclosures or other diligence items could be indicating either a lack of interest or that they have something to hide.
4. Lack of transparency – This sign could mean a lot of things, but they’re generally not good things.
5. The seller, buyer or agent becomes less responsive – Time is a deal killer, therefore it’s best to avoid anyone who is consistently taking longer than necessary (as in days) to respond to simple requests.
6. Low enthusiasm for the deal – If you can spot discord between business partners regarding the sale or a lack of excitement about the sale, the chances are much higher that it will fall apart.

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Around the Web: A Week in Summary

A recent article from Forbes entitled “Take Advantage Of The Golden Age Of Business Acquisitions” provides a list of reasons why SBA loans are a valuable tool for small businesses during a time period that is very favorable for growth via acquisition.

The current landscape of the business mergers and acquisitions market in the United States is most active in the small business sector. With droves of baby boomers retiring daily, a renewed growth strategy outlook amongst business owners, and an economy that favors business owners in need of financing, professionals are considering this a Golden Age. For many reasons, SBA loans are an excellent option for business owners considering acquisition. These reasons include:

• Lower equity requirements
• Funding is applicable for a variety of uses
• More franchises are eligible
• More affordable financing options
• Soft costs such as closing costs are eligible
• Flexibility on value

While SBA lending has its downsides, and is not for every business owner, for many its benefits outweigh the downsides.

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A recent article from Axial entitled “You’ve Received an Unsolicited Offer to Buy Your Business – Now What?” discusses the important factors that an owner needs to consider once they’ve received an offer for their business.

As a business owner, receiving an unsolicited offer for your business can be very exciting; especially if the offer sounds good. For many entrepreneurs, even if they weren’t planning to sell their business, the right offer could change their minds. However, it is best in these scenarios to hire a team of advisors before agreeing to anything with another party. In this scenario your team of advisors would help you to address the following:

1. Figuring out if the offer is fair and reasonable – Just because it sounds good doesn’t mean it’s actually what your business is worth. Without a proper evaluation of both your business and the offer, you can’t truly know if what you’ve been offered is worth taking.
2. Managing the flow of due diligence information – In any business sale situation it is important to share information about your company in a way that most positively represents your company and its strengths. Your advisor can help you do so.
3. Negotiation technique and approach – If you are unskilled in the art of negotiation, approaching it on your own can leave you very vulnerable.
4. Allowing you to focus more time on running the business – Regardless of how sudden or exciting a proposed deal can be, the process that follows is lengthy and very involved. If you are spending a lot of your time working on the merger or acquisition, it could potentially leave your business unattended and vulnerable to a decrease in value. Having a team in place handling many pieces of the process allows you to keep the ship steering straight.

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A recent article from the Mississippi Business Journal entitled “Estimating the value of your business” discusses multiple methods for determining the value of an existing business.

What a business is worth is dependent upon who is looking at it. It is commonly known that the value of a business is often much higher to an owner who founded the company than it is to an investor because of sentimental value. Different types of value include:

• Market value: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
• Liquidation value: This type of valuation assumes that the owner is in a time crunch to sell.
• Disposition value: Assumes a shorter than average marketing time.
• Going concern value: Assumes that the business will continue operating in the future.

Given the many factors that are included into the outcome of a valuation, it is important to have an unbiased third party professional perform the appraisal.

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