Red Flags are Not a Pretty Sight
When it comes to selling a business, sellers simply must pay attention to red flags. Problems can always pop up, and that’s why they need to keep their eyes open.
Rarely does a “white knight” ride in and rescue a business with no questions asked. And if this were to happen, you should be asking, “Why?” Until a deal is officially inked, sellers need to evaluate every aspect of a transaction to make sure something isn’t happening that could wreck the deal.
Common Red Flags to Watch For
One example would be having a company express interest in your business but you are never able to directly contact key players, such as the President or CEO. The reason that this is a red flag is that it indicates that the interest level may not be as great as you initially hoped.
A second red flag example would be an individual buyer, with no experience in acquisitions or experience in your industry, looking to buy your business. The reason that this second example could prove problematic, is that even if the inexperienced buyer is enthusiastic as the deal progresses, he or she may become nervous upon learning what a deal would actually entail. In other words, the specifics and the reality of owning a business, or owning a business in your industry, could come as a shock to an inexperienced buyer.
Both of these examples above are examples of early-stage red flags. But what about issues that pop up at later stages? The simple fact is that red flags can come at any stage of the selling process.
A good example of a middle-stage red flag is when a seller is denied access to the buyer’s financial statements, which is of course essential to verify that the seller is able to actually make the acquisition. A final-stage red flag example is an apparent loss of momentum, as the buying and selling process can be a long one.
Business Sellers Need to Protect Their Assets
Sellers are usually very busy and don’t have time to waste; this is doubly true for owner/operators of businesses, as the time they invest with a prospective buyer is time that could be spent doing something else.
All too often, businesses begin to run into trouble when they place their business on the market. If this trouble negatively impacts the bottom line, then the business can become more difficult to sell and the final sale price will likely be lower.
That’s why it is so essential that sellers protect themselves from buyers that are not truly interested or are simply not a good fit. Working with a business broker is an easy and highly effective way for sellers to protect themselves from buyers that are simply not the right fit. A broker helps to “weed out” unfit candidates.
While red flags are never good, that doesn’t mean that a red flag means a deal is a definitely at an end. Especially with the guidance of an experienced business broker, many of these issues can be overcome.
In the end, if you, either as a buyer or seller, suspect that there is a problem, then you should take action. The problem will not simply go away. The single best way to deal with a red flag is to tackle it head on as soon as you recognize it.
Copyright: Business Brokerage Press, Inc.
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Buying? Selling? Seven Key Points to Consider
Buying or selling a business is one of the most important decisions that most people ever make. Before jumping in, there are several points that should be taken into consideration. Let’s take a moment to examine some of the key points involved in buying or selling a business.
Factor #1 – What are You Selling?
Whether buying or selling a business it is important to ask a few simple questions. What is for sale? What is not included with the buyer’s investment? Does the sale price include any real estate? Are vital assets, such as machinery, included in the sale price?
Factor # 2 – What are the Range of Assets?
It is very important to understand the range of assets that are included with a business. What is proprietary? Are there formulations, patents and software involved? These types of assets are often the core of the business and will be essential for its long-term success.
Factor # 3 – Evaluating Assets for Profitability
Not all assets are created equally. If assets are not earning money or are too expensive to maintain, then they should probably be sold. Determining which assets are a “drag” on a business’s bottom line takes due diligence and a degree of focus, but it is an important step and one that shouldn’t be overlooked.
Factor # 4 – Determining Competitive Advantage
What gives a business a competitive advantage? And for those looking to sell a business, if your business doesn’t have a competitive advantage, what can you do to give it an advantage? Buyers should understand where a business’s competitive advantage lies and how they can best exploit that advantage moving forward.
Factor # 5 – How Can the Business Be Grown?
Both buyers and sellers alike should strive to determine how a business can be grown. Sellers don’t necessarily need to have implemented business growth strategies upon placing a business up for sale, but they should be prepared to provide prospective buyers with ideas and potential strategies. If a business can’t be grown this is, of course, a factor that should be weighed very carefully.
Factor # 6 – Working Capital
Some businesses are far more capital intensive than others. Understand how much working capital you’ll need to run any prospective business.
Factor # 7 – Management Depth
Businesses are only as good as their people. It is important to ask just how deep your management team is, how experienced that team is and what you can expect from that team. How dependent is the business on the owner or manager? If the business may fall apart upon the leaving of the owner or a manager, then this is a fact you need to know.
Buying or selling a business is often more complex than people initially believe. There are many variables that must be taken into consideration, including a range of other factors not discussed in this article ranging from how financial reporting is undertaken to barriers of entry, labor relationships and more. Due diligence, asking the right questions and patience are all key in making your business a more attractive asset to buyers or for finding the right business for you.
Copyright: Business Brokerage Press, Inc.
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Who Exactly Owns Personal Goodwill and Why Does it Matter?
Understanding Personal Goodwill: A Critical Factor in Business Valuation and Sales
Personal goodwill can significantly impact the valuation and sale of businesses, especially for small and medium-sized enterprises in Indiana. As a business owner considering selling your company, it’s crucial to understand how personal goodwill is created, its effects on your business value, and strategies for addressing it during a sale.
What is Personal Goodwill?
Personal goodwill refers to the intangible value associated with an individual, typically the business owner or key employee, rather than the company itself. According to the American Institute of Certified Public Accountants (AICPA), personal goodwill arises from the owner’s reputation, expertise, skills, and relationships with customers and suppliers.
How Personal Goodwill is Created
Business owners build personal goodwill through:
- Developing a positive personal reputation in the industry
- Establishing strong relationships with key customers and suppliers
- Creating unique products, inventions, or designs
- Cultivating specialized expertise or skills
Personal goodwill is particularly common in professional services firms like medical practices, law firms, and accounting firms, where client relationships are often tied to individual practitioners.
Impact on Business Valuation and Sales
When selling a business with significant personal goodwill, several challenges arise:
- Transferability: Personal goodwill is inherently difficult to transfer, as it’s tied to a specific individual.
- Risk for buyers: Acquiring a business heavily reliant on personal goodwill presents risks if key relationships or expertise cannot be effectively transferred.
- Valuation complexities: Separating personal goodwill from enterprise goodwill can be challenging but is crucial for accurate business valuation.
Strategies for Addressing Personal Goodwill in Business Sales
To successfully sell a business with substantial personal goodwill, consider these approaches:
- Transition period: Require the seller to remain with the business for a set period to facilitate relationship transfers and knowledge sharing.
- Earn-out agreements: Structure deals with performance-based payouts to protect buyers from potential loss of business post-sale.
- Escrow arrangements: Place a portion of the sale proceeds in escrow, subject to adjustment based on business retention.
It’s important to note that courts have generally held that personal goodwill belongs to the individual, not the business entity. This distinction can have significant tax implications for both buyers and sellers.
Conclusion
Understanding and properly addressing personal goodwill is crucial when buying or selling a business in Indiana. Working with experienced professionals, such as the team at Indiana Equity Brokers, can help navigate these complex issues and ensure a successful transaction.
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When Selling Your Business, Play to Win
If you are an independent business owner, you are most likely also an independent business seller–if not now, you will be somewhere down the road. The Small Business Administration reports that three to five years is a long enough stretch for many business owners and that one in every three plans to sell, many of them right from the outset. With fewer cases of a business being passed on to future generations, selling has become a fact of independent business life. No matter at what stage your own business life may be, prepare now to stay ahead in the selling game.
Perhaps one of the most important rules of the selling game is learning how not to “sell.” An apt anecdote from Cary Reich’s The Life of Nelson Rockefeller shows a pro at work doing (or not doing) just that:
When the indomitable J.P. Morgan was seeking the Rockefeller’s Mesabi iron ore properties to complete his assemblage of what was to become U.S. Steel, it was Junior [John D. Rockefeller, Jr.] who went head-to-head with the financier. “Well, what’s your price?” Morgan demanded, to which Junior coolly replied, “I think there must be some mistake. I did not come here to sell. I understand you wished to buy.” Morgan ended up with the properties, but at a steep cost.
As this anecdote shows, the best approach to succeeding at the selling game is to be less of a “seller” and more of a “player.” Take a look at these tips for keeping the score in your favor:
Let Others Do the Heavy Pitching
Selling a business is an intense emotional drain; at best, a distraction. Let professional advisors do the yeoman’s duty when selling a business. A business intermediary represents the seller and is experienced in completing the transaction in a timely manner and at a price and terms acceptable to the seller. Your business broker will also present and assess offers, and help in structuring the transaction itself. If you plan to use an attorney, engage one who is seasoned in the business selling process. A former Harvard Business Review associate editor once said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know what’s reasonable.”
Stay in the Game
With the right advisors on your side, you can do the all-important work of tending to the daily life of the business. There is a tendency for sellers to let things slip once the business is officially for sale. Keeping normal operating hours, maintaining inventory at constant levels, and attention to the appearance and general good repair of the premises are ways to make the right impression on prospective buyers. Most important of all, tending to the daily running of the business will help ward off deterioration of sales and earnings.
Keep Pricing and Evaluation in the Ballpark
Like all sellers, you will want the best possible price for your business. You have probably spent years building it and have dreamed about its worth, based on your “sweat equity.” You’ll need to keep in mind that the marketplace will determine the value of the business. Ignoring that standard by asking too high a price will drive prospective buyers away, or will at the least slow the process, and perhaps to a standstill.
Play Fair with Confidentiality
Your business broker will constantly stress confidentiality to the prospects to whom he or she shows your business. They will use nonspecific descriptions of the business, require signatures on strict confidentiality agreements, screen all prospects, and sometimes phase the release of information to match the growing evidence of buyer sincerity. As the seller you must also maintain confidentiality in your day-to-day business activities, never forgetting that a breach of confidentiality can wreck the deal.
Sell Before Striking Out
Don’t wait until you are forced to sell for any reason, whether financial or personal. Instead of selling impulsively, you should plan ahead carefully by cleaning up the balance sheet, settling any litigation, providing a list of loans against the business with amounts and payment schedule, tackling any environmental problems, and by gathering in one place all pertinent paperwork, such as franchise agreement (if applicable), the lease and any lease-related documents, and an approximation of inventory on-hand. In addition, you could increase the value of your business by up to 20 percent by providing audited financial statements for one or two years in advance of selling.
Think Twice Before Retiring Your “Number”
The trend is for sellers to assume they will retire after selling the business. But consider this: agreeing to stay on in some capacity can actually help you get a better price for your business. Many buyers will pay more to have the seller stay aboard, thus helping to reduce their risk.
Keep the Ball Rolling
You need to keep the negotiation ball rolling once an offer has been presented. Even if you don’t get your asking price, the offer may have other points that will offset that disappointment, such as higher payments or interest, a consulting agreement, more cash than you anticipated, or a buyer who seems “just right.” The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. In many cases, the structure of the deal is more important than the price. And when the ball is rolling, allow it to pick up speed. Deals that drag are too often deals that fail to close.
By following these tips, and by working closely with your business broker, you can have confidence in being a seller who, like John D. Rockefeller, Jr., doesn’t “come here to sell.” You will play the selling game–and be a winner.
Similar Companies Can Have Huge Value Differences
Can two companies in the same industry have very different valuations? In short, the answer is a resounding, yes. Let’s take an example of two companies that both have an EBITDA of $6 million but with two very different values. In fact, Business One is valued at five times EBITDA, which prices it at $30 million whereas Business Two is valued at seven times EBITDA, meaning it has a value of $42 million.
Value Difference Checklist
- Revenue Size
- Profitability
- The Market
- Growth Rate
- Regional/Global Distribution
- Management & Employees
- Capital Equipment Requirements
- Systems/Controls
- Uniqueness/Proprietary
- Intangibles (Intellectual property/patents/brand, etc.)
There are quite a few variables on the above checklist that stand out, with the top one being that of growth rate. Growth rate is a major value driver when buyers are considering value.
Business Two, for example, with its seven times EBITDA has a growth rate of 50%, whereas Business One, with its five times EBITDA has a growth rate of just 12%.
Discovering the real growth rate story means answering some pretty important questions.
- Are the company’s projections achievable and believable?
- Where is the company’s growth coming from?
- Are there long-term contracts currently in place?
- Where is the growth originating? In other words, what services or products are driving growth? Will those services or products continue to drive growth in the future?
- How is the business obtaining its customers for the projected growth?
- How reliable are the contracts/orders?
Ultimately, finding the difference in value between two businesses, that otherwise appear similar, usually resides in growth rate. This is a factor that should not be overlooked. It is essential to know a company’s growth rate as well as the key questions to ask regarding its growth. If you are going to obtain an accurate valuation as well as understanding the valuation between different companies, this part of the process cannot be overlooked.
Copyright: Business Brokerage Press, Inc.
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