Do You Know Your Customers?
It’s always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was. That personal contact goes a long way in keeping customers happy – and returning. It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems like forever, often forcing them to repeatedly listen to a recording saying that the call will be handled in 10 minutes. Small businesses are usually built around personal customer service. If you are a business owner, when is the last time you “worked the floor” or handled the phone, or had lunch with a good customer? Customers and clients like to do business with the owner. Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service.
The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business. When is the last time you visited with your banker, accountant, or legal advisor? A friendly call to your biggest supplier(s) can go a long way in building relationships. A call to one of these people thanking them for prompt delivery can pay big dividends if and when a problem really develops. With most communication now done online, a handwritten thank you to a long-standing customer, someone whose recommendation resulted in a new customer, or a vendor you appreciate stands out among the bills and junk mail.
Owning and operating your own business is not a “backroom” or “hide behind the business plan” business. It is a “front-room” business. Go out and meet the customers – and anyone else who has an interest in your business.
Selling a Business: How Long Does It Take?
A recent survey revealed that the average time between listing and sale was 9 months.
Why does it take so long to sell a business? Price and terms are the biggest reasons. Not over-pricing the business at the beginning of the sales process is a big plus, as well as structuring the transaction to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period from listing to closing.
Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is also key.
Here is the basic information that a prospective acquirer will want to review:
- Copies of the financials for the past three years.
- A copy of the lease and any assignments of the lease from previous sales.
- A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
- A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
- Copies of any other documentation pertaining to the business.
- Supporting documents for patents, copyrights, trademarks, etc.
- Sales brochures, press releases, advertisements, menus or other sales materials.
In addition, here are some of the questions that buyers may have. A prepared seller should have ready answers as well as the information to support them.
- Is the seller willing to train a new owner at no charge?
- Are there any zoning or local restrictions that would impact the business?
- Is there any pending litigation?
- Are any license issues involved?
- Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
- What about the employee situation? Are there key employees?
- Are there any copyrights, secret recipes, mailing lists, etc?
- What about major suppliers or vendors?
A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business. Using the services of a professional business broker can also greatly reduce the time period. They are knowledgeable about the current market, how to market a business and how to best advise a seller on price and terms. They can also recommend professional advisors, if a seller doesn’t have them already. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.
Read MoreThree Basic Factors of Earnings
When evaluating businesses for sale, it’s crucial to look beyond the raw earnings numbers and consider several key factors that provide deeper insight into the company’s financial health and future prospects. Here are three critical aspects to examine:
1. Quality of Earnings
The quality of earnings measures how accurately the reported earnings reflect the true operational performance of the business. High-quality earnings come primarily from core business operations, while low-quality earnings may be inflated by one-time events or accounting maneuvers. At Indiana Equity Brokers, we carefully analyze earnings quality by scrutinizing:
- “Add backs” and non-recurring items
- One-time events like property sales
- Extraordinary expenses and their frequency
- Allowances for typical annual extraordinary costs
Beware of valuations that completely eliminate all extraordinary items, as some level of unexpected expenses is normal for most businesses.
2. Sustainability of Earnings Post-Acquisition
Buyers must consider whether the reported earnings represent a peak in the business cycle or if they can be sustained and grown after the acquisition. Key questions to ask include:
- Is the company at the top of its growth curve?
- Can the previous growth rate be maintained?
- Are there untapped opportunities for expansion?
Our team at Indiana Equity Brokers can help you assess the future earnings potential of a business and identify growth opportunities.
3. Verification of Information
The accuracy and reliability of the financial information provided is paramount. Buyers should verify:
- Timeliness and accuracy of financial reports
- Allowances for potential product returns
- Provisions for uncollectible receivables
- Overall integrity of the seller and potential undisclosed issues
A thorough due diligence process is essential to uncover any “skeletons in the closet” and ensure you have a complete and accurate picture of the business’s financial situation. By carefully examining these three factors – quality of earnings, sustainability, and information verification – buyers can gain a much clearer understanding of a business’s true value and potential. This deeper analysis goes far beyond simple earnings numbers and is crucial for making informed acquisition decisions.
Read MoreA Listing Agreement is More than Just a Piece of Paper
In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.
For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.
For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.
So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.
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What is the Value of Your Business? It All Depends.
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.
- Does an owner need to know for estate purposes?
- Does the bank want to know for lending purposes?
- Is the owner entertaining bringing in a partner or partners?
- Is the owner thinking of selling?
- Is a divorce or partnership dispute occurring?
- Is a valuation needed for a buy-sell agreement?
There are many other reasons why knowing the value of the business may be important.
Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.
In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.
In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.
The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”
In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.
The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?
Business brokers can be a big help in establishing value or price.
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