Take a Look at Your Lease
If your business is not location-sensitive, that is, if your business location is immaterial to its success, then the following may not be important. However, lease information is usually helpful no matter what the situation. The business owner whose business is very dependent on its current location should certainly read on.
If your business is location-sensitive, which is almost always true for a restaurant, a retail operation, or, in fact, any business that depends on customers finding you (or coming upon you, as is often the case with a well-located gift shop) – the lease is critical. It may be too late if you already have executed it, but the following might be helpful in your next lease negotiation.
Obviously, a very important factor is the length of the lease, usually the longer the better. If the property ever becomes available – do whatever it takes to purchase it. However, if you are negotiating a lease for a new business, you might want to make sure you can get out of the lease if the business is not successful. A one-year lease with a long option period might be an idea. Keep in mind that you might want to sell the business at some point – see if the landlord will outline his or her requirements for transfer of the lease.
If you’re in a shopping center, insist on being the only tenant that does what your business does. If you have a high-end gift store, a “dollar” type of store might not hurt, but its inclusion as a business neighbor should be your decision. Also, if the center has an anchor store as a draw, what happens if it closes? The same is true if the center starts losing businesses. Your rent should be commensurate with how well the center meets your needs.
What happens if the center is destroyed by fire or some other disaster – who pays, how long will it take to rebuild? – these questions should be dealt with in the lease. In addition to the rent, what else will be added: for example, if there is a percentage clause – is it reasonable? How are the real estate taxes covered? Are there fees for grounds-keeping, parking lot maintenance, etc? How and when does the rent increase? Who is responsible for what in building repair and maintenance?
A key issue for many business owners is determining who holds ultimate responsibility for the rent. Are you required to personally guarantee the terms of the lease? If you have a business that has been around for years, or if you are opening a second or third business, the landlord should accept a corporation as the tenant. However, if the business is new, a landlord will most likely require the personal guarantee of the owner.
The dollar amount of the rent is not necessarily the most important ingredient in a lease. If the business is successful – the longer the lease the better. If it’s a new business, the fledging owner might want an escape clause. And, in any case, the right to sell the business and transfer the business is a necessity.
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Rating Today’s Business Buyers
Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:
Family Members
Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.
Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.
The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.
Business Competitors
This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.
The Foreign Buyer
Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.
These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.
Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.
Synergistic Buyers
These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.
Financial Buyers
This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.
For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.
Individual Buyer
When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.
The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.
A Final Note
Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.
Copyright: monkeybusinessimages/Bigstock.com
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Are you a “Baby Boomer” Business Owner?
The Unique Position of “Baby Boomer” Business Owners
Are you a “Baby Boomer” business owner? If so, you are part of a significant demographic. It’s estimated that 52% of businesses in the United States are owned by individuals aged 50 to 88, translating to around 9 million businesses. To put it into perspective, a business owner turns 65 every 57 seconds.
Why This Matters
For most business owners, their business represents 50% to 75% of their net worth, often more. The rest is typically tied up in personal real estate and financial investments. This means that business owners usually have only one opportunity to monetize their largest asset: the sale of their business.
The Wave of Retirements
Every day, approximately 11,000 people turn 65, a trend expected to continue for the next 18 years. Many of these individuals are business owners looking to sell their businesses to fund their retirements. These businesses collectively hold about $10 trillion in assets.
The Buyer-Seller Imbalance
While the number of businesses for sale is increasing, the pool of potential buyers is shrinking. Currently, the largest segment of business buyers is Baby Boomers aged 55 to 64. Although there are 80 million millennials in the U.S., their capacity to purchase these businesses is limited.
Supply and Demand Dynamics
Applying the law of supply and demand, we can expect a growing inventory of businesses for sale each year, while the number of qualified buyers decreases. This imbalance suggests there will be pricing pressure on these businesses. Historically, only 1 out of 4 businesses sell after being put on the market. However, the success rate increases to 1 in 3 for businesses with sales of $10 million and 1 in 2 for businesses with sales greater than $10 million.
The Importance of Exit Planning
According to PriceWaterhouseCoopers, over 75% of business owners have done little planning for their most significant financial asset. It’s a startling fact that business owners often spend more time planning their vacations than their exit into retirement.
Start Planning Now
Business owners should begin the exit planning process immediately. Creating a timeline to position the business for the highest possible valuation is crucial. Fortunately, current conditions are favorable: low interest rates, low inflation, historically low capital gains taxes, and high business valuations make it an ideal time to sell.
The Exit Planning Process
Exit planning is a comprehensive process requiring significant effort. Business owners should assemble a team of professional advisors, which may include:
- Business intermediary firm
- CPA/accountant
- Business attorney
- Financial planner
- Investment advisor
- Insurance advisor
- Valuation specialist
- Investment banker
- Business consultant
The Five Exits
Using a roadmap analogy, the exit planning process can be broken down into five exits:
- Making the Decision to Sell
- Exit Planning Process
- Maximizing Business Value
- Preparing the Business for Sale
- The Deal Process
Seven Steps of the Planning Process
The planning process often includes the following seven steps:
- Identify Exit Objectives
- Quantify Business & Personal Financial Resources
- Maximize & Protect Business Value
- Ownership Transfer to Third Parties
- Ownership Transfer to Insiders
- Business Continuity
- Personal Wealth & Estate Planning
Don’t Miss Your Exit
There is no better time than now to start planning your exit, whether it’s tomorrow, next month, next year, or the next decade. Missing your exit could lead to regret and missed opportunities. For more insights on the emotional aspects of selling your business, visit our article on The Emotional Side of Selling Your Business. If you’re considering selling your business, learn more about the process at Selling a Business. By starting your exit planning today, you can ensure that you are well-prepared to sell your business at the optimal time and for the best possible price.
Read More7 Important Questions to Ask Yourself When Selling a Business
A Buyer’s Quandary
Statistics reveal that out of about 15 would-be business buyers, only one will actually buy a business. It is important that potential sellers be knowledgeable on what buyers go through to actually become business owners. This is especially true for those who have started their own business or have forgotten what they went thorough prior to buying their business.
If a prospective business buyer is employed, he or she has to make the decision to leave that job and go into business for and by himself. There is also the financial commitment necessary to actually invest in a business and any subsequent loans that are a result of the purchase. The new owner will likely need to execute a lease or assume an existing one, which is another financial commitment. These financial obligations are almost always guaranteed personally by the new owner.
The prospective business owner must also be willing to make that “leap of faith” that is so necessary to becoming a business owner. There is also the matter of family and personal responsibilities. Business ownership, aside from being a large financial consideration, is very time consuming, especially for the new business owner.
All of these factors have to be weighed very carefully by anyone that is considering business ownership. Buyers should think carefully about the risks – and the rewards. Sellers should also put themselves in a buyer’s position. The services of a professional business broker or intermediary can help determine the relative pros and cons of the transaction.
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Why Your Company Needs a Physical
Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.
A leading CPA firm conducted a survey that revealed:
- 65% of business owners do not know what their company is worth;
- 75% of their net worth is tied up in their business; and
- 85% have no exit strategy
There are many obvious reasons why a business owner should get a valuation of his or her company every year such as partnership issues, estate planning or a divorce; buy/sell agreements; banking relationships; etc.
No matter what the reason, the importance of getting a valuation cannot be over-emphasized:An astute business owner should like to know the current value of his or her company as part of a yearly analysis of the business. How does it stack up on a year-to-year basis? Value should be increasing not decreasing! It might also point out how the company stacks up against its peers. The owner’s annual physical hopefully shows that everything is fine, but if there is a problem, catching it early on is very important. The same is true of the business.
Lee Ioccoca, former CEO of the Chrysler Company said in commercials for the company, “Buy, sell or get-out-of-the-way,” meaning standing still was not an option. One never knows when an opportunity will present itself. An acquisition now might seem out of the question, but a company owner should be ready, just in case. A current valuation may be as good as money in the bank when that “out of the question” opportunity presents itself.
One never knows when a potential acquirer will suddenly present itself. A possible opportunity of a lifetime and the owner doesn’t have a clue what to do. Time is of the essence and the seller doesn’t have a current valuation to check against the offer. By the time it takes to gather the necessary data and get it to a professional valuation firm, the acquirer has moved to greener pastures.
Having a company valuation done on an annual basis should be as secondary as the annual physical – it really is the same thing – only the patients are different.
