How does someone else, for example, a potential buyer, rate your business on the issues listed below? Rate your business and yourself on the time-honored “A” to “F” scale. You can even use a plus or minus. What’s your average? Too many business owners operate on gut feel or “from the heart.” Nothing wrong with that; many people start or buy their own business and operate it successfully with nothing more tangible than this kind of factor. But, every now and then, perhaps once a year, seize the moment and take a more realistic look at your business. Grade yourself, using the following business report card as yardstick:
1. Difficulty or the lack of competitive entry
2. Stature of the business or product . . . exciting/glamorous
3. Perceived level of required expertise – or licensing
4. Ability of the business to secure funding — seller carry-back
5. Volatility of business/customer loyalty
6. Diversity of customers and/or suppliers. Exclusives?
7. Length of business – history
8. Reliability or fuzziness of financial records
9. Key-man syndrome
10. Severity of business seasonality
11. The people factor
12. Hours of operation
13. Hazardous work, work place, products, or neighborhoods
14. Bad lease – no lease
15. Owner to stay
16. Trend or erratic numbers –non recurring
17. Goodwill (Blue Sky) as percentage of price
18. Sparkling physical appearance or needing upgrade
19. Regular or home office
20. Remote location
21. Contemporary and ship-shape equipment
22. Franchised or Independent
23. Visible expansion opportunity
24. Loyal key employees in place
25. Broker involved with deal
27. Name and reputation
One of the major advantages of small and mid-sized businesses is that it is much easier to make changes with this category of business than it is with the larger kind. The larger company can become so mired in bureaucracy that it can’t turn on a dollar much less on a dime. Changes can be a new product or service, expansion into new markets or focusing on existing markets, or a change in direction or positioning.
If your business is small or mid-sized, this might be the time to consider whether change, no matter how minor, might increase business. For example, if you’re in a retail business, would a new product or product line increase sales without increasing costs? If you’re in a service business, are there some new services that can be offered, or existing ones expanded? It is better to attempt a change rather than not to try one, because in the small and mid-sized business, strategies for change usually can be withdrawn or modified without inordinate damage to the existing business.
One change increasing in popularity is co-branding. It movement manifests itself in a variety of business combinations, one of the most common being the gas station and convenience store or mini-mart. Food franchises are also co-branding because one company may own or franchise several brands. KFC and Taco Bell may share the same premises and kitchens. Many of the travel plazas will have, for example, a Burger King, a Popeye’s Chicken and a Cinnabon’s (cinnamon rolls) joined together. There are coin laundries that also house espresso bars, tanning salons, and there are small convenience stores that sell soaps and other laundry items for use in washers and dryers, right along with snacks and other products.
Many other small businesses are adding other products and/or services to their existing business. Even some movie theatres are adding fine dining as a complement to the traditional movie to create a whole entertainment experience. Perhaps your business would profit by adding something else to the mix. All it takes is a little imagination, some homework, perhaps a trial run, and the courage to give it a try.
When the time comes to sell your business, what makes up the selling price. What is it that you are selling and the buyer is buying? It is important that the selling price be defined in such a way to avoid any confusion. Below you will find some sample wording used by business intermediaries to define the selling price. Keep in mind that this is sample wording only and is presented here merely for informational purposes.
- The term “selling price” shall include (a) the selling price of the assets acquired plus any obligations assumed by the purchaser, (b) if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.
- The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:
(a) The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein. Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.
(b) All future, contingent or undetermined amounts in whole, such as an “earnout.” The commission shall be based on the actual amount of such future or contingent payments as and when they are received.
(c) The current fair market value of all non-cash items such as securities, notes or other property.
(d) Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner’s historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.
(e) The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company’s financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company’s business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.
If you are even thinking about selling your business, it’s important to know the questions that buyers generally want answers to. For example, the first question almost always asked by buyers is: If this is such a good business why is it for sale? How you answer this question can make or break a sale. A vague answer can discourage buyers from further consideration of your business, as they may assume the worst.
If you say you are “burned out’ or just ready to try something new – that’s fine. If you’ve owned and operated the business for 10 to 15 years, buyers will most likely accept your reason for sale and continue their investigation. However, if you’ve only owned and operated the business for two years or less, a prospective buyer may find it concerning that you are already burned out or ready for something new.
If you’re sick, be open about what the problem is; otherwise buyers will think you are just sick of the business. The worst thing a seller can do is to fudge an answer or not provide a completely honest answer. Buyers will, most likely, see right through the given reason for sale and walk away. So, even if you really are tired of or just plain hate running your own business, be up front and explain why. Honesty is always the best policy.
It is also a good policy to engage the services of a professional business broker. Brokers have been through many transactions and can help a prospective seller deal with the reason for sale as well as the other questions a buyer may have. Here is a brief list of other questions buyers often ask and business brokers deal with all of the time:
• Why should I buy an existing business rather than start one myself?
• How are businesses priced?
• What should I look for?
• What does it take to be successful?
• What happens if I find a business I want to buy?
• Do I need outside advisors?
In addition, buyers often want answers to some more specific questions such as:
• How long has the business been in business?
• How long has the present owner owned the business
• How much money is the business making?
• Are the books and records readily available?
• Will the new owner help me learn the business?
These and many other questions are ones that business brokers deal with every day, equipping them to help you prepare honest and useful answers.
You may not have any intention of selling your business today. But, what happens to your business if you get hit by a truck, fall ill or are injured in some other way making you unable to operate your business for a fairly long period of time? Will your spouse step in? Do you have a trusted employee that can run things? Now might be a good time to give this some thought and discuss it with family and advisors.
You have spent time, effort and money building your business. Your business is probably your and your family’s biggest asset. So, what happens to this asset if one of the unfortunate events mentioned above actually occurs? Without some strategies to deal with the unexpected, your business could be in serious trouble by the time you recover and return to work. Or worse, if you fail to survive an illness or injury, your family/heirs will be forced to create a plan of action to run the business or, at least, operate it until it can be sold. The obvious time to come up with a plan for the unexpected is before it happens.
This type of plan is different than an exit strategy. An exit strategy provides a plan that can be followed for a planned retirement or cut-back. Illness, accidents and death are seldom planned events. They are sudden events where the owner and operator of a business becomes incapacitated and, if there is not a written plan of action the business could find itself in jeopardy.
This written plan of action should outline your wishes in the event of illness, injury or death. Is there someone who can run things until your business is sold? If you are the main cog in the company’s success and you are not able to be there, how will your customers and suppliers feel about doing business with your company? Maybe now would be a good time to get key person insurance, increasing your own life insurance to cover taxes in case of death. It may also be a good time to pick a successor – just in case. If there isn’t someone who could take over, is there someone who could at least keep things operative until the business is sold? Maybe it’s time to have your spouse or one of your children learn something about the business – again, just in case. Maybe you have an employee who could keep things running until the business is sold or until you are able to return to work.
In addition to your family and advisors, it might also pay to talk to a professional business intermediary. You may not be ready to sell, but if selling becomes a necessity in the future, a consultation with a business intermediary can provide you with a lot of valuable information about the sales process to help you plan now.
Considering selling your business? Just want to increase the value of your business? Here are some areas to look at that can fairly quickly increase profits, which are, after all, a main building block in creating value.
• PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.
• CUSTOMER SERVICE: Despite all of the above Elevating the quality or amount of customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.
• EXPENSES: Owners should review what they pay for inventory, supplies, utilities, insurance, technology and any other expenses. Are you getting the lowest price possible? Are you taking advantage of all available discounts, etc.? It may pay to check pricing from other suppliers and vendors. Every saving increase profits and subsequently profits.
• INVENTORY: In some cases inventory levels may be higher than necessary. Retail operations want their stores to look “busy,” but they don’t need a basement or warehouse full of inventory. In today’s fast-moving economy, inventory can be supplied almost on demand – in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.
• OUTSOURCING: Some services, especially in today’s environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.
• EMPLOYEES: Now may be the time to get rid of any disgruntled employees. Happy and contented employees make for a profitable business.
These are just a few areas to consider to help increase profits and, subsequently, increase value.
Prospective buyers don’t want to hear about “what the business really makes” – they want to see the books and records that show what is down in black and white. Here is the old story about proper accounting procedures, or lack of:
A Greek restaurant owner had his own bookkeeping system. He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in the cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register. When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods. “I don’t know how you can run a business that way,” he said. “How do you know what your profit is?”
“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back. Today, your brother is a doctor. Your sister is a speech therapist, and you’re a CPA. Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement. We have a good business and everything is paid for. Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”
Great story and it is probably an accurate depiction of many small businesses, even in today’s world. Unfortunately, today’s buyers are not going to buy a business—not for anywhere near what the business may actually be worth in the marketplace—without checking the books and records. Buyers will not pay for what they can’t see. Some sellers want it both ways. Since they haven’t reported this income to anyone, they haven’t paid taxes on it; and now they want to sell it as a real number. They also seem to forget the most important part – “skimming” is against the law.
Joseph Bankman, a professor of tax law at Stanford University Law School said, “Nothing is as good as taking half your income off the books to start with; that’s better than any phony deduction. That’s the biggest single source of revenue loss in the tax system.” What these sellers may fail to realize is that the Internal Revenue Service (IRS) has audit guides for many different businesses. It tells them, for example, how to roughly calculate annual sales and expenses of a pizza place by tracking its purchase of cheese. Any seller who doesn’t think that the IRS can’t figure out income and expenses of most businesses is kidding herself. Too many small business owners think that they are getting away with it – but they just haven’t been caught yet. If they kept accurate financial records they probably would get a much higher price for their business, most likely making up for more than what they would have skimmed.
What happens is this: a business owner gets ready to sell, realizes that due to his or her unreported financial dealings, the business won’t sell for anywhere what he had hoped for. Now he is in the position of having to reveal to a prospective buyer how he is skimming from the sales, paying help under the table to avoid the usual employee costs, or padding expenses. Buyers do not look favorably on sellers who attempt to justify their price by revealing how they are cheating the government(s).
Here are some tips for business owners who are considering selling:
• Plan now to maintain accurate financial records. When it comes time to sell, you will be able to show a prospective buyer where the money is and what it was used for.
• Keep in mind that a selling price is usually based on the cash flow of the business. The dollar you hide today will most likely be worth two or three times that when it comes to selling price. Think long-term, not short-term.
• Talk to a business broker professional. He or she can provide some education about how businesses are priced. They can also offer suggestions on how to gather the necessary information for a prospective buyer.
By following the suggestions above and reporting all income, by taking only legal deductions and maintaining accurate financial records, when it comes time to sell and the buyer says “Show me the money” – you can!
Naturally, sellers want the highest price they can get for their business. In come cases, however, it might not be the best deal. For this reason, every offer should be scrutinized carefully. When an offer is presented, the first thing a seller looks for is the price. If it is lower than anticipated, the seller’s first reaction is to give it back, initiating the case for its being much too low. A seller should consider an offer carefully and avoid a hasty reaction.
Here are a few alternatives that might offset a lower price:
• an offer with no or very few, and easily satisfied contingencies
• a consulting agreement or other deferred compensation
• a quick closing
• all cash, if that’s important
• employment contracts with relatives or long-time employee(s)
• business vehicle to remain with the seller
• buyer has a long success record indicating long-term survival
• short-term payment period if seller financed
When a professional business broker is involved, he or she can point out those areas that may offset the price, down payment or the structure of the deal. After all, the important thing is not what a seller gets, but what he or she gets to keep!
A recent survey revealed the following percentage breakdown of last year’s business sales by business types. The information was furnished by business brokerage firms nationally and compiled by Business Brokerage Press.
|Food & Drink related business||14%|
|Auto related businesses||9%|
|Distribution type businesses||11%|
|Service type businesses||25%|
Service type businesses include dry cleaners, quick print, video stores, etc. Other businesses include coin laundries, delivery, product, and vending routes, and any that don’t fit into the other categories listed.
What does this mean to you as a business owner? It indicates that service type businesses seem to be creating the most activity from business buyers, followed by retail and the food and drink sector. The service sector has also been the leader in businesses sold by business brokers for the previous two years. This coincides with the growth nationally in the service sector coupled with the broad range of businesses included in it.
The food and drink sector, which includes restaurants, fast-food, taverns and the like, has always been a popular one for buyers. One reason is that most people frequent these types of businesses on a regular basis and therefore are familiar with them. Plus, there has always been a certain “celebrity” status connected with this sector.
However, statistics aside, today’s buyer has more knowledge, experience and education than ever before and is willing to consider almost any type of profitable business.
The most recent editions of BizComps, the leading resource for comparable sales data (www.bizcomps.com ) has some interesting information on small business pricing based on the three major regions of the country – Eastern states, the Central states and the Western states. They cover thousands of actual business sales over a ten year period. Here is the breakdown:
Location Average Sale Price
Western states $299,500
Central states $221,951
Eastern states $285,941
Using the Western states as the base, since that region of the country has the highest average price business, businesses in the Central states sell for 74 percent of the average price in the Western states; and the average price in the Eastern states is 78 percent of the Western states average.