Before buying any business, a seller must ask questions, lots of questions. If there is ever a time where one should not be shy, it is when buying a business. In a recent article from Entrepreneur magazine entitled, “10 Questions You Must Ask Before Buying a Business”, author Jan Porter explores 10 of the single most important questions prospective buyers should be asking before signing on the dotted line. She points out to remember that “there are no stupid questions.”
The first question highlighted in this article is “What are your biggest challenges right now?” The fact is this is one of the single most prudent questions one could ask. If you want to reduce potential surprises, then ask this question.
“What would you have done differently?” is another question that can lead to great insights. Every business owner should be an expert regarding his or her own business. It only makes sense to tap into that expertise when one has the opportunity. The answers to this question may also illuminate areas of potential growth.
How a seller arrives at his or her asking price can reveal a great deal. Having to defend and outline why a business is worth a given price is a great way to determine whether or not the asking price is fair. In other words, a seller should be able to clearly defend the financials.
Porter’s fourth question is, “If you can’t sell, what will you do instead?” The answer to this question can give you insight into just how much bargaining power you may have.
A business’ financials couldn’t be any more important and will play a key role during due diligence. The question, “How will you document the financials of the business?” is key and should be asked and answered very early in the process. A clear paper trail is essential.
Buying a business isn’t all about the business or its owner. At first glance, this may sound like a strange statement, but the simple fact is that a business has to be a good fit for its buyer. That is why, Porter’s recommended question, “What skills or qualities do I need to run this business effectively?” couldn’t be any more important. A prospective buyer must be a good fit for a business or otherwise failure could result.
Now, here is a big question: “Do you have any past, pending or potential lawsuits?” Knowing whether or not you could be buying future headaches is clearly of enormous importance.
Porter believes that other key questions include: “How well documented are the procedures of the business?” and “How much does your business depend on a key customer or vendor?” as well as “What will employees do after the sale?”
When it comes to buying a business, questions are your friend. The more questions you ask, the more information you’ll have. The author quotes an experienced business owner who noted, “The more questions you ask, the less risk there will be.”
Business brokers are experts at knowing what kinds of questions to ask and when to ask them. This will help you obtain the right information so that you can ultimately make the best possible decision.
A recent article on Businessbroker.net entitled, First Time Buyer Processes by business broker Pat Jones explores the process of buying a business in a precise step-by-step fashion. Jones notes that there are many reasons that people buy businesses including the desire to be one’s own boss. However, he is also quick to point out that buyers should refrain from buying a business that they simply don’t like. In the quest for profits, many prospective owners may opt to do this, but it could ultimately lead to failure.
Step One – Information Gathering
For Jones, there are seven steps in the business buying process. At the top of the list is to gather information on businesses so that one has an idea of what kind of businesses are appealing.
Step Two – Your Broker
The second key step is to begin working with a business broker. This point makes tremendous sense; after all, those new to the business buying process will benefit greatly from working with a guide with so much experience. Business brokers can gain access to information that prospective business owners simply cannot.
Step Three – Confidentiality and Questions
The third step in the process is to sign a confidentiality agreement so that you can learn more about a business that you find interesting. Once you have the businesses marketing package, you’ll want to have your broker schedule an appointment with the seller. It is vitally important that you prepare a list of questions on a range of topics. There is much more to buying a business than the final price tag. By asking the right questions, you’ll be able to learn more about the business and its long-term potential.
Step Four – Evaluation
In the fourth step of the business buying process, you’ll want to evaluate all the information that you have received from the seller. Once again, a business broker can be simply invaluable, thanks to years of hands-on experience, he or she will know how to evaluate a seller’s information.
Step Five – The Decision
In the fifth step, you’ll need to decide whether or not you are making an offer. If you are making an offer, you will, of course, want it to be written and include contingencies.
If your offer is accepted, then the process of due diligence begins. During due diligence, you and your business broker will look at everything from financial statements to tax returns. You will evaluate the company’s assets. Again business brokers are experts at the due diligence process.
Buying a business is an enormous commitment. Making certain that you’ve selected the right business for you is one of the most critical decisions of your life. Having as much competent and experienced help as possible is of paramount importance.
In a recent Divestopedia article entitled, “Kids Take Over the Business? 8 Things to Consider,” author Josh Patrick examines what every business owner should know about having their children take over their business. He points out that there are no modern and accurate numbers on what percentage of businesses will be taken over by the children of their owners. But clearly the number is substantial.
Patrick emphasizes as point number one that allowing a child to take over a business right after finishing his or her education could be a huge mistake. After all, how can a parent be sure that a child can handle operating the business without some proven experience under his or her belt?
Point number two is that businesses frequently create jobs for the children of owners. The flaw in this logic is pretty easy to see. This job, regardless of its responsibilities, isn’t in fact a real job. Senior decision-making roles should be earned and not handed out as a birthright. The end result of this approach could create a range of diverse problems.
The third point Patrick addresses is that pay should be competitive and fair when having children take over a business. Quite often, the pay is either far too high or far too low. This factor in and of itself is likely to lead to yet more problems.
Business growth must always be kept in mind. When having your children take over a business, it is essential that they have the ability to not just maintain the business but grow it as well. If they can’t handle the job then, as Patrick highlights, you are not doing them any favors. Perhaps it is time to sell.
Another issue Patrick covers is whether or not children should own stock. If there are several children involved, then he feels it is important that all children own stock. Otherwise, some children will feel invested in the business and others will not. In turn, this issue can become a significant problem once you, as the business owner, either retire or pass away.
In his sixth point, Patrick recommends that a business should only be sold to children and not given outright. If a child is simply given a business, then that business may not have any perceived value. Additionally, if a child or children buy the business, then estate planning becomes much more straightforward.
In point seven, Patrick astutely recommends that once a parent has sold their business to their child, the parent must “let go.” At some point, you will have to retire. Regardless of the outcome, you’ll ultimately have to step back and let your children take charge.
Finally, it is important to remember that your children will change how things are done. This fact is simply unavoidable and should be embraced.
Working with an experienced business broker is a great way to ensure that selling a business to your child or children is a successful venture. The experience that a business broker can bring to this kind of business transfer is quite invaluable.
Forbes author Keith Gregg’s, February 8, 2019 article, “Using Tech to Enhance and Sell a Business,” has a range of interesting ideas that business owners should explore and embrace. Gregg looks at three big ways that business owners can use technology to help them get the most out of the sale of the business. He explains how important it is to address these three areas before placing your business on the market.
The first tip Gregg explores is to upgrade systems. Upgrading systems can be particularly important for attracting younger buyers. It is common for businesses to be successful without proprietary technology or procedures, but that doesn’t mean that technology should be ignored.
Important information should be digitized, as this data will be vital for the new owner to grow the business over the long haul. Incorporating software that can track and analyze data across the business is likewise valuable. Using software, such as customer relationship management and financial management software, will showcase that your business has been modernized.
Determining the value of your business can be tricky and laborious. Gregg recommends opting for a business valuation, as he feels, “business valuation calculations can remove much of the guesswork from the process.”
You should expect a business valuation calculator to include everything from verified data on comparable business deals, including gross income and cash flow figures and more. There are even industry-specific calculations that can be used as well. The main point that Gregg wants to convey is that business owners should use tangible and proven data to sell their businesses. Like upgrading systems appeals to younger buyers, the same holds true for using verified data to sell.
Take Advantage of the Digital Marketplace
Gregg’s view is that perhaps the single greatest technology for business owners to leverage is that of the digital marketplace. Sites that link businesses with prospective buyers can help to streamline and expedite the sales process. Through such sites, it is possible to go deeper than a specific industry and even explore sub-sectors, thus enhancing the chances of finding the right buyer.
Technology can be used to help sell businesses in a variety of ways. An experienced and proven business broker will leverage a whole range of tools to assist business owners when selling their businesses. When you opt for a proven business broker, you can expect to receive offers from serious and vetted buyers and, in the process, save a great deal of time while maintaining confidentiality.
If you haven’t been thinking about succession planning, the bottom line is that you should be. In the February 20, 2019 Divestopia article, “All Companies Need to Look at Succession Planning,” author Brad Cherniak examines the importance of succession planning. Owning and/or operating a business can be a great deal of work, but it is imperative to take the time to develop a succession plan.
Succession Planning is for Businesses of All Sizes
Author Cherniak wants every business owner to realize that succession planning isn’t just for big businesses. Yet, Cherniak points out that the majority of small-to-medium sized businesses, as well as their senior managers, simply don’t focus much on succession planning at all.
Many business owners see succession planning as essentially being the same as exiting a business. Cherniak is quick to point out that while the two can be linked and may, in fact, overlap, they are by no means the same thing. They should not be treated as such.
Following an Arc Pattern
Importantly, Cherniak notes, “Succession planning should also be linked to your strategic planning.” He feels that both entrepreneurs and businesses managers follow an arc pattern where their “creativity, energy and effectiveness” are all concerned. As circumstances change, entrepreneurs and business managers can become exhausted and even a liability.
The arc can also change due to a company’s changing circumstances. All of these factors point to “coordinating the arcs of business,” which includes “startup, ramp-up, growth, consolidation, renewed growth and maturity,” with whomever is running the business at the time. In this way, succession planning is not one-dimensional. Instead it should be viewed as quite a dynamic process.
Evaluating Each Company Individually
Cherniak highlights the importance of making sure that the team matches the needs of a company as well as its stages of development. Who is running a company and setting its direction? Answering these questions is important. It also is of paramount importance to make sure that the right person is in charge at the optimal time.
Companies and their circumstances can change. This change can often occur without much notice. As Cherniak points out, few small-to-medium sized businesses focus on succession planning, and this is potentially to their detriment.
The economy is red hot, and that fact is translating over to lots of activity in businesses being sold. However, it is possible that this record-breaking number of sales could cool down in the near future. In a recent article in Inc. entitled, “The Hot Market for Businesses is Likely to Cool, According to This New Survey,” the idea that the market for selling business is cooling down is explored in depth. Rather dramatically, the article’s sub header states, “Entrepreneurs who are considering selling their companies say they’re worried about the future of the economy.”
The recent study conducted by Pepperdine University’s Graziadio School of Business as well as the International Business Brokers Association and the M&A Source surveyed 319 business brokers as well as mergers and acquisitions advisers. And the results were less than rosy.
A whopping 83% of survey participants believed that the strong M&A market will come to end in just two years. Perhaps more jarring is the fact that almost one-third of participants believe that the market would cool down before the end of 2019.
The participants believe that the economy will begin to slow down, and this change will negatively impact businesses. As the economy slows down, businesses, in turn, will see a drop in their profits. This, of course, will serve to make them more challenging to sell.
The Inc. article quotes Laura Ward, a managing partner at M&A advisory firm Kingsbridge Capital Partners, “People are thinking about getting out before the next recession,” says Ward. The Pepperdine survey noted that a full 80% of companies priced in the $1 million to $2 million range are now heading into retirement. In sharp contrast, 42% of companies priced in the $500,000 to $1 million range are heading into retirement. Clearly, retirement remains a major reason why businesses are being sold.
Is now the time to sell your business? For many, the answer is a clear “yes.” If the economy as a whole begins to slow down, then it is only logical to conclude that selling a business could become tougher as well.
The experts seem to agree that whether it is in one year or perhaps two, there will be a shift in the number of businesses being sold. Now may very well be the right time for you to jump into the market and sell. The best way of making this conclusion is to work with a proven and experienced business broker. Your broker will help you to analyze the various factors involved and make the best decision.
Selling a business can be an exciting and rather lucrative time. But going through the sales process means embracing the notion that you’ll have to be very prepared for whatever might be thrown your way. A key aspect of preparing to sell your business is to know what types of buyers you’re likely to encounter.
It is only logical to anticipate the types of buyers you may be dealing with in advance. That will allow you to plan how you might potentially work with them. Remember that each buyer comes with his or her own unique desires and objectives.
The Business Competitor
Competitors buy each other all the time. Frequently, when a business is looking to sell, the owner or owners quickly turn to their competitors. Turning to one’s competitors when it comes time to sell makes a good deal of sense; after all, they are in the same business, understand the industry and are more likely to understand the value of what you are offering. With these prospective buyers, a great confidentiality agreement is, of course, a must.
Selling to Family Members
It is not at all uncommon for businesses to be sold to family members. These buyers are often very familiar with the business, the industry as a whole and understand what is involved in owning and operating the business in question.
Often, family members are prepared and groomed years in advance to take over the operation of a business. These are all pluses. But there are some potential pitfalls as well, such as family members not having enough cash to buy or not being fully prepared to run the business.
Quite often, foreign buyers have the funds needed to buy an existing business. However, foreign buyers may face a range of difficulties including overcoming a language barrier and licensing issues.
Dealing with an individual buyer has many benefits. These buyers tend to be a little older, ranging in age from 40 to 60. For these buyers, owning a business is often a dream come true, and they frequently bring with them real-world corporate experience. Dealing with a single buyer can also help expedite the process as you will have fewer individuals to negotiate with.
Financial buyers are often the most complicated buyers to deal with, as they can come with a long list of demands. That stated, you should not dismiss financial buyers. But just remember that they want to buy your business strictly for financial reasons. That means they are not looking for a job or fulfilling a lifelong dream. For financial buyers, the key point is that your business is generating adequate revenue.
A synergistic buyer can be an excellent candidate. The reason that synergistic buyers can be such a good fit is that their business in some way complements yours. In other words, there is a synergy between the businesses. The main idea here is that by combining the two businesses they will reap a range of benefits, such as access to a new and very much aligned customer base.
Different types of buyers bring different types of issues to the table. The good news is that business brokers know what different types of buyers are likely to expect out of a deal.
Most people fail to keep their New Year’s Resolutions. But where buying and selling a business is concerned, failing to keep those resolutions could mean an abundance of lost opportunity.
Todd Ganos at Forbes recently penned a thought-provoking article entitled The 8 New Year’s Resolutions for the Sale of Your Business. In this article, he compares selling a business to getting in shape in the months preceding your visit to the beach. It is necessary to do a great deal of planning and hard work if you want to be in good shape for the big “beach body reveal.”
When it comes to selling a company, Ganos believes that there are eight factors that must be taken into consideration. Listed below are those factors he feels are a must for business owners looking to get their business ready for “the beach.” These are the eight factors that Ganos believes are most essential and should be on your New Years’ Resolution list for your business:
In order to get your business ready, it is necessary to take a good long and honest look at each of these eight important categories.
Planning is at the heart of everything. He points out that owners who truly want to get their business ready for the market will want to adopt a focused month-by-month plan.
This plan means having discipline, developing a business plan and involving your team in the development of that plan. Once the plan has been developed, it should be reviewed with your leadership team each month.
New Years’ Resolutions fail because they don’t get properly integrated into peoples’ lives. And the same holds true for making changes in one’s businesses. Ganos correctly asserts that in order to get your business ready to sell, you have to make it an “all-of-the-time thing” in which you are constantly focused on success.
New Years’ Resolutions have to be about doing things differently, having a plan and then sticking to these changes permanently.
Every business has to be concerned about maintaining confidentiality. In fact, it is common for business owners to become somewhat obsessed with confidentiality when they are getting ready to sell their business.
It goes without saying that owners don’t want the word that they are selling to spread to the public, employees or most certainly their competitors. Yet, there is something of a tug of war between the natural desire for confidentiality and the desire to sell a business for the highest amount possible. At the end of the day, any business owner looking to sell his or her business will have to let prospective buyers “peek behind the curtain.” Let’s explore some key points that any good confidentiality agreement should cover.
At the top of your confidentiality list should be the type of negotiations. This aspect of the confidentiality agreement is, in fact, quite important as it stipulates whether the negotiations are secret or open. Importantly, this part of the confidentiality agreement will outline what information can be revealed and what cannot be revealed.
Also consider the duration of the agreement. Your agreement must be 100% clear as to how long the agreement is in effect. If possible, your confidentiality agreement should be permanently binding.
You will undoubtedly want to outline what steps will be taken in the event that a breach does occur. Having a confidentiality agreement that spells out what steps you can, and may, take if a breach does occur will help to enhance the effectiveness of your contract. You want your prospective buyers to take the document very seriously, and this step will help make that a reality.
When it comes to “special considerations” category, this should be elements that apply to the business in question. Patents are a good example. A buyer could learn about inventions while “kicking the tires,” and you’ll want to be quite certain that any prospective buyer realizes that he or she must maintain confidentiality regarding any patent related information.
Of course, do not forget to include any applicable state laws. If the prospective buyer is located outside of your state, then that is an issue that must be adequately addressed.
A confidentiality agreement is a legally binding agreement. And it is important that all parties involved understand this critical fact. Investing the money and time to create a professional confidentiality agreement is time and money very well spent. An experienced business broker can prove invaluable in helping you navigate not just the confidentiality process, but also the process of buying and selling in general.
What exactly does the term “goodwill” mean when it comes to buying or selling a business? Usually, the term “goodwill” is a reference to all the effort that a seller puts into a business over the years that he or she operates that business. In a sense, goodwill is the difference between an array of intangible, but important, assets and the total purchase price of the business. It is important not to underestimate the value of goodwill as it relates to both the long-term and short-term success of any given business.
According to the M&A Dictionary, an intangible asset can be thought of as asset that is carried on the balance sheet, and it may include a company’s reputation or a recognized name in the market. If a company is purchased for more than its book value, then the odds are excellent that goodwill has played a role.
Goodwill most definitely contrasts and should not be confused with “going concern value.” Going concern value is usually defined as the fact that a business will continue to operate in a fashion that is consistent with its original intended purpose instead of failing and closing down.
Examples of goodwill can be quite varied. Listed below are some of the more common and interesting examples:
- A strong reputation
- Name recognition
- A good location
- Proprietary designs
- Trade secrets
- Specialized know-how
- Existing contracts
- Skilled employees
- Customized advertising materials
- Technologically advanced equipment
- Custom-built factory
- Specialized tooling
- A loyal customer base
- Mailing list
- Supplier list
- Royalty agreements
In short, goodwill in the business realm isn’t exactly easy to define. The simple fact, is that goodwill can, and usually does, encompass a wide and diverse array of factors. There are, however, many other important elements to consider when evaluating and considering goodwill. For example, standards require that companies which have intangible assets, including goodwill, be valued by an outside expert on an annual basis. Essentially, a business owner simply can’t claim anything under the sun as an intangible asset.
Whether you are buying or selling a business, you should leverage the know how of seasoned experts. An experienced business broker will be able to help guide you through the buying and selling process. Understanding what is a real and valuable intangible asset or example of goodwill can be a key factor in the buying and selling process. A business broker can act as your guide in both understanding and presenting goodwill variables.