Advisor Answers by Matt McDonald

15 Critical Mistakes to Avoid When Selling Your Business

Wed, 14 Aug 2024 19:04:52 GMT

Advisor Answers by Matt McDonald

This article was originally written by Matt for BizBuySell: https://www.bizbuysell.com/learning-center/article/avoiding-mistakes-when-selling-business/

As a business owner, you may someday intend, or hope, to sell your business. You’re always busy either running the business or with life in general, which means selling your business is likely not at the forefront of your mind. It’s common for owners to not think of, or prioritize, exactly how they are running their business and the decisions they make that can either add or detract from the business’s value. They’re often on autopilot, too focused on hammering nails to see what they’re building, majoring on the minors. Before they know it, it’s time to sell, whether by choice or not, and they haven’t taken the necessary step back to understand what, if any, value they’ve created for themselves.

Creating a valuable business should be a top priority for every business owner, whether or not they ever intend to sell. Why? Because aside from how much money a business makes, a well operated, balanced, and documented business is not only worth more, it’s much easier and enjoyable to run. An owner should attempt to always have their business operating in such a state, not only for efficiency and maximum earnings, but you never know when a desire or reason to sell may arise. Some aspects of a business could take years to adjust. Others can be done in the shorter term.

15 Mistakes Business Owners Can Address Now for Future Success

1. Selling in a Rush

Selling your business in a rush can force you to lose leverage. There may be several reasons beyond your control that have you in a time pinch to sell. Having your business prepared for a sale at all times can help minimize any time pressure to accept sub-par terms or price. Patience can be one of the most effective negotiating tools. Allow yourself enough time to ensure you’re choosing the best buyer available. Plan, plan, plan.

2. Selling When Business is Down

The last three years of business performance are critical to a buyer’s perception of the business’s value. A continuous downslope can be hard to merit a seller’s desired value. Naturally, when anything negatively affects the business or the industry the business is in, and then you look to sell, it can come with a hefty discount. If possible, sell when business profits have been on a regular increase for perhaps 2-3 years and operations have been in a steady place. Too often owners think about selling when something bad happens and they do not get nearly as much as they hoped.

3. Attempting to Time a Sale With the Market

The stock or general economic market should have little to no bearing on when you decide to sell your business. If you’re able to sell at a perceived premium because of market health, you’re using the same sale proceeds to invest/spend that money at the same premium market price for stock, real estate, or another business. The value of a good business should have little to no fluctuation with the larger external economy, and could sometimes be worth more in a down market. Naturally there can be exceptions for businesses in industries whose revenue tends to fluctuate with the economy [restaurants, travel, leisure, etc.] but a consistent history, a good broker, and a savvy buyer can help mitigate that.

4. Having Commingled Books or Taxes

It’s not uncommon for business owners to combine business or personal funds/taxes into the same entity. This makes it very difficult, if not impossible, to separate revenue and expenses between the businesses, and for an acquirer to be comfortable with the numbers. Keep unrelated entities separate if you ever desire to sell one of them.

5. Being a Point of Contact with Customers or the Face of the Business

If your customers do business with your business because of you, the business is too dependent on you. As an owner, take yourself away from customer interactions and delegate that to a salesperson/account manager. Otherwise, a buyer will see those relationships with a low level of transferability. In the same thread, as much as some owners enjoy being the face of a business, it’s hurting the business’s value. Buyers may not see Joe Smith’s Driving School as having any value without Joe Smith.

6. Having any Single Customer or Client Make up More Than 10% of Your Revenue

If any single customer makes up 10% or more of your business’s revenue, a buyer would be worried if that customer were to leave after a sale and decrease revenue by 10% or more. It’s not always easy or possible, but add enough customers and diversify to decrease dependency on any single or small group of customers. If customer concentration is too high, a seller may only get incremental portions of revenue after a sale, conditioned on those customers remaining with the business after closing.

7. Ignoring Issues You Need to Address

You can’t ignore them away. An issue, whether externally or internally, that has been a challenge or that you see coming will arise in either a due diligence process, training period, holdback, earnout, or even a lawsuit. Be honest with yourself, your sales advisor/broker, and buyer. There may be a simple fix, reference, or term to consider prior to listing and negotiation that can save you a lot of time, money, and headache.

8. Not Allowing Enough Time to Prove any Major Changes Were Effective

It is very common for business sellers to make a major change to the business in the time leading up to a sale and assume a buyer will understand or be confident in the decision. The truth is, buyers (and lenders) want to see a history of consistency with a business’s offerings and operations to perceive value. Just because you fixed or added something to the business that improved revenue/profit six months ago, doesn’t mean it’ll immediately add a significant price jump. Conversely, don’t cut necessary expenses for long-term operations for better perceived short-term margins. It will be noticed and can decrease the value.

9. Not Knowing the Total Costs of a Sale with Taxes and Fees

The sale of a business can be taxing in more than one way. Once you’ve had an advisor conduct a realistic valuation on your business, consult your tax professional and financial advisor regarding your tax and larger financial responsibilities. Before making major financial decisions on your future, know what your business might be worth. Decisions could prove irrelevant if you don’t know the facts. Don’t let incorrect assumptions about taxes, fees, or your business’s value lead to poor retirement planning or business decisions.

10. Assuming You Know How a Sale Will Go

The sale of a business rarely goes how everyone expects it to. You may get a price you hope for, but the process itself often takes longer than expected, along with aspects that weren’t expected but are usually surmountable. Having a good combination of optimism, flexibility, and perspective will get you to a close. If you’ve hired a good sales advisor, they should be helping you foresee and overcome any challenges, providing you with information and options to make the best decisions for yourself.

11. Telling Everyone You Want to Sell

99% of the time don’t tell anyone! Except your spouse, certain family, and trusted advisors. Telling people such as customers, employees, or vendors opens them, and you, up to a world of uncertainty, pessimism, anxiety, and problems that are usually not merited. Issues are often more quickly overcome once a deal is done. Having the wrong people know about a potential sale can hurt your buyer and thus the business’s value. There can be specific cases when it makes sense, or may even be required, to tell people outside your ‘circle of trust’, but ensure you fully understand those reasons and the pros and cons.

12. Assuming You Can Start a Similar Business After You Sell

It may be obvious to some, but sometimes sellers don’t realize they cannot open a similar or same business after a sale. If you sell a business in an industry, a buyer will require a non-compete in that industry or geographic market. A common period is five-10 years. Keep in mind this can apply to any customer, vendor, or even employee overlap, depending on the circumstance. If your plan was to restart after a sale, revisit the plan.

13. Being Dependent on One or Few Suppliers or Service Providers

There can be exceptions to this with long term, transferable, or new contracts put in place. Since such contracts are not as common, having one or a few suppliers is not desirable and risky for buyers. If possible, ensure there’s a quick and solid backup plan if that supplier were to disappear. Regardless of how much you’re making, if you’re simply a retailer for a unique product or service, if someone else can use the same supplier in the same market, your business may have little to no value. The competitive risk for a product or service with a low barrier to entry may be too great.

14. Attempting To Do It On Your Own

Selling your own business yourself could make sense if it's small, the money is not a concern to you, and you're doing it with someone you know and trust very well. Even that can be riddled with problems and has low success. Using an advisor/broker will help ensure you’re getting a maximum price from a large buyer network. There are many potential terms, issues, and problems that can arise when selling a business. Even seasoned professionals don’t always get it right. Use an experienced advisor to protect yourself and get the most value.

15. Not Hiring Professionals That Specialize in Business Sales/M&A

I’ve seen many either real estate or commercial brokers attempt to sell businesses unsuccessfully. There are some that do both, but ask enough of the right questions to ensure they’re well versed in business sales. Business sales have a world of differences and complexities from real estate sales, which is why the fee is higher. I’ve also never seen a generalist attorney that didn’t specialize in business sales help close a transaction. Although I’m sure it’s happened at some point, there are many unique legal norms, terms, and language that needs to be known in business transactions. Ensure your counsel is versed in business sales for maximum value and a smooth process.

Now you know some major critical mistakes to avoid when selling and running your business. Applying solutions and avoiding these mistakes will not only make your business more valuable later but also help you run a smoother and more sound operation now, regardless of when or if you sell. Don’t sell in a rush or when business is down. Don’t be a main point of contact for the business or ignore problems. Ensure your customers are diverse and do not be dependent on a single supplier. The sooner changes are made and the longer such changes can be portrayed as effective, the better. Lastly, hire professionals that are experienced and focused on business sales. Your future self will thank you.

The Common Deal Delayer or Killer: New Priority Lag

Wed, 03 Apr 2024 17:03:16 GMT

Advisor Answers by Matt McDonald

This article was originally written by Matt for BizBuySell: https://www.bizbuysell.com/learning-center/article/new-priority-lag/

It’s no secret business transactions are usually quite complex and delicate processes, often involving emotions, tough decisions, and a constant re-prioritizing of objectives. The business advisor’s job is to help minimize such challenges, foresee potential issues, manage both buyer and seller expectations, and get the transaction to a close as smoothly as possible. Sometimes it is smooth, but more often than not, complex transactions require patience, a fluid perspective, and complex solutions. This common challenge is known as “New Priority Lag.”

Understanding New Priority Lag

New Priority Lag is the adverse, but understandable, challenge of not knowing what you don’t know about the transaction, terms, norms, the buyer, the seller, the business, the timing, prioritizing, and even yourself. This lack of awareness can significantly slow down or, in some cases, even jeopardize a deal. It’s like the Dunning-Kruger Effect but in the context of business sales. People who know little about a subject or circumstance don't have the knowledge or skills to spot their own mistakes or knowledge gaps. Simply put, New Priority Lag is the lack of knowledge that slows (or kills) deals.

The Dunning-Kruger Effect in Business Sales

The Dunning-Kruger Effect is a cognitive bias in which people wrongly overestimate their knowledge or ability in a specific area. By contrast, this effect also causes those who excel in a given area to think the task is simple for everyone, and underestimate their relative abilities as well. This tends to occur because a lack of self-awareness prevents them from accurately assessing their own skills. This can happen very innocently with anyone in a given area. Since business owners (sellers) and buyers (often previous business owners) tend to have had some level of success to get them to where they are, it's not uncommon for them to also have a higher level of confidence. Neither may have gone through the process of buying or selling a business, or sometimes worse, they have done it once or twice and think they know how it’s supposed to go every time.

Confidence is so highly prized that many people would rather pretend to be smart or skilled than risk looking inadequate and losing face. Even smart people can be affected by the Dunning-Kruger effect because having intelligence isn’t the same thing as learning and developing a specific skill. Many individuals mistakenly believe that their experience and skills in one particular area are transferable to another.

Obviously, confidence is a good thing to have, unless it’s attached to an impenetrable or fragile ego. Selling or buying a business can be humbling, and more often than not, open-minded buyers and sellers walk away having learned something about themselves, in addition to having sold or bought a business, or not. New Priority Lag is the effect in the process of a transaction that someone or everyone didn’t see, or know, to expect was coming. It will suddenly change someone’s, or the transaction’s, priorities, which will usually delay or can even kill a deal. It can be as simple as a seller suddenly realizing they aren’t ready to sell for a personal reason, or something as external as new regulations not allowing a buyer to acquire a business under the terms they intended.

The Impact of New Priority Lag

Even the most well adjusted, intelligent, and experienced parties in business transactions experience New Priority Lag. Business advisors serve their clients best by honestly managing expectations, being prepared for the worst but optimistic for the best. NPL is why a transaction that should theoretically take a month or two will often take a month or two longer, or more. Due diligence gets delayed because the bookkeeper is on vacation. The seller’s supplier increases prices, thus requiring a recalculation of expected earnings. The buyer’s spouse loses their job, thus changing loan qualification with the lender. Having the right attitude and patience to get past such hurdles is a required skill set to be a successful business owner.

Examples of New Priority Lag

Expired Patent : Seller doesn’t know their revenue-dependent patent expired, devaluing the business.
Miscommunication with Family : Buyer or seller assumes their spouse/family agreed with their decision to purchase/sell a business, leading to miscommunication or no communication.
Unexpected Tax Burden : Seller miscalculates the tax burden, leading to a decision to continue operating for a potentially greater future valuation, but the value actually declined
Final Offer Miscommunication : Buyer doesn’t share that their first offer is their final offer, causing the seller to expect negotiation, resulting in retracted offer.
Employee Exodus : Seller thought it was a good idea to tell all of their employees their intention to sell, leading to employee resignations before a transaction.
Funding Source Withdrawal : Buyer thinks their funding source is solid, but the ‘friend’ had to back out at the last minute
License Assumptions : Seller assumes buyer is licensed in the trade they are acquiring, buyer assumes the seller will keep their license attached to the business
Post-Sale Availability : Buyer assumes the seller’s availability post-sale, but the seller is relocating.
Non-competition Expectations : Seller plans to start a nearly identical business right after selling, buyer expects 10 years of non-competition
Allergy Discovery : Buyer discovers he’s recently developed a shellfish allergy and backs out of the seafood franchise, buys a car wash instead
Inadequate Legal Representation : Buyer’s attorney is a generalist and assures the buyer they can handle the transaction, only to find out weeks later they cannot, buyer loses opportunity
Lease Negotiations : The landlord of the seller’s business requires a profound rent increase for the buyer in order to approve the lease assignment, a month is spent just negotiating new lease terms, delaying closing by a month.

Managing New Priority Lag

Naturally there is learning when experiencing something new, so New Priority Lag will inherently, and most likely always, be a factor in business transactions to a degree, however minor. An experienced business sales advisor will help a seller and buyer foresee and minimize such problems. Ways a buyer or seller can help minimize New Priority Lag for themselves:

Self-awareness : Routinely question your knowledge base and perceptions. Be your own devil’s advocate.
Seek counsel : Consult experts and seek advice from others.
Honesty is key : Don’t assume problems will go unnoticed; be honest about challenges.
Expect the unexpected : Anticipate and prepare for unexpected obstacles.
Continuous learning : Keep yourself in a constant learning position.
Emotional control : Don’t let emotion override logic. Take time to process before responding or making decisions.
Experienced advisors : Hire experienced advisors, attorneys, CPAs, advisors, partners, to help with the sale of your business.

In conclusion, New Priority Lag is an inherent factor in business transactions, and effective management is crucial for successful deals. Ensure you hire an experienced business advisor that can help you navigate the complex process of selling a business.

Buying a Business: Financing Options Available from Low Down Payments to All-Cash Offers

Tue, 02 Apr 2024 21:50:12 GMT

Advisor Answers by Matt McDonald

This article was originally written by Matt for BizBuySell: https://www.bizbuysell.com/learning-center/article/finance-options-down-payments/

Perhaps you are amongst the growing number of individuals who are interested in being their own boss by starting a business, or better yet, buying an already established one. Buying a business may cost you more, on average, than starting one from scratch, but aside from any tangible assets, what you’re really buying is less risk, existing revenue/customers, and a significant shortcut. In this article, I’ll be covering some common types of financing buyers utilize when purchasing a business and how much money it typically takes.

So how much money do you really need to buy a business? As often answers go in business, it depends. It is more the exception than the norm that a business is purchased outright with a simple and flat cash transaction. In a market where financing options are plentiful, few deals outside of smaller asset sales are all cash purchases. In larger private equity backed deals, cash transactions are more common.

SBA Financing

What is often considered the gold standard for financing the purchase of a business is an SBA 7(a) loan. These types of loans are popular because they usually have competitive interest rates, are spread on average over 10 years to allow lower payments, are backed by the U.S. Small Business Administration, and typically only require about 10-12% of the transaction price as a down payment.

The caveats of SBA financing, as with anything involving compliance with the government, is that the application process can take a while, 2-3 months on average, and you can only have one at a time. Some SBA lenders may be able to process it in as little as 6-8 weeks. In that application process, the lender will want to see a business plan and ensure the buyer has the skill set, knowledge, and capability to continue operating the business successfully in a manner to support the loan payments.

Other aspects that come into play with SBA financing:

Lease - if a business is location dependent, they will likely require the buyer’s lease to be for the life of the loan. Landlords don’t always want to commit to a 10-year lease. If the majority or all of the commerce the business conducts is remote, and the business is easily relocatable, then the location may not be an issue at all.

Taxes - the revenue/income of the business being acquired must have been well documented on previous year’s taxes, ideally for at least three years. If the seller did not accurately report income, it does not matter how profitable the business was on the profit and loss statements. SBA only cares about the taxes. An experienced broker should identify this before the business goes to market.

Competition from other types of financing - if a business is desirable enough, and if a seller has options, not having to go through an SBA application process with an acquirer can be an attractive alternative for a seller, leaving SBA dependent buyers by the wayside. Being an SBA pre-approved buyer does not automatically put you in a top consideration or make you a desirable buyer, but it can help.

Seller Financing

A second commonly utilized type of financing is seller financing, also referred to as an installment sale. This is when the seller of the business acts as the lender to the buyer of the business, usually with a significant percent of cash put down at the time of close, and the rest paid over a predetermined amount of time with interest. A common amount of cash at close is about 70-80% of the total purchase price, but it can be whatever percent is agreed upon between a seller and a buyer. I have done transactions with as little as 30% of the transaction price being cash at close, but there is risk for a seller to consider when accepting a smaller percent, which is why a lower percent is not common.

Typically, at a minimum, the business itself, and its tangible assets, act as the collateral to secure the buyer’s loan with the seller. If the buyer were to default on their obligation, the seller then has legal grounds to reclaim the business and its assets through court proceedings. Since online or service-based businesses typically have little to no tangible assets near the value of the amount loaned, a seller may require additional collateral, such as a buyer’s real estate, another business, or some other form of security.

Seller financing can be an attractive option for both a buyer and a seller for several reasons.

SBA Alternative - if a business does not qualify for an SBA loan, and the buyer does not have enough cash, but the seller is confident in the buyer, it can be a great alternative.

Taxes - a seller can spread their tax burden over several years and keep the income in a lower bracket. Always consult your tax professional.

Interest - a seller can offer a competitive interest rate to a buyer, compared to an SBA loan, and collect interest on the financed portion of the sale they would otherwise not receive in an all cash sale.

Payment Efficiency - prior to closing the transaction, the buyer and seller agree to a set payment schedule and can thus plan their future income/expenses. As opposed to another type of financing structure with fluctuating payments that I’ll get into next.

Earnout

A third common financing structure is called an earnout. It is similar to seller financing only in the sense that there is usually a portion of the consideration in cash at the execution of the transaction, with the rest paid over time with agreed upon conditions. Commonly, it is a percent of revenue, not profit, since profits are more easily manipulated, and paid quarterly until either a balance is paid or a time period has expired. Since it is a percentage of the revenue and not a fixed amount, payments can vary widely or be nothing for certain periods.

Earnouts can get very complex and are typically preferred more by the buyer than the seller, but a seller may have the motivation to require it as well. The amount of money a buyer may need in an earnout structure can also vary widely, and depends on the reason for the structure. There can be scenarios with little to nothing down for what may be considered a high-risk acquisition, or as much as 90%+ down when only mitigating risk for a specific scenario or loss of a customer. Here are common reasons, with oversimplified term solutions:

Customer Concentration - if a business has a customer that makes up a significant amount of its revenue (say 15%+), there is an inherent risk for an acquirer to lose revenue if that customer leaves. The solution is to base a portion of the future consideration on whether that customer stays or goes. If the customer continues spending X amount with the business, payments continue at X amount. If the customer stops business or changes providers for any reason, then payments stop or are reduced by X amount.

Lack of Historical Performance/Expected Future Performance - if a business is young, or just added a significant new offering, or doesn’t have enough history with a certain revenue stream, or is going through some kind of change that makes future revenue uncertain, an earnout makes sense. If a seller expects changes in progress to increase revenue and profitability post transaction, they may require a ‘bonus side’ earnout where they share in the business’s future success.

Industry or Market Threats - perhaps a buyer really likes a pool cleaning business but heard pool cleaning robots will be replacing humans as early as next year. The seller doesn’t agree and thinks the robots are many many years away from replacing humans to clean pools. They agree to an earnout structure under the condition the buyer will be able to maintain X amount of customers with an average X amount price. If the acquirer cannot compete with the robots, and business drops, the remaining balance is forgiven after a certain period.

Owner Dependency/Relationships - perhaps a buyer is highly interested in a business but is concerned the seller is too involved, has too many personal relationships with clients, and thus thinks the business is too dependent on the seller’s personal involvement. The buyer and seller can agree on a structure that keeps the seller involved during a one year transition period and should any of a specific list of clients leave after the sale but prior to a certain date, the total consideration is reduced by X amount.

Additional Financing Options for Buying a Business

Other types of financing sources can be a traditional bank loan, a home equity line of credit (HELOC), cashing out a retirement account, or simply borrowing from family/friends, amongst others. If a lack of cash is your main obstacle, SBA might be your first best option, but you may be competing with many other similarly qualified buyers. If you have a little more cash to work with than others, and depending on various factors of a business, seller financing or an earnout may be a more feasible option, if not an all cash purchase.

The type, size, and terms of a business you can acquire can obviously vary widely. Here’s some examples:

Example 1 - You may be able to find a cafe or coffee shop for $100K that earns the seller $60K/year, but the seller works 50 hours/week, which means you’d be working 50 hours/week, unless you identify a way to increase revenue enough to hire support, or pay yourself less. Few, if any, businesses of that size are SBA financeable. The sale would likely require all or mostly cash. A HELOC can be a good option for smaller deals, as the process is much simpler and the only collateral is the buyer’s real estate and not the business assets.

Example 2 - You find an e-commerce business you love that’s earning the seller $300K/year that costs $1M, but it’s not SBA financeable because the seller’s business taxes were commingled with another business of theirs. Perhaps you have and are able to offer $600K cash at close and seller financing for the rest.

Example 3 - You find a distressed/asset only sale of a pressure washing business that only costs $30K total. It includes the necessary equipment and a website, but there are no customer contracts, or employees, and the seller only worked part time and seasonally. It will then be on you to grow the amount of customers, perhaps invest additional money into advertising, and find a way to turn those assets into profit.

Example 4 - You find a property management company that makes $500K/year, the asking is $2M, and it’s SBA pre-approved. You have $400K total in the bank and it's a potentially great fit with your background. You make a full price offer but don’t hear back until the seller has accepted an exclusive offer from someone else. You discover later that larger companies are acquiring property management companies like crazy and you were likely beat out by a simpler cash offer.

Example 5 - Perhaps your goal is to find a business that requires the least amount of your time, makes the most money, and requires the smallest down payment. Well, get in line, that’s what everyone wants, and I don’t blame you. For a business to be absentee, or semi-absentee, it needs to make enough revenue to pay full-time management, and still have profit left over for the owner. There is a reason why those businesses cost the most and have the most competition between acquirers, they’re in demand.

In conclusion, there are many ways to finance many kinds of businesses with various amounts of money. If I could share a summative bit of advice for a first time buyer, it would be to know the size and kind of business you’re looking for and what your financing options are, while at the same time being open-minded to the process, and sincere about your limitations and expectations. Always consult with your professional advisors, financial planner, tax professional, partner, etc., when weighing options for your business acquisition strategy.

Holding Your Advisors Accountable

Thu, 08 Jun 2023 20:42:01 GMT

Advisor Answers by Matt McDonald

As a business owner or professional, you have employees and you may also have outside advisors you hire who’s counsel you trust, such as CPAs, attorneys, consultants, and business advisors, to name a few. Often we naturally think of them in a different class, after all, they are experts in their field whose knowledge, education, and experience we must depend on for what we do not know, are not capable of, or are not licensed in.

Sometimes, because we respect their advice, we do not hold them accountable in the same manner as we would for other’s service we pay for. We’ve already set them on a pedestal in our mind, we trust they will guide us, and thus we may overly tolerate adapting to their schedule, their timeline, and their way of doing things. There may be examples where it’s worth it, or you don’t have a choice, but it is worth evaluating.

Such a subconscious complacency could be costing you extra time, money, and missed opportunities. Do not forget, they work for you. If your CPA can’t schedule important time with you sooner than weeks out, or if your attorney takes a week or more to review a simple document for you, perhaps you’ve been significantly bumped down their priority list.

It could be the case that in the years you’ve hired them they’ve taken on higher paying clients, or they’ve found a system to pack in as many clients as possible into a schedule that works for them. Whichever the reason, your mutual expectations have become misaligned, and unless you can realign them, it may be time to find a new advisor. Prior to hiring them for a project (or continuing with them in general), find out what their responsiveness and capacity are. If it doesn’t meet your needs, they’re not a fit.

There are many great advisors, CPAs, attorneys, consultants, financial advisors, and business advisors out there. A long history of experience is great, but if they’re not:

Keeping up with the latest industry norms, laws, trends, and information
Listening to your goals and adjusting to them
Ensuring you remain a priority as a client

Then being set in their ‘usual way of doing things’ will become a major hindrance on you and your business’s progress.

Do your advisors prioritize you? Or have you complacently adapted to being a low priority?

New Buyer Advice for Business Acquisition

Wed, 22 Mar 2023 21:40:55 GMT

Advisor Answers by Matt McDonald

Often I work with first time buyers on businesses I have listed and I enjoy helping them embark on the exciting journey of entrepreneurship. Being a first time buyer is nothing to be secretive or ashamed about. Everyone has to start somewhere, whether you're buying an existing business or starting one from scratch.

It's great when a buyer is receptive, open to learning, and willing to receive assistance. More rarely a buyer may take a defensive approach or see me as being on the 'enemy's side’ because I represent the seller. Nevertheless, as long as a potential transaction continues to progress in a manner that both buyer and seller are happy with, then I'm doing my job.

With that in mind I wanted to share some tips for buyers that are fresh in the acquisition realm.

Try not to make assumptions about what an offer negotiation process will look like. Everyone has their own style, approach, and expectations. Sometimes either side may be expecting some back and forth, sometimes either side may be quite firm on their stance. Although I can usually help intermediate, I’ve seen deal talks with motivated parties that were close to reaching terms come to an abrupt end because one side envisioned the process to unfold in a manner that no one else was aware of. Being sincere about limitations and expectations will help you secure your deal.

Another major hindrance on deal progress can be emotions. It’s very understandable why making what is potentially the largest purchase of your life is an emotional process, but allowing emotions to override logic is another deal killer. Since purchasing a business is not something new buyers have done, their otherwise in check emotions may become unchecked, often to their own surprise. Being aware of that possibility and taking a beat before taking something personally or making an emotional decision, as in most circumstances, can immensely benefit your larger logical goals.

Lastly, and I’ve mentioned this in previous posts, know what you’re looking for and seek to understand that which you don’t.

What size, industry, and type of business is a good fit for you or your current company?
Are you willing to bring on employees?
If you don’t have enough cash for the purchase do you know what your financing options are and why?
If needed, will you qualify for a lease? If not, do you have a guarantor lined up?
Are the earnings you expect the business to be making realistic to what you expect to pay for it?
Are there unique aspects to the industry to be aware of that may not apply to other industries?
Does the amount of hours the business requires from you align with the amount of hours you have available?

Whether you are a buyer or a seller, feel free to contact me to learn more about business sales.

Is Your Personal Asset Portfolio Diversified?

Mon, 06 Mar 2023 20:21:53 GMT

Advisor Answers by Matt McDonald

If you are business owner, when was the last time you calculated the percentage of your net worth tied to your company’s value?

When you started your business, its value was probably negligible. Unless you purchased or inherited your company, it wasn’t worth much when you opened your doors, but over time, the proportion of your assets tied to your business may have crept up.

Let’s imagine a hypothetical business owner named Tim, who starts his company at age 30. He has a little bit of equity in his first home and a small retirement fund. When he starts his business, it’s worthless, so it doesn’t yet factor into Tim’s net worth calculation.

By the age of 50, Tim has built up $600,000 worth of equity in his home, his retirement nest egg has grown to $400,000, and his business has blossomed and is now worth $4,000,000. Tim’s company has crept up to represent 80% of his net worth.

Tim knows the first rule of investing is to diversify, which he is careful to do with his retirement account. Still, he has failed to achieve overall diversity given the success of his business.

What’s more, he may have unknowingly passed something called “The Freedom Point,” which is when the net proceeds (i.e., after taxes and expenses) of selling his business would garner enough money for him to live comfortably for the rest of his life. Your lifestyle determines your Freedom Point, but when you pass it, it’s worth considering the risk you’re taking.

If the pandemic taught us anything, it is that nothing is for sure, and a thriving business one day can turn into a struggling company overnight. When your business makes up most of your net worth and selling it would garner enough money to retire, there’s no financial reason to continue owning your business. You may enjoy the challenge, the social interactions, and the creative process of building a business, but keeping it may be unnecessarily risky.

When you’ve crested the Freedom Point and want to diversify—but still don’t want to retire—talk to an advisor like myself to start understanding some new options. Building a successful business is rewarding, but when your personal balance sheet gets out of whack, it may be worth considering the risk you’re shouldering and the options you have for sharing some of it.

You-proofing Your Business

Wed, 15 Feb 2023 20:11:04 GMT

Advisor Answers by Matt McDonald

Making your business less dependent on you has a number of benefits: you can scale your company more quickly if you’re not acting as a bottleneck; you get more time to enjoy life outside of your business; and a business less dependent on its owner is much more valuable to an acquirer.

Pulling yourself out of the day-to-day operations of your business is easier said than done. Here are three specific strategies for getting your company to run without you.

1. Think Like LEGO

Pre-school children can make a collection of generic looking pieces come together in a complex creation by following the detailed instruction booklet that comes with every box of LEGO. Your employees need LEGO-like instructions to execute the recurring tasks in your business without your input.

Ian Schoen is the co-founder of Two Tree International, a design and manufacturing firm that brings products directly from concept to customer. The company was started in 2008 with a $50,000 loan and had grown to sales of over $4 million and a staff of 15 employees when it was sold in 2015. Schoen credits his operating manual for allowing him to sell his business for a significant premium: “We started creating standard operating procedures in the business and had a set of documents that helped us run the business. Basically we could plug anyone into any position and have them understand it.”

2. Imagine Hosting Your Own AMA

Everyone from Barrack Obama to Madonna to Bill Gates has participated in an “Ask Me Anything” (AMA) forum where participants are encouraged to ask the featured guest anything that is on their mind.

Now imagine you invited your customers to an AMA. What questions would they ask you? What zingers would your most sceptical customers pose? These are the questions you need to document your responses to in a Frequently Asked Questions document that your employees can leverage in your absence.

3. Shine the Media Spotlight on Your Team

It’s tempting to take the call from a local reporter who wants to interview you about your company, but consider inviting an employee to take the interview instead.

Stephan Spencer founded Netconcepts and grew it into a multinational Search Engine Optimization (SEO) agency before selling it to Covario. His first attempt to sell his business failed because potential acquirers viewed Netconcepts to be too dependent on Spencer himself: “My personal name and my company name were too intermingled. If I didn’t go with the business, nobody was going to buy it.”

Spencer set out to reduce his company’s reliance on him personally and one of his strategies was to position his employees as SEO experts: “I encouraged key staff, various executives and top consultants within the company to speak and write articles, and I introduced them to the editors I knew.”

It can be tempting to run your company as your own personal fiefdom but the sooner you get it running without you, the faster it can scale into something irresistible to an acquirer. The reasons for you-proofing your business are simple, it makes your business more valuable and it frees you up as the owner. Since it can take time, the sooner you do it and the longer you can portray to a potential acquirer that the business is not dependent on you the better.

Financial Buyer vs. Strategic Buyer

Wed, 01 Feb 2023 23:15:42 GMT

Advisor Answers by Matt McDonald

If you decide to sell your business to an outside acquirer, you may be weighing terms between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you are producing or the more you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they usually want you and your team to stick around, and seldom buy a business outright. Instead, they may give a portion of cash at close and pay the rest in earn-out terms desirable to them, or buy a chunk and ask you to hold on to a piece of equity to keep you committed.

A strategic buyer is different—often a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Strategic buyers may be less common but are usually a more desirable buyer, not only because of the higher value they may place on your business, but often a smoother transfer. They are likely already familiar with your industry, possibly even your business, and thus require less hand-holding. Although they may still need a seller involved for a transition period, they are usually better equipped to replace you and may already have such a manager in place.

Of course there is also the owner-operator buyer, amongst others, that may share straits of both a financial buyer and a strategic buyer. They are essentially buying a job (your job), viewing a potential acquisitions with the lens of both an investor and an entrepreneur, often with the hope of being able to grow the business and/or make it more self sufficient and valuable.

An experienced advisor can identify and differentiate various types of buyers for a seller, understand their motivations, and speak the language they want to hear when considering an opportunity to help a seller get a maximum value for their business.

4 Steps to Finding Your Sell-by Date

Tue, 24 Jan 2023 17:54:01 GMT

Advisor Answers by Matt McDonald

Most business owners think selling their business is a sprint, but the reality is can take a long time to sell a company. The process of selling your business can look more like a marathon. It can take years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.

Here’s how to backdate your exit:

Step 1: Pick your eject date

The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back, or log out and never log back in. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.

Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.

Step 2: Estimate the length of your earn out, transition, and/or seller financing

When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future -- if you hit certain goals set by the buyer. The length of your so-called earn out will depend on the kind of business you’re in.

The average earn out these days is three years. If you’re in a professional services business, your earn out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period. A small, simple, and buttoned up business could have a transition period of 1-3 months. [Seller financing is often regular fixed payments over time with interest.]

Estimate: + 1-5 years

Step 3: Calculate the length of the sale process

The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary like myself (a sales advisor, M&A professional or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes 6-12 months. To be safe, budget one year.

Estimate: + 1 year

Step 4: Create your strategy-stable operating window

Next you ideally need to budget some time to operate your business without making major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you want to be able to show three years of operating results during which you didn’t make any major changes to your business model. Depending on the industry, the business, and the level of strategic change, you may be able to get away with just as much value over perhaps a 1 year period.

If you have been running your business over the last few years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.

Estimate: + 1-3 years

Figuring out when to sell

The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50. You budget for a three-year earn out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.

It certainly would be nice to make a clean, crisp break from your business after an all-out sprint, but for the vast majority of businesses, the process of selling a company is a squishy, multi-year slog. Will your exit take 6 months or 6+ years? Contact me to start planning, the sooner you start, the better.

A New Year and New Reasons Why It Might Be Time to Sell

matt@sdbiz.com (Matt McDonald) — Wed, 04 Jan 2023 00:29:20 GMT

Advisor Answers by Matt McDonald

Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?

While your objective to build your company’s value is admirable, here are a few reasons why you may want to sell sooner than you might think:

1. Timing Your Sale Is A Fool’s Errand

The costs of most financial assets are correlated, which is to say that the value of your private business, real estate and a Fortune 500 company’s stock all move in roughly the same direction. They mostly lay eggs at the same time. The problem is, you’ll have to do something with the money you make from the sale of your company, which means you will likely buy into a new asset class at the same frothy valuation as you are exiting at on a high end. Selling your business at a lower end of the market allows you to buy assets low as well. Granted this can be very circumstantial for what makes sense from person to person.

2. Earn More Through Seller Financing

Right now you could charge a higher than usual interest rate with seller financing. You, the business owner, can compete with lenders that currently have higher than normal rates. Since these higher rates are less attractive and require more hoops to jump through for a buyer, seller financing at a slightly better rate is going to be much more attractive. Let some interest go into your pocket and help mitigate your tax burden with financing a portion of the sale of your business yourself.

3. There Is No Corporate Ladder

In most occupations, the ambitious must climb the ladder. Aspiring CEOs must methodically move up, stacking one job on the next until they are ready for the top post. They have to put in the time, play the right politics and succeed at each new assignment to be considered for the next rung.

By choosing a career as an entrepreneur, you get to skip the ladder entirely. You can start a business, sell it, take a sabbatical and start another business and nobody will miss you on the ladder. Your second (or third) business is likely to be more successful than your first, so the sooner you sell your existing business, the sooner you get to take a break and then start working on your next.

4. Someone Else May Be Willing to Invest More In Your Business Than You

When you start your business, you have nothing to lose, so you risk it all on your idea. But as you grow, you naturally become more conservative, because your business actually becomes worth something. For many owners, their company is their largest asset, so the idea of losing it on a new growth idea becomes less attractive. They become more conservative and hinder their company’s growth.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain't got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

How Much Goodwill Do You Have In Your Business?

matt@sdbiz.com (Matt McDonald) — Tue, 03 Jan 2023 22:55:14 GMT

Advisor Answers by Matt McDonald

The term “goodwill” is often thrown around in conversation as though it is a subjective description of how much your customers like your business.

In fact, when it comes to valuing your business, there is nothing subjective about the definition of goodwill. It is defined as the difference between what someone is willing to pay for your company minus the value of your hard assets.

Let’s imagine you own a plumbing company and the main physical assets in your company are the five vans you own and some tools with a total value of around $100,000. If you sold your plumbing company for $1,000,000, the acquirer would have paid $900,000 in goodwill ($1,000,000 - $100,000).

When a company sells for the value of its fixed assets, it is often a distressed business one step away from closing down. Accumulating hard assets like land and machines and equipment is fine, but the savvy owner, looking to maximize value, focuses less on the tangible assets and more on what those assets allow them to create for customers. There is nothing wrong with owning hard assets unless they take away from capital you could be investing in creating goodwill. Then the opportunity cost may exceed the value of owning the stuff.

Goodwill, although the best way to build value, can also be challenging, that’s why it’s valuable. I couldn’t tell you how many times business owners have attempted to convince me their business is worth more than the valuation I presented to them because of their own perceived goodwill they have created. “There’s more value in the name and story!” Granted there is tangible value there, just often not as much as many sellers would like there to be.

I have sold businesses where the entire value of the business was attributed to goodwill, with zero hard assets. Goodwill is not just a reputation or name (names are often changed), its recurring revenue, customers, services, processes, and even employees. Sometimes the goodwill of a business is simply a shortcut for a buyer looking to enter an industry, and they would rather pay X amount to start sooner than spend X amount of time starting from scratch.

As a business owner, one way to think about your job description is to maximize the difference between what your business is worth to a buyer and the value of your fixed assets. How can you differentiate your product or service? How can you create recurring revenue? How can you make your business not reliant on you?

Focus on what creates value for customers and you will maximize the value of your business far beyond the value of your hard assets. A good place to start is to learn what your business is worth now, why it’s worth that, and what you can do to maximize your goodwill and overall company value for the future. Contact me for a free valuation.

5 Strategies for Identifying Innovative Candidates to Replace Yourself as Founder

matt@sdbiz.com (Matt McDonald) — Fri, 30 Dec 2022 20:11:37 GMT

Advisor Answers by Matt McDonald

In 2012, Jaclyn Johnson founded Create & Cultivate, a media company that educates and inspires women to succeed in business.

By 2018, Johnson had grown Create & Cultivate to eight employees when an acquirer offered her a staggering $40 million. Unfortunately, the deal was too good to be true. When the acquirer discovered how dependent the business was on Johnson to succeed, they pulled out.

A few years later, Johnson signed an acquisition offer from Corridor Capital for $22 million. While still a lucrative deal, it was a significant decrease from the original offer.

Like Johnson, if your company becomes dependent on you, it may end up costing you down the road. The most valuable companies don’t rely on the owner’s involvement to succeed. However, finding extraordinary talent to replace yourself can be challenging.

The Biggest Mistake Most Founders Make When Trying to Replace Themselves

Finding a general manager, second-in-command, or Chief Operating Officer to replace themselves is one of the hardest projects founders may ever tackle.

Whether you rely on a recruiter, paid advertising, or your personal network to find candidates, one of the first steps to shortlisting talent is a comprehensive review of their background. That’s when many founders make the common error of being bamboozled by a Fortune 500 name on a resume or LinkedIn profile. While a stint at a big company may be impressive, the skills held in high regard at a Fortune 500 company tend to differ from what most young companies need.

Big companies often have well-established processes, systems, and hierarchies that have contributed to their success. People that thrive in big companies tend to excel at winning within a predetermined framework. However, in a younger, scrappier start-up, there is no framework to follow, which is why big company veterans often struggle in a more entrepreneurial environment.

Instead of basing your hires off an impressive name on a resume, look for someone innovative, comfortable with chaos, action oriented, and creative—someone with an entrepreneurial mindset.

Here are five strategies you can use to identify innovative candidates when making hiring decisions:

1. Look for problem-solvers: Innovation often involves finding creative solutions to problems. Look for candidates that have demonstrated the ability to think strategically and come up with innovative solutions to challenges they have faced in the past.

2. Ask about their approach to problem-solving: During the interview, ask candidates to describe their approach to problem-solving and how they have produced innovative solutions in the past. This will give you insight into their thought processes and willingness to take risks and think creatively.

3. Evaluate their learning agility: Innovative employees are often those that are open to learning and adaptable. Look for candidates with a history of taking on new challenges and learning new skills.

4. Assess their ability to work in teams: Innovation often involves collaboration, so look for candidates that have demonstrated the ability to work effectively in teams. Ask about their past experiences working in teams and how they have contributed to the success of those teams.

5. Consider their creativity: Look for candidates that have a creative portfolio or have pursued creative hobbies or projects outside of work. This can be a good indicator of their potential to bring new and innovative ideas to your organization.

Right now, your company probably relies on you for a healthy dose of creativity and innovation. But if your goal is to replace yourself, following these five strategies can increase your chances of identifying innovative candidates that will bring fresh thinking and creativity to your organization.

How to Know if You Have a Job or Own a Business

matt@sdbiz.com (Matt McDonald) — Wed, 21 Dec 2022 16:11:41 GMT

Advisor Answers by Matt McDonald

The ultimate test of your business can be found in a simple question: would someone want to buy your company?

Whether you want to sell next year or a decade from now, you must be building an asset someone would buy – otherwise, you have a job, not a business.

Here are eight ways to ensure you are building a company, not just doing a job:

A job requires that you show up at work to make money, whereas a company generates revenue whether you are there or not.
If your company is so reliant on a single or select few customers that can dictate how you deliver your product or service, your company is more like a job than a valuable business.
A job is a place where your personal reputation impacts your results, whereas a company is a place where the brand is more important than the personality of the founder.
A job requires you to use your personal experience and expertise to get a result, whereas a company is a place where a process – not a person – consistently produces a desirable result.
In a job, you get fired for taking too much vacation, whereas if you own a company, the more vacation you can take without impacting your company’s performance, the more valuable your business will be.
In a job, the harder you work, the more money you earn. In a company, the smarter you work, the more money you earn.
In a job, you solve the problems. If you own a company, your employees solve the problems.
If the majority of your customers know your mobile phone number, it’s likely you have a job, not a company.

If you’re not sure whether you have a job or own a business, it’s time to get your Value Builder Score. Whether you want to sell now or in a decade, the Value Builder Score assessment allows you to see your business as a buyer would see it, and to identify how you perform on each of the eight key drivers of company value. The questionnaire takes about 13 minutes to complete, and after you’re finished you’ll get a free customized 27-page report outlining how you performed and where you could improve the value and sellability of your company.

Get your score now https://score.valuebuildersystem.com/sd-business-advisors/matt-mcdonald

Or can contact me if you are interested in getting a free valuation on your business.

Traps To Avoid When Selling Your Company

matt@sdbiz.com (Matt McDonald) — Tue, 06 Dec 2022 15:08:16 GMT

Advisor Answers by Matt McDonald

Business owners have been known to refer to due diligence as "the entrepreneur's proctology exam." It's a crude analogy but a good representation of what it feels like when a buyer pokes, prods, and looks inside every inch of your business.

Most professional acquirers will have a checklist of questions they need answered if they’re considering buying your company. They'll want answers to questions like:

When does your lease expire and what are the terms?
Do you have consistent, signed, up-to-date contracts with your customers and employees?
Are your ideas, products and processes protected by patent or trademark?
What kind of technology do you use, and are your software licenses up to date?
What are the loan covenants on your credit agreements?
How are your receivables? Do you have any late payers or deadbeat customers?
Do you have a proven and repeatable means for gaining customers?
Do you have any litigation pending?

In addition to these objective questions, they'll also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business.

Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It's more art than science and often requires a potential buyer to use a number of tricks of the trade, such as:

1: Juggling calendars

By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.

If you can't accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.

2: Checking to see if your business is vision impaired

An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.

3: Asking your customers why they do business with you

A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. However, the customers may be asked a question like 'Why do you do business with these guys?' The acquirer is trying to figure out where your customers' loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that's good. If they respond by explaining how much they like you personally, that's bad.

4: Mystery shopping

Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.

Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they'll be concerned business will dry up when you leave.

Whether you believe your business is prepared in these aspects or not, contact me to discuss or start on your exit plans.

The Downside of Just Milking Your Business

matt@sdbiz.com (Matt McDonald) — Tue, 29 Nov 2022 18:19:24 GMT

Advisor Answers by Matt McDonald

If you have considered selling your business of late, you may have been disappointed in your valuation or to see the offers a business like yours would garner from would-be acquirers. If not, maybe you are ready to hit the eject button. You would need a valuation to find out (I do them for free).

According to the analysis of some 60,000 business owners who have used The Value Builder System, the average offer being made by acquirers across all sizes of businesses is about 3.7 times your pre-tax profit. Companies with less than a million dollars in sales garner significantly lower multiples (~2-3x), and much larger businesses may get 5 times or more of the pre-tax profit, but regardless of size, private company multiples are still significantly less than those reserved for public company stocks.

Given the paltry offer multiples, you may be tempted to hold on to your business and “milk it” for years to come. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic – let’s call it the “Just Milk It Strategy” – seems sound on the surface, but there are some significant risks to consider.

1. You Shoulder the Risk

The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2020 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders. If you are planning to continue your business, hopefully you have a growth strategy in place. If you do not and plan to just maintain business as usual, then any number of things can happen to risk its value.

2. Disk Drive Space

If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory you can do other things like play golf or snowboard in Japan and still own your business, but as long as you are the owner, your business will always occupy a large chunk of your brain’s capacity. This means family fun, vacations, and weekends are always tainted with the background hum of your brain’s operating system churning through data.

3. Capital Calls

Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, for examples, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

There’s obviously much to consider in deciding when to exit your business so please consult with an advisor to ensure you understand as much as you can. You’re welcome to contact me to learn what your business is worth and learn your best options.

What Makes Your Business More Valuable Than That of Your Industry Peers?

matt@sdbiz.com (Matt McDonald) — Tue, 15 Nov 2022 20:03:41 GMT

Advisor Answers by Matt McDonald

The value of your company is partly determined by your industry. For example, cloud-based software companies are generally worth a lot more than printing companies these days.

However, when we analyze businesses in the same industry, we still see major variations in valuation. So we dug through the data available to us from our partners at The Value Builder System™ and we found 9 things that will make your company more valuable than its industry peer group.

1. Recurring Revenue

The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer. Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable than those of your competitors.

2. Something Different

Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable than a company that sells the same commodity as everyone else in their industry.

3. Growth

Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your industry overall. If your business has seemingly hit a growth plateau in recent years, there will not be as much perceived value.

4. Caché

Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry. If you are the darling of your industry trade media, expect to get a premium acquisition offer.

5. Diversity

Acquirers pay a premium for companies that naturally hedge the loss of a single customer. Attempt to ensure no customer amounts to more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers. If a significant amount of your revenue is attributed to 1 or 2 customers, a buyer could require a significant hold back or earn-out in their favor.

6. Predictability

If you’ve mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who doesn’t have a clue where their next customer will come from.

7. Clean Books

Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more. You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry. Having your taxes returns closely match your P&Ls is highly desirable and sometimes required by certain buyers.

8. A 2iC

Companies with a second-in-command who has agreed to stay on post sale are more valuable than businesses where all the power and knowledge are in the hands of the owner. You can be considered fortunate to be comfortable speaking with your top management about a potential sale. In many businesses, knowledge of a potential sale too early may be too disruptive. Often the cat is let out of the bag, then all of the employees know.

9. Happy Customers

Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.

*Note: A net promoter survey for customer satisfaction is something I can facilitate for any business. Being able to show a NPS score above 15 makes the business all the more attractive.

Like a rising tide that lifts all boats, your industry typically defines a range of multiples within which your business is likely to sell for; but whether you fall at the bottom or the top of the range comes down to the factors within your business. Contact me to learn what your business may be worth.

What to do Before Signing a Letter of Intent

matt@sdbiz.com (Matt McDonald) — Tue, 08 Nov 2022 16:47:52 GMT

Advisor Answers by Matt McDonald

You may be years away from selling your business, but it’s never too early to understand what the process involves.

If you have ever promised your child a treat in return for good behavior, you know all about negotiating leverage. When selling an attractive business, you also have leverage—but only up to the point where you sign a letter of intent (LOI), which often includes a “no shop” clause requiring you to terminate discussions with other potential buyers while your newfound “fiancé” does due diligence.

After you sign the LOI, however, the balance of power in the negotiation swings heavily in favor of the buyer. With each passing day, you will likely become more psychologically committed to selling your business. Savvy buyers know this and often attempt to come up with things that justify lowering their offer price or demanding better terms. A tired trick, often from VC/PE firms. They might give an excellent offer but have no intent on fully honoring it, with full intent on whittling it down in their favor.

With your leverage diminished and other suitors sidelined, you are then left with the unattractive options of either accepting the inferior terms or walking away.

Here are six things you can do—before you even put your business up for sale, and before signing an LOI—to minimize the chances of your deal dragging on for months and becoming watered down.

1. Make sure your customer contracts have “successor” clauses.

When possible, have customers sign long-term, standardized contracts, including a clause stating that the obligations of the contract survive any change in company ownership.

2. Ensure your management team is all on the same page.

During due diligence, acquirers will want to interview your managers without you in the room. They want to find out if everyone in your company is pulling in the same direction. Deciding when you tell your management about a potential sale can be highly personal and specific to the working relationships you have.

3. Consider getting audited financials and doing pre-diligence.

An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm. Furthermore, spending the money and time to have a firm conduct a pre-diligence on your business allows you to enter due-diligence much more confidently and efficiently.

4. Disclose the risks up front.

Every company has some risk factors. Disclose any legal, accounting, operational, or other hiccups before you sign the LOI.

5. Negotiate down the due diligence period.

Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You, or your sales advisor, may be able to negotiate this down to 45 days—perhaps even 30 with some buyers. If nothing else, you'll alert the acquirer to the fact that you're not willing to see the diligence drag out past the agreed-to close date. I like to include exclusivity/due-diligence milestones on behalf of my seller clients. Exclusivity will only continue if [blank] is done by [blank] date.

6. Make it clear there are others at the table.

Explain that, while you think the acquirer's offer is the strongest and you intend to honor the exclusivity agreement, there are other interested parties at the table. Time limits for due diligence and exclusivity are in place for both parties to avoid wasting time, running up the attorney tabs, and unnecessarily dragging out the process. An experienced advisor-broker knows how important setting the stage early in negotiations is.

If you take all of these steps, you will protect the value of your business as the balance of power in the negotiations to sell your company swings from you to the buyer. Contact me to discuss your exit strategy.

The Hidden Goal of the Smartest Business Owners

matt@sdbiz.com (Matt McDonald) — Tue, 01 Nov 2022 17:59:15 GMT

Advisor Answers by Matt McDonald

What were your business goals for the year? If you’re like most owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. While those goals are important, there is another objective that may have an even bigger payoff: building a sellable business.

But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

1. Sellability means freedom

One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….

2. Sellable businesses are more fun

Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

3. Sellability is financial freedom

Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.

4. Sellability is a gift

Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.

You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.

You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

5. Nine women can’t make a baby in one month

There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for a period after you have made the changes required to make your business sellable. Therefore, if you want to sell as soon as within a year or so, you need to start making your business sellable now so the changes have time to gestate.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Value Builder Score. It takes about thirteen minutes and your responses are kept confidential. You can complete the questionnaire here Get My Score .

Or contact me learn about the business selling process or to get a valuation with no obligation.

A Blood Pressure Test for Your Business

matt@sdbiz.com (Matt McDonald) — Tue, 25 Oct 2022 18:55:15 GMT

Advisor Answers by Matt McDonald

When was the last time you had your blood pressure tested?

Taking your blood pressure is one of the first things most doctors do before treating you for just about anything. How much pressure your blood is under as it courses through your veins is a reliable indicator of your overall health; and it can be an early indicator of everything from heart disease to bad circulation.

Does it tell the doctor everything they need to know about your health? Of course not, but one powerful little ratio can give the doctor a pretty good sense of your overall wellbeing.

Likewise, your Value Builder Score can be a handy indicator of your company’s wellbeing. Like your blood pressure reading, your company’s Value Builder Score is an amalgam of a number of different factors and can help a professional quickly diagnose your company’s overall health.

When a doctor takes your blood pressure, they not only rule out possible nasty ailments; they can also use the pressure reading to forecast a healthy life ahead. Similarly, your Value Builder Score can predict good things for the future, while diagnosing and treating areas for improvement.

Just like blood pressure, one little number can tell you and your advisor a whole lot about how well you are doing; and your advisor can then prescribe an action plan to start maximizing your company’s health – and its value down the road.

Heart disease is called “The Silent Killer” because so many people do not monitor their blood pressure regularly. People can walk around for years with dangerously high blood pressure because they haven’t bothered to get it tested.

The first step on the road to health is to get tested. If you have a great score, you can sleep well at night knowing you have one less thing to worry about. If your score is not where it should be, then at least knowing your performance can get you started down the road to better health.

Is your business operating with high blood pressure? Is there a secret killer rendering your business worthless if you ever wanted or needed to sell?

If you’re interested in getting your free Value Builder Score, please visit Get My Score

If you're interested in learning what your business may currently be worth and want to plan an exit, Contact Me

Prevention is Better Than Cure, In Business and Life

matt@sdbiz.com (Matt McDonald) — Tue, 25 Oct 2022 18:51:27 GMT

Advisor Answers by Matt McDonald

To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you.

This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise.

To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialized your knowledge, the harder it is to hand off work to juniors.

The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention.

Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be easier to train others to do.

For example, it takes years for a dentist to acquire the education and experience to successfully complete a root canal, but it’s relatively easy to train a hygienist to perform a regularly scheduled cleaning.

It’s almost effortless for a real estate manager to hire someone to clean the eaves trough once a month, but repairing the flooded basement caused by the clogged gutters can be quite complex.

For a master car mechanic, overhauling an engine that has seized up takes years of training, but preventing the problem by regularly changing a customer’s oil is something a high school student can be taught to do.

For an IT services company, restoring a customer’s network after a virus has invaded often takes the know-how of the boss, but preventing the virus by installing and monitoring the latest software patches is something a junior can easily be trained to do.

When you’re selling your expertise, it can be tough to hire a team to do the work for you. As ironic as it sounds, sometimes the key to getting out of doing the work is to offer a preventive service, which not only maintains your business income, but also eliminates the need for someone to call you in the first place.

8 Mistakes for Business Buyers to Avoid

matt@sdbiz.com (Matt McDonald) — Tue, 11 Oct 2022 18:58:47 GMT

Advisor Answers by Matt McDonald

Not attempting to make an offer on the value you see. Granted some seller’s are firm on price, but you will miss opportunities when disqualifying a business by simply seeing the price/earnings ratio and deciding it’s too expensive. There could be hidden value or a seller could be highly motivated and expect to negotiate. You don’t know until you engage.
Not sending backup offers on accepted deals. A deal isn’t done until it’s done and it’s very common for transactions to fall apart. If you’ve found an opportunity you like but weren’t fast enough, send a backup offer to be first in line.
Being overly fearful of the economy/interest rates . You’re more likely to get a bargain when everyone else is skeptical of the economy and you’ll benefit when it improves. Waiting until there’s a positive economic outlook can cost you more.
Not being prepared to qualify for a lease assignment . We’re seeing landlords have stricter requirements than in the past for various reasons. Do not expect a discount. They may require any/all combination of good credit, proven experience in the industry, guarantors, large deposit, rent increase, etc.. Those are usually in addition to requiring the seller to be a guarantor for a period. As a buyer, if you do not have significant net worth, you should be prepared with your own guarantor on deck.
Over-shopping . Brokers are familiar with the ‘regulars’. The buyers who inquire on everything but never buy. They want to see everything that is on the market before making a decision. This type of buyer usually winds up getting so confused about the various businesses and all of their differences they spend all their time looking, never buying, and missing out time after time. Paralysis by analysis. Over time that buyer’s credibility with sellers and brokers reduces, thus reducing their opportunities. Have a plan, know yourself, know the types of businesses you want, and take action.
Being overly worried about the seller's employees leaving post sale . It’s a valid concern but in my experience it happens at too low of a frequency to substantiate the prevalence. As long as the buyer doesn’t do anything stupid like cutting pay or benefits, the employees are usually thankful to keep their job.
Attempting to circumvent the broker . This signals to the insightful seller that the buyer is not ethical and cannot be trusted. The seller then has good reason to believe the buyer will attempt to circumvent them on something.
Not being honest . Being anything but truthful with the broker or seller about your financial ability, or anything else important, will result in a huge waste of your and everyone else’s time and money. The truth will come out before the transaction closes and you’ll get red flagged.

10 Questions You’ll Be Asked When Selling Your Business

matt@sdbiz.com (Matt McDonald) — Tue, 04 Oct 2022 19:03:53 GMT

Advisor Answers by Matt McDonald

One of the most intimidating aspects of selling your business can be facing the barrage of questions during the various meetings you’ll be doing with potential acquirers. Be prepared to be grilled on all facets of your operations. Of course every meeting will be different, but here are some questions you can expect to be asked when you’re in the hot seat:

1. Why do you want to sell your business?

It's a slippery question because if your business truly does have a bright future—and you want the buyer to believe that's the case—the obvious question is: “Why would you want to sell it now?”

2. What is your cost per new customer acquired?

The potential acquirer wants to find out if you have a predictable, economical and scalable formula for finding new customers.

3. What is your market penetration rate?

The acquirer, with an eye to future growth, is trying to understand how big the potential market is for your product or service and what part of the field remains to be harvested.

4. Who are the critical members of your team?

The acquirer wants to understand the breadth and depth of your team and determine specifically which members need to be motivated and retained post-purchase.

5. Who buys what you sell?

Strategic buyers will be searching for any possible synergies between what you sell and what they sell. The more you know about your customer demographics, the better the buyer will be able to assess the strategic fit. If your customers are other businesses, a buyer will want to know what functional role (e.g., training manager, VP of sales and marketing) buys your product or service.

6. How do you make what you sell?

This question is asked in an effort to size up the uniqueness of your formula for creating your product or service. Potential buyers want to know if you have any proprietary systems that would be hard for a competitor to replicate. For various reasons, they will also want to understand if the creation of your product or service is dependent on any one person.

7. What makes your offerings truly unique?

A buyer is trying to understand how big the moat is around your business and what kind of protection it offers from competitors who may decide to compete with you in the future. What have you done to safeguard yourself against the competition?

8. Can you describe your back-office setup?

Most buyers will try to understand how easily they can integrate your back office into their operation. They'll want to know what bookkeeping and billing software you use, how customers pay, and how you pay suppliers.

9. Why haven’t you done [blank] with your business?

A buyer may ask a question about your business that they see as an obvious opportunity or fix in your current business. Although it may seem somewhat insulting, this can actually be an opportunity to showcase the business’s immediate potential. Rather than take offense, compliment the potential buyer’s insight while helping explain the circumstance and how a buyer can possibly address it.

10. What have been your biggest challenges and risks with the business?

There may not always be relevant ways to sugarcoat an honest answer about your challenges but honesty is the best policy. Being anything but forthcoming about your business is setting yourself up for a huge waste of time. Besides, what may have been a challenge for you could be a strength or opportunity for a buyer.

Of course this is not an exhaustive list, but it’s a good start when you’re preparing to represent your company to potential buyers. As an advisor agent, I am the one typically fielding initial rounds of questions while coaching a seller on how to best respond in an honest and positive light. The time does come when a buyer wants to hear answers directly from the seller. Contact me if you are interested in possibly selling your business, learning about the process, and getting a free valuation.

Does Your Business Have Curb Appeal?

matt@sdbiz.com (Matt McDonald) — Thu, 29 Sep 2022 17:23:05 GMT

Advisor Answers by Matt McDonald

Let’s say you’re in the market for buying a house and you go to view one that looks appealing in the ad. How does it look on the inside? The outside? What about the location? What is your general impression?

Like your house, your business projects an image to potential buyers. When they come to see your business for the first time, your “curb appeal” can attract a buyer to your business—or cause them to walk away from it.

Do you need to improve your curb appeal? Here's a three-step plan:   

1. Fix Your Leaky Faucets

Perhaps, like many other business owners, you started your business from scratch with one or two employees and now you have 20 people working for you. But do you have the appropriate HR infrastructure in place for that size of a company? Perhaps you even take pride in your informal management style, but it can prove to be a liability when it comes time to sell.

Make sure your human resources policies are at least as stringent as those of the company you hope will buy your business. Some basics to have in place:

• A written policy making it clear you forbid any form of harassment or discrimination; 

• A written letter of employment for each staff member; 

• A written description of your bonus system;  

• Written policies for employee expenses, travel and benefits.

2. Assemble Your Binder

When you go to buy a house, it will give you confidence if the owner has the instruction manuals for the appliances, information on where they were purchased, and who to call if one of them breaks down.

Similarly, when a potential buyer looks at your company, he wants to see that you have your business information in order. Documenting your office procedures, core processes, and other intellectual capital can help you attract more bidders and a higher price for your company, while also lowering the chance of the deal falling apart during diligence.

If you want to attract a buyer one day, your business needs a binder with instructions for basic functions, such as:

Opening up in the morning and closing down at night;
Forms and step-by-step instructions for routine tasks;
Templates for key documents;
Emergency numbers for service providers;
Billing procedures for customers.
How your company is positioned in the market and your marketing tools.

3. Document Your Intangibles

Intangibles for house buying might include: Is the house near a good school or daycare? What kind of neighborhood is it? What kind of commute are you looking at to get to work?

Your business also has intangible, often intellectual, assets that a potential buyer needs to be made aware of, such as:

Proprietary research you’ve conducted;
A formula for acquiring new customers;
Criteria you use to evaluate a potential new location;
Your unique approach to satisfying a customer.

As with selling a house, your company's curb appeal can go a long way toward closing a deal.

Is Now the Time To Sell Your Business?

matt@sdbiz.com (Matt McDonald) — Thu, 22 Sep 2022 14:05:24 GMT

Advisor Answers by Matt McDonald

Have you been thinking about selling your business but just can’t decide if now is the best time? Do you find yourself repeatedly analyzing the economic situation and wishing you had a crystal ball? There are always positive and negative signs….

If you’re still up in the air and can’t quite decide whether or not to hit the eject button, here are six reasons you might want to consider getting out now.

1. The coming glut

As a business owner, demographics are not on your side. As the baby boomers start to retire in droves, we’re going to have a glut of small businesses coming on the market. That’s great if you’re buying; but if you’re a seller, you may want to avoid the flood and head for higher ground now.

2. You’re less interested in fighting the good fight

A lot of business owners took the pandemic in the teeth. If you’ve got your business stabilized and the prospect of possibly having to fight through another crisis leaves you panic-stricken, it could be time for you to get out.  

3. The worst is behind you

Let’s say you were mentally ready to consider selling a few years ago and the pandemic hit, and in 2020 and 2021 you made cuts and adjustments, so now you’re starting to see some profit and revenue growth. With your numbers going in the right direction, now might be just the right time to make your move.

4. The tax man is coming

Governments around the world are looking for money to fund the cost of an aging population. This means continually increased taxes.

5. Nobody is lucky forever

If you’re lucky enough to be in a business that actually benefitted from the pandemic, congratulations... you’ve probably just had some of the best years of your business life. But the boon may not last and right now might be a great time to take some chips off the table.

6. A closing window?

The Great Resignation showed more individuals are choosing entrepreneurship over returning to the 9 to 5. According to the Bureau of Labor Statistics, a record number of workers have left their jobs. What's more, the U.S. Census Bureau reports that a record number of entrepreneurs applied for business applications. While demand for existing businesses is strong, it could be a trend with an uncertain length.

Regret often happens from the things we wish we did do, as opposed to things we wish we didn't do. The window of an ideal time to sell is smaller than the window of an unideal time to sell. There are obviously many things to consider in deciding when may be the best time to exit/sell your business. Consulting with an advisor sooner rather than later will better equip you for such decisions.

We have a free assessment specifically geared to help owners decipher if they may be ready to sell. It's called the Personal Readiness to Exit Score, or PREScore. You can take this 8-min questionnaire by following this link Get My PREScore .

9 Warning Signs You’re a Hub-and-Spoke Owner

matt@sdbiz.com (Matt McDonald) — Mon, 19 Sep 2022 19:15:34 GMT

Advisor Answers by Matt McDonald

If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of a traditional Christmas-tree-like organizational chart, or are you stuck in the middle of your business, like a hub in a bicycle wheel?   

As anyone who has tried to fly United when O’Hare has been hit by a snowstorm knows, a hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid hub-and-spoke managed businesses because they understand the dangers of buying a company too dependent on the owner. Here’s a list of nine warning signs you’re a hub-and-spoke owner and some suggestions for pulling yourself out of the middle of your business:   

1. You sign all of the checks

Most business owners sign the checks, but what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for checks up to an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review all signed checks and make sure the privilege isn’t being abused.   

2. Your mobile phone bill is over $200 a month

If your employees are out of their depth a lot, it will show up in your mobile phone bill because staff will be calling you to coach them through problems. Ask yourself if you’re hiring too many junior employees. Sometimes people with a couple of years of industry experience will be a lot more self-sufficient and only slightly more expensive than the greenhorns. Also consider getting a virtual assistant (VA), who can act as a first line of defense in protecting your time. You can find a VA by filling out the request for proposal at http://www.ivaa.org/.   

3. Your revenue is flat when compared to last year’s

Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.   

4. Your vacations suck

If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.   

5. You spend more time negotiating than a union boss

If you find yourself constantly having to get involved in approving discount requests from your customers, you are a hub. Consider giving front-line, customer-facing employees a band within which they have your approval to negotiate. You may also want to tie salespeople’s bonuses to gross margin for sales they generate so you’re rewarding their contribution to profit, not just chasing skinny margin deals.   

6. You close up every night

If you’re the only one who knows the close-up routine in your business (count the cash, lock the doors, set the alarm), then you are very much a hub. Write an employee manual of basic procedures (close-up routine, e-mail footer to use, voice mail protocol) for your business and give it to new employees on their first day on the job.   

7. You know all of your customers by first name

It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.   

8. You get the tickets

Suppliers’ wooing you by sending you free tickets to sports events can be a sign that they see you as the key decision maker in your business for their offering. If you are the key contact for any of your suppliers, you will find yourself in the hub of your business when it comes time to negotiate terms. Consider appointing one of your trusted employees as the key contact for a major supplier and give that employee spending authority up to a limit you’re comfortable with.   

9. You get cc’d on more than five e-mails a day

Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.

Why should I use a broker to sell my business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:50 GMT

Advisor Answers by Matt McDonald

Recently I had a discussion with the seller of a beloved neighborhood retail store that was approaching a very tough milestone. They either had to find a buyer asap or liquidate their FFE/ inventory and get out. The store had been there for over 20 years with many loyal customers and the lease was about to expire. The landlord was aware they were attempting to sell, would not grant a short-term extension, and was significantly raising rent. Even with the rent increase the business would still be profitable. The landlord was a large corporate entity and they didn’t care if the business shut and if the seller got nothing, their only job was numbers.

Unfortunately by the time the seller and I met it was too late. Over the last year or so he had been attempting to sell the business himself, posting on various social media sites and using word of mouth, to no avail. Had the seller used a broker earlier in the process he would have been able to get the business in front of thousands of active buyers, to have a much better chance of selling.

Aside from finding buyers, a broker/advisor wears many hats. They act as the intermediary between buyers and sellers to keep a deal on track and emotions in check. They help navigate the many nuances and unique challenges every deal faces while quarterbacking the attorneys, escrow officers, accountants, lenders, and stakeholders. They protect you and your business’s confidentiality and leverage their knowledge/experience to help negotiate the transaction to a close.

Whether you hire a broker or not, the sooner you discuss with one the better educated you can be about your options. Even if you already have a buyer, as a seller you should identify whether you’re leaving money on the table and if listing the business on the market could get a better price. Contact me to schedule a free discussion about your business.

Why should I sell my business while I'm ahead?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:46 GMT

Advisor Answers by Matt McDonald

Too often business owners only consider selling once they perceive their business has gained all the market share it can or only wait until there’s a problem before they consider selling. Unfortunately, buyers usually perceive it the same way and will not place as high of a value on it. I have heard countless times, “If we only sold (X) years ago it would have been worth so much more.” Everyone wants to have their cake and eat it too but leaving some can reap big benefits.

A seller’s finish line is a buyer’s starting line. Selling a business when there is still obvious and significant potential will attract more value. A business needs at least a few years to demonstrate ability and worth but waiting too long to sell, towards the end of your business’s market opportunity, or on the downslope of your business’s trend, will not likely muster the value you expect.

Attempting to time the exit of your business on the external market alone is not recommended, but timing your exit with the life cycle of your business and how it’s positioned in the market is wise. Consider the 10/40 rule. Size the potential market for your existing offerings and estimate your current market share. Consider exiting when your market share exceeds 10% (proof of “product/market fit”) but is no more than 40% of the total addressable market.

Why should you sell your business while you’re ahead? Because that’s when it’s worth more. Contact me to schedule a free discussion about your business.

What are “multiples” when valuing and selling your business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:43 GMT

Advisor Answers by Matt McDonald

A multiple is the number your annual pre-tax profit is multiplied by to get to a sale or asking price for your business. Your pre-tax profit is identified as your Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a larger business. An advisor or broker will need to analyze your P&Ls/ taxes, and ask several questions, to identify an accurate adjusted earnings number for your business.

Once that number is identified the advisor/broker will research comparable businesses that have sold in the same industry, at similar sizes and earnings to arrive at a suggested multiple. Many factors can contribute to whether your business will fall on the higher or lower side of the spectrum. It is common for sellers to get hyper focused on a multiple number. If, for example, your pre-tax earnings are $400K and the multiple is 3.75, the asking price would be $1.5M. If the multiple were 3.25 the asking would be $1.2M, a difference of $300K by a change in the multiple of .5.

When having initial discussions with sellers about multiples, it is common for them to have heard stories that, “X business in their industry sold for 10x earnings,” or even revenue, which may be true. But multiples scale quite closely with pre-tax earnings. A business with $10M in annual earnings is going to get a much higher multiple than a business with $1-2M in annual earnings. Small businesses often have a 2-3x multiple, or a modular valuation if there is significant value in FFE/inventory in relation to earnings. The better the seller of a business understands how and when multiples are applied, the better they can manage their future and their expectations.

Since there are many factors that can push your businesses towards the higher or lower side of the multiples spectrum, contact me to schedule a free discussion about your business.

How do I get my business to run without me?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:39 GMT

Advisor Answers by Matt McDonald

A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take. A business independent of its owner is worth a lot more than an owner-dependent company. Here are five ways to set up your business so that it can succeed without you.

1. Create an ownership culture inside your company. If you can, be transparent about your financial results, and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.

2. Have Employees Walk in Your Shoes. “If you owned the company, what would you do?” Get them thinking about their question as you would, and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems.

3. Vet Your Offerings. Identify the products and services which require your personal involvement in either making, delivering, or selling them. Only provide that which you can teach others.

4. Create Automatic Customers. Work to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis.

5. Write an Instruction Manual for Your Business. A set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.

You-proofing your business has enormous benefits. It will allow you to create a valuable company and have a life. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.

What are your plans after you sell your business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:36 GMT

Advisor Answers by Matt McDonald

Sounds like a simple answer, “Whatever I want!,” but it doesn’t cease to amaze me how often business owners do not think this through. Perhaps you already have other ventures in the works or you really are at a stage in your life where you can be truly happy doing little to nothing. But it is not uncommon for sellers to have a sense of remorse after they sell, leaving a gap in their life that money does not fill. The same personality that has made you successful is the same personality that can make you restless.

It may sound odd for a broker to bring this up, after all, helping you exit your business is my business, but if I can help a seller get ahead of the experience and have confidence in their decision to sell, I know I am being (or at least attempting to be) of service. Business owners usually identify being a business owner as part of their personality/persona. Take that away and there can be a sense of loss of self worth. Similar to what many people go through with retirement, people often don’t expect to feel that way.

Nothing wrong with taking time off to do nothing for a while (I encourage it), but having a plan for what you are going to do after you sell your business and how that is going to make you feel will best prepare you for an exit. Obviously there’s worse problems to have.

I'm putting my business up for sale, can I take time off now?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:28 GMT

Advisor Answers by Matt McDonald

You better not! Unless your business is completely self sufficient, now is the time you need to spend even more effort on your business leading up to a sale. As interested buyers start to look at your business, and especially after negotiations have been conducted, your business will be under the microscope. Any indications of recent trouble, dips in revenue, loss of customers, or increases in expenses, for examples, can cause a buyer to lower their offer or even back out of a deal.

From the time you put your business up for sale to the final months leading up to the close of a transaction, a seller should be highly motivated to ensure operations are at peak performance. Take a much needed break after the transition period and enjoy the fruits of your labor.

As a business owner, what's your number?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:25 GMT

Advisor Answers by Matt McDonald

What number? The price you would sell your business for. What is it? Have you thought about it? Write it down, stash it away, and keep it to yourself. You may not be considering selling your business anytime soon, but if you build a good and sellable business, that day will hopefully come.

The value you put on your business is not likely the same value a buyer or the market puts on your business. If it was, you would have already sold it. Start with learning what your business is worth now, why it’s worth that, and what needs to happen to get it to your secret number. Then 1, 5, or 10 years from now you won't be surprised by the valuation your business receives.

My landlord is selling the building my business is in. Can I sell my business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 22:22:21 GMT

Advisor Answers by Matt McDonald

Possibly. This may be a very specific circumstance but one I have experienced. It obviously depends what the terms of your lease are, if you have options, and how willing the landlord is to work with you. The buyer of the building must honor the terms/options of your existing lease. If you are a valuable or ‘anchor’ tenant, your landlord may be willing to extend the lease, prior to sale, if they think it will be attractive for a buyer to have your business as a tenant.

Often the seller of a commercial property will not want to be restricted by the terms of a tenant when presenting the building to potential buyers because a buyer may want to make drastic changes or demolish the building completely. The selling landlord may offer to buy you out of your existing lease, where a price can be negotiated.

It will be difficult, if even possible, to find a buyer for a business that is location dependent (restaurant/retail/automotive/etc.), with a lease of less than 3 years. A seller may have to accept a significantly lower sale price with a shorter lease than they may otherwise receive with a longer lease. If your lease is expiring, and you have the time/ability, it will be worth waiting to negotiate new lease terms with the new owner of the property to know what can be assigned to the buyer of a business.

Ensure you understand your lease, your terms, and your options as you start to consider a possible exit. Contact me to schedule a free discussion about your business.

Who should know that I'm interested in selling my business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 21:54:06 GMT

Advisor Answers by Matt McDonald

It may be obvious, but essentially no one. Aside from your closely trusted counsel, CPA, attorney, business coach, partners, spouse/family, or broker agent, etc., the pending sale of your business should be kept strictly confidential. The main purpose of secrecy is to avoid unnecessary problems for yourself, for the buyer, essentially all involved, which could even prevent you from selling your business.

Who should not be aware of a potential sale:

Competitors - they could attempt to leverage the knowledge of the pending sale to go after your customers, suppliers, or employees

Employees - knowledge of a pending sale can naturally cause anxiety and stress for employees, who may start seeking other employment. “Will I lose my job or get demoted? Will I dislike my new boss, coworkers, policies?” It’s case by case but often these fears can go unwarranted. Buyers usually want to keep the team in place. Ambitious buyers are often looking to promote from within to support growth goals.

Customers - the unknown of what will change about the product or service, if anything, could result in them revisiting competitors. A dip in sales leading up to a transaction could push a buyer back to the negotiating table.

Vendors/Suppliers - depending on the business and the relationships, this could be the least important or most important aspect. Some vendors will not care at all, some could attempt to drastically change terms. A unique supplier essential to the business may even require approval of a buyer in order to continue doing business, which would be an exception.

Landlord - until you have an accepted offer with a qualified buyer for the lease assignment, and depending on the relationship you have with your landlord

Since all businesses and transactions are unique, consult with your business advisor/broker if you are unsure on who you may or may not want to discuss a pending sale with.

Why make your business sellable, even if you don't want to sell?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 21:54:04 GMT

Advisor Answers by Matt McDonald

“Even though it’s sometimes hard to imagine that you’ll ever want to leave the company you worked so hard to build, there are many reasons for wanting to build a sellable business:

-Your company may be your best shot at a comfortable retirement

-You may want to start another business

-You may need cash to deal with a personal financial matter

-You may want more time for yourself

-You may want to sleep better at night knowing you could sell your business if you wanted to or needed to”

John Warrillow, Author, Built to Sell

Does how you file your business taxes affect the value of your business?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 21:48:59 GMT

Advisor Answers by Matt McDonald

Yes. I’ll start with prefacing that I am not a CPA or tax advisor. But I do deal with a lot of business taxes. A business’s tax filings are often the preferred premise for verifying revenue, expenses, and profit, as opposed to a business’s profit and loss statements. Filing your business’s taxes commingled with either another business’s taxes or your personal taxes, makes verifying your financials much more difficult and is often a deal-breaker for many qualified buyers. I highly recommend filing each business separately, if you don't already.

Another problem small businesses encounter when it comes time to value their business is a lack of revenue reporting on their taxes. It’s quite common for small business owners, especially those dealing in a lot of cash, to under-report their revenue to save on the amount of taxes due. I’m not here to judge. But, if those revenues/earnings cannot be accounted for, we cannot include it in a valuation, which can drastically lower value. Often resulting in the necessity of an asset only sale. Many buyers will usually want to see at least 3 years of reported tax revenue. Perhaps, as a seller, you believe the money you save on taxes outweighs the potential selling price later down the road. Which could be true in certain scenarios but it’s not recommended and a pro/con worth examining.

Taxes are the required premise for SBA financing approval. Having SBA financing pre-approval on a business for sale opens up the buyer pool immensely compared to a business that can only accept cash and/or seller financing. Having SBA pre-approval is like having a stamp of verification on the business’s viability, whether a buyer needs the financing or not. Consult your tax professional sooner rather than later to ensure your taxes are filed separately and to weigh your priorities in reporting.

Is your business sellable in its current form?

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 21:48:54 GMT

Advisor Answers by Matt McDonald

Many factors come into play that may or may not make a business more or less sellable. Aside from profitability, employees, client contracts, licenses, locations, equipment, external trends/technology, and industry or business specific knowledge (to name a few), are your contributions transferable?

How essential are you, as an owner, to the business? Many business owners naturally take pride in the fact that their business could not function without them. But when it comes time to sell, the necessity of their presence can drastically hinder its salability. Picture your business without you. Would your clients leave? Is there management in place to oversee your responsibilities? Are you harbouring knowledge essential to tasks you could delegate to someone else, whether consciously or not?

The more a business owner and future business seller can make their business self-sufficient, not dependent on the owner, or any single employee, the better and more sellable it is. It’s very common for small business owners to be essential, they often are the business. But when it comes time to exit, if an owner wants to get paid for passing what they’ve created on to someone else, they will need to start finding ways to remove themselves from the essential day to day. It’s a process that can take time, if even possible for some.

How an interested buyer may lose out on buying a business.

matt@sdbiz.com (Matt McDonald) — Sat, 17 Sep 2022 21:48:48 GMT

Advisor Answers by Matt McDonald

In my experience, business buyers sometimes approach buying a business with the wrong attitude. Of course a prudent buyer should ask any and all of the right questions, but interrogating or negotiating with a seller to a level of discomfort or accusation can quickly put a buyer out of the running. It’s not like buying a used car, it’s more like adopting a baby. The seller’s baby, they have poured blood, sweat, and tears into.

It’s not uncommon for sellers to be willing to accept slightly lower offers, or more buyer friendly terms, if they like one buyer more than another. After all, buyers and sellers will be working together during a transition period in a temporary business partner capacity. Seller’s want to know their business (baby) is going into capable hands and know their valued employees and customers will still be taken care of once they’re out of the picture.