Archive for category: Must Knows About Business Sales

In our social-media conscious age, we might think it’s a perfectly normal thing to announce a new business acquisition to the world. Imagine the humble-braggy LinkedIn post, “I’m honored to announce…” along with press releases and maybe even a shiny new “under new management” sign to drape across the exterior of the business. The problem? These aren’t always the smartest moves. Balancing continuity with change is one of the biggest challenges that any new business owner will face.

Sometimes Change is Good

We shared a success story some time ago of an owner that made pretty dramatic changes right off the bat which led to major financial gains. Short version: the old owner didn’t always send complete orders, but customers put up with it because they liked the owner and there weren’t a lot of alternatives. 

All the new owner did was actually start fulfilling the orders as requested. No more partial fulfillment. Customers were delighted and unsurprisingly, new business followed. 

Other Times, It’s Not

As we recently shared in a podcast episode, one new owner made a change and was bankrupt before the year was out. As in the previous example, the old owner could have improved a part of the business before the sale. In this case, his products and services were underpriced for the market.

The new owner, dreaming of dollar signs, immediately implemented a dramatic price change when he took over the business. The customers were unhappy and it was only 60 days later that the new owner had driven the old business into the ground.

Were the prices outdated? Definitely. They hadn’t been changed in over a decade.

Could they have been changed gradually, with explanations and context? Of course.

Did the customers save any money by switching? Probably not, but they got to vote with their feet, which is one of the most powerful muscles that consumers like to flex.

But the new owner thought revenue was just a matter of flipping a switch. Unfortunately for him, it was the off switch.

We Resist Change

We may not like to admit it, but we are creatures of habit. That’s why you see companies spend untold millions getting you to simply try a new beverage or toothpaste or even a type of “burger” made with beets. They know that at least trying something is a gateway to possibly making that product a willful future purchase.

The same is true with businesses we deal with. We develop relationships with them and just like employees, we fear that the new owners might mess everything up. We might stay away from the business for a while “waiting to see what happens” but that in itself can create a self-fulfilling prophecy in which fewer people go and the business hits a revenue death spiral, simply because of the perception of change.

Change, But Slowly

This is not an impossible problem. In fact, we’ve seen it successfully negotiated hundreds of times.

Firstly, don’t change anything. The reason you bought a business in the first place is because it works. If it ain’t broke, don’t fix it.

Obviously changes that are not customer-facing can be done right away, whether that’s a change of who the company banks with, or processes credit cards with, or solicits for insurance coverage.

But other things, like what we mentioned regarding pricing, or personnel who are customer-facing and have developed relationships with the customer base, should be left as is.

If there are changes you’re considering, poll employees and customers. Give them a voice.

If there are changes you are definitely implementing, think about how to give context and explanations to customers. They deserve it. They don’t owe you anything, especially as a new owner. Take the time to explain why prices need to change, or the logo is adding a new color, or why you’re adding a new product or service (or getting rid of old ones). People won’t always be happy with the changes, but they’ll appreciate the explanation.

And you’re much more likely to keep them as customers. And keep the business too, instead of losing it in 60 days.

Want more tips on how not to lose a business in 60 days? Give us a call!

We’ve talked about our signature Offer to Purchase (OTP) before. In this article we’re going to break down that OTP into some broad areas to make sure buyers know what can make an offer attractive to sellers.

Don’t Wait on Diligence

Sometimes buyers will ask to do due diligence before making an offer. But a business is like anything for sale, and those who submit offers sooner are more likely to get accepted than the offer that may come from someone “after they’ve seen additional details.”

Show Me the Money

Earnest money or escrow is typically required of a buyer when making an offer. A seller wants to know that a buyer is serious and committed before allowing additional confidential information to be shared. Often the escrow money that accompanies an offer is the first of three payments that together can comprise a down payment:

• Escrow payment 1 accompanies an offer
• Escrow payment 2 is due with the acceptance of an offer
• Escrow payment 3 is delivered a week prior to closing

These three payments will usually comprise at least 10% of the total amount of the sale, but can sometimes be more.

The amount of the earnest money can also signal to a seller how serious an offer is. This doesn’t by itself make the offer better, but it’s definitely something that sellers consider when looking at competing offers.

Time Constraints 

The offer should also mention milestones. Examples include:

• A certain amount of time for diligence. 3 weeks is the most common.
• A target closing date. This will depend on the particularities of the buyer and seller and can be tied to personal or business matters. The bank lending process is also a key factor in setting a closing date.
• Transition. Sometimes sellers are getting out lock, stock, and barrel, and will have a short transition time. Other times sellers will continue to work in the business uninterrupted for months, sometimes even years at a time. A desired transition time should be spelled out in the offer.

Obviously all these times are negotiable, as they are part of an offer, and when the seller accepts, he/she may accept with changes made to these timelines.

Reminder to Sellers

While it’s exciting to accept an offer, it’s important to remember that it’s only the beginning of the process. We often tell sellers to keep working in their business as if the sale was not going to happen. 

That means: 

• keeping the sale confidential
• continuing to run the business as usual, whether that’s hiring new team members or running the usual advertising campaigns, etc.
• setting aside a block of time to dedicate to the sale each week so that the process keeps moving forward; selling a business is a part-time job on top of running your business — thankfully it’s just a temporary one

We help draft offer letters just about every week of the year as part of the service we offer to our clients. Learn more about how we can help you by giving us a call.

A minority-owned business enterprise (MBE) or woman-owned business enterprise (WBE) is a powerful certification to have in certain industries. They can connect you with larger corporations and government agencies (at the federal, state, and local level) that set spending goals and targets for businesses owned by minorities and/or women. But what happens when it’s time for those businesses to sell?

Qualifications

Before we talk about exits, let’s review what it might take to get one of these certifications in the first place.

MBE

These are for-profit businesses, regardless of size, physically located in the US or one of its territories, that are owned, operated, and controlled by minority group members. Those members are US citizens who are:

• African-American
• Hispanic-American (includes Puerto Rico, Mexico, Cuba, Central and South America)
• Native American (includes those who are Eskimo, Aleut, native Hawaiian)
• Asian-Pacific American (includes Japan, China, the Philippines, Vietnam, Korea, Laos, Cambodia, Taiwan, the Indian subcontinent, Samoa, Guam, and other US trust territories of the Pacific)

Ownership is defined as at least 51% owned by such individuals. In the case of a publicly-traded company, that means 51% of the stock must be owned by one or more such individuals. 

WBE

Like MBEs, these are for-profit businesses physically located in the US or one of its territories, that are owned, operated, and controlled by women who are US citizens or Legal Resident Aliens. The same ownership, operation, and control rules are in place.

Other Certifications

There are a couple more business designations worth knowing:

• DBE (Disadvantaged Business Enterprise): aimed at those that have disabilities or residents of economically depressed areas
• VOSB (Veteran-Owned Small Business): at least 51% owned by one or more veterans

Exit Strategies

There are two clear strategies for exiting a business with one or more of these certifications.

Continuity

If the majority of the business of the firm comes through contracts that are tied to these certifications, you will probably want to find buyers that can retain this certification. That means if you have a WBE, you’re going to have to sell to women only, or find a buying group that will make sure that magical 51% threshold is occupied by women.  Same for an MBE.

Break

You’ve heard us talk before about the importance of having as wide of a buyer pool as possible. More buyers means more interest means more offers means more leverage. But this path is only worth pursuing if you’re willing to take a valuation haircut. 

You can prepare two financial projections leading to two different sale prices, a higher one that a buyer that can qualify for one of the certifications would pay (because he/she would hold on to the business/contracts that are tied to that certification), and a lower one that assumes the certification will be lost and the business will have to continue on without it.

We would go for “continuity” if more than 20% of the business is tied to a certification and for “break” if 20% or less of the business is tied to a certification. The “break” option is nice in that it still offers continuity should such a buyer show up.

Do you have a MBE or WBE or other certification and have been procrastinating on an exit because you don’t know what to do? We can help (because we’ve helped in these cases in the past). Give us a call.

While there are many ways to get a value for your business, we always point towards a professional valuation as not only the most accurate, but the one that qualifies for SBA and bank financing.  In this article we’re going to talk about five factors that professional valuation experts consider when evaluating the proper multiple for your business.

More Than Numbers

While we are never going to argue that an accountant doesn’t know numbers, we will point out that, without years of experience with business transactions, an accountant or CPA can only offer an academic valuation.  It may be accurate, but the advantage of having the knowledge and experience which comes from doing valuations regularly leads to a professional valuation that is tethered to the marketplace, and for those who are actually looking to sell a business, a number that has a relationship to the marketplace really matters.

So, let’s look at what the professionals consider for a valuation multiple that CPAs and accountants who aren’t regularly involved in business deals don’t:

1. Industry Assessment

As we saw during the pandemic, some businesses thrived. Others really struggled.  

Is your industry on an up or down trend?  Is there regulation or legislation that is pending that can really change the model of the industry?

Is the industry susceptible to supply-chain disruptions?  Weather?  Geopolitics?  Prior to 2020 these factors may have been never-never thoughts that we thought didn’t relate to Main Street businesses.  We know better now.

2. Company’s Competitive Position

As with the industry assessment, an assessor will look at whether the company is on an up, down, or stable trajectory within the local, regional, and possibly national markets.  

How is the company competing (price, quality, knowledge, customer service, etc.)?  Are any of those competitive vectors under threat from new entrants?  How?

3. Internal Trends

Just as we saw after 2008, many potential buyers are “giving a pass” to business numbers from 2020.  But that anomaly aside, what was the profitability year-on-year before 2020, and what is it now, when we are many months since shutdowns and business closings?  

4. Ownership Change Risk

With a solid team, a business should stay stable even with an ownership change.  In fact, when done right, many customers don’t even know the business has changed hands for months or sometimes years.

An assessor will look at how involved the owner is with sales and relationship management.  He/she will also look at how much recurring revenue is coming into the business, a factor that de-risks the specter of an ownership change.

5. Desirability in the Marketplace

How desirable is your business in the current climate?  For example, when the Affordable Care Act was going through the legislative process, a lot of health care related businesses didn’t go to market and buyers were adopting “wait and see” attitudes until the ink on the new laws dried.  What are market conditions around your type of business and your industry at this time?

There can be other factors to consider in valuations, depending on the industry and specific business situation, but these five factors are always considered when determining the right multiple for a business value.  Remember that before even looking at these factors the business needs to have clean books and operating manuals.

Do you have an academic value of your business and want a professional one instead?  We can help with that! Give us a call.

July 2021 saw 4M workers leave the workforce, with that number increasing in August and September.  The largest age group among these workers were in the 30-45 age group.  While these numbers are not insignificant, they still only represent 3% of the workforce, not 30%.  But as we noted before in our discussion about the $15 minimum wage, business owners are at their best when they anticipate trends, instead of waiting for those trends to happen to them.

Causes

While the term “great resignation” is just as recent as the resignations themselves, a few theories have been floated as root causes of these employees leaving their jobs:

• “Pent-up” quitting: those who didn’t immediately resign in the face of uncertainty in 2020 have decided to finally do so now
• Existential revelations: when people were laid off or had some time to work remotely, they took a hard look at their present circumstances and didn’t like them
• High stress: resignations have been higher in health care, tech, food service, and retail, all sectors that either had a sharp increase or a sharp decrease in revenues and customers

Given that the event is still happening amidst a lot of other global uncertainty, it’s not clear that any of these possible causes is driving resignations more than another.  There may be a hidden factor that will become more clear in time.  But that shouldn’t stop buyers or sellers from moving forward with transactions.

Address the Situation

Whether you’re a buyer or a seller, you can lean into the so-called “Great Resignation” as part of your due diligence or preparation to sell your business, respectively.

Buyers

We’ve already mentioned earlier this year that Covid-19 is causing buyers to look at staffing issues more closely.  Buyers are often not going to be able to interview current employees directly, but they can ask the seller for employment information: how long employees have been there, what the historic turnover rate has been, and if that’s been any different since March 2020.  If there is a significant difference, ask the seller for reasons why.  

Sellers

With the additional buyer scrutiny directed at personnel, it’s entirely justifiable to lean into retention as you prep your business for sale.  If you have had more resignations than usual since March 2020, try to look at aspects of employment that may have broken under the stress:

• Company culture: is it healthy and thriving and did it weather the challenges that lockdowns and layoffs may have caused?  If not, what are you doing to address this?
• Pay and working conditions: are your workers in-person or working remotely?  How is your pay in relation to the rest of the marketplace and its adjustments since March 2020?  If your staff is unhappy with pay and working conditions, what do you intend to do?
• Vendors and supply chains: bad business conditions tend to roll downhill.  Did you have to absorb any of the challenges of your vendors?  Did your supply chain break down?  How did this affect your team?  Are there measures you can take to mitigate future shocks?  Have you implemented those measures?

Business owners often look at what is going on around them and try to think about how conditions might affect their businesses.  But those who are looking to sell need to be particularly sensitive and proactive.  It’s not enough to know about the Great Resignation, you need to make sure you take whatever measures you can to make sure you don’t become part of its statistics, as that will directly affect your ability to sell the business at the price you want.

Has your business been affected by the Great Resignation?  We’d love to talk to you about how to turn things around.  Give us a call.