Archive for category: Must Knows About Business Sales

We’ve talked in the past about broad reasons why we might (and might not) take your listing, so today we’re going to get a bit more granular and talk about what that process of listing looks like.

I Want to Sell!

We get it! You’re ready to move on with your life and once you’ve told us you want to sell, you might already have a mental countdown clock started. But you shouldn’t start that clock, because we haven’t listed the business yet, and when we do, it’s going to take an average of 6-9 months to sell. So, we appreciate the enthusiasm but we need a few things first!

Key Information

We can’t price and promote your business without hard data. Most times that hard data is going to come from the last three years of tax returns along with the financial statements to substantiate and corroborate those returns. 

We’re going to need a bit of time with you and your accountant to understand some charges, as we haven’t worked side-by-side with you in the business for years and may not understand why certain things are classified the way they are.

Not Auditors

We aren’t the IRS and we aren’t interested in passing judgment or scolding you for where expenses have been classified. What matters to us is getting to a clear number of SDE that will allow us to move towards a proper price for your business. That said, we’ve seen some, shall we say, creative interpretations, including:

• Vet visits for a dog classified as “security” expenses
• Cosmetic surgery for a spouse classified as “building improvements”
• A lake house used once in five years for a company retreat as an active company asset

Banks can be leery of excessive addbacks, but that doesn’t mean they won’t work with companies that have a lot of them. But without being clear as to what expenses are legitimate addbacks, we can’t get a true value for your business.

Seller Disclosure Statement

So we’ve gotten all the key paperwork we need to get pricing, now we need to cover anything the numbers can’t tell us, which can include:

• Current or future lawsuits/legal actions against the business
• lease/real estate situation (if applicable)
• Upcoming changes (key employee or major customer leaving)

This information completes the snapshot we will come up with called the Confidential Business Review (CBR).

Why Confidentiality Matters

Confidentiality is perhaps an important part of a business sale in general, but it’s particularly important during the listing process. Don’t tell employees what is in the works or you may have an exodus that leaves you with a shell of a business.

Going to Market

Armed with all this information, we will put together marketing material to showcase your business in various formats and on various platforms, and to do so confidentially. We asked you to keep things confidential, and we follow our own advice. We even keep that confidentiality sometimes long after a sale closes, referring in general terms to a business in a generic industry in a generic region.

That countdown clock we referred to above? Now that the business is listed, you’re free to start it, but make sure you do with expectations that have been tempered by a discussion with us, not a timeframe you’ve manufactured in your head. You may have sold a business before, but you’ve never sold this business, in this market, before. 

Did this article make you realize you need to get a few ducks in a row before you can even list your business? We’d love to help you with those ducks! Give us a call.

One way to know how the market is looking in 2022 is to look at the most recent data and recently BizBuySell released their Q1 2022 Report which offers a number of insights worth considering for those looking to close a business transaction this year.

Q4 Beats Pre-Pandemic Levels

Based on BizBuySell’s last report, we already knew that Q4 2019 was eclipsed by Q4 2021, which saw a significant uptick in transactions which was welcome news for everyone. While there were a number of factors for this, not least of it being Q4, which always offers a natural calendar-based urgency, there also seemed to be optimism in an economy that continues to recover amidst uncertainty and inflation. That has carried forward into 2022 with acquisitions now 24% higher than the same period last year and just 3.7% shy of Q1 2019, when most of us had no practical idea of the meaning of “lockdown” or “pandemic.”

Business Owners’ Numbers

Another really fascinating statistic from the BizBuySell’s previous report (Q4 2021) was the fact that despite more than half of the surveyed business owners being negatively impacted by the pandemic, the key financials of business that sold in Q1 2021 were the highest since BizBuySell began collecting data in 2007. The median revenue of these businesses was $688,020 with a median cash flow of $147,752. As other businesses regained health and also went to market, these numbers only changed slightly, finishing at $656,599 and $150,000 in Q4.

Service Businesses Remain Desirable

Some 35% of buyers in the market say they are looking for a service business. This reflects a larger trend over the past five years, in which the number of service businesses changing hands in the market has grown to 45% of all reported business transactions. By comparison that statistic was 37% in Q1 2017.

The New Pandemic(s)

Most business owners surveyed were less worried about diseases and more about the labor shortage and Great Resignation. 64% of surveyed business owners say that they have been impacted by labor shortages, and of those, 59% say the situation is either not improving or getting worse. Peers in our industry weighed in to correlate, with 59% of business brokers saying that labor shortage is the biggest threat to small businesses at the moment.

Not far behind the labor shortage which itself leads to higher overhead, there’s also the challenge of inflation due to monetary policy and supply chain issues. 72% of owners say that their business has been impacted due to inflation, with 76% saying it has not improved or is getting worse. Many business owners have had to weigh keeping prices consistent for customers by eating the margin or raising prices and sharing the pain all around.

These pressures will surely push more business owners into the market to sell, just as the pandemic did two years ago. “Pandemic fatigue” was listed as moderately to extremely motivating for 43% of business owners to consider selling.

The Other Side of the Transaction

Over 5 million entrepreneurs applied for business applications in 2021, which was the largest number ever recorded by the US Census Bureau. At the same time, one in five business buyers self-reported as having come from the Great Resignation and business brokers correlated this trend by saying that 23% of inquiries came from corporate refugees or those proactively seeking business ownership. Part of what is causing pain for business owners — labor shortages — may also be the solution, as some of those “shorting” the labor market may end up buying those labor-troubled businesses.

Final Thoughts

Through these constantly shifting times, the fundamentals of business transactions still hold, whether sellers are finally letting go or buyers are excitedly entering the fray: due diligence, clean books, solid systems. 

We’ve got all sorts of exciting businesses for buyers to look at and are always open to representing sellers who think that 2022 might finally be time to ride off into the sunset. Give us a call.

Often business owners come to us long after they should have started to prepare to sell their business.  They realize, all of a sudden, that it’s time to sell.  Just like you want to obtain credit before you need it, you want to prepare to sell your business before you have to.  Below are some ways you know you’ve waited too long (and might want to give us a call for help).

You’ve Plateaued

If you’ve taken the business as far as your capital, competence, and contacts can take you, you’ve plateaued.  There’s nothing wrong with that; in fact, some people love a lifestyle business that they are completely in control of.  

But if that’s not you, and you’re looking for more professional challenges or more income, it might be time to acquire within your industry, or to sell.

You Dread Work

As a business owner, there is absolutely no reason you should dread work.  It doesn’t mean you need to spring out of bed singing every morning, but it does mean that you should be excited, or at least happy, to go to work.

If this isn’t the case, you need to find out if there are other personal reasons why this is the case, or if it’s related to your business.  If it’s the latter, your team will pick up on it, and their morale will decrease accordingly.  More than likely, so are your customers and vendors, and they might already be going elsewhere.

Another way of expressing this that we’ve heard from many business owners ready to sell is, “my heart just isn’t in it anymore.”

The Market Is Changing

Many businesses have to go through various changes not just in consumer preferences, not just in legislation, but in technology, both that’s used inside the office (like Slack) and what is facing the customer (like social media).  

You may sense another change coming in your industry and don’t want to deal with such changes anymore (like the business owner in this case study) or you’ve prepared for the change but think this might be a great time to hand off to someone with a fresh pair of eyes (and legs!) to carry on.

Other times a major shock happens (think of multiple-property vacation rental owners during worldwide lockdowns/closures) and people reassess and realize they don’t want to go through that again.  Those struggles drove many sales in 2021.

You Want to Make a Change

Some people want to make a change to their personal lives, but can’t do so because of their businesses.  While the attitude to remote work has entirely shifted in the last two years, perhaps your business won’t allow for it, or perhaps remote work isn’t what you need, but a break.

That break could be just for your own reasons, or it could be to spend more time with family, or to do something you promised yourself you would do years ago, and then seemed to forget that promise.  When that’s the case, the business is no longer an enabler of your goals and dreams, but an obstacle.  One of the final ways you can thank your business (and follow your dreams) is to change that obstacle into an enabling asset and pass it on to someone else.

If you’ve realized in reading this that it is time to sell, we’ve got a few first items that you should consider, which we are going to ask you about the first time we talk. 

The IBBA and M&A Source Market Pulse Survey was created in 2012 to provide business owners and their advisors with analysis of changing market conditions.  Here at Apex we use these surveys to get a sense of what’s going on in the Main Street (businesses between $200k-$2M) and the lower middle ($2M-$50M) markets.  Q2 of 2021 gave us a chance to look at the strange year of 2020 and what has changed in 2021.  Given that the findings from the survey come out to over 100 pages, we’re going to save you from reading it and share just a few observations of our own.

Covid-19 Changed Conditions for Buyers and Sellers

While it may seem obvious that “Covid changed things” in the business transaction market, most outsiders would not necessarily be able to tell you precisely how.  

Buyers

Many talented individuals got laid off in March 2020.  While some of them were hired back, many of them weren’t, and this led to an openness to a shift in career, including buying a business.  The overall lack of certainty not just globally but internationally, and not just in how we live and work but even how we vacation and make future plans has led some to see business ownership as a way to control their own destinies.  We’ve certainly seen quite a few of those individuals come through our doors in the last 18 months.

Sellers

Sellers had to work through their own situations starting in March 2020.  Layoffs may have been part of the solution, but they also had to deal with local legislation and had to embrace remote work, even if they had previously never considered the option.  If they made it through 2020, even with the assistance of EIDL and PPP, they now had a story to tell: my business survived through a pandemic.  That made some businesses more valuable than they were prior to the pandemic, and the owners of some of those businesses, now that they’ve had a moment to stop bailing water, are keen to cash out.  The adjusted EBITDA on such businesses in the lower middle market have been enjoying a .5 multiple increase in valuation.

For those sellers who didn’t have a “pandemic-proof” business, they still had opportunities to sell to buyers who were open to turnaround options.

Areas of Focus

The survey also confirmed trends we’ve been seeing.  For example, in due diligence in the lower middle market, the focus has been on staffing.  With the major changes happening in employment trends due to the pandemic upheaval, buyers in the lower middle market have been focusing on key players and putting employment agreements in place for their transactions.  Main Street businesses are also looking at staffing issues and getting clear who has been in place and for how long, and what the turnover rate has been historically and during Covid-19.

Some things never change.  We still see a closing time of 3-4 months from LOI to dotted line, but 50% of those deals fall through for one reason or another.  One of the consistent reasons a deal may ultimately fall through is a total lack of mental and actual exit planning on the part of owners.  95% of owners do not have exit plans in place and get dismayed when we tell them about tax consequences or what they will need to do accounting-wise to be sale-worthy.  

If you’re serious about selling a business, whether this year, next year, or sometime in the future, the one single action you can take today to make sure you get more money at closing, a better multiple, and fast, smooth sale is exit planning.  Then when you’re ready to sell we can just start executing on that plan.

Need help getting started on that exit planning?  We know just where to start.  Give us a call.

Inevitably, in discussions with sellers, we hear the phrase, “If the buyer does X,” in which X increases the value of the business. In fact, we’ve shared before the major benefits of one small tweak which buyers made to significantly increase profitability. But that’s the point, that’s a benefit that accrues to the buyer, because he/she did the work. So, when can “potential” additional revenue be factored into a selling price, to the benefit of the seller?

Possibility in the Future

Let’s say your business is B2C and is in a heavily-trafficked shopping center. But, there is a development going up across the street. It’s an apartment complex with 250 units. For purposes of this example, we will assume that the permitting process has completed and approval has been issued, but construction has not yet started.

It is, of course, certain that your business will profit from the increased presence of the inhabitants of the new apartment complex. But how can you factor that into your selling price?  

Firstly, you’ll need to zero in on construction start/finish dates. You can’t just accept those dates at face value: you’ll need to look at the history of the municipality in regard to major projects as well as the contractor(s).  How often are projects completed on time? If they are not completed on time, how far off are the estimates?

Secondly, you’ll need to investigate the actual numbers behind the new traffic. As part of the permitting process municipalities have to issue future traffic estimates. Obviously, those numbers are going to be phased in over time as not all the apartments will fill up the day the complex opens. Don’t only ask the municipality for their data. If your business has a professional association, that association will often have studies done that can tell you precisely the economic impact of a new development in proximity to your location.

Thirdly, you’ll need to deal with the real estate in relation to your business.  If you own the real estate and have it as a separate transaction (best practice), then not only will the value of the business go up, but so will the value of the property. If you don’t own the real estate, you’ll need to get written commitments from the lessor as to what the new rents will be, as the buyer will certainly argue that any potential profits due to the new development could be eaten up by major rent increases, also due to the new development.

With all this information, you’ll be in a much stronger position to build “potential” into your selling price and make a case to a buyer for an increase in the price of your business over what the current financials demonstrate.

Certainty in the Near Future

But that scenario is entirely different from one in which the seller has done something that has not yet shown up in the financials, and may not for some time. Let’s say you’ve signed a contract with a client for which work will begin in a year or two, or with a type of vendor that tends to have long and laborious payment cycles (like the government). How can you build this soon-to-be actual income into a selling price?

We’ve seen this go a number of ways. It’s rare that a buyer and seller will agree on some simple formula immediately. Often we see that a buyer might agree to a percentage of that revenue significantly less than what the seller hoped for. Or, we might see the seller so certain of the strength of this new revenue stream that he/she will ask for a percentage of that new income to be baked into the deal.

Unlike the apartment scenario, in which a shovel has yet to hit dirt, in this scenario, the seller has done all the digging and building and is just waiting for the payback. Rather than an estimate based on an estimate, a seller is now talking about percentages based on a certainty. Hence that “potential” will seem much more immediate to both the buyer and seller.  

Are you facing some developments that you think will spell great potential for your business and want to discuss how it might affect your selling price? We’d love to chat with you about it!