The Profit Needs of Your Buyer

profitPart of the process on the seller side of a transaction is deciding to sell and getting a valuation.

As buyers scrutinize the businesses they examine, there are three questions we encourage them to consider. All of them are centered, understandably, around profit.

Profit to Pay Salaries

Whatever goodwill you’ve generated over the years with your employees will not transfer to the new owner. You can’t sell it, not just because it’s not legally or practically possible, but because the odometer will reset with the new owner.

He/she will have to earn goodwill and trust, and if your employees (or yourself!) have been taking below-market salaries, the buyer will need to put together a financial plan that ensures that staffing issues will not be a problem.  

Happy employees are one of the cornerstones of any business. While money isn’t everything to your staff, passion for the work always works best side-by-side with a feeling of being properly valued.

On the other hand, let’s say a business is valued at $500,000 and the owner has been paying himself/herself over market value to run it, let’s say $200,000. 

If it could be reasonably run by a manager for half that (or if the buyer is willing to work for that amount), there’s an extra $100,000 of free cash flow which can be used for investment in the business or debt service.

Profit to Pay for Financing

Continuing on with our $500,000 example, let’s say that the bank requires the buyer to put 25% of his/her own money in the deal, which would be $125,000. Knowing that interest rates always vary, for purposes of this example, we will use a rate of 5% on the $375,000 that would need to be borrowed.

That would give us, on a ten-year term, a monthly payment of $3977.46, which we can round up to $4000 to keep the numbers simple.) In the example above, this number could be easily handled by the extra cash flow from the lower salary the owner is willing to take or delegate.

Conversely, if there’s no cash flow to support the debt service, there’s a problem – not just for the potential owner, but for the would-be financiers.  

Profit to Return an Investment

Ultimately buying a business is an investment, and a reasonable rate of return should be expected above and beyond salaries and debt service. Let’s go back to the $125,000 that our potential buyer invested in the business.

He or she could have put that money into stocks, bonds, cryptocurrency, real estate, precious metals, etc.  To keep our numbers simple and conservative, let’s offer the same rate of return, 5%, on that money.

That payout would be equal to what the debt service is, and in our example, that need would be met, with even a bit of a cherry on top.

Final Thoughts

Now, let’s be clear, not every buyer comes in with such an agenda. Some are happy, after years of corporate life, to just “buy a job” where they don’t have to answer to anyone anymore. And, that works for many people.

But running a business is transformational. If all you bring is a job mentality, you’ll never be successful. If you scrutinize the numbers and stay grounded first and dream later, you’re on the right road to business ownership: calculated risk, colored with a bit of hope, and powered by a lot of elbow grease.  

When you meet our sellers, they might tell you that at the beginning of their journey they would’ve been happy for a 5% return on their years of hard work. But they often smile when they realize it’s many times more, and it’s because they brought the right attitude and they knew their numbers.  

Regardless of your vision for business ownership, you should know yours too.

How Long Does It Really Take to Sell a Business?

how long does it takeOne of the very first questions we get from prospective sellers is “How long will this take?”  

The truth is that we’ve seen anything from 2 days to 2 months to 2 years…but the average will be 6 to 9 months.  

And that doesn’t include the “pre-listing” process – your actual decision to sell, which will include discussions with us, a professional valuation, and then prepping the documents and paperwork that buyers will want to see immediately.  

Once you’ve completed all of that, we’re looking at 6-9 months.

Why does it take so long?

Well, it’s not actually “so long.”

Perhaps in the internet age of “everything now” six months may seem like a long time, but it’s just simply a reality given the amount of work that needs to happen.

Firstly, your business needs to be marketed. We need to get the word out to interested buyers about what you’ve got to offer. Some buyers may be romanced by your industry, while others may be interested in your cash flow. Some want both, plus significant growth potential.

Secondly, the price really matters. This is why we work hard with our clients to make sure the business is appropriately, and attractively, priced. A valuation helps get us to the right price, but so does disabusing sellers of fantasies about “what my business is worth” that have no basis in financial reality.  

A business is worth what the market is willing to pay. A solid valuation goes a long way to identifying that number with some precision.

Closing

If taking your business to market is the “dating” phase of selling your business, closing is the “marriage.”  

You could spend 1-3 months taking meetings with serious buyers. You need to realize that selling a business is a new part-time job you’ve added to your life.  

You’ll need to be chasing down requests from your broker and potential buyers, and you’ll need to do so in a timely manner. You must do all of this while being patient and realizing that even though you may be ready to exit the business, it’s going to need you for just a bit longer to get through the transition.

Once you and a buyer have agreed on an offer to purchase, due diligence (or as someone else once put it, “trust, but verify”) begins.  

The buyer will need to examine your records and verify that the business is as advertised. He/she will also need to arrange for financing, a lease, and other variables like software licenses or other licenses required by the state or municipality.

Stay focused

We can share many stories of business transactions with you, but the “easiest” ones involve patient and focused buyers and sellers. These people know that a business transaction isn’t to be rushed through, but done thoughtfully and with professionalism.

If you prepare for a timeframe of 6-9 months, you can be pleasantly surprised if it happens faster (as it sometimes does) or more understanding if it takes a little longer (which it sometimes will).

Remember that the journey of selling a business starts with a conversation with one of the brokers on our team.  Let us know if we can help you with this next stage in your business journey.

How to Prioritize Buyers

prioritize buyersOne of the biggest values we add to any transaction is helping to coach sellers on the various buyers that may line up to buy their business.  

We want to negotiate leverage and make buyers compete for a sale. We can only do that if we convince our sellers to be patient and to not only go down one road too quickly.

Patience and prioritization are key to a successful exit.

Strategic Buyers

When prioritizing buyers, strategic buyers are definitely at the top of the list. This is in part because they can often offer higher valuations, but also because they may already possess a great deal of knowledge about your business and have great motivation.  

These can often be (but aren’t always) competitors, suppliers, or customers who have known you and your team a long time, and as such, don’t need a “getting to know you” period.

What they may need instead is an intensive due diligence process. This is because they may be looking to acquire your company as a turnkey expansion into a market and leverage back-office economies of scale.  

They will want to examine synergies and business processes in depth to make sure joining forces won’t be overly difficult or challenging. Strategic buyers may also be private equity firms who think they can manage your company better than you and plump it up for an even larger acquisition down the road.

Don’t take it personally! Just smile and take the money.

Financial Buyers

However, many of our transactions don’t involve strategic buyers at all but are entirely composed of financial buyers. Their priorities are getting a reasonable return on investment, good growth opportunities, competitive advantages, a growing market, and strong fundamentals – be it great management or reliable staff.  

They’re willing to wait for their return, but not forever. They will also often have to line up financing, unlike strategic acquirers, which can lengthen the time of a transaction.

When we as brokers prioritize buyers to our seller, we do so taking a number of factors into account, including our own sense of the various situations and actors.  

We’re looking not just to close a sale, but to make sure there’s a good match between buyer and seller so that the transaction closes well for everyone.

We believe in win/win…always.

One of the advantages of hiring an APEX broker is knowing that we won’t introduce you to a buyer who isn’t financially qualified, or a seller who doesn’t have his/her paperwork in order. Give us a call today, whether you’re a serious buyer looking to buy or a motivated seller who is serious about selling.

Are You Dealing With a Serious Buyer?

serious buyerOne of the reasons people enjoy working with us is knowing that the buyers we bring to the table are financially qualified.  We’ve done our part to make sure that we aren’t going to introduce you to people who just want to kick tires.

But being financially qualified is only part of a successful transaction.  Buyers also need to be mentally serious about buying your company, and there are some clear indicators you should keep in mind when meeting prospective buyers.

Interest

Serious buyers will have at least some level of interest in your industry.  They will seek not just to understand the industry as a whole but will look at the specifics of your business, be it your existing customers or prospective ones.  

They’ll also be interested in a SWOT analysis, particularly in O – Opportunities and T – Threats quadrants – to help them contextualize whether what they bring to the table can help accelerate where the company is already going.  Serious buyers will go beyond the basic financial questions and get to the why of your business.

Discretionary Spending

Discretionary costs refer to spending on things like advertising, research and development, and public relations.  Mature businesses may be on cruise control and have scaled back or even eliminated some of these costs, but serious buyers will be concerned to not see some level of spending in all of these categories.  

In today’s marketplace especially, clients and customers aren’t to be taken for granted, and these discretionary costs are seen by serious buyers as ways to stay ahead of the curve and not be complacent.  R&D, in particular, can help firms not just wait for the next innovation, but create it themselves.

Staff and Wages

A serious buyer will want to speak to your senior staff, if possible, to find out how invested they are in staying with the firm if you leave.  Most times the need for confidentiality won’t allow for those conversations, but what a serious buyer will be looking for in those cases are:

Wages – are they at a market rate and what expectation do your staff have that they will grow?
What about benefits?
What is morale like in general?
What is the culture that drives that morale?
If people are there due to the social capital you’ve earned with them, and you leave, does that mean they will too?

Inventory

This last point only applies to companies that have inventory, but it’s important to make sure that you have a realistic and detailed inventory.  Serious buyers will target old and unusable/unsellable items and ask for them to be removed from the value of the business.

This gives you an opportunity to do some preventative maintenance and get rid of that stuff yourself before it’s time for a sale.  It will only give more confidence to buyers that they’re dealing with a business that has something as basic as inventory handled.

We know what serious buyers look like and can save you the time from having to try to identify them yourself while running your company.  Give us a call to see if we can help you with your exit strategy.

Is It Time to Sell?

is it time to sellIn a previous article, we discussed various signs that it’s the right time to sell your company.  

What so many people see as ultimately mostly a financial transaction is possibly going to be one of the most emotional things they ever experience.  

So, even clicking through to read an article with such a title as “Is it time to sell?” means you’re contemplating it in the near future, or you want to inform yourself on future possibilities.

Whatever the reason, there are three things we want you to think about.

Clearly articulate your why

“Why do you want to sell?”  You may think this is a question only your family and friends will pose to you, but we promise that every single potential buyer will ask this question, particularly if your business is doing well.  

Often “I’m tired” or “It’s time” is plenty good enough, but that needs to be framed within a position of growth and optimism.  Buyers don’t often want something that promises a flatline future.

Whatever your why is, make sure you consider how it sounds to someone who wants to buy your business.  If you don’t like how your reason sounds, that’s a good opportunity to step back even further to get a better perspective.

Sometimes you need to look at the really big picture to appreciate the details.

Spring Clean

We’ll be honest.  We sometimes see complete disasters when it comes to financials and taxes.  Taxes haven’t been paid for years and the financials wouldn’t even have passed the smell test at Enron. Don’t wait for an imminent sale to get your business house in order.  

A potential buyer is often scared off a “fixer-upper” when it comes to a business, and the very first thing we will ask you when considering listing your business is for the last 3-5 years of financial statements and tax filings.  

Even if you don’t end up selling your business, you should want that feeling that comes with any spring cleaning…the relief that it’s done and wondering why you didn’t do it sooner.

Have a conversation

Talk with your family and trusted friends and confidantes.  Figure out what’s next for you.

We often see business owners who, after the sale, simply wander figuratively or literally, being cut off from what gave them a purpose for so many years.  

By taking that time to think about what’s next, you can go from a passive seller who is ready to move on to an active seller who is moving (or running!) towards what’s next.

That will give a potential deal momentum, and also fuel the narrative for a potential buyer that you’re looking forward to what’s next.

Of course, we welcome conversations with us as well!  With centuries (yes, literally) of experience in our office, we’ve got a broker who will suit your needs and help you through this important next phase in your business and stage in your life. Give us a call.

Is Your Business Overpriced?

business overpricedHowever a business owner makes it to that critical moment when he or she decides to sell, it’s important to realize that this is the beginning of an entirely new process.  

Whatever amazing expertise he/she may possess in running a business, selling a business is something entirely separate.

More than anything, emotion can get in the way of one of the most critical elements of this process: appropriate pricing.  

There are many points to consider when coming to an appropriate price, but today we’re going to focus on three.

What’s Fair

Are your financials in order? Are you in good standing with the IRS? Anything other than a strong “YES” to both of these questions will point you in the direction of what you need to work on.  

You can’t truly have an idea of what your business is worth unless you know what your numbers are. And if you have buyers who will be seeking SBA funding, and your business will be priced over $350,000, you’re going to need an independent valuation. 

The first thing they will ask you for is audit-worthy financials. A valuation is a good starting point for figuring out a list price for your business.

What Will Sell

For buyers who aren’t looking for a strategic acquisition, the focus is going to be on the length of time for payback of the original purchase price of the business.  

If you take the amount of the business loan and account for some measure of reasonable growth against the financial benefits the owner of your business can accrue, you should have a sense of how long it will take your buyer to get into the black.  

Looking at comps (i.e. what other businesses in your category have sold for) will also be very helpful.

Market Conditions

This is something entirely out of either the buyer or seller’s hands, as there are things like interest rates or “confidence” that can’t be controlled. But it can dictate how quickly (or slowly) a business sells.

With the centuries of experience we have at Apex, we have a good sense not only of current market conditions but about appropriate pricing strategies to adapt to those conditions.

Remember that the ultimate goal of a seller is to sell a business. Apart from not having a business that is capable of taking on a new owner, a big reason that businesses don’t sell is that they price themselves unreasonably. Next, they get unflattering questions when prospective buyers ask why the business has been listed for so long.  

Be smart. Price your business appropriately to give you the best chance to walk away happy when the transaction is done.

Keeping the Best Employees in a Sale

Selling a business is fraught with all sorts of challenges. One of the most important ones is how to deal with employees. If handled thoughtfully, they can make the transition almost effortless. If handled poorly, you could end up with a deal that doesn’t close.

Do you tell them or not?

Keeping a sale confidential is critical for both seller and buyer. If the seller discloses that the business is for sale, employees might start looking elsewhere because they (understandably) fear change and worry that a buyer will eliminate their positions.

Customers may look for a new supplier because they think you’re going out of business, and vendors may change payment plans to COD! These are just a few of the obstacles when disclosing that your business is for sale. Trust us, we’ve seen it all. People love to gossip and tend to imagine only the worst!

Keep Best EmployeesBuyers expect that a seller will operate their business in a normal fashion until closing which can be difficult if the seller is constantly putting out the fires due to the rumor mill.

Additionally, there are legal limits to what can be disclosed to others before and after closing.

All that said, there can be exceptions to the rule of keeping a sale quiet from your staff.

If you’re ready to retire and your employees know that you’re seeking a buyer, there are ways to handle a transition to accomplish the goals of both the buyer and the seller.

Since you’ve already disclosed that you’re looking for a buyer, your staff can assist in ensuring a transition process is in place. It shows them that you’re being transparent with them and that you want to share what’s happening.

You don’t have to give a play-by-play, but try to make yourself available to them to answer anything you can.

If you can ensure that the buyer is going to keep the employees, that will be even better. It will go a long way to quelling fears they might have about having to start looking for work elsewhere.

It might also be worthwhile to have the staff write out a vision about their position and where they see themselves in the company in the coming years. The buyer will appreciate such documents. It will also give them time to think about the best way to work with these employees.

Share the wealth

Consider a transition bonus. In order to give the buyer confidence that the staff will stay in place, you can give the employees a bonus for staying on for a given period of time, say 6 months or a year.  

Some business owners have even given key employees a percentage of the sale proceeds. This serves as a thank you for their years of dedication and assistance with the transition.

Continue on as normal

Regardless of your approach, it’s important as closing day approaches to continue to run your business as you normally would. Things change and deals can fall apart, so don’t be left in a lurch!

Be Realistic About Your Cash Flow Adjustments

Apex Business Advisors Selling A BusinessOne of the most important steps in getting a business ready for sale is preparing for a valuation.

An important step in this process is making sure that the proper Cash Flow adjustments, or “add-backs,” have been made to your annual Net Profit.

While we see lots of questionable cash flow adjustments. This article will focus on three we see very often: Owner Compensation, One-Time Expenses, and Legal Fees.

Cash Flow Adjustments

Owner Compensation

There are three abuses we frequently see here:

Owner pays him/herself nothing.

Sometimes this is done simply to avoid paying additional taxes. However, any buyer is going to want to account for owner compensation and will wonder why a business couldn’t pay the owner a salary. A buyer will need to account for a salary and unless the seller is 100% absentee, $0 isn’t going to work.

Owner has a relative in the business who either takes no salary or an unreasonable one.  

If it’s the former, it may be because he/she is trying to keep the business afloat. That additional salary will harm the company’s profitability. If it’s the latter, it’s simply an inefficient method of taking/distributing additional income.

Remember that buyers are going to want to continue the business after you’re out of the picture. They will probably not get a spouse to work for free nor will they necessarily want to pay a child or relative above market rates. Correct this before a sale.

Owner uses the business as a slush fund…just one or two steps short of (or far beyond) tax fraud.  

Alas, this is very common. While new business owners may decide to go wild and “expense everything,” the sign of a mature business is one in which benefits exclusive to the owner are modest.

Season tickets for a sports team that your sales staff use with clients? Reasonable.  A private box for your family that none of your staff have access to? Unreasonable.

Excessive personal expenses could give a potential buyer pause in making an offer and could negatively impact your value.

One-Time Expenses

Some sellers like to think of R&D, Marketing, or Advertising for their business as a “one-time” expense. Maybe they tried a new campaign but it didn’t pan out.

To survive, businesses need “one-time” new products or services developed by research and development. They constantly need to be thinking about how to continue to be relevant in the marketplace.

This doesn’t mean big spends or new products or new campaigns every quarter. But it does mean that these should be a regular part of your business expenses and not something you can claim as a one-time expense.

Legal Fees

As with the example above, legal fees often have to be accounted for. Now, we aren’t referring to the big ugly case that maybe took a couple of years to get through and was with “that one event” in 30 years.

We’re talking about the fact that your business may need regular legal consultations, whether it’s launching a new product, auditing old business practices, or discussion about future ventures.

Sure, for something out of the ordinary, a “one time expense” is very much appropriate. But legal fees in general?  The longer you own a business, the more you realize it’s as regular as rent. And please, don’t let the business pay for your personal legal problems.

Did this article make you uncomfortable?  That’s okay!  Give us a shout. We’ll help talk you through positive changes you can start making today to make your business more valuable.

3 Reasons You Won’t Be Able To Sell Your Business

There are many reasons why you might not be able to sell your business, but today we want to focus on three in particular. Think of them as the ghosts of business past, present, and future.

1.The Ghost of Business Past: You have a lopsided company

Now, many businesses started with “that one client” which may have carried them through those long and lonely nights at the beginning, but for a business to truly become something other than an owned job, it needs to have a diverse client portfolio, revenue-wise.

If your business is lopsided it’s unattractive to buyers because they will naturally and obviously ask, “Well, what happens to this business if your major client goes out of business, gets acquired, or goes into crisis?”

Since you’re not in charge of your client’s business, you probably don’t know how or when any of these eventualities could occur, but more importantly, you probably don’t have an exciting answer which replaces all that revenue.

ghosts2.The Ghost of Business Present: You have no recurring revenue

While not every business will work on a subscription model, it’s definitely a trend in multiple industries to pivot to create more steady and dependable revenue streams.

While some of these pivots might be obvious, like flower companies offering a monthly subscription for both personal and corporate clients, the unexpected one that got large scale adoption was Amazon Prime: an annual recurring fee that actually led customers to buy more from the mega-giant.

If you want to learn more about this trend (and get some ideas for your business) you should read John Warrilow’s The Automatic Customer.

3.The Ghost of Business Future: The company can’t make it without you

How often are you on vacation, and how long can those vacations be?  The best answers are, “Often,” and “however long I want,” but obviously preferences are different for each business owner. The wrong answers are definitely, “Never,” and “not more than a few days.”

This indicates a strong dependence upon you – whether it’s because you are the secret sauce in the sales cycle, because you are the only manager who can keep your team on task, or because you are simply too involved in day-to-day operations to be gone for any amount of time.

This screams “owned job” to a potential buyer and if that buyer loves your industry and wants to get involved right away, that might be a great play for them, but nine times out of ten they’re going to see this situation as a giant red flag, that an owner hasn’t created systems to make the company survivable without his/her daily blood, sweat, and tears.

Remember that Scrooge was able to send away the ghosts at the end of A Christmas Carol by promising to amend his life. Take a look at your own business to see if any of these ghosts are hanging about.

And then get rid of them.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at dhubler@kcapex.com or 913-433-2303

For True Value, Get an Independent Business Valuation

business valuationWhat’s my business worth?  

This is a question any owner might ask himself when he/she is ready to sell.  You close your eyes and think of all those long hours, sleepless nights, times you personally covered payroll (or didn’t take a paycheck), and struggle to put a number on what any of those sacrifices could possibly add up to.  

“Well, it better be big!” you think.  This is the precise moment you need an independent business valuation.

Why?  Simple.  You’re not objective.  Yes, you can go through the cold hard numbers yourself.  You can calculate what we refer to as “Total Owner Benefit” (sometimes called SDE – “Seller’s Discretionary Earnings”) and then attach some multiple you find meaningful.  

You might even have relationships with people in your industry who have successfully exited and could give you a number.  You could do some internet research.  And after all that, you might have a value and stick it on the side of your business and say, “This is the price I want.”

A buyer could shrug his/her shoulders after finding out you were the one who came up with this number, and then proceed to due diligence the heck out of you to find out if this number is accurate.  Or you could do it the easy way: slide a professional business valuation across the table.  A reputable 3rd party valuation is not just a key component of an SBA loan, but it’s also required by many banks for financing.  

Often these valuations will contain useful information as to why a particular multiple has been used, which can include factors like growth, how many years you have been in business, how proprietary what you do is, your particular geographical territory, and what the competitive landscape looks like.  

Getting a valuation is a lot like getting peace of mind.  Of course, it’s important to remember that your business is ultimately worth whatever someone is willing to pay, but having a valuation means you have an objective opinion grounded in fact, and it’s going to be hard for a buyer to poke holes in a valuation if it’s been done by someone professional.

Need a professional business valuation done?  We can recommend some reputable firms for you.  Just ask!