Know the Value of Your Business Early On

Know the Value of Your Business Early OnWhile we always advocate a professional valuation as one of the first steps in listing a business, if we had it our way, we’d have business owners do at least an informal evaluation years before even finding out business brokers exist.

The reason is simple. The more you understand what your business is currently worth and what the value drivers are, the better you can have a goal to reach that can trigger a sales event. You won’t wander up to a broker with a ridiculous idea like, “I need X to retire, and so that’s what my business needs to sell for.” Because you found out the value of your business long before you decided to sell, and have monitored its growth in value, when you come to a broker, you’ll be able to say with confidence, “I think it’s worth X, and here are all the reasons why, which I’ve monitored for years.” We’ve seen it all in this business, but it’s not too often we’ve seen something like that, though we would welcome it!

Long-term Value Drivers

When we are getting businesses ready to sell, there are some short-term value drivers that can be pushed over a 6-12 month period to give one last push to your sale value. For example, if your sales are showing a nice upward trend ahead of your last full fiscal year, you’ve got an argument for a little more value.

But there are other value drivers that take a long time to develop, but have a correspondingly high value. Let’s talk about a few of those.

Company Culture

You cannot create or fix a company culture in a 6-12 month period. Like all things of value, it takes time to grow.

Culture grows from a set of beliefs about a company due to the actions of its team members and leadership. The generation coming into the workforce and rising into its leadership rank has certain conceptions about where they want to work and what they want to do. Remote work is one of the things they expect. Another is a culture they can enjoy and support (and brag about to their friends). 

The rising generation would rather make less money and really believe in what they are doing than make more money in a culture they despise.

Culture is a value driver because it attracts and retains staff. A solid team is foundational to a well-run business and part of the valuation price. It’s not something that can be built overnight and the best ones don’t need a constantly supervising owner to maintain it. 

Quality of Revenue

Every business is going to have different ways of generating new revenue and maintaining current revenue. But long before you think about selling, you should be looking to do three key things with your revenue:

  1. Diversify. If 80% of your revenue comes from one client, you have a fragile business that is not attractive to a buyer. Try to make sure that one client is not more than 15-20% of your revenue.
  2. Go recurring. Recurring subscription models are now normative in the B2C and B2B worlds. Take advantage of those norms and build in some recurring revenue models into your business. Buyers love recurring revenue. Bonus? Auto-renewals.
  3. Create contracts. Side-by-side with recurring revenue are contracts. These are also part of valuations and create peace of mind for buyers.

All revenue is not created equal. The higher your quality of revenue, the higher your possible valuation. You cannot upgrade the quality of your revenue in a 6-12 month timeframe.

Won and Lost Bets

One of the formational aspects of the entrepreneurial journey is trying stuff and failing. And trying stuff and winning. One of the conversations that will be part of a transaction will be a buyer asking a seller what possible things could be done to drive new revenue.

Believe it or not, a buyer would love to hear, “we tried this and it didn’t work, and here’s why.” This not only saves them some money going down one road a particular way, but it also gives them data to consider making a new assault on that road with a different approach. 

The more data you have on things that you’ve tried, the more a buyer will be helped in brainstorming new ways to drive growth in the business. To say nothing of the fact that if you don’t take swings, you can’t hit homers. You only need to hit 3 out of every 10 to make it into the Hall of Fame. So take some bets and drive the value of your business now and in the future.

Even if you aren’t interested in selling for years, we can help you get a basic valuation for what you’ve got now and tell you what value drivers you need to leverage to get maximum value. Give us a call today!

4 Steps to Prep Your Business for Sale in 2022

Prep Your Business for Sale in 2022Another year, another set of unusual conditions for the world and business.  But the fundamentals of buying and selling businesses have remained the same.  That doesn’t mean that sellers can’t focus on a few key spots to better prepare their businesses for sale.  Let’s look at them.

1. Monitor Market Conditions

We’re long past the “wait and see” time of early 2020.  Buyers are looking for new opportunities and they are most excited about businesses that continued to perform well throughout the last two years.  In addition, financing can still be had at very good rates (for the moment!).

Action item: Be in touch with your broker about market conditions in your segment and how quickly businesses like yours are selling.  More importantly, find out what were the 1-2 reasons why buyers ended up picking particular businesses and see if you can use those reasons to better position your business.

2. Think Virtual

The last two years have completely transformed our lives in almost every aspect of our lives:

  • Work & School: many employees moved to remote work situations and some schools had a hybrid of in-person and virtual learning
  • Food: from delivery and pick up of already-made food to delivery and pick up of groceries, businesses have bent over backwards to accommodate legal requirements and consumer desires
  • Religious services: many places of worship offered virtual services to account for the fact that their congregations were not able to be together in person

What has that meant for your business?  If you used to travel to visit vendors or clients, how have virtual meetings worked?  If you’ve had to offer contactless or distanced delivery of services to your clients, have they been as engaged or consistent in staying with you?  What new opportunities presented themselves in the new environment that Covid-19 presented?

Action item: Have a full report compiled on what you learned from the early days of Covid-19, what your business did to adapt, then how you measured those adaptations and continued to tweak for best results.

3. Plan Your Exit

We’ve said before that the overwhelming majority of successful sellers wait until their business is already on the market before doing their exit planning.  It’s never too soon to start your exit planning.

Exit planning isn’t just about when you want to exit and what you want to get for your business, but what happens next after a successful transaction.  It also isn’t something that just happens because you want it to: you need to have made sure your business is ready for your exit too.

Action item: Put together your exit plan.  Write down why you want to exit and when, and how much you would want for your business (based on a valuation, not your opinion).  If systems and personnel aren’t yet in place for your departure, how long would it take to put those in place?  Remember that the more the business is dependent on you for day-to-day operations, the less attractive it is for buyers.

4. Prep Due Diligence

One of the first places a transaction can get bogged down is in the due diligence phase.  Part of this is normal: there’s a lot of documentation that buyers want to go through and that simply takes time.  But the sheer number of documents can tire sellers, even motivated ones.  And the longer deals take to close, the likelier they are not to close at all.

Just as with exit planning, due diligence prep should be started before you list your business for sale.  Knowing that all the reports and paperwork are saved and ready to go for a buyer is not just a load of your mind, but it will give you, as a seller, a quiet confidence: your business is ready for sale.

Action item: Ask your business broker for a typical due diligence list for a business like yours.  Some basics you’re going to want to have include:

  • Business tax returns for at least the last three years
  • Internal accounting files for the last three years
  • Account Payable and Receivable aging reports
  • Detailed Inventory and Equipment Lists
  • Annual CapEx report
  • List of Insurance Policies
  • List of Required Licenses
  • Customer records, in as detailed a form as you have
  • Employee records
  • Employee Benefits
  • Vendor records, with recommendations as to whether relationships have been good, average, or should be switched 
  • Records of payables and receivables
  • Operations Manual and Employee Manual 
  • Organizational Structure with names and positions
  • Technology report: how well-developed is your website, social media presence, SEO, etc.
  • Pending changes and improvements: what purchases or changes are going to happen in the next 12 months regardless if the business is sold (e.g. website upgrade, equipment purchase, brand refresh) and why are those purchases or changes happening

We can’t do these action items for you, but we can certainly help.  Give us a call and let us know which of these you need help with.

Fundamentals of Exit Planning

Fundamentals of Exit PlanningOne of the drums we beat a lot in these articles, and have even more so this year, is the importance of exit planning.  The vast majority of business owners never do it until they’re in the middle of a transaction.  But if you take the time to do so, not only are you going to probably get a better deal than you otherwise would have, you’re going to get to keep more money too.  Let’s look at some fundamentals of the exit planning process.

When to Plan

As they say, the best time to plant a tree is twenty years ago; the next best time is now.  You don’t need to go back twenty years to plan a business exit, but 2-5 years will give you a chance to do the tax planning, business enhancement, and transition planning you’ll need in a sale.  On top of that, you’ll then be in the position of watching the market and making a move when it’s favorable for you, not just because now you’ve decided to sell.  Market timing is a factor often entirely disregarded by sellers.

What to Plan

A business sale is often the most significant financial transaction of an individual’s life.  What is it that you want to accomplish by a business sale?  That question can be overwhelming, so think about it in via these smaller questions:

  1. What do you want your business to accomplish before the exit?  Is there a revenue goal or particular milestone that matters to you?  Or do you feel that the only way to get to the next level is through significant investment and hiring?
  2. When do you want to exit?  In the next year, the next five years, the next ten years?
  3. How do you want to exit?  Are you okay to stay on for a transition period or do you want to be done right away?  Do you want cash upfront or are you okay with an earnout?
  4. What do you want to accomplish as a result of your exit?  Do you never want to work again?  Do you want a break from working?  Do you want to use the funds to buy a different business?

Once you’ve answered these smaller questions we will have a much better idea of your answer to the first question, which was what did you want to accomplish by a business sale.  Now the process begins of bringing your answers into alignment with each other.  For example, if you want to sell in the next year, and you want to walk away with no transition and an all cash-deal, is the business ready for you to leave and is the business attractive enough and in the right range to attract an all-cash deal?  The answers to those questions can then drive the changes you want or force you to question whether your expectations are reasonable.  And yes, there are plenty of times when seller’s expectations are out-of-this-galaxy unrealistic.

What to Know

Many sellers are in a first-time position, so rather than lamenting all they don’t know they should take the time to educate themselves.  Do they know:

These are just a few of the many areas that we as brokers will cover with buyers and sellers, but like anything in life, the more you bring to the table, the more you’ll get out of an experience.  The more familiar you are with these matters during your exit planning, the clearer headed you’ll be when it comes time to actually move towards a transaction.

Do you really want one of the most important, if not the most important financial transaction of your life to be something you compress into a few emotional weeks and months, or would you rather have the benefit of taking the time to do the exit planning now so that when those weeks and months before closing do come, they are less emotional, and as a result, probably more financially profitable?  Then take the time to do the work now.

We would love to help you think through your exit planning.  Give us a call.

7 Red Flags to Watch Out for When Hiring a Business Broker

Red FlagsWhile we recently talked about how to find a business broker and have often shared profiles of our team here at Apex, it’s also important to know what to look out for when considering a business broker.  A business transaction is one of the most important you will go through in your life, so it pays to watch out for these.  Even one of these red flags could end up being very costly for you.

Lone Wolf

The best brokers are affiliated with a professional organization (like IBBA) or have a certification (like a CBI).  They also work with other brokers to help on deals that require special expertise.

We’re not saying you have to be professionally affiliated or have certifications to be a good broker.  But we are saying that those brokers who are affiliated tend to be better networked and current with the latest information, and those who are certified have the knowledge to protect you and your interests in a transaction.

No Experience in Your Industry

We will be the first to say that everyone who is a specialist in a particular industry had to, at one point in the past, do a first transaction in that industry.  

We’re not saying you can’t take a chance on someone promising.  We are saying to beware of those who unreservedly claim to be able to sell your business guaranteed, yes sirree, despite having zero experience in that industry.

No Process

Most sellers want to get their businesses marketed as soon as possible, maybe even yesterday if they can.  Many buyers want to be introduced to potential businesses immediately.  The best brokers won’t do either of those things.

A seasoned broker isn’t going to engage your business for sale without a look under the hood themselves.  They may often advise you to get a professional valuation in addition to offering you some estimates of their own.

An experienced broker isn’t going to introduce you to potential buyers without making sure you’re financially qualified.  Otherwise we’re just wasting everyone’s time.

If a broker can’t articulate to you how he/she will take your business to market, look elsewhere.

Isn’t Willing to Say “No”

We often talk about the coaching aspect of brokering and part of that is setting proper expectations.  We can’t do that if we never tell you “no.”

Isn’t Currently in Process On Any Other Deals

Our business is all about pipelines.  Brokers don’t put all their eggs in one basket.  They work multiple deals across multiple deadlines (with multiple personalities!).  While it might seem like a dream scenario to be the “only client” of a broker, this is a red flag.

Charges an Upfront Fee

We get paid for results.  Be wary of anyone who asks for a fee before they’ve done anything for you.

Has No Reviews or Testimonials

We love hearing from our clients after transactions.  If a brokerage has no reviews, it indicates that they don’t (yet) have people willing to take the time to rave about the experience.  You want an experience to rave about as well, so no reviews = red flag.

As we said above, even one of these red flags should be a reason to avoid a broker.  More than one, run for the hills.  It doesn’t make that broker a bad person, just probably bad for your transaction (or anybody else’s for that matter).

We’ve got a number of great brokers on our team with none of these red flags.  Learn about them here.

Using a Deferred Sales Trust in a Business Transaction

Deferred Sales TrustThe incoming presidential administration has indicated its desire to tax certain earners’ capital gains at the same rate as their personal earnings.  That has led to us getting more questions here at Apex about ways to reduce exposure to capital gains.  One of these ways is called a deferred sales trust.

What is a Deferred Sales Trust?

Simply put, this is a vehicle one can use to defer capital gains taxes.  This is something that must be set up prior to a sale and, unlike the well known 1031 Exchange which is for real estate transactions, a deferred sales trust does not impose strict, short-term time limits on your proceeds.

How Does it Work?

The trust buys the business from the seller (this can be set up in a contract to be concurrent with the purchase from a buyer).  The seller can set up a contract that allows the trust to pay for the business over time.  In a sense, it’s seller financing…for yourself.  As you withdraw from the trust (on a timetable that you set up, that can be modified) then you will be taxed at that time, and only on those amounts.  Even better?  Those funds can be used to make investments which are not subject to the capital gains that you incurred on the original transaction.

Some conditions include:

  • A third party must be the trustee
  • The trustee can invest those funds in new investments
  • The trustee is responsible for making your disbursements or making modifications to the disbursement schedule
  • Capital gains are to be paid on any principal amount the seller receives from the installment payments.  As we noted above, the trust can make investments and earn income and hence could also be “saddled” with non-taxable (to you) interest on your payments.

What’s the Catch?

We’ve always said that it’s key to not fall afoul of the IRS.  You shouldn’t look at this vehicle solely as a way to “avoid capital gains.”  You won’t be able to.  All you can do is adjust the time of paying those taxes to your choosing, but that also means not taking all the gains from your sale at once.  If getting your proceeds in an installment fashion suits your lifestyle, this might be an ideal way to go.  You can also negotiate the payment amounts, so if you need a lump sum up front before moving to smaller payments, that’s possible.

The main “catch” involved is picking the right trustee.  This isn’t just because this person will be in charge of the proceeds of possibly the largest transaction of your life, but because he/she will also oversee investing that money.  Remember that capital-gains-free earning of new income via investments is a major benefit of this vehicle, so as much as you might want to just ask a family member to “help you with this one thing” you’re probably going to need to bring in a professional who can help you optimize your investments.

Speaking of professionals, that’s who you’re going to want to consult to help you examine a deferred sales trust: a lawyer in consultation with your financial team.  This sort of vehicle isn’t for everyone, but as tax conditions change in Washington, people should examine their options and be prepared to have different ways to execute their transaction, should they wish to do so.

We don’t create trusts at Apex, but we know great people who do.  If you need a referral, give us a call and we’ll connect you.

Three Reasons We Might Not Take Your Business Listing

Three reasons we might not take your business listing.The truth is that we are always looking to add to our inventory of listings. We want to give potential buyers as many choices as possible. It reassures them that they are choosing from the best of several opportunities, not just fighting for the scraps of a handful of listings. But that doesn’t mean we’ll take every listing that comes our way. In fact, sometimes we have to simply decline to list certain businesses. In this article we’ll discuss the three biggest reasons why we might not take your business listing.

No Clean Books

Serious business owners don’t just have clean books and regular access to intelligible financial statements, they actively use them in order to understand the health of their business. Clean books mean not just putting charges and expenses into some catch-all category, but being as specific as possible as often as possible, so that you can see changes month-to-month, quarter-to-quarter, year-to-year.  

Clean books are inextricably linked to being on good terms with the IRS.  You should have no serious tax issues nor should you be playing games in order to evade taxes.  While the IRS is the immediate issue for those who don’t take regular payment of taxes seriously, no buyer feels comfortable getting into a transaction with someone who feels comfortable trying to pull one over on Uncle Sam.  

No Processes

Almost every month in these pages we will talk about a variation of this familiar theme: have systems and processes in place. If you’re building a business to sell, it needs to be able to not just survive without you, but thrive without you. A good rule of thumb is 30 days. If your business can survive without you for 30 days, then you have something that you can probably sell. If it can’t, you probably own a job.

Every buyer dreams of being handed some kind of manual that explains everything about how the business runs. If you want to sell your business someday, you need to be writing that manual now.

Bad Attitude

There are many ways that sellers can have poor attitudes, but the two we confront most often are: 

  • Some fixed notion about what the business is worth, tied to emotions instead of hard financial facts.  Valuations, not opinions, help determine what a business is worth.  The market then determines how true that valuation is.  Neither the valuation nor the market cares about what you think the business is worth.  
  • Slowness or obfuscation when it comes to key documents or key questions we have about the business.  The way that you work with your broker is a good indicator of how you’re going to work with a buyer.  If you can’t (or won’t) answer important questions or get us key documents to help us understand your business and decide whether we will accept your listing, there’s very little chance you’re going to make it through due diligence, when the both patience and timely responses get you to the finish line.

Any one of these reasons is enough for us to refuse a listing, but the good news is that each of them can be turned around, with a little self-awareness and a lot of sincere effort.  If you need help with addressing these problems, don’t hesitate to contact us!

Cash Versus Accrual Accounting: Which to Use?

Cash Vs Accrual Accounting: Which to Use?Unless you actually run an accountancy or bookkeeping business, accounting isn’t usually at the top of a business owner’s mind. But if you don’t understand your books, you don’t understand your business, and the choice between cash and accrual accounting is a choice about how you choose to view your business, so it’s an important difference to know about (and make an informed decision on).

Cash Accounting

This is the type of accounting that is used by many small businesses and for personal finance. It is called “cash” but obviously deals with whatever forms of payment you take.  You enter revenues when you receive revenues and you enter expenses when you pay expenses.  

Pros

  • The process is simpler and easier, both for you and for your accountant
  • You get an excellent short-term, day-to-day glance at your business
  • Your bank balance bears resemblance to your bookkeeping

Cons

  • You cannot make long-term decisions based on this type of accounting
  • These books can sometimes provide an inaccurate picture of the company
    • E.g. you could have a very large amount of cash on hand but have payables that exceed all of that amount and then some

Accrual Accounting

This is the opposite of cash accounting. You book revenues when you have an agreement in place (even if you have not been paid) and you book expenses when they are incurred (not when you have paid them). 

Examples:

  1. A client signs up for one of your products and services in March, but they will take delivery in April, hence they may not pay you until then or later. But in accrual accounting you book that revenue in March, not April.
  2. A vendor sends you an invoice in June. It is due in July. In accrual accounting you book the expense in June.

Pros

  • This is the type of accounting that investors want to see because it gives a better sense of the long-term performance of the company
  • It’s more accurate (and GAAP recommended), because you have a better view of the profitability of the company over an entire year

Cons

  • Because you have to record revenue before actually receiving it, cash flow is tracked separately
  • This type of accounting is significantly more expensive in time and money
  • You don’t have a short-term picture of your business

The Choice

Many businesses can choose which type of accounting to use, but some can’t.  

  1. If you stock items to sell to the public and do more than $1M/year in revenue, you have to use accrual accounting
  2. If you do more than $25M/year in revenue, the IRS requires you to use accrual accounting 

If you do want to switch over from cash to accrual you can’t just decide to do it, you have to ask permission of the IRS via Form 3115, and if they approve you, you have to stick to that choice for the whole year. No changing mid-stream.

Small businesses without a lot of cash on hand and are primarily B2C will often choose cash accounting, simply for the ease of it. Businesses that keep a large inventory or don’t get paid quickly will often choose accrual accounting, simply because it makes more sense.

This is ultimately a decision you should make with the advice (and consent?) of your accountant. He/she knows your business, knows its cash flows, but most importantly, knows you, how you deal with different financial statements, and what your long term goals with the business are. Armed with that information, it’s easy to figure out whether your business should be using cash or accrual accounting.

If you want us to take a look at your books to see whether you’re in a good position to sell, we’re always happy to not just look, but offer suggestions on what you can improve and clean up to get ready for a future sale. Give us a call today.

Best Practices for Marketing a Business for Sale

Business for SaleIn our Day in the Life article, we gave you a sense of what we as brokers might do on any given day to move the ball forward on transactions. In this article we wanted to get more specific on a few things to keep in mind when you have a business for sale.

Confidentiality

There are several parties you want to keep a sale confidential from until it’s complete, including:

  • Customers
  • Employees
  • Competition
  • Creditors

Employees might seem like a fairly obvious one. You don’t want them worrying about job security and spending time applying for new jobs instead of keeping the business going. The same is true of your customers. They don’t know what will happen and may worry about how a sale will change your product or service and postpone doing business with you (or go with a competitor, who will then also find out) if they learn that you are selling your business.

You also don’t want to let creditors know. This isn’t because everyone you do business with is necessarily interested in going around town and spreading the news, but because they may also deal with some of your competitors and a casual comment can lead to word getting out much quicker than you expected.  

Keep the fact that your business is for sale known only to a selected group of trusted people.  Two basic rules of the road are: Be sure that buyers sign a NDA and that the ad used to market your business sufficiently shelters its name and location.

Targeting Likely Buyers

While it would be nice for the perfect buyer to just show up with some money, listing a business for sale isn’t that easy. You should be thinking about the profile of likely buyers so we can target them better.

Some questions to start narrowing the profile down include:

  • Is your business appealing to any buyer or a specific type of buyer?
  • Is a buyer looking for a business of your size or in your specific industry?
  • Is your buyer an individual? Another company (a competitor or one that wants to expand into your industry)?
  • Does your business require any special qualifications, licensing or certifications to own or operate?
  • Is your potential buyer looking to be an owner-operator or an absentee owner?  How would your business fit either model?

Answering these questions will give you a specific buyer profile.  You can then go to where those types of buyers are in order to have a more effective search.

Curb Appeal

When you get ready to sell a house, unless you’re selling it as a fixer-upper (not a great look in the business for sale world), you want to make it look its best. The same is true when you want to sell a business. There are things you tolerate when it’s your business that a new owner might find unappealing (and which can lead them to find the business less valuable).

These could be things as simple as peeling paint, squeaking door hinges, or out-of-order toilets. You and your employees may have gotten used to such things and may not even notice (or care) anymore, but a buyer with fresh eyes will. As you’re getting ready to take your business to market, these basic things need to be dealt with.

You should also be dealing with less visible things, like any ongoing disputes, or payable accounts that are not up to date, or software or infrastructure upgrades that are going to be expected by a potential buyer. All of these things require money to fix, but the shinier profile you’ll have as a result of making these tweaks will definitely lead to a better bargaining position when it comes to negotiating deal points later on in the process.

More Tips?

Every single week, our brokers meet to discuss the newest businesses for sale. While we keep our best practices in the forefront of how we market, we are also always sharing information with each other on how to improve the marketing for any given business. Put our expertise to work for you. Give us a call.

Selling a Franchise: Is Selling It Back to the Franchisor Possible?

While a person often buys into a franchise business with the hope of growing the location to sell one day, or possibly even to get into multiple units, there are times when a franchisee may have to sell the franchise back to the franchisor. In this article we’ll talk about this circumstance and what you need to keep in mind if you do so.

Part of the Deal Anyway

Selling a FranchiseYou will find that even in the best-case scenarios, in which you have decided to sell the business at a premium to an outside buyer, that the franchisor has the right of first refusal built into the franchise agreement they have with you. Simply put, that means that all they have to do is match the price that you have under contract with a potential and you will have to sell to them instead.

You can imagine that if you do have this clause in your franchise agreement it will not be particularly exciting for a potential buyer you are selling a franchise to to find out that they could be cut out at the last minute by the franchisor.

Franchisors do this to keep their options open as well: they might like to expand the footprint of their company-owned stores and buying a franchise back from a franchisee is one of the easiest ways to accomplish this. Part of this strategy also involves putting time limits on each franchise agreement and as an agreement comes to an end a buyback option may be in play also.  

Franchisors also keep a waiting list of those who would like to buy an existing location (and are willing to pay a premium to do so) rather than start one from scratch, in which case they can (and do) charge a referral fee to you if they end up giving you a buyer instead of you finding one yourself.

Even if the franchisor doesn’t decide to exercise the right of first refusal option, and they do accept the buyer you have found, they can still charge a transfer fee, which is also usually stipulated in the franchise agreement.  Furthermore, the buyer will still need to meet the then-current new franchisee qualifications (again, stipulated in your franchise agreement…see a pattern?).

Sometimes It Is the Best Option

There are times when selling a franchise to an outside buyer isn’t a real option.  The franchisee might simply be tired, not having realized how much work was involved to get the business to a certain level, and hence cannot make the business presentable for sale.  He/she may be in financial distress due to poor performance of the location.  Other times there’s a legal breach of the franchise agreement, for example when payments are not made on time or vendors are not paid in a timely manner. 

A breach of the franchise agreement can force the franchisee to sell the franchise back to the franchisor.

Even in circumstances such as these, the franchisor will want to keep the best foot forward for public relations reasons.  They will want, as much as possible, to keep legal and financial difficulties out of the public eye and to make a smooth transition with a temporary location closure, if it happens at all, for a very brief period.  As the franchisee, you’ll want to make this process easy as well by making sure your books and inventory are as up-to-date and as clean as possible.

Franchisees will also want to secure favorable non-compete terms as they exit the business.  Even though they may not want to work in the industry in the immediate future, they will have built up a fair amount of experience and may want to deploy that once the transition is over and they have had some time and distance from the negative outcome of their franchise experience.

Don’t Be Afraid to Ask for Help

Selling a franchise in any situation can be challenging and you don’t have to do it alone. Over the past three decades we’ve sold tons of franchise locations in many different situations. If you’re considering selling a franchise (or buying one) give us a call!

Which Small Business Valuation is the Best?

We’ve talked in the past about the importance of a professional small business valuation. Today we’re going to discuss different methods of small business valuation and which one might be the best for you.

Why Get a Small Business Valuation?

Small Business ValuationWhile you might think that the main reason to get a valuation is to get a good idea of a possible sale price, there are actually lots of reasons to get one:

  • A desire to better understand the growth of your business. Perhaps the least often cited reason for a small business valuation, but maybe the most important.
  • Interest in a merger or acquisition. You will need to know your financial position relative to your target, and you can’t do that without a valuation.
  • A desire to attract investors. Investors will want to see some basis for what you’re asking them to invest in.
  • Life events. You may be involved in a divorce or may have to buy out another owner.
  • Sharing equity with your team. You can’t offer equity to your staff without knowing the financial value of what you are offering them.
  • Need a line of credit or loan. A bank will want to know what they are getting themselves into.
  • Examining tax-planning strategies. If you want to get ahead of the tax game, this is important.

Get Your Paperwork Ready

Get your paperwork ready.Whichever method of small business valuation you use, you’ll need to get a few things in order for the professional who is going to help you.

There are three categories of paperwork you will need:

  1. Financial paperwork. The person in charge of your small business valuation is going to want to see a minimum of 3 years of business tax returns and financial statements, like balance sheets, income statements, and cash flow statements.
  2. Miscellaneous paperwork. This covers items like:
    1. Leases
    2. Permits
    3. Licenses
    4. Certifications
    5. Contracts
    6. Business Credit Reports
  3. Tangible assets.  
    1. Vehicle List
    2. Equipment List (focus on larger asset with at least $500 value)
    3. Real Property description and appraisal (if owned by the business)
  4. Intangible assets. This is helpful information for items that don’t easily have a value assigned to them, yet are very valuable. This could include items like:
    1. Patents and Trademarks
    2. An email list (number and engagement)
    3. SEO rankings (rankings across various keywords)
    4. Online reviews (number and frequency)
    5. CRM (customer data and leads)

You should have ready access to these items anyway, even if you don’t have a valuation on the horizon.  They will certainly be required of you in any business transaction.

Methods of Small Business Valuation

There are actually quite a few ways to do a valuation, but in this article we are going to focus on four of them.

Market-based valuation

This is the most subjective valuation and is not focused on the particular numbers of a given business but rather what the recent sale prices of similar companies have been. Similar companies would be within the same industry and revenue range. Finding relevant sales data on privately held industry peers can be difficult.

Discounted Cash Flow (DCF) valuation

For those who don’t have good memories of their financing or accounting classes, this might be triggering.  It will take a look at projected cash flow and the time value of money to determine a value. Projecting cash flows into the future is easily manipulated and difficult to determine for most small businesses and can be an easy target for debate.

Asset-based valuation

This is pretty straightforward: assets minus liabilities. However there is a division between whether the business will continue on after a sale (going concern) or it will be closed (liquidation). Obviously in the latter case the valuation will be lower as liquidation means assets will very likely be sold below market value.

Seller Discretionary Earnings (SDE) valuation

This is the small business valuation we most often see at Apex. This small business valuation takes your earnings and applies a multiplier that is appropriate for your industry. You start with EBIT (earnings before taxes and interest) and add back:

  • Owner compensation (the new owner may choose a different level of compensation)
  • Owner benefits (like season tickets or lake house)
  • Non-essential, non-recurring, or non-related expenses (an IRS audit, for example, or a new website build).
  • Typically, the valuation will include a reasonable replacement salary for a new owner.

Which is the Best Method of Small Business Valuation?

The short answer is: the one that makes the most sense for your business. While we often see the SDE method most frequently used for transactions we handle, if you’re planning to liquidate your business, an asset-based valuation would make a lot of sense.

Professional appraisers don’t tend to lean on just one form of valuation. Part of their process involves blending different methods to come to a smart and thoughtful final number. That is definitely something the majority of business owners do not have the expertise to do, and why we recommend you hire a professional.

Give us a call to get started on the process!