Quality employees are essential for the long-term success and growth of any business. Many entrepreneurs learn this simple fact far too late. Regardless of what kind of business you own, a handful of key employees can either make or break you. Sadly, businesses have been destroyed by employees that don’t care, or even worse, are actually working to undermine the business that employs them. In short, the more you evaluate your employees, the better off you and your business will be.
Forbes’ article “Identifying Key Employees When Buying a Business”, from Richard Parker does a fine job in encouraging entrepreneurs to think more about how their employees impact their businesses and the importance of factoring in employees when considering the purchase of a business.
As Parker states, “One of the most important components when evaluating a business for sale is investigating its employees.” This statement does not only apply to buyers. Of course, with this fact in mind, sellers should take every step possible to build a great team long before a business is placed on the market.
There are many variables to consider when evaluating employees. It is critical, as Parker points out, to determine exactly how much of the work burden the owner of the business is shouldering. If an owner is trying to “do it all, all the time” then buyers must determine who can help shoulder some of the responsibility, as this is key for growth.
In Parker’s view, one of the first steps in the buyer’s due diligence process is to identify key employees. Parker strongly encourages buyers to determine how the business will fair if these employees were to leave or cross over to a competitor. Assessing if an employee is valuable involves more than simply evaluating an employee’s current benefit. Their future value and potential damage they could cause upon leaving are all factors that must be weighed. Wisely, Parker recommends having a test period where you can evaluate employees and the business before entering into a formal agreement.
It is key to never forget that your employees help you build your business. The importance of specific employees to any given business varies widely. But sellers should understand what employees are key and why. Additionally, sellers should be able to articulate how key employees can be replaced and even have a plan for doing so. Since, savvy buyers will understand the importance of key employees and evaluate them, it is essential that sellers are prepared to have their employees placed under the microscope along with the rest of their business.
The first step towards successfully selling a business is finding a qualified business broker to work with. Sellers should also ask themselves an array of important questions. A recent article, “7 Questions to Answer Before Selling Your Business,” published by Good Men Project, has a great overview of questions sellers should answer before moving forward.
Author Troy Lambert believes that at the top of the list is one very simple and powerful question, “Are you ready?” For example, your financial reports should be ready to show.
The second question is, “What’s it worth?” Determining what a business is worth means you’ll need a professional business valuation. A great deal can go into evaluating your business and you need an expert to help you determine that value.
Third, Lambert believes that prospective sellers should ask themselves, “How’s the health of my industry?” He emphasizes that honesty is key here for a variety of reasons. If your industry is in a transition period, for example, then it might be better to wait until a better time to sell.
The fourth question on Lambert’s list is, “How long will it take?” In short, you need to remember that selling a business can take a long time. Successfully selling your business may even mean that you have to stay on and work with the new owner during a transition period.
The fifth key question is, “Who is my buyer?” You don’t want to waste a lot of time with potential buyers who are simply not a good fit. Finding the right buyer for your business helps to ensure that a deal will be finalized.
Sixth, Lambert wants sellers to think about how they will get paid. Are you willing to finance part of the deal? What about balloon payments over time? Understanding, before you put your business on the market how you want to be paid and how flexible you can be in terms of payment is essential.
For most sellers, selling a business will stand as the largest financial decision of their lives. With this realization comes more than a little pressure.
Considering the enormity of the decision, having good advice is simply a must. A seasoned and experienced business broker understands what it takes to buy and sell a business. Working with a business broker is an easy and efficient way to begin the process of selling your business. Brokers know what it takes to successfully sell a business and can help you answer these questions and many more.
The number of small business transitions continues to be strong for the first quarter of 2019. In fact, despite a small decline, small business transitions remain at historically high levels.
Looking at the Statistics
According to a recent BizBuySell article entitled, “Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers and Sellers,” now is still very much the time for both buying and selling a business. It is true that the number of businesses sold in the first three months of 2019 dropped by 6.5% when compared to 2018. Yet, it is important to keep in mind that the number of completed transactions remains very strong. Likewise, inventory is increasing, with a 6.1% increase in listings in Q1 of 2019 when compared to the same period in 2018.
While the market is indeed strong, the BizBuySell article did note that some experts feel that there are signs that the market could become more challenging moving forward. In part, this is due to the prospect that interest rates and financing could become increasingly challenging and more expensive. These factors indicate that now is a smart time to both buy and sell a business.
Likewise, the financials of sold businesses in Q1 remains strong. In fact, the median revenue of sold businesses jumped 6.5% when compared to Q1 2018. Now, the median revenue stands at $540,000. However, cash flow continues to hover around the $100,000 for five years in a row.
What are the Top Regions?
Currently, the top markets by closed small business transition are Miami-Fort Lauderdale-Miami Beach, Los Angeles-Long Beach-Santa Ana, New York-Northern New Jersey-Long Island, Tampa-St. Petersburg-Clearwater and Dallas-Fort Worth-Arlington. The top markets by median sale price are Charlotte-Gastonia-Concord, San Francisco-Oakland-Fremont, Denver-Aurora and Dallas-Fort Worth-Arlington.
A Consistently Strong Market
Overall, the experts at BizBuySell believe that the market remains very strong and active. They believe that the wave of retiring baby boomers looking to exit their businesses, historically low interest rates and the rise of the next generation of entrepreneurs are helping to fuel a great deal of activity.
According to Matt Coletta, Co-Founder and Managing Partner, M&A Business Advisors, “We are seeing more quality businesses coming on the market with good, clean books than I have seen in my 25+ years in the business.”
If you are considering buying or selling a business, then now is an excellent time to jump in. Working with a business broker is a great way to ensure that you find the right business for you at the right price.
The IBBA and M&A Source Market Pulse Survey Report for the fourth quarter of 2018 has a range of interesting insights. The survey’s purpose is to provide an “accurate understanding of market conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM-$50MM). This national survey was designed as a tool for business owners and their advisors and has the support of both the Pepperdine Private Capital Markets Projects and the Pepperdine Graziadio Business School.
One of the most striking facts to leap out of the report is the fact that a full one-third of advisors fully expect the strong market to end this year. Overall, advisors are not optimistic that the current climate will continue through 2020. In fact, advisors are encouraging sellers to consider placing their businesses on the market now, while the market is still strong. This is according to Craig Everett, PhD and Assistant Professor of Finance and Director of the Pepperdine Private Capital Markets Project.
One fact from the report that could be overlooked is that only a mere 8% of advisors expect the current climate to last for 48 months or more. Additionally, only 9% believe that the current climate will last between 24 to 48 months. Perhaps most striking of all is the fact that 60% of advisors feel that the current climate will end within the next two years.
Business owners who are considering selling should be advised that almost two-thirds of advisors now feel that there will be a significant shift in the next two years. Considering that it can take a year or more to sell a business, business owners would be wise to consider this important fact.
The report sites Neal Isaacs, Owner of VR Business Brokers of the Triangle who states, “Deals are taking longer in due diligence as buyers work hard to validate their investment and make sure that what they’re buying is worth the premium price today’s sellers are commanding.”
So, is now the time to sell? Many experts feel that it is possible to lose a sizable amount of value if one waits too long to sell. Even just a few months can make a huge difference in terms of perceived value and the ultimate sales price. Working with a proven business broker is a key way to ensure that you are selling at the right time and secure the best possible price.
In a recent Divestopedia article entitled, “Kids Take Over the Business? 8 Things to Consider,” author Josh Patrick examines what every business owner should know about having their children take over their business. He points out that there are no modern and accurate numbers on what percentage of businesses will be taken over by the children of their owners. But clearly the number is substantial.
Patrick emphasizes as point number one that allowing a child to take over a business right after finishing his or her education could be a huge mistake. After all, how can a parent be sure that a child can handle operating the business without some proven experience under his or her belt?
Point number two is that businesses frequently create jobs for the children of owners. The flaw in this logic is pretty easy to see. This job, regardless of its responsibilities, isn’t in fact a real job. Senior decision-making roles should be earned and not handed out as a birthright. The end result of this approach could create a range of diverse problems.
The third point Patrick addresses is that pay should be competitive and fair when having children take over a business. Quite often, the pay is either far too high or far too low. This factor in and of itself is likely to lead to yet more problems.
Business growth must always be kept in mind. When having your children take over a business, it is essential that they have the ability to not just maintain the business but grow it as well. If they can’t handle the job then, as Patrick highlights, you are not doing them any favors. Perhaps it is time to sell.
Another issue Patrick covers is whether or not children should own stock. If there are several children involved, then he feels it is important that all children own stock. Otherwise, some children will feel invested in the business and others will not. In turn, this issue can become a significant problem once you, as the business owner, either retire or pass away.
In his sixth point, Patrick recommends that a business should only be sold to children and not given outright. If a child is simply given a business, then that business may not have any perceived value. Additionally, if a child or children buy the business, then estate planning becomes much more straightforward.
In point seven, Patrick astutely recommends that once a parent has sold their business to their child, the parent must “let go.” At some point, you will have to retire. Regardless of the outcome, you’ll ultimately have to step back and let your children take charge.
Finally, it is important to remember that your children will change how things are done. This fact is simply unavoidable and should be embraced.
Working with an experienced business broker is a great way to ensure that selling a business to your child or children is a successful venture. The experience that a business broker can bring to this kind of business transfer is quite invaluable.
Forbes author Keith Gregg’s, February 8, 2019 article, “Using Tech to Enhance and Sell a Business,” has a range of interesting ideas that business owners should explore and embrace. Gregg looks at three big ways that business owners can use technology to help them get the most out of the sale of the business. He explains how important it is to address these three areas before placing your business on the market.
The first tip Gregg explores is to upgrade systems. Upgrading systems can be particularly important for attracting younger buyers. It is common for businesses to be successful without proprietary technology or procedures, but that doesn’t mean that technology should be ignored.
Important information should be digitized, as this data will be vital for the new owner to grow the business over the long haul. Incorporating software that can track and analyze data across the business is likewise valuable. Using software, such as customer relationship management and financial management software, will showcase that your business has been modernized.
Determining the value of your business can be tricky and laborious. Gregg recommends opting for a business valuation, as he feels, “business valuation calculations can remove much of the guesswork from the process.”
You should expect a business valuation calculator to include everything from verified data on comparable business deals, including gross income and cash flow figures and more. There are even industry-specific calculations that can be used as well. The main point that Gregg wants to convey is that business owners should use tangible and proven data to sell their businesses. Like upgrading systems appeals to younger buyers, the same holds true for using verified data to sell.
Take Advantage of the Digital Marketplace
Gregg’s view is that perhaps the single greatest technology for business owners to leverage is that of the digital marketplace. Sites that link businesses with prospective buyers can help to streamline and expedite the sales process. Through such sites, it is possible to go deeper than a specific industry and even explore sub-sectors, thus enhancing the chances of finding the right buyer.
Technology can be used to help sell businesses in a variety of ways. An experienced and proven business broker will leverage a whole range of tools to assist business owners when selling their businesses. When you opt for a proven business broker, you can expect to receive offers from serious and vetted buyers and, in the process, save a great deal of time while maintaining confidentiality.
If you haven’t been thinking about succession planning, the bottom line is that you should be. In the February 20, 2019 Divestopia article, “All Companies Need to Look at Succession Planning,” author Brad Cherniak examines the importance of succession planning. Owning and/or operating a business can be a great deal of work, but it is imperative to take the time to develop a succession plan.
Succession Planning is for Businesses of All Sizes
Author Cherniak wants every business owner to realize that succession planning isn’t just for big businesses. Yet, Cherniak points out that the majority of small-to-medium sized businesses, as well as their senior managers, simply don’t focus much on succession planning at all.
Many business owners see succession planning as essentially being the same as exiting a business. Cherniak is quick to point out that while the two can be linked and may, in fact, overlap, they are by no means the same thing. They should not be treated as such.
Following an Arc Pattern
Importantly, Cherniak notes, “Succession planning should also be linked to your strategic planning.” He feels that both entrepreneurs and businesses managers follow an arc pattern where their “creativity, energy and effectiveness” are all concerned. As circumstances change, entrepreneurs and business managers can become exhausted and even a liability.
The arc can also change due to a company’s changing circumstances. All of these factors point to “coordinating the arcs of business,” which includes “startup, ramp-up, growth, consolidation, renewed growth and maturity,” with whomever is running the business at the time. In this way, succession planning is not one-dimensional. Instead it should be viewed as quite a dynamic process.
Evaluating Each Company Individually
Cherniak highlights the importance of making sure that the team matches the needs of a company as well as its stages of development. Who is running a company and setting its direction? Answering these questions is important. It also is of paramount importance to make sure that the right person is in charge at the optimal time.
Companies and their circumstances can change. This change can often occur without much notice. As Cherniak points out, few small-to-medium sized businesses focus on succession planning, and this is potentially to their detriment.
The economy is red hot, and that fact is translating over to lots of activity in businesses being sold. However, it is possible that this record-breaking number of sales could cool down in the near future. In a recent article in Inc. entitled, “The Hot Market for Businesses is Likely to Cool, According to This New Survey,” the idea that the market for selling business is cooling down is explored in depth. Rather dramatically, the article’s sub header states, “Entrepreneurs who are considering selling their companies say they’re worried about the future of the economy.”
The recent study conducted by Pepperdine University’s Graziadio School of Business as well as the International Business Brokers Association and the M&A Source surveyed 319 business brokers as well as mergers and acquisitions advisers. And the results were less than rosy.
A whopping 83% of survey participants believed that the strong M&A market will come to end in just two years. Perhaps more jarring is the fact that almost one-third of participants believe that the market would cool down before the end of 2019.
The participants believe that the economy will begin to slow down, and this change will negatively impact businesses. As the economy slows down, businesses, in turn, will see a drop in their profits. This, of course, will serve to make them more challenging to sell.
The Inc. article quotes Laura Ward, a managing partner at M&A advisory firm Kingsbridge Capital Partners, “People are thinking about getting out before the next recession,” says Ward. The Pepperdine survey noted that a full 80% of companies priced in the $1 million to $2 million range are now heading into retirement. In sharp contrast, 42% of companies priced in the $500,000 to $1 million range are heading into retirement. Clearly, retirement remains a major reason why businesses are being sold.
Is now the time to sell your business? For many, the answer is a clear “yes.” If the economy as a whole begins to slow down, then it is only logical to conclude that selling a business could become tougher as well.
The experts seem to agree that whether it is in one year or perhaps two, there will be a shift in the number of businesses being sold. Now may very well be the right time for you to jump into the market and sell. The best way of making this conclusion is to work with a proven and experienced business broker. Your broker will help you to analyze the various factors involved and make the best decision.
Selling a business can be an exciting and rather lucrative time. But going through the sales process means embracing the notion that you’ll have to be very prepared for whatever might be thrown your way. A key aspect of preparing to sell your business is to know what types of buyers you’re likely to encounter.
It is only logical to anticipate the types of buyers you may be dealing with in advance. That will allow you to plan how you might potentially work with them. Remember that each buyer comes with his or her own unique desires and objectives.
The Business Competitor
Competitors buy each other all the time. Frequently, when a business is looking to sell, the owner or owners quickly turn to their competitors. Turning to one’s competitors when it comes time to sell makes a good deal of sense; after all, they are in the same business, understand the industry and are more likely to understand the value of what you are offering. With these prospective buyers, a great confidentiality agreement is, of course, a must.
Selling to Family Members
It is not at all uncommon for businesses to be sold to family members. These buyers are often very familiar with the business, the industry as a whole and understand what is involved in owning and operating the business in question.
Often, family members are prepared and groomed years in advance to take over the operation of a business. These are all pluses. But there are some potential pitfalls as well, such as family members not having enough cash to buy or not being fully prepared to run the business.
Quite often, foreign buyers have the funds needed to buy an existing business. However, foreign buyers may face a range of difficulties including overcoming a language barrier and licensing issues.
Dealing with an individual buyer has many benefits. These buyers tend to be a little older, ranging in age from 40 to 60. For these buyers, owning a business is often a dream come true, and they frequently bring with them real-world corporate experience. Dealing with a single buyer can also help expedite the process as you will have fewer individuals to negotiate with.
Financial buyers are often the most complicated buyers to deal with, as they can come with a long list of demands. That stated, you should not dismiss financial buyers. But just remember that they want to buy your business strictly for financial reasons. That means they are not looking for a job or fulfilling a lifelong dream. For financial buyers, the key point is that your business is generating adequate revenue.
A synergistic buyer can be an excellent candidate. The reason that synergistic buyers can be such a good fit is that their business in some way complements yours. In other words, there is a synergy between the businesses. The main idea here is that by combining the two businesses they will reap a range of benefits, such as access to a new and very much aligned customer base.
Different types of buyers bring different types of issues to the table. The good news is that business brokers know what different types of buyers are likely to expect out of a deal.
Most people fail to keep their New Year’s Resolutions. But where buying and selling a business is concerned, failing to keep those resolutions could mean an abundance of lost opportunity.
Todd Ganos at Forbes recently penned a thought-provoking article entitled The 8 New Year’s Resolutions for the Sale of Your Business. In this article, he compares selling a business to getting in shape in the months preceding your visit to the beach. It is necessary to do a great deal of planning and hard work if you want to be in good shape for the big “beach body reveal.”
When it comes to selling a company, Ganos believes that there are eight factors that must be taken into consideration. Listed below are those factors he feels are a must for business owners looking to get their business ready for “the beach.” These are the eight factors that Ganos believes are most essential and should be on your New Years’ Resolution list for your business:
In order to get your business ready, it is necessary to take a good long and honest look at each of these eight important categories.
Planning is at the heart of everything. He points out that owners who truly want to get their business ready for the market will want to adopt a focused month-by-month plan.
This plan means having discipline, developing a business plan and involving your team in the development of that plan. Once the plan has been developed, it should be reviewed with your leadership team each month.
New Years’ Resolutions fail because they don’t get properly integrated into peoples’ lives. And the same holds true for making changes in one’s businesses. Ganos correctly asserts that in order to get your business ready to sell, you have to make it an “all-of-the-time thing” in which you are constantly focused on success.
New Years’ Resolutions have to be about doing things differently, having a plan and then sticking to these changes permanently.