Why Your Company Needs a Physical

Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason. A leading CPA firm conducted a survey that revealed: 65% of business owners do not know what their company is worth; 75% of their net worth is tied up in their business; and 85% have no exit strategy There are many obvious reasons why a business owner should get a valuation of his or her company every year such as partnership issues, estate planning or a divorce; buy/sell agreements; banking relationships; etc. No matter what the reason, the importance of getting a valuation cannot be over-emphasized:An astute business owner should like to know the current value of his or her company as … [Read more...]

Should You Be Selling Your Company…Now?

The answer to the question asked in the title is, “It all depends!” There are all sorts of studies, surveys and the like suggesting that as more and more “baby-boomers” reach retirement age, the market will be flooded with companies for sale. The consensus is that with these privately-held company owners reaching and nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market. While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell … [Read more...]

How Does Your Business Compare?

When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look? Value DriverLowMediumHigh Business TypeLittle DemandSome DemandHigh Demand Business Growth LowSteadyHigh & Steady Market Share SmallSteady GrowthLarge & Growing ProfitsUnsteadyConsistentGood & Steady Management Under StaffedOkayAbove Average FinancialsCompiledReviewedAudited Customer BaseNot SteadyFairly SteadyWide & Growing Litigation SomeOccasionallyNone in Years SalesNo GrowthSome GrowthGood Growth Industry TrendOkaySome GrowthGood Growth The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don't just compare against businesses in general, but specifically consider the competition. As part of your overall exit strategy, what can you do to improve your company? © … [Read more...]

The Confidentiality Agreement

When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don't want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum. The following are some of the questions that a seller should expect a confidentiality agreement to cover: What type of information can and can not be disclosed? Are the negotiations open or secret? What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement. What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation? Which state's laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard? What recourse do you have if … [Read more...]

Common Reasons for Selling

It has been said that the sale of a business is usually event driven. Very few owners of businesses, whether small or large, wake up one morning and think, “Today I am going to sell my company.” It is usually a decision made after considerable thought and usually also prompted by some event. Here are a few common “events” that may prompt the decision to sell: Boredom or “Burn-out” – Many business owners, especially those who started their companies and have spent years building and running them, find that the “batteries are starting to run low.” Divorce or Illness – Both divorce and illness can cause a rapid change in one's life. Either of these events, or a similar personal tragedy, can prompt a business owner to decide that selling is the best course of action. Outside Investors – Outside investors may include family, friends, or just plain outside investors. These outside investors may be putting pressure on the owner/majority owner in order to recoup their investment. No Heir … [Read more...]

Valuing the Business: Some Difficult Issues

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate. Here are some issues that must be considered when arriving at a value for the business: Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms. Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue. Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value. Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption. ESOP Ownership – A … [Read more...]

Considering Selling? Some Important Questions

Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling. Here are three questions that potential buyers will ask: Why do you want to sell the business? What should a new owner do to grow the business? What makes this company different from its competitors? Then, there are two questions that sellers must ask themselves: What is your bottom-line price after taxes and closing costs? What are the best terms you are willing to offer and then accept? You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy. The best way to prepare your … [Read more...]

Is Your “Normalized” P&L Statement Normal?

Normalized Financial Statements – Statements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner's compensation and benefits need to be restated to reflect a competitive market value. Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company. For example, … [Read more...]

Do You Have an Exit Plan?

“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.” From: Selling Your Business by Russ Robb, published by Adams Media Corporation Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know! The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and … [Read more...]

Rating Today’s Business Buyers

Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today's most active categories of business buyers: Family Members Members of the seller's own family form a traditional category of business buyer: tried but not always "true." The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the "heir to the throne." If this has been done, the family member may be the best type of buyer. Too often, however, the difficulty … [Read more...]