Most business owners don’t give a second thought to the idea of going to the doctor for an annual physical. So why do they not give the same level of care and consideration to their company? The fact of the matter is that many executives literally go decades without giving their companies a “physical.” They only stop to truly evaluate their business when required by regulations or another matter forcing them to do so.
Consider an Annual Valuation
Let’s take a look at some of the reasons why business owners should get an annual valuation. The first issue concerns the curveballs life often throws at us. At any given time, you and your business could be unexpectedly hit with everything from partnership issues or life changes like a divorce to changes in bank relationships. When you keep careful track of the value of your business, you will know in advance how potential changes would affect you. Perhaps even more importantly, you will gain an understanding of the health of your business.
Monitor Business Growth
It’s critical to be aware of how your business compares from one year to the next. Are values definitely increasing? If not, you would surely want to know immediately and start making necessary adjustments. If a major problem were to surface, you would want to know about it right away so that you can take action. Otherwise, you might just let the years pass you by while this issue goes unchecked. This is the kind of data you will gain when you commit to regular valuations.
Be Prepared for the Unknown
You might feel far from ready to sell. However, you should always be ready if the situation does present itself. What if an amazing opportunity showed up on your doorstep? On the flip side of the coin, what if a life issue like illness put you in a situation where a sale was suddenly necessary? If you are not ready both mentally and with the necessary paperwork for your business prepared, you might miss out on a legitimate opportunity.
Statistics gathered from a prominent accounting firm showed that 65% of business owners do not know what their company is worth. However, at the same time 75% of the net worth of these business owners is tied up in their business. The problem with these statistics is quickly evident. Be sure to take as good of care of your business as you would take of yourself.
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When you’re in the process of buying a business, it’s important to stay logical. No matter how good the opportunity may seem at first glance, be sure to carefully evaluate the business in a step-by-step manner. Regardless of how excited you might be about the prospect of ownership; you’ll want to have your guard up when you go through the due diligence process. Let’s take a look at 5 of the most important questions to ask yourself before signing on the dotted line.
1. Do you have a personal interest in the business?
Needless to say, owners have made businesses successfully thrive even if they lack a personal interest in what is being sold. However, you might want to stop and ask yourself if you do indeed have a passion for the goods or services offered by the business in question. If you are uninterested, you may find it harder to make a long-time commitment.
2. What is the business plan like?
It’s helpful to see the goals of the current owner and evaluate which of these goals have actually been achieved. If there is no business plan, this should give you pause.
3. How does the business perform?
Take a look at the business’s overall performance. Do you get the feeling that the business requires many hours of intensive work from the owner? If so, remember that this owner putting in all of those hours could be you in the near future. Is there a reliable manager to oversee operations in your absence?
4. What are the demographics?
Who are the key customers? Are there several main accounts that the business depends upon or a wide variety of customers and clients? Needless to say, if the business relies on just a few key accounts, this could be problematic if things were to change. Further, do you see a clear way to add new customers in the future? Before you buy a business, you’ll want to feel confident that you can help it thrive and grow.
5. Are you satisfied with the financials?
Once you’ve successfully signed the necessary written agreements, you’ll want to take a deep dive into the business’s financials. Make sure that everything has been provided including:
- Tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
The bottom line is that you will want to be careful when purchasing a business and watch for any red flags. The last thing you want is to make a hasty decision that you regret later on.
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When you’re putting your business on the market, one of the top considerations is your asking price. Once you have a fair price established, let’s take a closer look at how business brokers and M&A advisors work with their clients to back up that price with details concerning why it is justified.
Telling the Story
A key aspect of defending your asking price is telling the story of your business. Your brokerage professional will help you go over the details of the story so it is properly conveyed to prospective buyers. Buyers, of course, will want to understand the story behind the business so that they can understand its history and why it is for sale. You will want to feel prepared to interact with prospective buyers and how to discuss details concerning its value.
Your business broker or M&A advisor will put together written materials about your business. These also help buyers gain clarity on the story of your business and its sales message.
Seeing Your Buyer’s Perspective
It goes without saying that a big part of coming up with your decision of the asking price is that you want something that sounds not only reasonable but also attractive to buyers. We recommend trying to view the entire transaction from the buyer’s perspective. The buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
Another consideration is, how will they pay for the business? In many cases, it can tremendously benefit a transaction to offer assistance in the way of seller financing. Seller financing can speed up the process, as you will not be so reliant waiting for the bank loan process, which can drag out for months.
The Complexities of Your Asking Price
The process of establishing and then justifying your asking price is not always simple. It is a symphony of moving parts, and it’s important to feel educated and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the journey towards the completion of a successful deal.
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Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
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Each quarter, the Market Pulse Report issues a report revealing information about market conditions The report is supported by M&A Source and the International Business Brokers Association. The data that is analyzed is based on a comprehensive survey of business brokers and M&A advisors. The report focuses on Main Street businesses (with values up to $2MM) and the lower middle market (values between $2MM and $50MM.)
The research is conducted and then the report is published each quarter to reflect the state of the industry. In this article, we will look at some of the key takeaways of the report and what it reveals about the path ahead for buyers and sellers.
Tracking the Labor Shortage
For the second quarter, the report revealed a variety of interesting information. One massive data point from the report is that the labor shortage continues to be a significant variable for business owners. A staggering 92% of report respondents state that the labor shortage has negatively impacted their business with 54% stating that the shortage has had a “very negative impact” and 35% stating that the impact is “somewhat negative.”
The report further indicated that it is taking about seven months for a business to close. They noted that it takes about six months to a year to sell a well-priced business or a well benchmarked business. The report noted that approximately 60-120 days are spent in the due diligence or execution stage, once the letter of intent has been signed.
The Strongest Industries
In terms of what kinds of businesses are selling, the report points to restaurants making a solid comeback. It is interesting to note that restaurants valued from less than $500K to $1 million are enjoying a particularly strong rebound. Business services, personal services, construction and manufacturing remain steady.
The latest Market Pulse Report is pointing in several directions. Currently, three factors are impacting business owners, namely, the labor shortage, inflation, and supply chain issues. Many businesses have had no choice but to give large raises to employees, and others have been able to pass the costs on to consumers and buyers.
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