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THE DANGER OF MARKET TIMING THE SALE OF YOUR BUSINESS

2012-02-02T09:52:00.000-08:00

The other day I was speaking with a successful CEO in his fifties who runs a heating and air conditioning company generating eight million dollars in revenue and over one million dollars in profit before tax.

Even though he was tired and nearing burnout, he was planning to wait another five to seven years before selling his business because he “wanted to sell at the peak of the next economic cycle.”

On the surface, his rationale seems to make sense. If you speak with mergers and acquisitions professionals, they’ll tell you that an economic cycle can impact valuations by up to “two turns,” which means that a business selling for five times earnings at the peak of an economic cycle may go for as low as three times earnings at a low point in the economy.

The problem is, when you sell your business, you have to do something with the money you receive, which usually means buying into another asset class that is being affected by the same economy.

Let’s say, for example, you had a business generating $100,000 in pre-tax profit in an industry that trades between three times earnings and five times earnings, depending on the point in the economic cycle.

Furthermore, let’s imagine you sat stealthy on the sideline until the economy reached the absolute peak and sold your business for $500,000 (five times your pre-tax profit) in October 2007. You took your $500,000 and bought into a Dow Jones index fund when it was trading above 14,000. Eighteen months later – after the Dow Jones had dropped to 6,547.05– you’d be left with less than half of your money.

Even though you cleverly waited till the economic peak, by March 9, 2009, you would have effectively sold your business for less than 2.5 times earnings.

The inverse is also true. Let’s say you waited “too long” and sold the same business in March 2009. And because you were at the lowest possible point in the economic cycle, you only got three times earnings: $300,000. Notice that’s 20% more than if you’d sold at the peak and bought an index fund at the top of the market.

Just like when you sell your house in a good real estate market, unless you’re downsizing, you usually buy into an equally frothy market. Which is why timing the sale of your business on external economic cycles is usually a waste of energy.

External vs. internal economic cycles

Instead, I’d recommend timing the sale of your business when internal economic factors are all pointing in the right direction: employees are happy, revenue and profits are on an upward trend, and there is still lots of market share for an acquirer to capture.

When internal economic factors are pointing up, you’ll fetch a price at the top end of what the market is paying for businesses like yours right now, which means that – for good or bad – you get to use your newfound cash and buy into the same economic market you’re selling out of.

Tips to Manage a Successful Sales Team

2012-01-24T11:13:00.000-08:00

Want to boost your business? It's time to set your salespeople free.
As economic times become more uncertain, companies are increasingly seeking to boost their sales operations to try to capture more market share. But properly running a successful sales department requires a special touch and technique.
Great salespeople also tend to be into solving problems and driving for results. They're positive in their attitude, powerful and authoritative.
The traits that make them so great at sales also can lead to traits that present difficulties for managers. They can be impulsive, demanding and unrealistic in their expectations. They may lack attention to detail and are often disorganized.
If you are more methodical, analytical or process oriented, you may get easily frustrated running a sales department. But those who are good at running a sales department learn how to manage around these issues.
There are certain styles of management that I've often found are a good fit for sales departments. Here are four tips for managing successful sales pros.

Avoid rulemaking. Great salespeople generally want freedom. They want autonomy. Compliance doesn't work for these people. The better you're able to remove the obstacles and set them up to produce those results, the more successful they will be -- and you will be. Don't ever tell them what they can't do, because they will simply focus their creativity on finding ways to overcome your rules.
Become a coach. That means asking, not telling your high performers what to do. Ask them to put themselves in your shoes over a particular issue, and discuss a variety of possible options. Let them own the solution to whatever obstacle is at hand.
Let them do what they do best. In order to motivate and lead salespeople effectively, you want to think about what's important to them and what drives them. If you have employees who are not great at details and writing proposals but they're great at selling, then let them sell. Find someone else to compensate in some way to support them on the detail.
Give them pats on the back. You need to recognize them. Especially with top-performing salespeople, money isn't often the main driver. It's really about being respected. It's achieving and getting those results.

If you adapt your management style to meet their needs, and understand the behaviors needed to do it, you'll have a lot fewer headaches. And your salespeople will thrive.

2012 Business Sales, Avoiding Risks and Higher Rewards

2012-01-12T14:38:00.000-08:00

The new year has begun and resolutions are flying around as if they are going to be kept as usual. The economy looks like it is coming back, so it is time to consider how that affects you and your decision regarding your exit strategy.

What I have found is that business owners sell only when two decision paths converge. The first path is the subjective or personal decision to sell: it is time to sell because personal goals can now be met better by selling the business than by staying active in it. The second is the business decision; both the market conditions and the companies readiness make it the right time to sell.

The personal motives are many but here are just a few to review to see if you can relate to any of them

· A desire to take the chips off the table. Your tolerance for risk just isn't what it use to be. The recession affected many business owners and took some of the fun out of being in business.

If the joy for going to work each day is fading. The fire in the belly is gone and for many has been replaced by the desire to do something else.

You realize that now is the time to sell because you can attain financial security. There are other activities that you want to explore other than just running the business.

There is a point at which these risks become overly burdensome, especially when the business itself has some value. The only way to eliminate the risks inherent to owning a closely held business interest to to sell it for cash. There are few buyers now that are interested in all cash deals so there is still some risk still on the table. However a personal guarantee for a good qualified buyer will eliminate any concern for collecting what is owed.

14 Easy Ways to Get Motivated

2011-12-21T12:53:00.001-08:00

These simple strategies will keep you energized through the holidays and well into the new year.

It's getting toward the end of the year, so with the holidays in sight, I thought it appropriate to give you all a little gift: a column that I guarantee will make you more more successful in the coming year.

Here are 14 quick strategies to get and keep yourself motivated:

1. Condition your mind. Train yourself to think positive thoughts while avoiding negative thoughts.

2. Condition your body. It takes physical energy to take action. Get your food and exercise budget in place and follow it like a business plan.

3. Avoid negative people. They drain your energy and waste your time, so hanging with them is like shooting yourself in the foot.

4. Seek out the similarly motivated. Their positive energy will rub off on you and you can imitate their success strategies.

5. Have goals–but remain flexible. No plan should be cast in concrete, lest it become more important than achieving the goal.

6. Act with a higher purpose. Any activity or action that doesn’t serve your higher goal is wasted effort--and should be avoided.

7. Take responsibility for your own results. If you blame (or credit) luck, fate or divine intervention, you’ll always have an excuse.

8. Stretch past your limits on a daily basis. Walking the old, familiar paths is how you grow old. Stretching makes you grow and evolve.

9. Don't wait for perfection; do it now! Perfectionists are the losers in the game of life. Strive for excellence rather than the unachievable.

10. Celebrate your failures. Your most important lessons in life will come from what you don't achieve. Take time to understand where you fell short.

11. Don’t take success too seriously. Success can breed tomorrow's failure if you use it as an excuse to become complacent.

12. Avoid weak goals. Goals are the soul of achievement, so never begin them with "I'll try ..." Always start with "I will" or "I must."

13. Treat inaction as the only real failure. If you don’t take action, you fail by default and can't even learn from the experience.

14. Think before you speak. Keep silent rather than express something that doesn’t serve your purpose.

Top 6 Management Mistakes Entrepreneurs Make

2011-12-19T12:28:00.001-08:00

The business plan is the easy part. Managing and leading a team? That's where the learning curve gets very steep.

Leaders are made, not born... which makes it tough when you start a company and have little to no management experience. (I spent years working my way through a variety of management positions and still made nearly every mistake possible.)

For many entrepreneurs the “business plan” stuff is the easy part; managing employees and leading a team involves a very steep learning curve.

Instead of waiting learning from your mistakes, take the easier route and learn from a few of my biggest leadership mistakes:

Too many positives equal a negative. Say you’re discussing the reasoning behind a new project. There are tons of positives, and your employees should be excited, but for some reason they seem wary. Why? Employees instinctively look for the downside because there is always a downside—and downsides always flow downhill. Share the negatives too. Freely describe the downsides. Show you understand that every project, every initiative, and every new process involves an upside and a downside. Sharing the positives is fun; sharing potential negatives is essential. While it isn’t easy to show doubt, your employees will respect you for it.

Results come and go but feelings are forever. Make decisions based on data, but lead based on feelings and emotions. Criticize an employee in a group setting and eventually he’ll appear to get over it... but inside he never will. When you make a decision, spend more time considering how employees will think and feel than you do evaluating whether the decision makes objective sense. You can easily recover from a mistake made based on faulty data or inaccurate projections. You’ll never recover from damage to an employee’s self esteem.

The flow of ideas is easy to turn off. For example, your best employees will typically generate the best ideas. (That is one of the reason they are great employees.) When an employee has a great idea, it’s natural to give her the responsibility for putting that idea into practice. Unfortunately your best employees are also great because they are extremely productive. The last thing they may need is responsibility for yet another initiative. Pile on too much and if only out of self defense some will stop making suggestions. Give other employees a chance to shine instead; all they may need to become great is an opportunity.

No presentation ever changed the world. Formal education conditions us to assume great information comes from presentations. (Listening to lectures while watching PowerPoint slides must be the best way to learn, right?) In business there’s an inverse relationship between the length of a presentation and its value: The longer the presentation the less valuable the ideas and information. The best ideas can be captured in one or two sentences. Plus, most of the time your employees have those ideas. Listen to your employees and turn their ideas into action. The only presentations you really need are ones used to recognize your employees’ great ideas.

Data is accurate, but sometimes your employees are right. Some decisions should be based on more than analysis, logic, and reasoning. Ideas and decisions are eventually carried out by people, and every employee has a different set of skills, emotions, motivations, and agendas. Leadership decisions should certainly be driven by data, but great leadership decisions can be messy and at times counter-intuitive. If your employees don’t agree with you, ask why. Don’t simply defend your position—find out what they know and why they feel the way they do. No one knows everything, and the only way we learn is when we shut up and listen.

How to Run Your Business Without You - Key to Increasing the Value of Your Business

2011-12-01T10:04:00.001-08:00

Making sure your company can operate in your absence should be a basic element of business planning, but many entrepreneurs don't consider the possibility until it's too late. Planning for short-term and long-term replacements is key.

But how do you do that? Here's how to get started.

Get Your Job In Writing. It's easy to become mired in day-to-day tasks and lose track of how you're running your company. Knowing how you spend your time daily is key to ensuring your business can run without you. Ask the question, 'Who can jump in and do my whole job?' Ask yourself: What are the short-term and long-term aspects of the business you take care of? Write them down.

Prioritize. You'll find that certain responsibilities stand out among the many. Identify your priorities and start thinking about what would happen if you weren't around to do those tasks. This ensures that if you're pulled away from your job unexpectedly, the people who step in will know what to tackle first.

Create Processes. Writing out step-by-step instructions for your most important tasks will ensure those responsibilities are taken care of in your absence. Whether it's payroll or tracking sales and expenses--responsibilities that business owners tend to guard closely--making sure someone else knows how to handle those tasks is essential. For example, after Ashton's fall, he switched from manually signing every check himself to using an electronic signature.

Identify People Who Can Step In. Make a list of all your key contacts, starting with employees, vendors, clients, bankers, accountants, and lawyers, and think about who could take over each of your responsibilities

Step Back While You Can. It often takes an emergency for small business owners to realize they don't need their hands in every aspect of the business. Getting away from day-to-day chores has also allows you to spend more time on the company's long-term growth including raising money, expanding marketing efforts, and launching new services, etc.

Stop Procrastinating - NOW!

2011-10-13T13:03:00.001-07:00

It seems that no one is immune to the tendency to procrastinate. When someone asked Ernest Hemingway how to write a novel, his response was "First you defrost the refrigerator." But putting off tasks takes a big hit on our productivity, and psyche. Procrastination is not inevitable. Figuring out why you postpone work and then taking concrete steps to prevent it will help you get more done and feel good about yourself.

What the Experts Say
According to Ned Hallowell, a psychiatrist and the author of 12 books, including Driven to Distraction, delaying work is often a symptom of how busy you are. "We procrastinate because we all have too much to do," he says. And of course, we want to dodge things we don't like. "Many people procrastinate because they fear the drudgery or the difficulty of the task they are avoiding," says Teresa Amabile, the Edsel Bryant Ford Professor of Business Administration at Harvard Business School and coauthor of The Progress Principle. But, as you have likely learned, it doesn't pay to dawdle. "Putting it off doesn't make it go away. Getting it done does," says Hallowell. Here are five principles to follow next time you find yourself deferring important work.

1. Figure out what's holding you back
When you find yourself ignoring or delaying a task, ask yourself why. Hallowell points out that there are two types of tasks most often deferred:

Something you don't like to do. This is the most common one. As Hallowell says, "You don't put off eating your favorite dessert."
Something you don't know how to do. When you lack the necessary knowledge or are unsure of how to start a job, you are more likely to avoid it.

Once you've identified why you've put something off, you can break the cycle and prevent future bouts of procrastination.

2. Set deadlines for yourself
One of the simplest things you can do is create a schedule with clear due dates for each part of a task. "As soon as you get the project, chunk it down into a few manageable segments that you can complete in sequence," Amabile advises. Then, assign deadlines for each piece. "Put an appointment in your calendar to work on a small piece of the next segment each day to allow yourself to get it done a bit at a time," she says. These "small wins" make the work more manageable and contribute to your sense of progress. And achieving them is much easier than trying to barrel through a complex project.

Setting deadlines also makes sure the project doesn't get buried. For things that you are likely to put off, add reminders in your calendar or put a Post-It on your computer screen. Use whatever visual cues will ensure you don't avoid the project.

3. Increase the rewards
We often dally because the reward for doing a certain assignment is too far off. Regina Conti, an associate professor of psychology at Colgate University and an expert in motivation, provides the example of doing your taxes. "A person may want to complete their taxes to avoid the legal penalties of not doing so, but because those penalties are far in the future and the task is a boring one, they will not have much incentive to get started with the project," she says. To make a task feel more immediate, focus on short-term rewards, such as getting a refund. Or if there aren't any, insert your own. Treat yourself to a coffee break, or a quick chat with a co-worker once you've finished a task. You can also embed the reward into the task itself by making it more fun to do. Work with someone on a particularly difficult project or set up a game for yourself so that doing the task isn't so boring or onerous.

4. Involve others
One of the principles Hallowell often repeats in his work is "Never worry alone." If you don't know how to do something, ask for help. Turn to a trusted colleague or a friend for advice. Or, look for an example of the project you are working on to use as a starting point. "Others are a great source of extrinsic motivation," says Conti. Asking someone to review your work can spur you to get started knowing they will expect it. You can even enter an anti-procrastination pact with a co-worker: share what you are working on and hold each other accountable to set deadlines.

5. Get in the habit
"People throw up a hand and say 'I'm such a procrastinator' as if they have no control," says Hallowell. "You do have control over this and you'll be very proud when you change it." Hallowell says that he used to be a procrastinator but trained himself to stop. "I don't procrastinate at all now. I just do it," he says. There are immediate benefits when you start getting things done right away, and it's a habit you can cultivate. Amabile suggests tracking your improvement. "Spend just five minutes a day to note the progress you made, any setbacks you encountered, and what you might do the next day to enable further progress," she says. She recommends you do this in a work diary. Then see yourself, and talk about yourself with others, as someone who gets things done. "The most powerful event, for maintaining positive inner work life, is making progress in meaningful work," says Amabile.

Principles to Remember

Do:

Identify which tasks you are most likely to put off
Use deadlines to motivate you to get things done within a certain timeframe
Reward yourself for reaching milestones

Don't:

Call yourself a procrastinator as if it is an intrinsic part of who you are
Tackle arduous tasks on your own — ask others to help you get over the hump
Try to finish a project in one sitting — break it down into smaller, achievable chunks

How to Narrow Your Target Market

2011-07-19T12:17:00.001-07:00

Companies that try to be all things to all customers are sure to fail. Here's a business guide on how to focus on your target market.

Huge, profitable companies like Walmart and Amazon didn't start as the all-encompassing retailers we know today. Each debuted with a very specific focus that helped them find and nurture a strong customer base. Walmart originally catered to shoppers in rural areas where there was a dearth of options for low-cost goods; Amazon famously limited itself to just books for years before expanding into selling everything from DVDs to motorcycle gear.

The process of finding a target market and narrowing your company's focus to appeal to it directly often trips up new businesses, who find it difficult to turn down business opportunities when they arise. But trying to be all things to all people is a sure way to fail in the marketplace.

The Dangers of Being Unfocused

Whatever market you're in, you've likely got a lot of competition and static standing between you and the consumer. Narrowing your focus to one specific demographic or slice of the marketplace gives potential customers a reason to notice you in the rest of the fray.

If you don't know specifically which customers you are speaking to, you are actually speaking to no one.

The big danger is that without a target market, it's like standing in a park shouting in the wind. When you have a target market, its like standing in a park and talking to a specific group of people.

That means you can't be afraid to exclude certain types of consumer from your marketing or to target your advertising at small groups. Some customers will feel left out, but those are the sacrifices necessary for a successful business.

Become an Expert in one Area

One way to hone in on a specific sector is to become an established resource in one area. Starbucks, for example, is able to charge premium prices for its coffee even though it also sells pastries, tea, and accessories, because it has positioned the company as an authority on good coffee.

If you're an expert in your field, people will pay the price tag on whatever product and service you offer

You can build up credibility by offering information for free through your company's website or blog: things like tips, industry information, or niche data that will help consumers think of you as a reliable expert in that area, she says.

Your credibility comes with giving away information. If this is the value I'm getting for free, what will I get if I pay for it?

Dig Deeper: Do the Market Research

Experts give several methods for whittling down the vast expanse of the market to find your ideal target.

Some business owners find their niche first by focusing on the areas in which they already have a strong interest, or by looking at markets that already know about you and your services. Then, look for areas of the marketplace where a gaping need exists that you can fill with your company's services.

Tweak your Marketing

As simple as it sounds, the name of your company is crucial when narrowing your market.

You may have to change your branding strategy or marketing efforts to clarify your mission. Once you find your target, you'll definitely want to alter your advertising efforts to go after the places and media you use to generate new business.

It's not just an advertisement that you do. It actually has to become part of everything you do.

Your marketing needs to highlight the specialization, which improves credibility. You've got to be perceived as the best at something.

Then, once you've identified that base, use it to improve the business through things like social media and interactive marketing to find out more about what the customers are looking for.

Discover Your Marketing Perspectives

2011-06-27T13:32:00.000-07:00

Do you believe that there is a right way and a wrong way to market your business? Is there a set of rules floating around somewhere that we must live by when we step into the role of marketing director for our company?

While some marketing guru’s have discovered that there are steps that are more, or less, effective than others, it’s important to evaluate your own belief system and be certain that your marketing represents YOU. But if your current marketing mindset is fearful and limiting, it's time to step into a new mindset and bring success to your door. There is a wealth of outstanding information out there for all of us, and you can combine this information with your own perspective to create an effective marketing model that resonates with you and represents your brand authentically.

Here are a few questions you can ask yourself to understand the value of what you offer, and to find the words to share your wonderful offerings with a larger audience.

What is unique about my product or service?
What is unique about ME and how does that enhance my product or service?
How does it help others?
How does it enhance the lives of my clients/customers?
What are some of the things my clients have said about their experience with me or my company?
Would my clients feel good about telling others about their experience?
Is there something I can do to help those happy clients to easily spread the word of this experience?
What can I do for my clients/customers to thank them for their business?
Is there anything I can do to make my product of service more affordable for them on occasion?
What are the most common words I hear others use to describe their experience of my product or service?
How can I use those words to describe it to my future clients?
If I don’t tell more people about my offerings what am I depriving them of?

If your marketing mindset is stopping you from growing your company, if you shudder when you hear the word, consider embracing a new mindset. Instead of marketing, use words and phrases like; sharing, spreading the word and helping others.

Enjoy growing your business; let us know how you’ve shaped a new perspective!

Tips for Business Owners on Retirement Planning

2011-06-23T15:07:00.000-07:00

'I'll never retire' is a common refrain among ambitious entrepreneurs, but the fact is you are likely to decide to at some point. Here's a look at how to plan for that day.

Saving for retirement is tough. For one thing, there's no way to know exactly how much you'll need to save. All you can do is make your best guess based on your situation and goals.

Traditionally, financial planners and retirement calculators suggest you'll need 70 percent (or 80 percent or 100 percent) of your pre-retirement income to maintain your current lifestyle. This doesn't make much sense.

Say, for instance, you earn $80,000 a year but spend $70,000. If you based your retirement needs on your income (70 percent of $80,000 is $56,000), you'd fall short of supporting your current lifestyle. But if you earn $80,000 a year and spend only $35,000, basing your retirement goals on your income might lead you to save too much, meaning you could have used that money to enjoy life when you were younger.

68 percent Workers who report that they have saved for retirement

56 percent Workers who report that the total value of their savings and investments is less than $25,000

36 percent Workers who expect to retire after age 65

74 percent Workers who plan to work for pay in retirement

How Much Should You Save?
Instead of basing your retirement needs on your income, base them on your spending patterns. Your spending reflects your lifestyle; your income doesn't. But how much should you save?

According to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey, 49 percent of retirees spend less in retirement than before (23 percent spend much less) and 37 percent spend about the same. Only13 percent spend more in retirement--and of those, 6 percent say their expenses are only "a little higher."

Sure, you will need a sizeable nest egg for retirement--especially if you plan to travel or play golf every day. But don't be snookered by the constant refrain that you need to save 70 percent of your pre-retirement income to retire well.

Retirement Calculators
There are hundreds of retirement calculators across the web, and each is a little different. No one calculator is necessarily better than any other, but these are especially handy:

The T. Rowe Price calculator bases its results on your spending, not income.
The Motley Fool has two useful calculators. One estimates your retirement expenses and the other lets you see if you're saving enough.
Choose to Save's ballpark estimate tool can be used online or off. (But its numbers are based on income, not expenses.)
FireCalc.com may seem overwhelming at first, but it'll give you an idea of how safe (or risky) your retirement plan is based on how it would have fared in every market condition since 1871.

Looking at the results from one calculator isn't very useful. But by comparing numbers from several, you'll get an idea of how much to save for the retirement you want. If you're lucky, you may even have enough to spend your mornings on the golf course.

Remember, as a business owner you own an asset, be sure to include the sale price of your business into your net worth and retirement plan. Have an exit strategy in place, and be sure to get a “Broker’s Opinion of Value” to ensure you have a grasp on the true value of your business when you are looking to retire and ready to sell.

Maintain Your Mental Well-Being

2011-06-08T10:00:00.001-07:00

This week the US government revised the food pyramid — that diagram that's been with us for decades that is supposed to remind people how to eat well. The model needed a revision, and the new version, called Choose My Plate, is a big improvement.

However, there's a different epidemic happening out there that's getting less attention, perhaps because it is less obvious than the epidemic of obesity we're experiencing. It seems we may be entering an era of an epidemic of overwhelm. A time when too many people's mental well-being is being stretched through multi-tasking, fragmented attention and information overload.

The trouble is, we are short on simple, clear information about good mental habits. Few people know about what it takes to have optimum mental health, and the implications of being out of balance. It is not taught in schools, or discussed in business. The issue just isn't on the table. Businesses schedule time as if the brain had unlimited resources, as if we could focus well all day long. Every week I talk to an organization who says that their biggest problem is simply the overwhelm their people are feeling. Without good information about the mind and brain, we may be stretching ourselves in ways that may have bigger implications than poor eating habits.

This platter has seven essential mental activities necessary for optimum mental health in daily life. These seven daily activities make up the full set of 'mental nutrition' that your brain needs to function at it's best. By engaging regularly in each of these servings, you enable your brain to coordinate and balance its activities, which strengthens your brain's internal connections and your connections with other people.

The seven essential mental activities are:

Focus Time. When we closely focus on tasks in a goal-oriented way, taking on challenges that make deep connections in the brain.

Play Time. When we allow ourselves to be spontaneous or creative, playfully enjoying novel experiences, which helps make new connections in the brain.

Connecting Time. When we connect with other people, ideally in person, richly activating the brain's social circuitry.

Physical Time. When we move our bodies, aerobically if possible, which strengthens the brain in many ways.

Time In. When we quietly reflect internally, focusing on sensations, images, feelings and thoughts, helping to better integrate the brain.

Down Time. When we are non-focused, without any specific goal, and let our mind wander or simply relax, which helps our brain recharge.

Sleep Time. When we give the brain the rest it needs to consolidate learning and recover from the experiences of the day.

We're not suggesting a specific recipe for a healthy mind, as each individual is different, and our needs change over time too. And we're not suggesting that business suddenly changes everything and reorganized all of work. The point is to become aware of the full spectrum of essential mental activities, and just like with essential nutrients, make sure that at least every few days we are nudging the right ingredients into our mental diet.

Just like you wouldn't eat only pizza every day for days on end, we shouldn't just live on focus time and little sleep. Mental wellness is all about giving your brain lots of opportunities to develop in different ways. In organizations, from a practical perspective, this means allowing people to work from home more, to be more flexible, to give people more autonomy.

In short, it is important to eat well, and we applaud the new healthy eating plate. However as a society we are sorely lacking in good information about what it takes to have a healthy mind. We hope that the healthy mind platter creates an appetite for increasing awareness of what we put into our minds too.

Three Traits of a Successful Entrepreneur

2011-05-24T16:28:00.001-07:00

Sometimes when you're wondering what to do next in life, good advice can come when you least expect it — like when you're getting your hair cut.

Jenn*, the hairstylist giving me a trim, mused aloud about what she was planning to do with her career. Cutting hair was just one part of her livelihood; she was also a professional caregiver as well as the owner of a rig that her husband operated. But her husband was about to retire from the road, and now they were wondering, "What next?"

Over the course of our brief conversation, in no more than the time it took Jenn to cut my hair, I picked up on three attributes of her success that are helpful for any entrepreneur:

Practical. Listening to her brainstorm reminded me that successful entrepreneurs know how to keep their feet on the ground. First, they get inspired through personal observation, developing ideas from needs they see in the world around them. Second, they develop a concrete plan. They may work the plan, changing it as they go, but always with an eye towards getting a good return.

Purposeful. People with a practical outlook seek opportunities that add value, as opposed to opportunities that just seem "cool." (It's easy to forget this distinction, especially in well-established organizations.) Their focus is offering products and services that customers need and will pay for. For instance, Jenn's second job as a caregiver: that's a service for which there is always a need.

Impatient. Sure, patience is a virtue in some cases. But for an entrepreneur, so is impatience. Jenn is eager to make things happen so that she can continue to earn a good living. When it comes time for her husband to leave the trucking business, she will be ready with another venture. Her gumption and ambition make her impatient for success, and that drive increases her chances of getting there.

There's one final trait that successful entrepreneurs share: They realize that inspiration is useless without perspiration. During my 15 minutes in Jenn's chair, we talked about three different industries she's involved in — personal service, health care, and transportation. People who work for themselves have to rely on their own get-up-and-go.

People like Jenn enjoy working for themselves because it affords a level of independence. With hiring still sluggish at large firms, I suspect we will encounter many more such entrepreneurs. The future of our economy may indeed depend upon such folks, whether they are running a company that cuts hair, or running a company that makes microprocessors.

People who can think and plan ahead, are comfortable with uncertainty, and have the discipline to work hard are an asset, and are ideal candidates for business ownership.

How Do I Build A Valuable Company?

2011-05-18T09:09:00.000-07:00

My entrepreneurial journey has seen me start and exit a number of companies. I want to share three of my best tips for building a valuable – sellable – company.

Tip No. 1: Make it all about a number of clients, not one client

It's common for a business to be dominated by one or two important customers. It happens pretty naturally. You do a good job for one customer, and they buy again. You keep satisfying them, and they stop looking for other suppliers and start to bring more and more of their orders to you in hopes you can handle the increase in business while maintaining your amazing service.

Given their importance, you're probably also servicing this giant customer personally, which makes them even more profitable because you do not need to hire sales or service staff to support the account. This, of course, makes both the account and your business very profitable—which makes it harder to walk away. It's a cash cow.

Pretty soon, you have a codependency that can undermine the value of your company—and make it virtually impossible to sell. For example, an acquaintance of mine owns a business that supplies a product to the home improvement chain Lowe's. In some months, Lowe's makes up more than half of his revenue, which is why, when the U.S. housing market crashed and Lowe's slashed the size of its orders and slowed down its payment cycle, my friend's business teetered on the brink of insolvency.

Desperate for cash, my friend tried to sell his company to both strategic and private-equity investors, all of whom offered him pennies on the dollar (when compared to the value of similar businesses) because of his reliance on just one customer.

To build a valuable company—one you can sell if you choose—you need to winnow down your reliance on any one buyer. My suggestion is to strive to ensure no one customer represents more than 15 percent of your revenue.

Tip No. 2: Increase your customer base

We survive the early years of our business by listening to our customers and responding to their requests. The problem is, when all you're doing is reacting to customers, you end up offering way too many things—customizing too much—because everyone wants a slight twist on your offering.

If you offer an ever-expanding list of things, your staff will never get really good at making or selling anything. The broader your product or service line, the more your business will be reliant on you—the person with the most knowledge in your field—rather than your employees. If the business is too reliant on you personally, it will be hard to sell.

To pull yourself out of this quagmire, you have to sell less stuff to more people. That may seem like counterintuitive advice, but some of the fastest-growing, most valuable companies in the world do it.

Take Apple for example. Apple is really good at selling a few core products (iMac, MacBook, iPhone, iPod, and iPad) that offer the same basic user interface. As a result, the company can train its Apple Store employees on one basic operating system and a few core products.

By contrast, walk into a Best Buy, with thousands of technology products running hundreds of different operating systems. If you're actually able to find someone to help you, you'll be lucky if they can read the specifications on the back of the box, let alone actually know anything about the product.

Focusing on selling less stuff to more people will allow your business to scale up beyond you, which in turn will allow you to grow through the ceiling that holds back many owner-dependent businesses. Ultimately, you'll have a company you can sell.

Tip No. 3: People want to work with you because you are the BEST at what you do.

Quick—how do you explain your business in a social situation? Do you define yourself by your industry? For example, "I own a printing company." Or do you describe what makes your business unique? For example, "We've developed a process for printing annual reports that reduces the turnaround time to three days."

The problem with describing yourself as a part of an industry is that most industries are commoditized. You're sentencing yourself to a life of low margins and groveling for work. When there is nothing unique about your business, the customer has no choice but to rely on price as the only decision-making criterion.

And before you claim "customer service" as what makes you unique, remember that people don't buy wishy-washy claims as a point of differentiation. After all, service is in the eye of the beholder, and until your prospect makes the decision to become a customer, intangible claims about how well you treat your customers ("offering great customer service since 1977," "specializing in great customer service") will not sway them.

Instead of describing your business in terms of the industry you're in, accompanied by some vague description of your service, describe in concrete terms what makes your business different. For example, under Tony Hsieh, Zappos became a successful company (Amazon acquired it in 2009) not because it's a retailer of shoes but because it offers a two-way free-shipping policy.

One-way free shipping is standard for a lot of e-tailers, but Zappos offers to ship your shoes free and then if you don't like them not only refund your money but also pay to pick them up. "Great customer service" is a wishy-washy claim. "Free returns" makes Zappos special and is a big part of what sets it apart. A shoe retailer is a boring commoditized business with low margins and very little hope of being acquired. A company that allows people to return shoes if they don't like them, all from the comfort of their own home, is unique and a big part of the formula that allowed Zappos to scale up into a sellable business.

Stop describing the industry you're in and start describing what makes you irresistible.

Capital Gains Taxes Changing - 0% for 2011

2011-05-12T09:35:00.000-07:00

The idea of paying no taxes on your capital gains is an appealing one for most small business owners and investors.

And based on current tax law, it's very possible for many. For taxpayers who are in the 10% or 15% tax brackets for ordinary income, the maximum tax they'd owe on stocks and mutual funds sold for a gain would be 0%.

The zero tax rate is especially appealing now, since many small business owners who might not have expected to qualify just might.

Originally, the 0% maximum capital gains rate was supposed to expire in 2010. However, the 0% rate was extended to last through the tax year 2011.

This is only one of MANY changes to taxes for 2011. I will be facilitating a webinar on May 17^th discussing this and many other “game changers” for business owners. Our guest speaker will be Monty Walker, CPA, CBB, BCB – a renowned tax expert specializing in small businesses.

Reserve your seat: https://cc.readytalk.com/cc/schedule/display.do?udc=gp8lq3q51ukg

The First Step to an Exit Strategy

2011-04-29T11:10:00.000-07:00

When do you want to sell your business? If you're like most business owners, the date keeps shifting. Like driving on a flat stretch of highway, you keep going, and yet the horizon never seems to get any closer.

If you ask a business owner when they are going to leave their business, they'll say five years from now. If you ask them three years later, it will still be five years from now. Business owners know they can't afford to leave their company because it doesn't have enough value to fund their retirement. They're not sure what they need to do to increase its value, but they think they will be able to fix it in five years.

Without a clear plan to increase its value, a business owner risks being taken out boots first still five years away from being ready to sell.

To get out of the Perma Five cycle, we recommend business owners divide their time between tasks that are either operational or strategic and focus on eliminating operational tasks one by one.

A business with an owner who is operationally irrelevant yet still strategically involved has a lot more value than a company in which all the little decisions are run through the corner office.

To become operationally irrelevant, we recommend business owners create a summary of the key elements that drive their business. Just like scanning a car's dashboard to check your speed, you start looking at the metrics on the dashboard and managing the numbers, instead of wading into every crisis to try to fix it.

So what should be on your dashboard? I know manufacturers that track their work-in-progress (WIP) to the day and Internet companies that monitor their conversion rate in real time to the decimal point. Your dashboard should include a few basic numbers that reveal how you're doing now and ideally how your next few weeks are shaping up.

• Cash position
• Revenue on the books for the month
• Customer retention rate
• Rolling net promoter score (a measure of customer satisfaction)

If you can make yourself operationally irrelevant, you'll be able to sell your business if you want to, or, if you don't, you'll have more fun running it knowing you can focus on the strategic issues without getting marred in the operational details.

Day 2: Understanding EBITDA: Seek Outside Opinions

2011-04-13T09:18:00.000-07:00

You can tinker with the formula all you like. But how will you know what calculations are safe to assume and which aren't? How do you put a price tag on your company's competitive advantage, list of customers, and your brand as a whole?

There are endless variables and measurements that factor into your company's worth. One way to gauge interest is to approach potential buyers in your industry.

There are a number of other resources you can use to estimate the value of your company. Business Valuation Resources, for instance, provides you with comparative and historical information within your industry. Experts agree, though, that EBITDA does depict an accurate comparison across markets because of the exclusion of interest and taxes that vary by sector. Making the right changes – cutting unprofitable costs, expanding sales, or reaching new markets – can have a significant effect on EBITDA as a measure of your performance.

At this point a simple question remains: which year's EBITDA are we talking about, the current, past, projected, or a combination? Buyers, of course, will be pushing for a lower valuation and might look at an average of EBITDA over, say, three years as the base number. To get the highest valuation, you'll want to bolster gains in the present and future. To do so, be sure to exceed your business plan and monthly goals, create a solid sales stream into next year, and get clients on-board with long-term contracts. Don't exaggerate too wildy, though: sophisticated buyers will always cut through the grease.

How to Use EBITDA to Value Your Company

2011-04-11T12:40:00.000-07:00

It's not the only number potential buyers look at, but EBITDA will give you a solid idea of how they'll start evaluating your business.

Looking to the future, can you envision a time when you might want to sell your business?

The best way to build a company is to build it as if you're going to sell it. It has to be built to last.

One place to start measuring your company's potential value in a sale is determining your EBITDA, or earnings before interest, taxes, depreciation, and amortization. It's certainly a mouthful, but the equation itself is really quite simple: subtract expenses from revenue (excluding interests and taxes) without depreciation and amortization (what you pay for tangible and intangible assets). The remaining number paints a basic picture of your profitability as well as your ability to pay off what it owes.

It's a quick way to assess the firm's ability to pay back interest or debts. EBITDA can be thought of as a "quasi-estimate" of your free cash flow, a more traditional and comprehensive assessment of a company's performance. You can get a more accurate reading of your free cash flow by subtracting out new capital expenditures for that year. Once you get this dollar amount, simply build upon the foundation to see how well you are doing.

Day 1: Understanding EBITDA: Add and Subtract Value

It's unlikely that you as the business owner would be fiddling around with your company's EBITDA. Still, before you sit down with the buyers or investors who will, it's important to understand what they'll be looking at.

Essentially, EBITDA on its own makes for a fairly futile statistic. There is, after all, a very good reason why you depreciate and amortize assets. To simply put those charges back in to earnings may give an unrealistic measure of your finances.

That's where the need for adjustments comes in. Since EBITDA is technically a non-GAAP figure, meaning it does not conform to generally accepted accounting principles, you can make these adjustments almost wherever you see fit. As just mentioned, you might need to devalue assets like old equipment within the overall number. Likewise, you also might have failed to collect some accounts receivables from clients. These result in a net-negative for your operating cash flow.

By the same token, you can also add both tangible assets (like equipment) and intangible assets (like your management team and employees) to the figure. It's typically through this addition process that you arrive at your company's value as a multiple of EBITDA. Let's say you pay yourself a $300,000 salary for a position that someone – like a buyer or competitor – could do for $150,000. That buyer would then add that extra $150,000 back into the value of your company once its absorbed. In this case, the number you arrive at is a form of adjusted EBITDA called "field" EBITDA, where you take into account subsidiaries and components of a company that can be absorbed for little to no cost. The term most often applies when selling the business to one in a similar field, in which case the management team, office space, and other business expenses may fall by the wayside during the takeover.

How to Get Involved with Your Employees Work Without Micromanaging People

2011-04-05T14:30:00.001-07:00

One of the more vexing problems most small business owners face every day is how to get involved in the work of their people without doing the work themselves or micromanaging those doing it.

You can resolve this when you think of every activity not as one step — doing — but three distinct steps: prepare to act, act, and then reflect on the outcome and what can be learned from it.

Start by expecting your people to use Prep-Do-Review themselves in their work. Not only will it make them more effective, but it will provide a way for you to become involved in their work as appropriate for the person and the situation.

This is the way it works:

Prep: Start by previewing people's plans with them and suggesting changes, if necessary. You do this by asking crucial questions. What are you going to do? Why — for what purpose? How will you do it? How can you use this to make progress on our goals and plans? Who should be involved or kept informed? How can this be used to help you learn and get better? What if your assumptions are wrong or the unexpected happens? This is how you move your group's purpose, plans, and work forward, how you coach and develop others, how you delegate more confidently, how you assure yourself that someone is well prepared and ready to act on her own.

Do: Based on what you learned in the Prep stage, you can decide whether and how to be involved in the doing of the activity. Working with a novice, you may want to perform the activity yourself while the person observes. Next, you may want to monitor periodically as the person does the activity and then give them feedback afterward. Thereafter, you probably don't need to be present at all — the Prep and Review stages are where you'll be involved.

Review: Great managers make post-action review a regular practice for themselves and their people. You can make it the focus of a one-on-one after an activity has been completed. Or it can be part of periodic meetings with each of your people or a standard procedure you go through in the updates your people provide at staff meetings. Be sure to model what you expect when you describe something you did — Here's what we learned. Next time we'll do it this way.

Remember to do a review regardless of the outcome of an action — failure or success. We are much more likely to reflect on our failures. Too often, we don't take time to learn from our accomplishments and never really understand the keys to our success and what lessons we can take forward.

Most of your managerial interactions with people will occur in the Prep and Review stages. Only with someone inexperienced or in situations of high stakes and high risk will you, or should you, be involved in the actual performance of a task.

Used this way consistently and consciously, Prep-Do-Review becomes a powerful management tool that will improve how you manage your people. By giving you ways to be involved without directly intruding as your people do their work, it will make your interactions with them richer, improve outcomes, help people learn, and make you a better delegator.

If you operate this way as a boss consistently, you'll find certain core management tasks become easier and more systematic. It will let you delegate more intelligently, based on both a person's skill and experience level and on the situation. It will help you coach people more effectively; indeed, it will help you turn many tasks into learning experiences. And it will let you use your time more effectively by helping you determine when you do and don't need to be involved.

With very experienced people, and especially with routine tasks, you needn't be involved in either Prep or Do, but as a boss you never completely let go of the Review stage. You may not review outcomes after every task, but ongoing performance review is something you'll never give up entirely.

If you think about it, Prep-Do-Review is the fundamental cycle of activities by which effective bosses manage — through a perpetual loop of prep-do-review-prep-do-review. By using it to become more mindful and deliberate in all you do, it will help you convert mundane workaday activities into management activities. It will help you make progress through the daily work. And it's the way you guide your people, produce results, and help them learn without inserting yourself unnecessarily into what they do. It's not the solution to every management challenge, but it's a powerful approach and the closest thing to a management secret that we know.

Groom Your Company with a Buyer in Mind

2011-03-29T16:25:00.000-07:00

One of the reasons that so many companies are formed in Silicon Valley is that they are all groomed from Day One for sale to another Silicon Valley company. Proximity makes it just that much easier for a company to be sold, which makes it that much easier for the company to raise capital. When a company has a huge-market capitalization, it can use that stock or cash to go on an acquiring binge. For many years, we started companies with a specific buyer in mind, such as Microsoft, Oracle, or Cisco. More recently, Google, Groupon, and AOL have been active acquirers. The movie companies are also in the wings as they decide to get into or out of the game business. It is a good strategy to watch the IPO market this year and ask yourself what newly-public companies would like to buy. Groom your start-up from to be a fit into their portfolio. Then move fast and get something going quickly before they have spent their money or find out that some of the things they bought are crap. Your sale will make your shareholders rich and you get to work with these companies for a couple of years as part of the deal. After that, you can buy your boat (or perhaps an island) and live happily ever after.

Alternative Acquisition Funding

2011-03-16T08:33:00.000-07:00

As the economy struggles to rebound, unemployment rates remain at historical highs and millions of Americans are still looking for work. As a result, many have considered following their entrepreneurial dreams of "creating" their own job rather than relying on corporate America to see them through. While hard times have kept demand for small businesses high and a wide selection of options are on the market, most business buyers are facing one major challenge: Accessing the capital required to purchase one.

It's rare that a buyer has enough cash to buy a business outright, so traditionally they've relied on a variety of sources to finance the purchase. Unfortunately, the primary source of capital for small business buyers--commercial and bank loans backed by the U.S. Small Business Administration's 7(a) loan program--has dried up significantly over this past year. According to numbers released for the SBA's 2009 fiscal year, the 7(a) program made 36 percent fewer loans than it did in 2008, backing only 44,221 loans from banks for starting, purchasing, or expanding a small business.

These numbers might seem to paint a grim picture for aspiring business buyers, but fortunately there are other ways to secure financing to buy a business. If you're in the market but face a lack of capital and no clear idea of where to start, consider the following financing options:

Peer-to-Peer Lending Networks
If you're unable to access bank capital to finance a small business purchase, one alternative is to turn to peer-to-peer lending networks. These networks remove the traditional lending institutions, instead allowing lending transactions to take place directly between individuals. If you want to use this route, you can do so via online companies such as Prosper.com and LendingClub.com. On these sites, loan seekers request a specific amount (typically up to $25,000) at a specific interest rate, and lenders fund all or portions of the loan. Lenders are then paid back with interest over a set period of time. Buyers' success when using these networks depends largely on their credit ratings.

Friends and Family
Borrowing money from the people you're closest to in life is probably the longest-standing method of funding entrepreneurial endeavors. Many people are hesitant to borrow money from friends and family for fear of straining personal relationships, but--if you make it a point to hold up your end of the deal under all circumstances and borrow only from individuals who are in a position to lend without risking their own financial health--it can serve as one of the most effective ways to fund a business.

If you feel this is an ideal method for your individual situation, you can use sites such as VirginMoney.com to manage the process of borrowing from people you know to ensure all parties involved are comfortable with the deal and confident that all loans will be paid back on time.

Retirement Funds
As with borrowing money from friends or family to buy a business, some might consider using money from a retirement nest-egg risky. That said, it can often be an effective way to invest in your entrepreneurial endeavors and has had successful outcomes for more and more of today's business buyers. As laid out by the government's ERISA law, you can invest your existing IRA or 401(k) funds to the purchase of a business without taking an early distribution and incurring penalties.

It's even possible to combine money from your retirement fund with loans and other funding methods for greater flexibility. Many entrepreneurs choose to invest in a business they control because they believe the growth opportunity is greater and want to diversify a portion of their retirement holdings outside of the stock market. If you find this is a viable option, sites such as GuidantFinancial.com can provide you with more information on this small business investing method.

Seller Financing
Increasingly today more business-for-sale transactions are resting on a seller's willingness to finance at least part of a sale. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three-to-five years. This has become essential; buyers are having difficulty accessing funds through traditional methods, therefore there's a natural gravitation toward seller-financed businesses to help offset some of the cost up front.

Conversely, sellers who continue to say no to seller financing are finding it difficult to close a deal, and as more of them have realized this, there has been an increase in seller-financed businesses on the market. To make it easier for buyers to locate these businesses, my company site, BizBuySell.com recently introduced the ability to filter search results based on a seller's willingness to offer financing.

If you're in the market for a small business it's important to be aware of alternate funding options, but know that in some cases it's still possible to borrow from a bank. Government stimulus and bank policy have been trying to promote ongoing small business lending, although many banks are still more conservative than they used to be about when and to whom they'll loan money.

Today's business-for-sale marketplace is full of exciting opportunities that will allow you to take your destiny into your own hands, and with various options available there's no reason to let a shortage of traditional capital sources get in the way of your dreams.

Re-Build to Sell

2011-03-09T09:36:00.000-08:00

It's sad to say but many small business owners who come to me wanting to sell are in a crisis. They haven't kept up with the times and have outdated equipment and pricing that is below industry standards, and are up to their eyeballs in debt. One thing to keep in mind is that when you do something to enhance your service, it will have an impact on the eventual sale of your business.

Here are a few things to consider when getting your business ready to sell:

Equipment: If you were six months away from putting your service on the market than I would not recommend purchasing new equipment or upgrading your software. You will not make back your investment in that period of time. The buyer may also prefer a particular brand of equipment or may buy only your accounts. You would then have to sell your equipment on the used market, which usually brings only pennies on the dollar. If you are two to three years from selling and have old equipment, then by all means buy newer equipment. This enables you to keep up with your competition by offering the same or more enhanced services.

Rate increases: Annual rate increases are recommended. One of the most important formulas I use in evaluating a business is determining profitability, which comes down to rate structure. I recently sold a medical service for more than 14 times its monthly billing and the reason it sold for that multiple was the way the services were priced. It was very profitable, averaging $365 per client. The service had only 140 accounts but billed more than $50,000 per month, producing a net profit margin of more than 38 percent. Do not increase your rates just before selling your business to boost your monthly billing. A potential buyer will want to see a reasonable conversion history for the rate increase. I would also recommend switching to a 28-day billing structure. This will give you an additional one month's billing per year, which should increase cash flow along with your annual revenue.

Automate: One way to cut down on your biggest expense, labor, is to automate some of the message taking and delivering functions. By delivering messages via email, fax, voice mail, pager, or cell phone, it will free up the time it takes the operator to deliver the messages in person. Some services offer an automated attendant feature, giving the caller a choice of where the call should be directed with instructions that if they have an emergency, the caller should press zero for an agent.

Cut the fat: Get your business lean and mean. Cut out all frivolous expenses and cut the dead wood clients. If you have clients who are non-payers or who do not produce a profit for your company, get rid of them.

Financial record keeping: Buyers are interested in businesses with a good profit margin of at least 20 percent, advanced equipment with updated software, solid management in place, and a history of growth. One of the first items buyers ask for after reviewing your listing information is a current financial statement, along with at least one previous year's statement. This shows the prospective buyer how your business has grown financially in the past and its likely future growth trend.

Clean your financial history: Make sure that you have clear titles to your equipment and other assets, and that all your federal and state taxes are paid, along with being current on your payroll tax deposits. Buyers will do lien searches on you and your business, so if you have any skeletons in your closets, clean them up before placing your business on the market.

Of course location, cleanliness of the operation, and a reliable, well trained staff, all have something to do with how salable your telephone answering service will be, but the above points are critical to getting your business ready to sell.

Factors to consider when preparing to sell your business.

2011-03-01T10:18:00.000-08:00

If you want to sell your company, there are some “rules” that you should consider in order to have a successful transaction. Selling a business requires discipline, a sound strategy and strong advisors. While these ‘rules’ won’t guarantee that your business will be sold, they are certainly some key points to think about.

1. Prepare yourself personally for the sale
Think about the challenge that is involved in selling a company. The transaction is much different than a real estate deal and it does involve patience and perseverance. Are you truly ready for the work that is involved to sell your business?

2. Prepare your business for the sale
One of the biggest issues that befuddles business owners is that they do not properly plan a clear exit strategy from their business well in advance. Talk to your accountant and lawyer, get your financial documentation in order, claim all of your “cash” sales, renovate if necessary, and so on. Also, if you can implement some strategies to improve growth or profitability do so. It is better to show actual growth to buyers instead of simply talking about the theoretical “potential” of your business.

3. Don’t wait too long to sell a business
Selling your business while it is still growing or while it still has much upside left is advisable. Too often, business owners wait a few years too long, past the point that they “should have sold” and realize that the value for their business may have declined. Timing is everything – especially in a business sale.

4. Run your business properly
Don’t lose focus when you list your business for sale. Selling a business is a time-consuming process and it is possible to focus so much attention on the process and neglect the actual business that is being sold. Work with a business broker to sell your company so that you can focus on the operations.

5. Be reasonable about the selling price
It is one thing to get as much value as you can from your business when you decide to sell it – it is quite another to be unrealistic about the selling price. Talk to your advisors to get a sense of what a fair selling price is. .If you are unhappy with the recommendations of your advisors regarding your company’s value then implement steps to improve the business so that you can ask the selling price that you really want to. Simply setting a high price on your business and “waiting” for a buyer to come and purchase it is not a sound strategy.

6. Be flexible during negotiations
Selling a business means you will need to eventually enter into a negotiation with a buyer. Be flexible during the negotiation and try to compromise on the items that aren’t “deal breakers” to you. For instance, if the selling price is an issue then perhaps you can meet in the middle, or perhaps offer some additional vendor financing to make the deal more palatable to both parties. The point is, be prepared to budge on deal points that you are willing to bend on and offer creative ways to add value to your purchaser. Give and take is a good approach to take.

4 Traps to Avoid When Selling Your Company

2011-02-15T15:06:00.000-08:00

Potential acquirers can be a crafty bunch when they start poking around your business. Here are some tricks of their trade.

A business owner I know refers to due diligence as "the entrepreneur's proctology exam." It's a crude analogy but a good representation of what it feels like when a stranger pokes, prods, and looks inside every inch of your business.

Most professional acquirers will have a checklist of questions they need answered before buying your company. They'll want answers to detailed questions like:

When does your lease expire and what are the terms?
Do you have consistent, signed, up-to-date contracts with your customers and employees?
Are your ideas, products and processes protected by patent or trademark?
What kind of technology do you use, and are your software licenses up to date?
What are the loan covenants on your credit agreements?
How are your receivables? Do you have any late payers or deadbeat customers?
Does your business require a license to operate, and if so, is your paperwork in order?
Do you have any litigation pending?

In addition to these objective questions, they'll also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business.

Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It's more art than science and often requires a potential buyer to use a number of tricks of the trade:

Trick #1: Juggling calendars

By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.

If you can't accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.

Trick #2: Checking to see if your business is vision impaired

An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers as the last steps in due diligence before closing. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.

Trick #3: Asking your customers why they do business with you

A potential acquirer may ask to talk to some of your customers as a contingency to close. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. However, the customers may be asked a question like “Why do you do business with these guys?” The acquirer is trying to figure out where your customers' loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.

Trick #4: Mystery shopping

Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website or come into your company to understand what it feels like to be one of your customers.

Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned business will dry up when you leave.

2011 Business Brokerage Market Expanding

2011-02-07T11:14:00.001-08:00

Based on my own observations from more than two decades in the field of business brokerage and mergers and acquisitions, many small businesses that survived the economic downtown are now seeing renewed strength in their top-line revenues, and solid or growing bottom-lines. In fact, the bottom-line cash flow for a number of businesses appears to be healthier than the top-line sales.

While this doesn't mean all companies are back to pre-recession performance levels, entrepreneurs are likely to see new options for their business next year, thanks to an expected increase in bank loans and a larger pool of potential buyers.

Here are my four predictions for this year that could affect the sale of your company.

No. 1: Large Pool of Potential Buyers
There is expected to be no shortage of business buyers in 2011. That's because there are a growing number of unemployed (or soon to be) middle- to senior-level executives who are likely to decide that buying a business is a feasible alternative to looking for a job.

While potentially more capital-intensive, these buyers realize that purchasing an existing business with revenues, clients, trained employees and cash flows could allow them the best possibility to sustain their lifestyle in the ab-sence of concrete employment options. However, these individuals would be wise to keep their options open (employment search, start a business, or buy an existing business) in case the right deal doesn't materialize.

No. 2: Bank Lending on the Rise
Based on current and anticipated behavior, banks are expected to come back to the lending market for small-business acquisitions. From a business broker perspective, it's been quite some time since bankers called to source deals. The good news is that they have started calling again.

While many of these deals are smaller in size, this still bodes well for 2011. Businesses with adequate cash flow will ultimately see more overall activity in terms of bank lending this year.

No. 3: Increase in Business Valuations
Valuations are likely to increase for businesses with solid fundamentals. This may sound counter-intuitive, given current market conditions, but it's basic supply and demand. There are an inordinate number of prospective (and qualified) buyers in the marketplace chasing a small number of healthy businesses. It's not uncommon for good companies to attract a large number of buyers, which results in an auction-type atmosphere where buyers bid up prices and terms.

This dynamic will not face a major change this year. Business owners who are emotionally and financially ready to sell will be the benefactors of this lopsided market.

No. 4: Baby Boomers Will Start Selling
Back in 2007, one in every two baby boomers -- who control almost 8 million small businesses in the U.S., according to BIGresearch -- was expected to begin selling their businesses. This trend was on track until the recession hit. However, these boomers will retire soon and could revisit a sale.

When that happens, there will be a sharp increase of businesses on the market. The supply and demand dynamics will shift heavily in favor of buyers. At that point, sellers will need to be exceptional in order to secure a good price for their business.

Regardless of how 2011 plays out, one prediction will certainly hold true -- businesses that take the proper steps to prepare for a potential sale will have a much better chance of achieving a successful exit than those who don't.

Tips for Negotiating an Earn-out

2011-01-27T14:23:00.000-08:00

Less than half of entrepreneurs stick around long enough to reach their earn-out goals. Using these tips, though, might make it worth the wait.

Less than half of entrepreneurs stay for the length of their earn. A lot depends on the entrepreneur. If the earn-out looks at all doubtful, and they have an idea for another business, they’re not going to stay around for three years.

How can you negotiate the earn-out to be beneficial for you, as a seller?

1. Ask for a seat at the table when the goals are being set

Most earn-out agreements are drafted in isolation by the acquiring firm and presented to the seller as a final package. Instead, business owners should ask to be involved in setting realistic post-sale goals for the joint company.

2. Agree to goals that reward integration results

Using an earn-out tied to your company’s profits as a division of the buyer encourages the business owner to prioritize profits of his/her division over the integration of the two entities.

For example, let’s say you use Peachtree for accounting, and the buyer uses SAP. The last thing you want to do is waste time changing accounting platforms when you have an earn-out number to hit, yet having one bookkeeping software program would accelerate integration. The same trade-off is played out in decisions around the sales team, product lineup, real estate, marketing and so on. Integration trade-offs can be the enemy of short-term profit and can create serious tension between the selling entrepreneur and the buying firm.

Instead of signing up for an earnings goal exclusively, ask the buyer to consider also including goals that measure the performance of the integration, such as cross-selling targets, revenue in a new geographic region, number of new customers, etc.

As opposed to profits, earn-outs can be based upon the acquired owner serving their time, client retention or earning a patent, etc.

3. Sprinkle goals throughout the earn-out period

Three years is a long time to wait to get paid, yet most earn-out contracts are heavily weighted to the last year of the agreement. Both buyer and seller would be better served by negotiating smaller payments throughout the earn-out period that reward results along the way.

Try to increase your up-front payment and put less in the earn-out. If the acquirer has their “way” of structuring an earn-out and won’t budge from it, he probably isn’t the right buyer for your business, and you probably won’t see the amount that you had anticipated receiving for your business.

Remember, you have to work with the buyer for years to come. If the buyer gives off a rigidity nature, the track record of earn-outs and the natural tension between integration and maximizing short-term sales, it is unlikely any seller will last six months post-sale.

How to find the best buyer for your business.

2011-01-24T14:37:00.000-08:00

It takes more than setting the right price to acquire the ideal match for buying your business.

You want a big payoff by selling your business. But you don’t want just any buyer for the business, you want the most qualified buyer. Easily, you could end up getting multiple offers from buyers that aren’t offering the most money. Matching the right buyer with the right business is a painstaking process and the transfer of business ownership is time consuming. However, the more prepared you are the more successful the outcome is likely to be.

Before seeking a buyer there are some important questions that sellers should ask themselves. First off, can your business be sold? Several elements of a business make it an attractive buy. It has a solid history of profitability, for instance; a competitive advantage; a large and loyal customer base or long-term contracts with clients; and, growth opportunities. Other considerations are brand loyalty, intellectual property rights, licenses, or issued patents.

For both seller and buyer the bottom line is what’s your business worth? This is evident in the valuation. You of course want maximum value for your business but setting an asking price too high could raise a red flag, scaring away potential buyers. But if you price it too low, you’ll lose out.

According to the International Business Brokers Association, a company’s value is determined by a compilation of factors such as sales, earnings, performance, market outlook, personnel, net book value, and the fair market replacement value of equivalent operating assets. Value is also influenced by intangible assets such as a company’s brand image, industry reputation, and good will.

To get a fair and reasonable price for your business, you need good negotiating power working on your behalf. Consider hiring an intermediary, which depending on the size of the deal could be a broker (usually $10 million or less), mergers and acquisitions professional (more than $15 million), or an investment banker (a large or public company). The intermediary’s job is to determine the appropriate value for your business and to find the perfect buyer to purchase it at the asking price.

Finding the right buyer is the key to a smooth transaction; it also will contribute to the continued success and growth of the business. Even if you work with an intermediary, it still behooves you to understand the process. Here are a few guidelines to help you navigate through the murky waters.

1. Who Are Your Potential Buyers?

Anyone could be a prospect. A buyer can come from your employees, customers, suppliers or competitors. People buy businesses for different reasons, and this will affect how you pitch your business to them. But generally buyers are divided into two groups: strategic and financial buyers. Strategic buyers will look at how well your business fits into their own company’s long range plans. Financial buyers are more interested in your company’s profitability and stability. They could be companies or individuals with money to invest. Some will want a solid, well-managed company that requires little oversight while others may specialize in turnaround situations and will look to buy a business that they can tweak to turn a profit.

2. Where Can You Reach Potential Buyers?

If your business is well known then word that it’s for sale may be enough. But more than likely you will need to cast a wider net. You could put out feelers to people you know or use such outlets as trade publications or newspaper advertising. There are websites such as BizBuySell.com and BizQuest.com. But a broker, M&A advisor or investment banker has access to deal flow and can sift out and approach potential buyers confidentially. You don’t want to risk loosing valuable clients, vendors or employees because of negative connotations that might come from putting your business on the block for sale.

3. Why Should You Qualify Potential Buyers?

Documents like confidentially agreements and financial background information are standard documents for prospective buyers. A broker or investment banker can pre-screen buyers to make sure they are financially qualified to purchase the business. This includes reviewing ownership, available funds to invest, sources of financing, and any judgments or bankruptcies filed. You also want someone who has the business knowledge, management experience and complementary skills to take the company to the next level.

Find out the primary reason for that individual’s or company’s interest in buying your business. If the buyer is another company, make sure there will be a synergistic fit. If it is a private equity group, look at their past experience in acquisitions

4. How to Look Good for Potential Buyers?

Selling a house is not the same as selling a business. But just as sellers stage a home to make it more appealing you need to get your business in good shape before you approach potential buyers. Your books should be in order for inquiring eyes to review. Have in hand before you go to market both current and three years’ of profit and loss statements, balance sheets, and full tax returns. In addition to listing assets and financial information, include projections for future earnings. Create a selling memorandum which starts with an executive summary that tells potential buyers the key elements of your business; provides a list of your products or services and an overview of the industry; and, explains why you are selling the business, which should have a positive spin on it. In addition, you want to get the physical business cleaned up and ready to show. It’s not just about the numbers; first impressions count. Make sure the business had good curb appeal. This includes disposing of unproductive assets or unsalable items (e.g., a broke down truck sitting in the warehouse).

5. What to Expect Out of The Deal?

There are some basic decisions you must make like will you offer seller financing; will you sell the entire business entity or just assets; will you keep any assets; will the buyer likely retain or replace staff; will you maintain a minority stake of the ownership; will you be expected to put in a year of transition time after the business is sold. Don’t make the mistake of waiting until after the deal is done to remove assets that are your personal property. Unless specified, “When a buyer walks in the facility, he wants to own everything he sees.

6. When Are You Ready to Close The Deal?

The average house will sell in four months. It may take nine months to a year to sell your business.
Once a buyer presents an offer of purchase, you may accept the offer, counter, or reject it entirely. The agreement becomes a binding purchase offer and sale once all parties agree to the terms and conditions; the buyer does due diligence inspecting all aspects of the business operation; and all contingencies are removed. Sound sales strategies will bring you the optimum price for your business, says Bruce.

What Goes Into the Sale Price of Your Business?

2011-01-14T12:37:00.000-08:00

Small business owners usually have an idea about how much they want to sell their business for—but they have no idea what it’s actually worth.

Why? They’re too focused on the blood, sweat and tears they’ve poured into the business over the years and not enough on what the market will bear. Coming to the realization that your business’ worth is not directly related to the amount of hard work you’ve put in is difficult. It’s also necessary to get the process moving.

While the ultimate value, or sale price, given to you by professionals may be much lower than you were expecting (and it usually is), the experts have their methods.

Here’s what goes into that final number:

The buyer. The sale price of your business is often determined by who’s buying. If a family member or top manager has agreed to buy your business over a 10-year period, for example, the deal could be structured where payment installments fluctuate based on the company’s performance.

If a buyer strictly wants to buy your business for its assets, though, and does not wish to continue operating the business, the sale price will likely be determined by the value of these assets.

A buyer’s biggest question is: how can I service my debt and get a reasonable return on investment?

The approach. If you decide to get an official value from a valuation professional—usually a certified valuation analyst—expect to hear terms like “market-based approach” and “income approach.” These terms indicate which appraisal method the professional employed when valuing your company.

The most common methods for a small business are:

The income approach, which emphasizes your past, current and projected revenue and cash flow.
The market approach, which derives value from historic sales of similar businesses
The asset approach, which takes into account the fair market value of a business’ assets

The approach largely depends on the professional’s discretion and your company’s situation.

Typically, a small business valuation is based on a combination of the income and market approaches, he says.

Cash is king. Even so, most valuation professionals agree that cash flow is the top determinant when valuing a business for a third-party buyer. Why cash flow, and not revenue or assets? Because buyers are more concerned with how they’ll make money after the sale. “It’s pretty simple. Take the past 12 months of a small business’ cash flow—in my world, that’s every way the owner makes money—and the business will sell for two to three times that. That’s why many business owners see valuations drop off precipitously during a recessionary period.

If you’re thinking about selling your business, get going as soon as possible. The biggest mistake you could make is to wait too long to get a value and put the company on the market. Once you are “checked out”, motivation decreases, and its value follows suit.

Protecting your company’s value during a sale

2011-01-10T09:14:00.000-08:00

If you have ever promised your child a treat in return for good behavior, you know all about negotiating leverage.

When selling an attractive business, you also have leverage—up to the point that you sign a letter of intent (LOI), which almost always includes a “no shop” clause, forcing you to terminate discussions with other potential buyers while your new found “fiancé” does due diligence before handing over the check.

After you sign the LOI, the balance of power in the negotiation swings heavily in favor of the buyers, who can then take their time investigating your company. At this point, there is little you can do.

Yet, with each passing day, you will likely become more psychologically committed to selling your business. Savvy buyers know this and often drag out diligence for months, ultimately manufacturing things to justify lowering their offer price or demanding better terms.

With your leverage diminished and other suitors sidelined, you’re then left with the unattractive options of either accepting the inferior terms or walking away.

We recommend four things you can do prior to signing an LOI to minimize the chances of your deal dragging on for months and becoming watered down:

1. Make sure your customer contracts have “successor” clauses

Try to have customers sign long-term, standardized contracts that include a clause stating that the obligations of the contracts survive any change in ownership of your company. Have your lawyer wordsmith the details.

2. Nurture and prepare a group of 10–15 “reference-able” customers

Acquirers will want to ask your customers why they do business with you and not your competitors. Cultivate a group of customers to act as references before you sign the LOI.

3. Ensure your management team is all on the same page

During due diligence, acquirers will want to run “isolation” interviews, during which they speak with your managers without you in the room. They are trying to understand if your company is pulling in the same direction and to identify any dissension or incoherence among your ranks.

4. Make sure you have audited financials

An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm.

Tomorrow we’ll look at the top three things you can do to ensure your deal does not become diluted or fall apart at the altar.

Mistakes to Avoid before Selling your Business

2011-01-03T13:52:00.000-08:00

Are you planning to sell your business in the next few years? Here are eight mistakes to avoid before calling it quits:

Mistake 1: Being boring

While it is true buyers like predictability, they also like growth. Set aside a small slice of money for experimenting on new things (product ideas, etc.). The BBC, for example, has a “gambling fund,” which it uses to fund experimental programs that fail the typical new program development testing cycle. It was through the gambling fund that the blockbuster t.v. show “The Office” received funding.

Mistake 2: Selling your product, not your business

A buyer will need to see that your company has a way of winning customers without you. Hire salespeople or invest in marketing so that your business is less reliant on you as a rainmaker. Start thinking of your business as your most important “product” and invest your sales energy in meeting with people who might buy your business, not your product.

Mistake 3: Staying married

Eighty-four-year-old Hugh Hefner told The New York Times last year, “If I sold it (Playboy Enterprises), my life would be over.” If you’re too emotionally connected to your business, it will be difficult to get the price you deserve and will leave you feeling as though you’ve lost a family member after the sale. Instead, slowly start cultivating interests (e.g., travel, another business idea, charity, etc.) outside of work to ease the transition.

Mistake 4: Using retirement income as the basis of your number

Succession planners will tell you to figure out how much income you want in retirement and make that the basis for calculating how much money you need to get from selling your business. The reality is, your business is worth what someone will pay for it and has nothing to do with how much you need to retire. You’ll likely be bored after selling your company, so after taking some time to decompress, travel and play, you’ll probably find yourself starting something new anyway.

Mistake 5: Not including survivor clauses in your contracts

Acquirers like to see that you have locked customers into long-term agreements, but if your customer contracts do not have a “survivor clause” to ensure they remain enforceable after a change in ownership of your company, they may be moot. Talk to a lawyer to make sure an acquirer will get the benefit of the contracts you’ve got with customers after you’re gone.

Mistake 6: Sharing equity with key employees

It’s tempting to use equity or options to retain employees you want to keep through the negotiation and sale of your company. However, you can achieve the same result with a simple “stay bonus,” which you offer key employees who remain with your company for a period of time after the sale. A stay bonus is a lot simpler to implement, doesn’t muddy your company’s capital structure and may end up costing you less in the long run.

Mistake 7: Leaving your team rudderless

A lot of big-personality founders set the tone for their business through their personal charisma, but if you want to sell your business, you need to make sure your company has a set of values independent of you. David Ogilvy handed out Russian dolls to his managers as a reminder of the perils of hiring successive layers of smaller and smaller people. Ogilvy sold his shares in his agency and retired to a castle in France, where he ultimately passed away, but the dolls live on in the hallways of Ogilvy offices as a reminder to managers to always hire people smarter than they are. Find a way to remind employees of your values when you’re not around.

Mistake 8: Not having a BATNA

Professional negotiators suggest having a best alternative to a negotiated agreement (BATNA) — that is, a plan B in case negotiations to sell your business stall. For example, if you’re planning to sell your business to a strategic buyer, also have a financial buyer keen to make an offer or a management team with the means to buy your business over time. That way, you’ll have more leverage when negotiations get dicey.

Have you ever sold a business? If so, what you would you do differently next time?

The Escrow Advantage

2010-12-21T15:16:00.000-08:00

In dealing with business sales, often times the seller or the buyer will ask about the use of an escrow company. The seller may say 'Why can't the buyer just pay me cash or give me a cashier’s check'?

Escrow does a number of things during the business sale transaction that are designed to protect both the buyer and the seller. First, it is important for the seller to know that the buyer's earnest money deposit or good faith deposit actually has some cash behind it. Escrow will deposit the buyer's check and hold these funds in an escrow account until such time as the transaction closes or is cancelled by the buyer and seller.

On occasion, the buyer will discover during the due diligence period that the income of the business was overstated by the seller. The buyer may decide that the business will not generate sufficient cash flow for his/her needs and may choose to cancel the transaction. If the buyer has given the seller a cashier's check or cash as a deposit, there may be substantial difficulty in getting the deposit back. However, it is generally a simple process to have the deposit funds returned by Escrow.

It is important for the buyer to know if there are any liens against the business and if so to ensure they are paid by the seller. Escrow orders UCC searches to see that the seller doesn't have other liens or encumbrances against the assets of the business. Imagine if a buyer simply handed over a cashiers check for $200,000 only to find out six months later that there was an outstanding lien for $125,000 that had been recorded against the assets of the business. Additionally, Escrow ensures that a "Notice to Creditors of Bulk Sale" is published so that any other creditors can file any claims they may have against the business or the seller prior to the transaction closing. All of this is done to protect the buyer in the transaction.

The buyer's funds have to be deposited into escrow several days prior to the closing date. The funds may come from a lending institution, cashiers check, wire transfer. However, typically the funds are required a few days in advance. This is to protect the seller. There have been situations where buyers have paid sellers directly with cashier’s checks and then proceeded to the bank to stop payment. Since escrow requires the funds in advance, it prevents this type of situation from occurring.

An escrow company acts as a neutral third party in relation to the following issues:

There are often prorations and adjustments to the purchase price, such as rent payments, personal property tax, inventory adjustment and vacation accrued to name a few.

It is always a good idea to have an objective third party hold the funds, make sure there are no additional encumbrances against the business and make sure both the buyer and seller are in agreement on closing prior to releasing funds. After all, once the funds have been disbursed, there's no going back.

9 Tips to Increase the Value of Your Business

2010-12-15T14:17:00.001-08:00

As 2010 comes to a close, and the holiday season grows near, I’m sure you have a set of goals for your revenue and profit in 2011.

As you know, most businesses are valued on a multiple of earnings, so your profits are one key factor in driving up the value of your company. The more predictable and exciting your business, the higher a multiple you’ll get.

Here are 9 things you can do to increase the multiple your business attracts:

1. Redefine your market to be a first-place product

Acquirers like to buy companies with market-leading products and services. Narrow your market so you can claim market leadership. For example, instead of defining yourself as an e-commerce business, be the “best place to find shoes on the internet”; instead of being a landscaping company, be the “best caretaker of California native flowers, in the Bay Area.”

2. Implement contracts with survivor clauses

Move as many customers as you can to long-term written contracts that will survive a change in company ownership.

3. Diversify your customers

How can you reduce your reliance on a handful of big customers?

4. Work toward steady profit-margin growth

Can you increase prices or reduce costs to improve your profit margin? Acquirers like to see an increase in your margin, which is often a sign that you have something unique in the market.

5. Give managers real responsibility

If there’s a recurring situation in your business that drives your managers to turn to you for advice, it’s time to focus on how you can train them to handle that problem by themselves.

6. Build a team full of “A”s

You don’t want employee turnover leading up to the sale of your company, so the time is now to replace anyone you don’t see as a long-term fit.

7. Upgrade and update your website

When potential acquirers develop an interest in your business, the first thing they will do is Google your site.

8. Develop a predictable, recurring revenue stream

Potential buyers want to know your business will continue to make them money. A subscription offer or long-term contract model are two ways of achieving this.

9. Lock in key managers with golden handcuffs

Lock in your managers with some sort of long-term incentive plan that ties them to your business after the sale of your company.

A Tale of Reported vs. Actual Income – Sellers Beware

2010-12-08T09:33:00.000-08:00

Among the genre of small business owners, there is one individual whom I met that stands out from all the rest. He was the epitome of one obsessed with a need to minimize his reported taxable income. I was amazed at the lengths he went to, to distort his sales revenue and expenses on his financial statements. You name it, he did it: pocket cash sales and never enter them on the books, bloat reported expenses by recording personal purchases such as travel, meals, magazine and newspaper subscriptions, personal auto expenses, home repairs and maintenance and so forth as business expenses. He held back credit sales in November and December and didn’t book them until January; he stuffed his postage meter in December with enough postage to last him until August but reported the total purchase as an expense in December, and on and on. Moreover, he was quite proud of this accomplishment. He told me that he met with his CPA several times a year to “brain storm” new ways to minimize his reported income. The energy he put into this practice was enormous. He was truly consumed not with just a desire, but it seemed to me, a compelling need to avoid paying income taxes.

However, the enormous difference between his advertised earnings and what appeared on his financial statements and tax returns didn’t sit well with the buyers.

In addition to the negative affect that distorted financial performance reporting has on a business’s market value, such statements also become less useful—and in many cases useless—as a business planning and control tool. This is dangerous because there comes a point in a growing business where the absence of accurate financial reporting becomes the kiss of death.

There also comes a time in most growing businesses when the need arises to borrow money to finance new operating equipment, leasehold improvements, the purchase of real estate, inventory perhaps and so forth. Without good financial statements (and accompanying tax returns) that demonstrate a history of solid earnings, the ability to borrow the needed money becomes significantly more problematic.

And finally, one always runs the risk of being audited by one or more taxing authorities. If they should discover that you have been deceptive in reporting your company’s earnings, they can make you wish you hadn’t. In fact, I asked the business owner who I have told you about here if he was at all concerned about an audit. He assured me he was not. He said he was confident that he was much too clever to get caught by an auditor. I had my doubts about that. After all, he readily spilled the beans to both prospective buyers. One of those buyers could have been an under-cover I.R.S. agent. They really do stuff like that. Now there’s something else to think about.

Retention Bonuses Prove Effective for Companies in Transition

2010-12-06T10:15:00.000-08:00

Mergers, downsizing and reorganization all can wreak havoc with operations. To make transitions run smoothly, companies increasingly turn to retention bonuses, or "stay pay," to entice employees to remain through the rough patches.

Retention bonuses are becoming more common in the corporate landscape because companies are going through more transitions. They need to give key people an attractive incentive to stay on through the transition to ensure productivity, particularly with a liquid labor market today in which individuals can easily move on.

In contrast, a large international communications firm in the process of completing a merger has offered retention incentives to selected management and sales personnel. The company wants to ensure that those employees remain through the transition.

Retention bonuses have proven to be a useful tool in coaxing employees to stay. In a recent survey, 70 percent of the companies reported that retention bonuses were effective in holding employees through transition periods.

COMPANIES NEED A RETENTION STRATEGY

Incentives for retention are a matter of common sense. Whether a corporation is moving headquarters or merging with another company, the corporation is going to need certain people to carry out the project. In this economy, companies need to offer something, because otherwise employees can and will seek employment elsewhere.

While bonuses are becoming a major factor in employee retention, they may not be enough to hold top employees if used alone. A company can't simply dangle a bonus before employees and expect them to stay. As with any incentive, retention bonuses should be part of a larger strategy.

The company has to know what's desirable to the employee, and that isn't always money. Like any form of compensation, a retention bonus isn't going to work without communication. Companies need to find out what employees want and offer a package. The retention bonus may be part of it, but so is a good working environment, praise, challenges and other things that make it attractive to stay.

Although retention bonuses often are used to retain high-level executives, they are not the exclusive domain of management. Where some business owners tempt front-line hourly workers by offering one month's pay for those who agreed to stay on for three months during a merger.

MANY VARIETIES OF STAY-PAY PLANS

There is no single formula for establishing a retention bonus plan that will work for all companies. The experts agree that a successful retention plan depends on both the amount of the bonus and the time frame of the retention period.

A survey found that non-management employees generally receive about 10 percent of their annual salaries in bonuses, while management and top-level supervisors earn an additional 50 percent of their annual salaries.

While bonuses based on salary percentages are the norm, some companies choose to pay a fiat figure. These flat-rate bonuses range anywhere from $1,000 to $40,000, depending on the employee and the company.

A flat figure is simply a different way of expressing the same thing as a percentage, and each company should implement a plan that makes sense for them.

There's no one way to determine how much to pay, but being competitive is key. First, you have to determine if your base pay level is competitive, and as for what percentage, there's no rule of thumb. It depends on the situation and what it will take to retain the employee.

DETERMINING THE RETENTION PERIOD

Just as there is no set formula for determining the size of the bonus, there's no one retention period that works for all companies. However, a typical retention period runs somewhere between six months and three years.

Determining the retention period shouldn't be difficult if a company has developed specific goals and has done long-range planning. The retention period really depends on the objectives of the particular company and whether it's looking at long- or short-term projects.

Because there's always a risk that employees may bolt before the project is complete, most companies draw up agreements to bind them to the company for a specified time period. There's usually a contract that outlines the agreement, so that if employees don't stay, they don't get to keep the bonuses.

A WIN-WIN PROPOSITION

The growing interest in retention bonuses is testament to their effectiveness. They work because it's a win-win proposition. It's a win for the company, which can retain key employees through crucial transitions, thus saving time and money by keeping operations fluid. And it's a win for employees, who not only benefit from the extra pay but also avoid sudden layoffs, making it easier for them to put together strong resumes and begin searching for future employment.

How Do I Get an Accurate Business Valuation?

2010-12-01T14:12:00.000-08:00

If you're planning to sell your business, an accurate valuation will ensure that all the hard work you've put into it will be taken into account and included in the price. Business valuations are also important when seeking investment capital, taking on a partner, or selling shares.

While many business owners have an idea of what their business is worth, that idea can quickly wither in the face of challenges from the IRS or other sources. Therefore, getting an accurate business valuation is crucial.

There is more than one type of valuation. For example, there's no point in evaluating a services business based on the value of its physical assets. Other methods to consider include intangibles such as goodwill, which can be difficult to assess. And value may also vary with context and subjectivity — a business may be worth different amounts to different people, depending on their preferences and needs.

This means that if you want a meaningful valuation, you will need to discuss your business circumstances with a business valuation expert. You may find that the valuer needs to use a number of different methods and then come up with a final amount that gives weight to each figure that emerged from each method. Good interpretation and judgment will be needed to come up with a final figure that accurately reflects the value of your business.

Value factors

A number of different factors need to be taken into account to ensure that a valuation is accurate and useful. Some of these factors include:

The nature and history of the business
General economic outlook, including industries that affect your business
Your business's book value, financial condition, and earning capacity
Your business's dividend history and paying capacity
Investor risk inherent to your industry
The maturity of the business and its industry
The value of the business in the absence of the current owner
Stock sales
Stock of comparable public corporations

A valuation expert will also review and analyze recent financial history, financial projections, buy-sell agreements, executive compensation, organizational charts, quality of employees, management depth, major customers and competitors, and the viability of the business without the current ownership.

Methods of Valuation

The crudest valuation method is known as the "multiples" method, which operates by rules of thumb. For example, legal firms are commonly valued at 40 to 100 percent of their annual fees, while landscape businesses are estimated at 1.5 times their discretionary earnings, plus the value of their capital assets. However, multiples only give a rough, industry-wide ballpark figure for business value, not an exact value.

More accurate methods include the "balance sheet" approach, which basically subtracts business liabilities from assets. The "adjusted book value" method is similar, but uses current market value rather than purchase price or depreciated value.

Retail and manufacturing businesses are often assessed according to asset value, assuming those assets are significant. Service companies are often valued using the "capitalization of income" method, which places a heavy emphasis on intangible assets. It's also possible to calculate the value of a private company by making a comparison with an equivalent public company and making appropriate adjustments. Business value can also be estimated by anticipating cash flow over a three- to five-year period, and adjusting that into current dollar amounts.

Should You Develop a Business Exit Strategy?

2010-11-29T12:33:00.000-08:00

Whenever you create something that's interesting and useful, you create something that's worth selling. And when you're thinking of selling something that's as vital to you as your business, it's best to have a well-developed plan firmly in place.

In business terminology, an ending for a business owner is called an "exit," while the planning of a defined ending is called an "exit strategy." Having an exit strategy tells others who have the occasion to view your business that you're in control of your business, that you're aware and goal focused, and that you have a plan for an organized and profitable ending.

Business owners who don't plan for ownership transition are often faced with the inability to receive enough money in an ownership change to fund a comfortable retirement. This doesn't happen because such owners failed to create value in their businesses; rather, it's because they failed to do the planning that would have allowed them to keep that value.

If you are just starting your business and intend to seek angel investors or venture capitalists, those investors will require that you have a viable exit strategy in place before they'll award you a dime. Business owners who are approaching retirement may want to sell their business to an outsider, a key employee, or to a co-shareholder or partner. Alternatively, they may want to transfer their interest intact to children or other family members. How can all of this be accomplished? You got it — with an exit strategy.

If you've been in business for years and are just now thinking of developing an exit strategy, don't despair. But do start your exit strategy today, keeping in mind that defining it is a process that requires careful thought. Rather than being something you'll finish in 10 minutes, this plan takes time, both now and in the future. Continue to revisit your exit strategy as your business grows.

All strategic exit plans should identify the following key topics:

Current valuation of your business
The factors that drive the value of your business
Methods to increase your business value
The potential future value of your business
Your options for ownership change
Likely tax implications of ownership change
Tax-saving methods specific to your business
Your likely proceeds from strategic ownership change

Set Up a Strategy

Let's say you accomplish the above imperatives and realize the current valuation of your business isn't what you thought it was, perhaps because you were off the mark when you originally determined the factors that drive your business's value. These two factors play into a third: your likely proceeds from an ownership change.

In cases like these, you'll need to amend your exit strategy or potential buyers won't be interested. Maybe expenses need to be reduced, better buying practices put into place, tighter controls placed on accounts receivable, improved service or focused sales and marketing initiatives need to be considered.

You get the picture. With a proper business valuation and some exit strategy planning, you can provide for a smooth transition and make the business more valuable and desirable. Alternatively, you can ensure that it will be turned over to family members on the most favorable terms to you, with the lowest tax consequences legally possible.

With your exit strategy in hand, work each day to make the decisions and moves that will position your business to reach your exit goal.

Don't let Lengthy Negotiations Depreciate Your Business

2010-11-24T10:39:00.000-08:00

I once asked a corporate lawyer - a veteran of hundreds of company sales - what percentage of the time the sale price of a company gets discounted between when the buyer and seller sign a letter of intent (LOI), and when the deal actually closes.

The lawyer looked at me thoughtfully and, after a moment of reflection, asked, “Is there a number higher than 100 per cent?”

The reason so many companies get discounted in the due diligence period is that the seller usually has to sign a “no shop” clause when accepting an LOI from a buyer. This lets the buyer know the seller is committed to getting a deal done and has given up any leverage they had when multiple bidders were vying for the company.

Three Suggestions:

1. Disclose the “hair” up front

Every company has some risk factors. Disclose any legal or accounting hiccups before you sign the LOI. For example, don’t wait until after you have signed an LOI to let the potential buyer know that a former employee is suing you for wrongful dismissal.

2. Negotiate down the due diligence period

Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You may be able to negotiate this down to 45 days—perhaps even 30 with some financial buyers—so include in your negotiations with the buyer a discussion on the length of diligence. At the very least, you’ll alert the acquirer to the fact that you’re not willing to see the diligence drag out past the agreed-to close date.

3. Make it clear there are others at the table

Clearly but respectfully communicate that there are a number of interested parties at the table. Explain that, while you think the acquirer’s offer is the strongest and you intend to honour the “no shop” agreement, there are other interested parties and that those relationships will be rekindled in the event the buyer starts to negotiate in bad faith.

Taking all seven steps will help you protect the value of your business as the balance of power in the negotiation to sell your company swings from you to the buyer.

Reasons to Sell Your Business Before You're Ready to Retire

2010-11-18T10:03:00.000-08:00

You don't have to hold onto your business until your working days are done. Here are some reasons why "retirement" and "exit planning" shouldn't be synonymous.

Have you ever noticed how the terms “retirement” and “exit planning” for business owners are often used interchangeably?

Sometimes it seems as though the only socially acceptable way to exit a privately held business is to hang on until you’re well past your prime, eventually giving the reins to your offspring so you can play golf for a few years before retiring into a home to wait to die. Your children, however much you love them, could be the last people in the world that should run your company. Spending your retirement watching your life's work diminish before your eyes –

I’m sure you have your own reasons for building a business you could sell, and while retirement is a legitimate reason, it’s not the only one. Here are my favorite reasons—inspired by real people in their 30s, 40s, 50s and 60s—for selling a business before you want to retire. You may want to:

Become an angel investor;
Capitalize on an unsolicited offer for your business;
Write a serious check to a charity;
Get rid of your mortgage;
Start a bigger, faster and more profitable business;
Live debt free;
Take a year off to coach your kid’s baseball team;
Buy a beach house;
Get out of a toxic partnership;
Experience what it is like to work for a big company

When I ask business owners who have sold their company to share the one thing they wish they had known before doing so, many are quick to say they wish they had known to do it sooner.

Don’t wait too long to enjoy the other jobs of life. Allow a good 20 years to do the things you have always wanted to do.

Should I Hire A Business Advisor to Sell My Business?

2010-11-15T13:34:00.000-08:00

As a business broker, our first contact with business owners is often when they decide that they want to sell their business. Sometimes this is great, but sometimes it doesn’t allow the business owner to meet their expectations.

For business owners who are not familiar with business brokers, we are often seen - not as professionals who help them navigate a long and challenging road - but as a ‘salesperson’ just looking for the listing. This makes it difficult for some business owners to understand both the value of having an opinion of value, and in appreciating that the right time to get this (for the first time) may well be years before they need/want to sell.

At Sunbelt Business Brokers, we charge our clients to prepare a Most Probable Selling Price (MPSP) Report which is a broker’s opinion of value. Once a client reviews the MPSP they have a clear understanding of the range of value of their business as well as understanding the areas that contribute to the value of the company. This will also identify areas to change or improve to have your business ready to sell.

Imagine that you have owned your business for many years. It has provided you and your family with a lifestyle that you have enjoyed, but you are getting ready to retire. Remember, from the cash flow of the business buyers have to be able to support themselves, pay their debt servicing costs and expect to get a return on their invested capital. You, on the other hand, not only want to ‘get a great price’, but also to keep as much of it as possible. If taxes eat your selling price, then the great price wasn’t so great.

In many cases you need to prepare yourself and your business for this transition.

• Your Sunbelt MPSP provides an opinion of value AND reviews your operations for elements that may need to be changed prior to sale;

• Your accountant, with their knowledge of your business (and a copy of the MPSP!) may assist you with tax planning and recommend deal structures;

• Your financial advisor, may assist you with tax planning and disposition options;

• Your lawyer may assist you with deal structure, sale documentation, and sometimes help create tax- efficient entities.

Shifting your company from ‘operating to run’ to ‘operating to sell’ can take one or two, or more years to prepare for as you whip that business into a condition that can maximize both the selling price and your ability to retain those proceeds. Having a Most Probable Selling Price Report done - and in turn - updated as you move closer to your proposed exit time, can be a great tool to allow you and your advisors to prepare for this significant transition. Not allowing yourself the time or avoiding an ‘expense’ can both come back to haunt you. The snapshot that a Most Probable Selling Price Report provides can be one of the best investments you will ever make. Ask your local Sunbelt Business Broker About preparing your business for sale.

IN THIS ISSUE

PAGE 1

How Buyers Put a Price on Your Business

2010-11-11T14:09:00.000-08:00

If you're looking to sell your business, you probably have a number in mind. Here's why it might differ from what an acquirer is willing to pay.

A funny thing happened when I was first approached by someone who wanted to buy my printing company: I forgot everything I knew about sales.

Instead of listening to the customer and understanding his or her needs, I went into negotiations with potential buyers focused on my needs. I wanted to get a certain multiple for my business but failed to put myself in the shoes of a buyer to figure out what he or she would be willing to pay.

It was a rookie mistake on my part. Any first-year salesperson knows the first step in selling is figuring out what the customer needs. I should have asked about buyers’ goals in wanting to acquire us. In particular, I should have tried to understand what kind of return they were looking for on their investment in an acquisition.

The price buyers are willing to pay for your business depends on a lot of factors, but one of the most important is the return they expect to get and the risk associated with achieving that return.

Assuming your revenue is flat or growing modestly, the higher the return on investment the buyers are looking to achieve, the lower the multiple they will be willing to pay for your business.

At the risk of oversimplifying a complex equation, if the buyers are looking for a 22 percent return on their investment in your company, then they will derive the multiple they are willing to pay as follows:

100 ÷ 22 = 4.5 times EBITDA

Provided you’re not the next Google and you don’t have the cure for cancer, the buyers would be willing to pay around 4.5 times EBITDA to buy your business.

If, however, their expectations for a return are higher, let’s say 30 percent, they will be willing to pay less for your business:

100 ÷ 30 = 3.3 times EBITDA

So what drives up buyers’ expectations for return on investment while at the same time driving down the price they are willing to pay for your business? In a word, risk. The riskier your business looks to buyers, the higher their expectation for a return will be.

Likewise, with your own investments, you are willing to settle for a lower return when you buy relatively safe assets, like a government bond. But when you buy that risky small-cap fund, you expect a higher rate of return in exchange for putting your capital in harm’s way.

So how do you de-risk your business in the eyes of an acquirer?

Client risk—do you rely on just one or two key clients for most of your business?
Supplier risk—will you be in trouble if one of your suppliers goes under?
Depth of management—what happens if a key employee disappears?
Contracts—do you have legal agreements in place, or do you rely on handshakes?

Ask yourself these questions to judge how risky your revenue stream is. Investors want to know that things won't fall apart if something unexpected happens. Show them safety in your pattern of earnings, and you can expect a higher offer.

When you sit down with people interested in buying your business, try to find out what their expectations for return on investment are. That will tell you a lot about what their offer will look like and how risky they view your business. From there, you can do the math and anticipate their offer price and decide whether or not you want to keep talking.

The Ins and Outs of Earn-outs and Why They are Becoming a Trend

2010-11-10T09:11:00.000-08:00

You have built a successful business, are ready to sell it, and have found a potential purchaser. However, you and the purchaser cannot agree on a price. All is not lost. A properly negotiated and drafted earn-out agreement may be the difference between closing the purchase and losing the sale.

What is an earn-out?

An "earn-out" is an agreement by the purchaser of a business to pay additional consideration to the seller if the business meets or exceeds certain post-closing goals. The earn-out generally is contained within an Asset or Stock Purchase Agreement and often is used to smooth over any differences between the purchaser and the seller as to the perceived value and, thus, the purchase price of the business. The amount of any additional consideration paid under the earn-out will be based on an agreed-upon formula which takes into account certain financial or non-financial measurements.

The existence of an earn-out allows the purchaser to pay at closing an amount that more closely resembles what the purchaser believes the business to be worth, while also allowing the seller to receive additional money after the closing if the value of the business, based upon its post-closing performance, more closely resembles the value perceived by the seller. It sounds like the best of both worlds. However, the seeming simplicity of the idea hides numerous traps for the unwary. An earn-out adds a great deal of complexity to the sale of a business and must be drafted carefully in order to accomplish the goals of both the purchaser and the seller, while avoiding future litigation between the parties.

Earn-Outs: Advantage to Both the Purchaser and the Seller

Some advantages to the purchaser of agreeing to an earn-out are:

• Limiting the risk that the purchaser is overpaying for the business;
• Providing an incentive for sellers to remain as management-level employees with the business in order to grow the business and ensure that it is successful after closing; and,
• Allowing the purchaser to pay later and to use funds earned by the business to make the payment.

Some advantages to the seller of agreeing to an earn-out are:

• Allowing the seller to receive a potentially higher price for the business;
• Indicating to the purchaser that the seller is confident in the business and its upside, and therefore making the purchaser feel more confident in the deal; and,
• Allowing the sale to move forward despite differences over the perceived value of the business.

When should an Earn-Out be Utilized?

An earn-out is more appropriate when the business will be operated after closing as a stand-alone business, rather than being integrated into the purchaser's existing business. Keeping the business as a separate operating unit after closing, at least for the period of the earn-out, makes it much easier to measure its post-closing performance. Differences in accounting policies between the purchaser and the seller, which may include allocations of income and expense items between the purchaser's existing business and the seller's business, may pose problems in the earn-out computation if the businesses are integrated shortly after closing. In addition, the seller should play a management role in the business post-closing. From the seller's perspective, having a management role will enable the seller to ensure that the business meets or exceeds the performance criteria necessary to receive the full payment under the earn-out. Of course, the purchaser may be concerned that allowing the seller to have a management role in the business after closing will enable the seller to engage in activities to maximize the earn-out payment at the expense of long-term profitability. These potential issues must be addressed in the earn-out through careful drafting of each party's expectations, rights, and obligations.

How is an Earn-Out Amount Calculated?

Earn-outs can be based on any number of financial or non-financial measures, including gross sales; earnings before interest, tax, depreciation, and amortization; net income; obtaining regulatory approval of a product; obtaining patent protection for an invention; or the number of sales of a pre-closing product line. Using gross sales as a measure of the seller's performance following closing is advantageous to the seller because gross sales are easy to measure and hard to manipulate. However, gross sales are not impossible to manipulate, and the purchaser and the seller should be careful to draft the earn-out to avoid any inadvertent or intentional manipulation.

One key to the successful negotiation of an earn-out is to ensure that the accounting methods used to determine the pre-closing performance baseline are defined clearly in the earn-out so that the identical accounting methods are used to determine the post-closing measurement. In other words, it's important to compare apples to apples, not apples to oranges. It may surprise some to realize how often the accounting policies used by a seller and a purchaser for certain items differ, even though both are using generally accepted accounting principles. Any difference could be very important, particularly if the earn-out requires a measurement of pre-closing versus post-closing accounts receivable or other items that may be recognized and characterized differently by the seller and the purchaser.

An earn-out can be a useful addition to a purchase agreement when there are differences between a seller and a purchaser regarding the purchase price for a business. The concept is simple, but the actual details of the earn-out require careful negotiation and drafting to ensure that each party's goals are met and future litigation is avoided. The earn-out should address details such as the performance measures that are applicable, the specific accounting methods and policies to be used, how much control the seller will have over the business after closing, the time frame for the earn-out, as well as issues such as what effect the purchaser's sale of the business during the earn-out period or the discontinuance of a product line of the seller will have on the computation. Disputes with respect to earn-outs are fairly common, but with the right amount of thought and drafting up front, it may be the key to salvaging a deal.

Seller Financing - It Makes Dollars and Sense

2010-11-08T11:11:00.000-08:00

When contemplating the sale of a business, an important option to consider is seller financing. Many potential buyers don't have the necessary capital or lender resources to pay cash. Even if they do, they are often reluctant to put such a hefty sum of cash into what, for them, is a new and untried venture.

Why the hesitation? The typical buyer feels that, if the business is really all that it's "advertised" to be, it should pay for itself. Buyers often interpret the seller's insistence on all cash as a lack of confidence--in the business, in the buyer's chances to succeed, or both.

The buyer's interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments--for any reason--the seller would be forced either to take back the business or forfeit the balance of the note.

The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms. On average, a seller who sells for all cash receives 69.9 percent of the asking price. This adds up to a 15.8 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash. The seller who asks for cash receives, on average, a purchase price of 36 percent of annual sales; compared to the seller accepting terms, who receives an average of 42 percent of annual sales.

Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.

• Seller financing greatly increases the chances that the business will sell.

• The seller offering terms will command a much higher price.

• The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)

• With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.

• The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.

• Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.

Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line--in many cases, their entire capital. Although this investment doesn't insure success, it does mean that the buyer will work hard to support such a commitment.

There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to sellers, they will, in most cases, be helping themselves as well.

When and why should I pay for a broker’s opinion of value?

2010-11-03T09:24:00.001-07:00

At Sunbelt Business Brokers, we charge our clients to prepare a Most Probable Selling Price (MPSP) Report which is a broker’s opinion of value. Once a client reviews the MPSP they have a clear understanding of the range of value of their business as well as understanding the areas that contribute to the value of the company. This will also identify areas to change or improve to have your business ready to sell.

• Your Sunbelt MPSP provides an opinion of value AND reviews your operations for elements that may need to be changed prior to sale;

• Your accountant, with their knowledge of your business (and a copy of the MPSP!) may assist you with tax planning and recommend deal structures;

• Your financial advisor may assist you with tax planning and disposition options;

• Your lawyer may assist you with deal structure, sale documentation, and sometimes help create tax-efficient entities.

Shifting your company from ‘operating to run’ to ‘operating to sell’ can take one or two, or more years to prepare for as you whip that business into a condition that can maximize both the selling price and your ability to retain those proceeds. Having a Most Probable Selling Price Report done - and in turn - updated as you move closer to your proposed exit time, can be a great tool to allow you and your advisors to prepare for this significant transition. Not allowing yourself the time or avoiding an ‘expense’ can both come back to haunt you. The snapshot that a Most Probable Selling Price Report provides can be one of the best investments you will ever make.

PAGE 1

Structuring an Earn-out: Ensure Good Chances for Success (and Avoid Disaster)

2010-10-28T09:50:00.000-07:00

You already know the importance of laying out simple, clear-cut standards that must be met for an earn-out to pay-out. There are some additional questions both parties should consider before signing on the dotted line.

Will the acquired party have enough autonomy?

"Earn-outs tend to work well when the seller is going to continue to run pretty much as before," Geis says. To that end, a seller should get in writing the seller's commitment to leave operations largely unchanged. If certain redundancies or back-office functions are to be folded into the acquiring company, that's fine. You simply want to make sure that every part of the acquired company that can be run independently is run independently.

Is the purpose of the earn-out financial or strategic?

An earn-out can be made for purely financial reasons, or a buyer can be making a bet on the owner's ability to expand the business. You will want to know which motivation is at play—and whether it is likely to change after the deal is closed. If the acquirer keeps a respectful distance and seems to be giving you autonomy, that is a good sign.

Who is the umpire? How will progress against an earn-out's goals be evaluated?

Consider both who will be evaluating the entrepreneur's performance under new ownership, and when evaluations will take place. Is it simply at the end of the period set in the contract, or will progress be tracked quarterly? Will the earn-out be allocated piecemeal or in one lump-sum? There's no right answer, but these questions should be addressed early on in your negotiations.

What will happen in the event outside factors drastically change the outcome?

Factors in neither party's control can harm the buyer's and entrepreneur's ability to maximize the rewards pledged in an earn-out. What if your industry tanks? What if a natural disaster hits? What if your biggest client was Lehman Brothers or Bear Stearns? Make sure to create contingency plans to address the most unlikely of scenarios – especially if you're entering into a long-term earn-out deal.

Avoiding These Sales Myths

2010-10-26T12:07:00.000-07:00

The typical business owner will only sell a business once. Understanding the complex process involved will help produce the best results. But don’t fall prey to the myths that can derail or seriously affect a potential sale.

Myth #1 – I Can Sell It Myself

Many owners believe they’re qualified to sell their business without professional assistance. Many owners are entrepreneurs and the key salesperson for the company. But selling a business is not like selling a product or service.

If you’re looking to sell on your own, confidentiality is lost. If word of a potential sale gets out, there are definite risks of losing clients, employees and favorable credit terms.

Do you really have the time to run your business and compile marketing materials, advertise, screen buyers, give tours and facilitate due diligence? When you’re looking to sell you want to put even greater emphasis on running your business, boosting your sales and not taking on new challenges.

Myth #2 – I’ll Sell When I’m Ready

Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor.

Economic factors can have a significant impact on the sale of a business. Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.

Myth #3 – I Know What it is Worth

Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.” Still others utilize industry multiples.

A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.

Myth #4 – It’s Like Selling a House

Preparing to sell your house may take a few weeks, then you want to get the word out to everyone that the house is on the market. Once you get a satisfactory offer, you sign on the dotted line, turn over the keys and move on.

Selling a company is much more complex. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses. The average house will sell in less than four months, while the average business sale is nine months to a year.

Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success. Sound sale strategies will bring you the optimum price the market will bear. Go to market with realistic expectations by getting a professional valuation and using a professional business broker or intermediary.

Hopefully this opens your eyes to what is involved in selling your business. it is not for the faint of heart. It will take hours and hours of your time daily in some cases to educate the buyer on your industry if they do not come from it. I have found that since the recession buyers are more cautious than they have ever been. They are looking carefully at customer concentration, cash flow, capital expenditures and commitment of the employees to stay on.

Another major concern is how critical is the Seller to the success of the company. The more he/she is involved the riskier it seems to the buyer.

Things to think about and possibly fix prior to putting your company on the market or be prepared for some tough negotiations.

SBA Law Changes Makes Buying & Selling a Business Easier

2010-10-18T13:04:00.001-07:00

I wanted to make sure you were aware of the changes regarding SBA loans announced two weeks ago. If you have held off from selling your company due to not wanting to play "banker" yourself this will hopefully enable Seller's to only have a small note to carry verses what has been happening out there.

The financial markets have made it difficult for small businesses to get loans - but this may be changing, as the President just signed a new law aimed at making it easier. This new law could benefit those looking to buy an existing business or start a new business or franchise. The law could also benefit current business owners who have been thinking about selling their companies.

This law improves existing loan programs and includes multiple small business tax cuts. Some elements of the new bill include:

Fee Waivers on SBA loans are now in place, but only while the money lasts. Buyers considering an SBA loan should act quickly to take advantage of fee waivers, as they will only last as long as the limited funding.
Lending limits have been increased significantly on SBA loans. Transactions that previously may have been too large for SBA funding may now qualify. This is especially good news for sellers and buyers of companies who were previously too large to qualify for SBA financing.
When small businesses buy new equipment, they may immediately write off the first $500,000 of that investment.
For eligible small businesses, some long-term investments in the company will be subject to zero capital gains.
Entrepreneurs with a fresh idea will be able to deduct the first $10,000 of their start-up costs.
Those who are self-employed will be able to deduct 100% of the cost of heath insurance for themselves and their families.

SBA lenders are working to incorporate the new law into their lending practices. We encourage those considering SBA franchising to 1) make sure they are working with SBA preferred lenders, and 2) get a recommendation from a local business broker on banks that are friendly to small business loans. Just because a bank is "SBA preferred" does not mean they are SBA friendly. A business broker can make sure you are talking to a lender that won't waste your time.

De-Cluttering Your Company

2010-09-30T12:12:00.000-07:00

Do you remember when they said our offices would be paperless by now?

Well, guess what? That just hasn't happened for most of us has it? If it has for you, my hats off to you!

We just had a scare, now that I look back on it. We thought we were going to sub-let our office to someone who needed the extra square footage that we do not need. We had four weeks to be packed, out of here and to find a new place. My assistant is a very good sport but the thought of going through all the files and deciding which ones we really need to keep with us, which ones can be stored and which ones can be tossed, even through her for a loop.

I realized I had presentation folders from seminars 10 years ago that I hadn't looked at since. I had old overhead presentation (Yep! The actual transparencies!) that I used years ago! Was the presentation really that good to keep all these years??? I think it is fair to say that I will probably use my InFocus and computer for any future presentations. There were 1998 sales reports and Broker's 1st year activity reports from the beginning of Sunbelt's days that really have no use or meaning to me now.

I think the obligatory catalyst for cleaning house is moving offices. Even though we didn't actually move and we have 12 more months here, I am beginning to sort through the files and putting them in 3 piles. Keep, toss, store (and mark on the box how long I must store them). By the time our lease expires we will be so lean I think we can probably get rid of 4 of the file cabinets and a credenza.

I encourage anyone reading this blog to do the same. It is quite liberating on one hand but sobering on the other hand. It makes me consider actually going paperless...

The Emotions Involved When Selling Your Business

2010-09-22T10:33:00.000-07:00

We intermediaries consider selling your business much like that of a marathon. It is a long process and takes much stamina, patience and hard work. I have had a few clients over the years decide to take it off the market due the amount of stress it placed on them while they were trying to run their business. One of my clients did this even before he had an offer due to all the conversations he had to have with potential investors and Private Equity groups. He was only at the 2 mile mark.

The sale of your business is often accompanied by other stressful changes or issues in your life at this time; health problems, divorce, forced relocation or poor financial issues. Even the best case scenario - you have built a great business over the years, and now it's time to move on. This can mean a great sense of loss and uncertainty.

For many business owners their business has been their life. They are afraid that they will lose their identity and worth once that is gone.

One of sad things to watch is someone who just can't let go even though it is time. Their energy and health isn't what it was when the business was growing, and the numbers begin to decline due to the lack of time and energy put into it. If they had sold it when the time was right the purchase price would have been considerably more than waiting, due to fear of the future without it.

Anger and defensiveness often creep in as a deal progresses. Buyers can be insensitive when they are criticizing how the business has been run, and they question all the variations in the financial's. Most of the time the questions are valid but they can have a cumulative effect on the seller. Some use the criticism as a bat to beat down the selling price. Whomever does the due diligence, whether it is a team of professionals or the buyer them self, they should not be offensive in attacking the seller. They will uncover what they uncover, get the answers to the "why's" and then decide it they are moving on or not. No need to put the Seller in the hot seat. Remember the buyer will need to depend on the Seller for a smooth transition so why not keep the relationship solid?

Another emotion in the deal can be the Seller mistrusting the buyer. Some buyers will try and manipulate the situation by stalling the deal in some way. This of course makes the Seller loose faith in the buyer. Seller's can get frustrated, mad and impatient. Some will be beaten down and will lower the price and others will just walk away.

Be prepared for these pitfalls that typically will happen. Be prepared not only with your business in the right shape to go to market but be in good mental shape to take on the marathon. You will get through it but trust me many days during the process you will be ready to quit. Think of how good it will feel when it is behind you. Remember the mirror.

Things You Should Know About Signing a Lease...

2010-09-14T13:27:00.000-07:00

When purchasing an existing company, one of the closing conditions is to be able to either negotiate a new lease or have the landlord assign the existing lease until the time that a new lease can be negotiated at market rates or better if you are a good negotiator.

I had a client 5 years ago purchase a retail business that had been in the same location for over 15 years. The Seller was the landlord as well as the owner of the business. Almost immediately after the transaction closed the relationship went sour. The landlord/seller granted them a 5 year lease with a 5 years option to renew. Of course the recession came after a few years in business and the landlord would not give any concession on the lease what so ever. The buyers were able to move recently after their 5 years were up and moved on to be able to work with a more reasonable landlord who will work with them when tough times return, if they do.

The Landlord will most likely sit on that property with no rent for an indefinite amount of time probably years. If he had been reasonable with the buyers he would have happy tenants for many years to come and have income coming in.

My word of advice before signing with the landlord is to ask questions. Ask what they have done for tenants during tough times. Ask how many people he has foreclosed on or sued in the last 3 years. You need to understand the true colors of the landlord. They of course are running a business and must make a profit. However, if the rent is way above market when things change economically they need to make concessions for you and you need to know ahead of time that will happen. There are definite cycles in the commercial market and if you sign at the top of the market you need to know how they will handle it.

I am in the same situation in our space. As many business, I now have twice as much space as we need due to the fact that two brokers didn't make it during the downturn and have gone elsewhere to find employment. The other brokers are working more from home and do not need the space. I am renting from the "Big Guys" who own most of the space by the SJ Airport. They were not willing to lower rent what so ever and I signed at the top of the market when many landlords would only do 5 year leases. I am counting the days until we can leave and will probably never lease again from the "Big Guys" and I advise new owners to be careful who you lease from.

Benefits of Planned Exit

2010-09-09T16:35:00.000-07:00

The primary purpose of approaching a business exit in a systematic, goal-focused and planned way is to dramatically increase the likelihood that the outcome will be optimal to the state goals. The employment of a team of professional and experienced advisors will add a cost of, say, 3%-6% of the wealth transferred, but will potentially add considerably more value by:

Mitigating against a failure of the mission
dramatically expediting the mission
inter-mediating the process to eliminate the risks associated with direct negotiations between principals
increasing the negotiated value of the mission
reducing the income tax burden
helping to reconcile the Expected Wealth Transfer to the Targeted

Wealth Transfer

...not to mention providing the knowledge and human resources to navigate a complex and time-consuming labyrinth of decision making and task execution.

An unprecedented number of Boomer Generation business owners will use exit strategies/planning to extract the wealth tied up in their company over the next ten years. For business owners planning to "cash out" in the near future, the impact of the Boomers will create a fundamental oversupply of opportunities in a marketplace with a relative undersupply of liquid capital. If the laws of risk and reward prevail, only the least risky and most profitable businesses will transfer successfully.

Transaction Structuring Strategies

2010-09-02T14:28:00.000-07:00

Every step along the complex path of executing an exit strategy demands access to advice from professionals who have been there and know the opportunities and pitfalls. Even though structuring of the exit transaction comes to an end of the process, structuring is included here as a positioning strategy because it impacts the value of the Expected Wealth Transfer. Key structuring considerations are:

Consideration of risk and reward
Tax consideration
What incomes and expenses are included (i.e. belong to transacted business)?
What assets and liabilities are ex/included?
What pre-transaction liquidation, settlement/exclusion opportunities exist?
What relationships between buyer and seller arise? (employment, advisory, landlord, supplier, partners, etc.)
Documenting or codifying contractual relationships (employees, vendors, customers, debt)

The majority of the middle-market businesses bought and sold derive their valuation, at least in part, from cash flow or earnings. The very key question then arises: "What assets and liabilities are essential to and an integral part of the ongoing enterprise, thereby supporting the established earnings flow?"

Business Marketability Enhancement

2010-08-26T16:21:00.000-07:00

If growth opportunity, managed risk and strong margins are the foundation for building value enhancement strategies, then clarity, transparency and certainty are the engines which drive marketability. Business performance is clearly reported and accounted for, activities and status are transparent to the buyer, and all information portrays a level of certainty about the future. Experienced buyers know that completing acquisitions is a time-consuming and expensive exercise. Buyers will perceive greater clarity, transparency and certainty, and therefore be more motivated to engage, when the seller has:

Audited or reviewed financial statements (larger companies are expected to have there)
A business plan with a clearly defined growth path
An in-place sector-experienced management
Current market metrics and analysis

Business Valuation Enhancement

2010-08-24T12:18:00.000-07:00

Business value enhancement strategies generally influence valuation because of their perceived impact on risk, growth or profit margins. At the top of many buyer's list is the need to see a strong, experienced and motivated management in place.

For financial buyers, this often includes the need to be assured that management is in place. This also often includes the need to be assured that management has skin in the game, typically an equity interest. Improvements in profit margins are strongest when they are reflected in trailing (historical) earnings. More recently effected changes, or even planned changes, can also influence valuation. However, if the benefit of the changes can be quantified and demonstrated because of the multiplier effect built into earning-based valuations, a $1mm earnings improvement may increase the valuation by, say, $5mm.

It doesn't seem entirely logical that an exiting business owner would have unexplored opportunities available for making improvements to the business. It's a little like living with an outdated kitchen and upgrading just before selling the house. As in the real estate analogy, the stakes are higher at the time of exit, and the focus on marketability and valuation greater, so these opportunities often do exist. Other business value enhancement strategies include:

Reviewing and revising the revenue and/or business models
Implementing product/market enhancement plans
Expanding and diversifying the customer base
Securing title to patents and intellectual property
Commissioning of financial and operational audits
Strengthening or upgrading of systems and procedures
Documenting or codifying contractual relationships (employees, vendors, customers, debt)

Corporate Value Enhancement

2010-08-18T09:44:00.000-07:00

The team should look at the corporate structure and governance mechanisms to consider whether the business is optimally positioned for the intended business exit. For instance, an asset sale from a C Corp could result in tax obligations at both the corporate and the individual levels. Conversion to an S Corp may be advantageous, but the tax benefits vest over an extended period of time. The make-up of the Board and any Advisory Board may also have an impact on the value perceived by a buyer. From the standpoints of the scale, product or market diversity, management strength or any number of others, the business may benefit from a combination with or consolidation into another business prior to its sale. Alternatively, it may be desirable to spin-off one or more non-synergistic or non-performing divisions to increase profitability or allow greater management focus.

Reconciling Goals and Objectives for Your Exit Plan

2010-08-12T16:24:00.000-07:00

Once one has established an indication of the Expected Wealth Transfer (the after-tax proceeds from the business exit) on the one hand, and an estimate of the Targeted Wealth Transfer (*the wealth transfer required to provide the personal life-after-business goals) on the other, the business owner and the exit team must now reconcile the two before selecting and implementing an exit strategy.

Whether or not the expected and targeted wealth transfer values are the same, the owner should review all exit options, and should also evaluate a number of Positioning Strategies for execution prior to implementing an Exit Strategy.

Reconciliation or Closing the Gap is an iterative process of evaluating combination's of positioning and business exit strategies that will yield a release of wealth compatible, as to quality, time, value and certainty, with achieving the specified goals and the associated Targeted Wealth Transfer. Again, notice that there are two key points of inflection for matching the exit with the personal goals:

The ability to vary the value timing and certainty associated with extracting the business wealth
The ability to vary the timing, risk tolerance, estate wealth, living standards and other variables inherent in the personal goals

A key issue business owners face in considering Positioning Strategies is the very central question of the risk - reward paradigm. Positioning strategies cannot be executed entirely without risk, but manageable risk strategies may deserve consideration if they serve to better ensure that the business wealth will be delivered in the context, amount, time and certainty needed to meet the identified personal goals.

Experienced Advisors are of Fundamental Importance to the Successful Sale of Your Company!

2010-07-30T15:02:00.001-07:00

You are probably considering the sale of your business or you wouldn't be reading this. You have probably realized that this critical financial transaction is unique in that it is outside the scope of your normal experience. Most likely, you have not sold a business before. Similarly, it is probably outside the experience of your normal set of advisors.

I am sure if you needed surgery on your heart or knee, or any major part of your body for that matter, that you would want to have a surgeon that had performed the same surgery at least a hundred times. The same principal applies in your transaction. The more experience you advisor has, the better change you have for closing a sale that meets your objectives.

EXIT PLANNING TEAM

This team typically consists of your attorney (make sure this transactional attorney has done many M&A deals), your CPA (same criteria for the CPA applies), a financial/insurance advisor and your Business Intermediary or M&A specialist.

Your CPA should have been advising you about your choice of entity, (C Corp, S Corp or some other pass-through entity) and how it will affect you during a sale. Of course they also should be keeping your financials clean. Your business attorney should be advising you on how to keep your employees motivated and focused during a sale. Your business intermediary should be working with you to create or enhance your company's Value Drivers. There value drivers will definitely increase the price of your business. Your advisors can help you concentrate and focus on the value drivers that are most critical to driving up business value in the shortest amount of time.

Advisors, such as the attorney and CPA will complete financial pre-sale due diligence to make certain the business is ready to be sold. You do not want to wait until the sale has been struck and then the buyer discovers problems.

The most important reason that advisors are crucial to your success is that they increase business value, find the right buyer and induce the buyer to pay top dollar for your company.

My next webinar is going to go into more detail on one of the major Value Drivers: "how a stable, motivated management team and high performing workforce" is accomplished. If you're interested in joining our webinar mailing list, please email me at jyoung@sunbeltbayarea.net!

For more information on Exit Planning, Valuations, M&A, and Business Brokerage, please call or email Joan Young, President of Sunbelt Business Brokers, Greater Bay Area at 408-436-1900 or jyoung@sunbeltbayarea.net.

Exiting is More then Selling

2010-07-20T16:17:00.000-07:00

Exit Planning is a process involving the development and execution of a series of systematic steps taken to allow both the owner and the "accumulated wealth" to be extracted from the business, via one or more of the numerous available strategies, including:

Selling the business to partners, strategic buyers, investors, competitors, international buyers, or the public
Recapitalizing the business for partial liquidity
Merging the business to achieve enhanced valuation and/or marketability
Transferring the business to family, management or employees
Gifting the business to meet personal and/or tax planning goals
Liquidating or partially liquidating the business

Exiting is a process, not an event.

The optimal exit will be achieved through the implementation of a managed process which includes:

Establishing a business valuation reference point
Clarifying "Life After Business" goals
Working with a team of specialist advisors
Executing any necessary positioning or preliminary strategies
Executing the selected exit strategy

Exiting is a complex subject with many moving parts. No single advisor is an expert in all aspects. The process should involve inputs from a team of experienced advisors, and should address the possible need to re-position the business before going to market.

For more information on Exit Planning, Valuations, M&A, and Business Brokerage, please call or email Joan Young, President of Sunbelt Business Brokers, Greater Bay Area at 408-436-1900 or jyoung@sunbeltbayarea.net.

Things that are Important to Buyers

2010-07-15T14:49:00.000-07:00

Only the least risky and most profitable businesses will change hands successfully.

With buyers focusing on businesses which represent good investments capable of operating with little or no dependence on their owners, the following characteristics will be seen as desirable:

Businesses which have scaled beyond a total dependence on the owner
Proprietary product, services or processes
Strong, remaining management
Defensible, differentiated market position
Stable, diverse customer base
Recurring revenue business model
Business growth (opportunities)
Strong operating margins
Manageable business risk
Quality business and accounting systems
Audited annual and timely internal monthly financial statements

By laying out these tangible points, as a Seller you can now see what areas you need to work on. Others of you will be encouraged to see that you have your company ready and are able to go to market now if the timing is right!

For more information on Exit Planning, Valuations, M&A, and Business Brokerage, please call or email Joan Young, President of Sunbelt Business Brokers, Greater Bay Area at 408-436-1900 or jyoung@sunbeltbayarea.net.

The Challenge of Exiting in Style

2010-07-06T15:13:00.000-07:00

I think most of us would agree that we have just seen a very difficult 18-24 months. So it seems that existing business owners will need to engage in a new reality for the foreseeable future.

According to an article published by Robert Avery of Cornell University in February of 2006,

"the majority of boomer wealth is held in 12 million privately owned businesses, of which more than 70% are expected to change hands in the next 10-15 years."

Only a portion of these businesses will successfully cash out, because of supply and demand. Now that it is the middle of 2010, this means that this will occur within the next 11 years.

Key mistakes made by sellers:

Sellers allow too little time to complete a properly executed business strategy. Another error owners make is focusing on the price while disregarding the terms and structure of an exit transaction.

Here are a few other mistakes business owners make before exiting their companies:

Selling to the (only) competitor who comes forward
Not using experienced advisors (in order to avoid spending more)
Setting expectations based on personal needs without considering the market
Failing to explore legitimate positioning strategies

Buyers of middle market companies don't buy jobs for themselves in the way that small business buyers do. They expect a return equal to the risk. Nothing enhances a buyer's perception of value more than the following:

Evidence of sustainable growth
A capable management team as the key to managing the risk

The business owner who engages professional advisors, plans thoroughly, and negotiates to ensure that the wealth transfer mechanism chose most closely delivers on his or her goals, is the business owner who will have executed the optimal exit strategy.

For more information on Exit Planning, Valuations, M&A, and Business Brokerage, please call or email Joan Young, President of Sunbelt Business Brokers, Greater Bay Area at 408-436-1900 or jyoung@sunbeltbayarea.net.

Getting into gear on Exit Planning

2010-06-28T12:49:00.000-07:00

Lee Iacocca summed up the importance of just getting started:

"So what do we do? Anything. Something. So long as we just don't sit there. If we screw up, start over. Try something else. If we wait until we have satisfied all of the uncertainties, it may be too late."

Applying Mr.Iacocca's sentiment to Exit Planning the message is: you don't have to do everything all at once to get yourself and your business ready for transition. However, you do need to start by creating a series of discrete, achievable steps, as suggested below, and tackle them one by one. The task can be made easier by:

1.) Breaking your distant goal of exiting your company into more immediate objectives, and
2.) Creating a list of small action steps for each objective, with deadlines, that will serve as a road map to your exit.

In my experience, it is rare for owners to maintain the momentum and discipline to see their plan come to a happy end, unless they take these steps.

Procrastination can cost you a lot!

2010-06-23T13:53:00.000-07:00

I have found that many business owners want "X" for their business. But once valued, they discover that what they were hoping for was not a reality. They are advised on what to do to position themselves to garner what they hoped for. I suggested a step by step road map to increase sales, minimize taxes and protect existing value from loss. The owners agree to do so but then many years later, now in 2010, I find they are still pretty much doing the same thing and nothing new has been implemented.

The economic downturn has caused their cash flow to decrease, which means the companies value decreased as well. Now the seller still remains 5 years away from his exit due to the lack of taking action. Why does this happen?

Rationalizing Delay
I have found in my many years working with business owners, the most put off planning exists because they just can't get their arms around the scope of the project. Owners are just not sure they can complete the project or task at hand and others decide to wait to make a decision to exit when they feel the market is stronger.

If delay has been your choice, ask yourself the following:

*Will your company be ready for sale when that yet-to-be-decided day dawns?
*Will your company stand out from the thousands of others on the market?
*Will you be able to attract a buyer willing to pay a premium price for your company?
*If you believe the business is as ready as it will ever be, but it doesn't fetch an offer sufficient to provide you with financial security, what then?

Remember, even in active M&A years, the reality is that many businesses on the market do not sell. The main reason for this, I strongly believe is that most businesses are not ready to be sold when the owner is ready to sell. But, businesses do sell and some owners, even during difficult economic times, figure out how to get their companies ready to sell.

So....will you procrastinate?

Exit Planning for Business Owners Webinar

2010-05-27T11:11:00.000-07:00

I recently began developing a series of Webinars for my clients. These webinars are intended to help you as a business owner drastically improve the way you do business today, tomorrow and for the future.

Below is the first webinar of the series: Exit Planning for Business Owners. All of our webinars are recorded live and have a Q&A session at the end of the presentation for the convenience of our guests.

If you're interested in attending our next Webinar, please email me at jyoung@sunbeltbayarea.net and we will put you on our invite list! Enjoy!

Business Buyer's Market?

2009-05-01T11:33:00.000-07:00

With all of the layoffs from Wall Street and the Financial District, there are more buyers in the market looking for a business. This, coupled with the fact that some businesses are experiencing a downturn along with the market, prompts buyers to come in with an offer that is far below the listed price. Granted, some businesses are experiencing a drop in gross sales, and their original price may need to be lowered; however, there are still some local markets experiencing stability and some even growth. It is, therefore, important to not value or price businesses based solely on the current national economy.

Sellers often must face the reality of what their business is really worth, not what they would like it to be worth or even what they need to sell it for. When business brokers begin preparing businesses for market, they will typically look at the last three years tax returns, profit and loss statements, and balance sheets. They take this information and recast it, adding back items that the next owner might not run through the business since they aren't necessary to running the business such as country club fees, manager's salary, etc. Based on the recasted financials and comparative sold businesses, a multiple is arrived at for the Seller's Discretionary Earnings (SDE), i.e. 2.5 x $130,000 equals the listing price of $325,000.

The most important aspect of pricing a business is still the most recent historical financial performance and how the business is currently doing. For the businesses that are continuing to show strong financials even though their market area may have a high unemployment rate and other local economic downturn indicators, there would be no reason to decrease the purchase price of those businesses. In fact, businesses that are continuing to do well in current economic times may actually be worth more than originally thought.

Buyers should be on the look out for those businesses that are doing well in the current economy. A good case could be made for decreasing one's risk by purchasing a well-performing business instead of just rying to buy a business at the lowest price. In the long run, the buyer may see a higher return on their investment.

Misconception for Small Businesses

2009-01-09T10:38:00.000-08:00

So many people assume that when there is a recession that small business must shrink. Not only does the small business market offer continued growth during a recession, it also offers relative stability. Take a look at the growth rate of the small business market versus that of consumer spending.

Consumer spending sports impressive growth rates during the best of times but also suffers big swings during recessions. Conversely, the small business market offers a more stable source of revenue through good and bad economies. Year after year changes in the small business growth rate are less than a third of the drops seen in discretionary consumer spending.

Small business is not only an important source of diversification for enterprise companies but also a relatively safe haven for investments during recessions.

Plan for succession and a possible sale.

2009-01-06T16:42:00.000-08:00

Of family owned companies, 30% will experience a change of ownership due to retirement within the next five years. This is according to the Research by the University of North Carolina’s Ashville’s Family Business Forum. More than half of the family-owned businesses' CEOs nearing retirement age 61 and older haven’t chosen their successor.

More retirees are finding that their children really do not have any interest in taking over the family business. This means you will need more time than you think to prepare your company for sale to an outside party.

You may find that an employee or employees may want to buy your firm. They typically will need bank financing or a private-equity partnership, and that will entail having good financial statements to show to lenders or investors.

Of course an unexpected illness or death can disrupt even the best of plans, so plan on the unexpected. Control what you can. Have a buy/sell agreement ready which will outline the terms under which a potential successor can value and buy your business.

Make sure you have talked with your tax planner to see how estate taxes might affect you as well. They are typically based on the fair market value of the company upon the date of the owner's death. Hopefully you are seeing the importance of using financial and legal experts knowledgeable about retirement and estate planning.

Being Flexible During These Changing Times

2009-01-06T16:40:00.000-08:00

You must remain as flexible as possible if you plan on selling your company or making an acquisition while these weak credit conditions are occurring.

If a good opportunity comes along you will need to act quickly. Quickly does not mean skipping any of the due diligence steps required. Using experienced advisors can assist you in evaluating a potential deal and help you include escape clauses in your purchase agreements to provide an exit.

Buyers--They are a changing!

2009-01-06T16:37:00.000-08:00

In the past the private equity groups (PEGs) were only made up of a few strategic buyers and mainly were financial buyers who looked for undervalued companies to go in and build and sell in a few years for a nice profit.

This has changed. If you are planning on selling, you can expect primarily strategic buyers who are hoping that your company fits into their larger investment strategy. Also count on fewer buyers knocking at your door.

Hard Financial Times

2009-01-06T16:33:00.000-08:00

If you have heard that there were fewer Mergers and Acquisitions (M&A) transactions completed in 2008 versus the previous year, you heard correctly. According to Piper Jaffray, there were $29 billion in M&A deals (212 deals) in the first quarter, compared with $219 billion (1,147 deals) over the same period the year before.

Access to capital is more limited, especially for smaller, less-capitalized companies. Issuance and trading are down in markets such as bank loans, mortgage-related financing, auction-rate securities and other formerly liquid sectors. Many major Wall Street institutions are avoiding making unwise choices right now due to what they saw happen to Bear Stearns.

Recession Proof Businesses? Do they really exist?

2008-12-15T10:31:00.000-08:00

Yes, they do. People still need to buy things. The trick is finding the businesses that offer products and services that are always in demand or are necessary. These businesses can be solid investments during tough times. To make the chances of success even better, the business needs to offer a structured marketing and business model to help the new business owner get to a running start more quickly. Franchises offer the edge that other opportunities do not.

All the gloom and doom that we are reading about out there makes the idea of starting or getting into business for yourself sound a bit crazy. Still businesses have thrived during past recessions and many will flourish this year. Both Microsoft and Google either started in, or accelerated through downturns early in their lives.

A few ideas for recession proof franchises offered are:

Education is probably not going to change a lot even during a recession. Tutoring is still going strong because parents want the best for their children no matter what is happening in the economy.

Temporary Staffing Agencies- Historically a recession actually can help in the growth of temporary staffing. While companies are laying off hundreds of workers, they still need the jobs done, so this can be the stop gap measure to save money and still be productive.

Health and Beauty- This is a business that cannot be outsourced or done oversees for you. It is a needed service, and if a family can have it done economically, the business will thrive. Fitness centers are also still doing well. We know that staying healthy and exercise is the key to a long healthy life, so we don’t cut corners when it comes to that.

Home Improvement Companies- Most people are staying put and not moving to larger homes, so they fix up their existing homes. Home improvement companies continue to thrive no matter what the economy is doing.

Health Care Businesses- Health care companies generally do well because in a recession, people get sick just as much and sometimes more than boom times. Since there are more and more baby boomers having the responsibility of taking care of their parents, home health care and health care products have a very good chance of doing quite well.

What Can Investor/Entrepreneur Do to Attract and Execute a Successful Acquisition?

2008-12-02T10:33:00.000-08:00

Critical Success Factors in Value Definition
Financial Discussion Points

I. Understanding the Financial Statements
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Footnotes to Financial Statements
II. Operating Plan-Financial Projections: 3-5 Year Vision
III. Systems—Accounting and Management Reporting
IV. Tax Compliance Issues
V. Review of Accounting Policies
VI. Stock Valuation Issues for Option, Warrants, Funding Rounds
VII. Tax Carryover Attributes
VIII. Integrations Steps and Processes

Welcome to the Financing Revolution!

2008-10-23T10:37:00.000-07:00

Many buyers are looking at "Hard Money" lenders versus the SBA or Home Equity loans due to the difficulty we are having in the market place. The interest rate is higher, but there are some real advantages. Here is how it works:

Buyer puts 20% -25% down.
The lender will finance 50% of the purchase price.
Seller finances the balance of 25%-30% of the transactional price.
The lender will finance from $100,000-$1,000,000.
A third party valuation will be needed.
There will be a fixed interest rate for full term.
$500 non-refundable application fee (SBA's fee is $1,000) or $1,000 at closing the buyer’s choice
4% origination fee (same as the SBA's fee)
Amortized for 6-7 years
Collateral: Lien on the business & a lien on personal residence for only 2 years (SBA is collateralized for 10 years)
Credit score must be at least 625 (SBA likes 725 and above).

If this sounds interesting, please contact Joan Young at Sunbelt Business Brokers for the referral of the "private label" lending program exclusively for Sunbelt Business Brokers: 408-436-1900 or jyoung@sunbeltbayarea.net.

Beware of internet businesses for sale.

2008-10-01T13:28:00.000-07:00

If you like the internet industry and would like to purchase one, beware there is a scam going on out there. Be sure to meet personally with the Seller, confirm the seller is the real owner of the corporation. Make sure you notarize the purchase agreement so that you can see his driver’s license to verify he is who he said he is. The scam is that the seller is re-selling the business over and over again.

Things to watch out for:

1) If any seller pushes for an early close date and rushing the process, BEWARE.

2) If they keep saying they have another buyer and that buyer can close by a certain date, but if you can close on the same date too, they would rather work with you.

3) If the price sounds too good to be true, it typically is.

4) If they cannot show financials with dates on the copies, show them in QuickBooks, or have you go to their office to verify the invoices, etc., RUN from the business.

5) NEVER get pushed into a corner so that you have to move faster than you can effectively do proper due diligence.

Having the broker represent you and the other party.

2008-09-30T14:45:00.001-07:00

Some people have a hard time getting their arms around the idea of the broker representing both sides (dual agent) in the transaction. In real estate it is rarely done, but in business brokerage for smaller transactions under $3M, it is quite common.

The listing broker knows an awful lot about the Seller's company. They have interviewed the Seller at length, recast their financials, toured the facility, and typically spent hours with the Seller. They know what is important to the Seller and know their hot buttons. When the agent lists the business, typically the business is listed on many web sites. The potential buyers call the listing agent to get more information. Buyers will sign an NDA (non-disclosure agreement) and an agency relationship form prior to getting additional information, agreeing that the listing broker will also be representing them as well.

IF the buyer is already working exclusively with a broker or does not feel comfortable having a dual agency relationship, then they should not agree to sign the agency relationship form. Buyer should identify the broker with whom they are working before the listing broker spends significant time with them.

If the buyer has signed the agency relationship form agreeing to work with the listing broker as a dual agent and changes their mind down the road after getting all the information and having used a lot of the listing brokers time, the following scenario will occur. If the buyer chooses to have their own broker down the line, the listing broker has no obligation to share their commission with the buyer's broker. The buyer may be responsible for their buyers half of the commission or what ever the buyer and buyers broker agree to. Be clear from the beginning after you have interviewed the Seller's broker whether or not you are comfortable working together before signing the dual agency agreement.

Why Sellers Stay Involved.

2008-09-22T10:02:00.000-07:00

If you think that you might not be carrying a note for a portion of the purchase price...

1. All SBA lenders are requiring a minimum of 10% from sellers with interest-only for five years. Then the seller can get the balloon payment after five years. If a buyer has no experience in the industry but good management experience, they will require more down payment and most likely a larger noter from the seller to reduce the bank's risk.

2. If the buyer uses other financing and does not ask for a note, they will most likely require a hold-back of at least 10% of the purchase price. This hold-back will be for up to 12 to 24 months in order for the buyers to have the reps and warranties guaranteed. If buyers find something that was misrepresented during that time, they have at least the hold-back amount to "offset". The offset is not limited to the hold-back amount but protects the buyer for a period of time.

How Do I Choose the Right Broker?

2008-08-26T14:41:00.000-07:00

This is the first and maybe the most important step you need to decide on prior to getting your business ready to go to market. The value of your business and the right time to sell are issues to be handled after a broker reviews your business information. But, right up front, there are some key points that you need to consider prior to signing a 9 month to a 12 month Representation Agreement or Marketing Agreement:

1. Do you like the broker? This may sound pretty basic, but it is important. You will be working on a weekly basis with your broker or intermediary, so you need to like them as a person since you will be working with them for up to a year.

2. Do you trust your broker? This will be one of the most significant decisions you make in selling your business. You want to make sure that the person you are dealing with is ethical, professional, and straight forward with you versus merely telling you what you want to hear.

3. Does your personality mesh with the brokers? If the broker is really loose and easy going (not necessarily a bad trait), but you like lists, details, immediate call-backs and regular updates, this may not be a good match. How the broker handles themselves at the first meeting will tell you a lot. Did they arrive on time? Did they call and confirm the meeting prior to coming? Were they prepared? Did they review the entire selling process and ask for any questions you may have? And, did they listen to you? Listening is a key strength for a broker.

4. How competent are they? Be sure and interview two or three people before making your decision. You want to make sure that they are comfortable with your industry. Were they prepared for your meeting? Are they an active member of the California Association of Business Brokers (CABB) or the business brokerage association for your state? Do they have the distinction of having their Certified Business Intermediary (CBI® ) and or their Certified Business Broker (CBB®) certification? The CBI® is held by less than 10% of all Business Brokers. This tells you that they are quite competent, have taken 60 extra hours of classes in their field and continue to stay current with the industry and market changes.

5. Are they giving your company the best exposure you can possibly get? Ask questions when meeting with them. How will they be marketing your business? How long does it typically take for a business like yours to sell? What is their average time with a listing before it sells?

6. Are they willing to give you a list of referrals who they successfully sold in the last 18 months?

Remember, this business broker is going to be representing you through out the entire sales process from listing to closing the sale. You need feel comfortable with your selected broker and able to trust this person with your business.

CLEAN IT UP!!!

2008-08-20T08:50:00.000-07:00

Well it just happened…. I am always advising potential sellers to have their books cleaned up, their files in good order, etc. before putting their business on the market. I am representing the buyer and co-broking with another broker in another office. It started off wrong. The broker would not provide the Trailing 12 month financials. This is an easy thing to get if one is using QuickBooks. We made our offer contingent on getting those numbers, which showed us that the last 12 months were down 20%. We still moved forward…

When due diligence began, the files were a mess. The Seller gave the Buyer incomplete employee files and wasn’t sure where two of the employee files were…RED FLAG… The sub-contractor fees were $100,000 higher on the tax returns than were reported on the P &L’s… RED FLAG. The 1099s that were given were the red copies which are the ones that are suppose to be filed… Were they filed? RED FLAG. The
Tax return showed a combination of his wife’s business and his business. Now we also need the wife’s business financials so the tax returns make sense.

When the Buyer inspected the equipment and vehicles, only one vehicle was insured out of five total, and one quarter of the equipment needed to run the business was in need of repair, which will amount to over $10,000. There also was a new fee that has been imposed for the equipment that will add $850 per month in expenses.

In summary, this deal will never happen, and it didn’t have to be this way. If the broker had advised the Seller to get his ducks in a row prior to listing this business, it would sell. It is in a hot industry. The Buyer REALLY wanted it to work out, and even if the price is lowered considerably, now the Buyer really doesn’t trust anything that he is given due to the mess the business is in.

Before selling, get things in order. Look at your business as if you were a buyer. Would YOU buy it the way it is now?

Time to Leave But Don't Want to Let Go? Reinvest in Your Company.

2008-08-06T13:48:00.000-07:00

You can have your cake and eat it too.

I was working with a client who had done an amazing job building his company but was toying with moving on. He had grown it to earn five times what it was making when he acquired it and added new products and loyal clients. No one customer made up more than 5% of the revenue, and the company had 50% repeat business. Sweet situation. Why sell?

The seller was bored and wanted a new challenge but knew if he kept the company a few more years, he could double it.

Solution--the seller decided to re-invest 20% of his proceeds from the sale back into the "new" company. The acquiring company had deeper pockets to build it to a much larger firm and had skill sets that would allow that growth to happen.

The seller now would be able to build another venture to hold his interest while he continues to increase equity in the business he built. This also, of course, gave the acquiring company comfort knowing the seller had enough confidence in the firm and the industry to put his money where his mouth is.

Transferring Ownership in a Small Business

2008-08-06T11:12:00.000-07:00

Just because a company has a key employee who knows a lot about the business, its operations, customers, and employees doesn't necessarily mean they should stay indefinitely.

I sold a temporary help business last year, and the key employee would only sign a six-month employee contract. At the time, this was a concern for the buyer. After one month of owning the business, the owner was counting the days until the six-month contract expired. With a key employee having a lot of knowledge but a bad attitude, not always honest, not a team player, and only out for himself, the company would not thrive and grow with him involved.

The new owner started interviewing and found several excellent candidates that he would enjoy working with--Oh, by the way, for less money and fewer perks than the previous employee was getting.

Don't Let the Buyer Run the Show!

2008-08-06T10:51:00.000-07:00

I just closed a transaction a month ago in which we thought we had a great match. The buyer was quite confident, aggressive, and not demanding at all of the seller.

The parties agreed to four weeks of training. After two weeks, the buyer told the seller, "All is well. We can handle it from here." In effect, they were saying "Don't call us; we'll call you."

Meanwhile the seller is home receiving phone calls from the employees saying, "She thinks she knows everything. She isn't warm and open like you. I think I'm going to get my resume out there."

The moral of the story: Stick around and help make a smooth transition. Key employees need to feel valued, safe, and respected. Educate your buyer ahead of time about the personality of each key player so they can begin building rapport gradually. Most sellers will be carrying a note, so they definitely have a vested interest in the success of the new owner.

Private Equity Groups - Good Liquidity for Family-Owned Businesses!

2008-08-05T15:24:00.000-07:00

If you have a family-owned business with several family members working actively in the company, you need to explore how to keep peace in the family when it's time to exit. You may not feel that any other of the family members are capable of taking over and continuing the legacy.

Private Equity Groups, officially called PEGs, can be a great solution. There are over 2,700 PEGs in the U.S., up from just a couple hundred 20 years ago. These groups are constantly looking for good opportunities.

PEGs offer flexibility. They may purchase the entire company but also structure deals where they invest increments over time slowly acquiring ownership while family members get some money each year. They often will purchase your company as an "add-on" to enhance or complement one of their other companies.

Private Equity Groups do this for a living and have dealt with dozens of companies so you can learn a great deal through out the process. They can be short-term or long-term partners.

You may stay on and run the company for a year or more, or they may bring in their own management. All things are open for discussion with the right Private Equity Group.

Capital Gains Tax, the New Administration and You!

2008-07-16T14:30:00.000-07:00

Sellers should be considering taking advantage of the low capital gains treatment on the sale of their company since the standard top on long-term gains rate is 15%, but it is set to rise to 20% in 2011. Then we need to consider that the Democratic administration is expected to raise the capital gains rate to 30% within the next four years. This will not only have a great impact on investors in stocks, real estate, but also businesses being sold. This is particularly important for a business owner who is contemplating an exit strategy within the next three years, weighing whether it makes more sense to grow the business and pay an extra 15% in capital gains tax down the road or sell it sooner for a little less but keeping more of the profit.

These business owners also should be aware that where will be a glut of available businesses on the market and a downward price pressure in the next few years due to the fact that there will be more sellers than buyers.

If you have been considering an exit strategy now is the time to be getting your company ready so that your are prepared when the timing is right for you.

What if I've only been in business a short time, barely breaking even and want to sell?

2008-07-11T11:10:00.000-07:00

We are receiving many calls from companies that have been in business for fewer than two years, and they would like help selling their companies. One of the first questions we ask is, “Is your business profitable?” The response is typically, ”We are breaking even.” or "We are getting there."

Not only is it difficult to find a buyer for a company that has a history of fewer than three years, but by not being profitable or not having at least $100,000 adjusted net makes it close to impossible. The owners of these young struggling companies typically also want to recoop their entire investment including working capital.

Think about it. If a buyer could get into a business that is making $100,000, and they are asking $265,000 versus one that is asking $265,000 and breaking even, which one would you choose?

It is too soon for that business owner to expect to be able to recuperate their investment. Our advice is to either raise more capital so that you can grow the company to a place where it is saleable or possibly bring on a partner who can do what the owner is obviously not doing well. If the owner decides to close their doors, they will still be on the hook for the property lease and any equipment leases that have been signed.

There is help out there. The Service Corp of Retired Executives (SCORE) or the Small Business Development Center (SBDC) offer free advice to business owners. They have offices in most major metro areas.

Be careful before jumping into business. It is safer to invest in an existing business with a history, customers, employees and cash flow versus starting from scratch. If there is nothing available on the market that interest you...WAIT. Be patient for the right one that will utilize your skills, interest and that will be able to help you reach your goals for your next career.

Franchising Industry

2008-07-01T11:44:00.000-07:00

I have seen many changes in the 28 years that I've worked in franchising.

The franchising industry has seen record growth in recent years. A recent economic analysis shows that the franchising sector of the economy expanded by over 18 percent from 2001 to 2005, adding more than 140,000 new businesses and 1.2 million new jobs to the nation’s economy. Direct economic output of franchises grew by more than 40 percent to $880 billion during the five-year span.

There are more than 900,000 franchised business in the U.S. operating in many industries, including automotive repair, restaurants, business services, retail, lodging, real estate and senior care.

The important element in finding success in franchising is the right match. We have witnessed buyers who put down $50,000 total investment and have built it to a business making over $250,000 profit. We've also seen a few others having to close their doors after 12 months. When you are looking at franchises, make sure it's an industry that is growing, that is not a fad, and one that will utilize your skills and abilities.

How does the Real Estate Crisis Affect Small Business?

2008-06-12T11:16:00.000-07:00

Restoring confidence in the housing market is crucial to restoring economic growth.

It is estimated that 45 percent of outstanding small business loans are collateralized by some type of real estate asset. Many business owners often rely on the equity in their homes and widely use home equity loans and lines of credit.

The housing sector's weakness affects not only home builders, realtors, mortgage brokers, and others directly involved in home sales, but also related small businesses that provide services such as home improvements as well as home products.

Many small business owners in these industries will most likely not to see a turnaround in their own bottom lines until the real estate market rebounds.

The House Small Business Committee is studying a number of tax incentives that benefit small firms caught up in the housing crisis. Among the initiatives being discussed is a Super SBA Small Business Loan Program. It would provide "low-doc," expedited SBA 7(a) loans of up to $250,000, with reduced lender and borrower fees. The government would guarantee 85 percent of the loan. The idea is to expedite loans to small businesses to help them expand and create jobs.

Another measure proposed would grant immediate relief from the Alternative Minimum Tax (AMT) for the 2008 and 2009 tax years and would increase after-tax income for small business owners by sending rebates directly to taxpayers.

These measures are just being discussed and are not a sure thing.

How Do Sellers Respond to Banks Tightening Down on Lending?

2008-05-22T13:55:00.000-07:00

As banks are being more stringent with their lending criteria, Sellers are being asked to carry a larger note back on the business. This is really a good thing for the Seller if they have a good, qualified buyer. Sellers not only get 7% interest on their note, which is hard to come by these days, and they do not have to pay taxes on the funds until they receive them. This spreads out their tax consequences over the three to five years of the loan.

If the buyer is using the Small Business Administration (SBA) to fund the majority of the loan, the SBA will require that the Seller receive interest only for the five-year period with a balloon after 60 months. The SBA is quite concerned about the Buyer's cash flow and is making sure they do well in the business.

Can you use your 401k to buy a business?

2008-04-23T16:16:00.000-07:00

As of May 1, 2008, the Small Business Administration (SBA) requires 25% down from the buyer versus 20% down. SBA lenders are also now requiring the buyer to spend $2,500 to $3,500 for a third party valuation in addition to their hefty fees. Because of these changes along with the tightening up of financial institution, many of our buyers are opting to use their 401K funds to purchase a business.

There are several IRS approved companies that will set this up without any tax consequences or penalties. Here is how it is done. Either the approved IRS company can set up a new "C" corporation for you or you can have your attorney do this. The "C" corp. then creates a new retirement plan. The funds from your existing retirement plan are rolled over into the corporation's new retirement plan. The last step is that the new retirement plan purchases stock in the newly-created C-corporation.

When your new company can afford to pay back what you have borrowed from your retirement plan, you can then change your C corp. to an S corp. which is typically more desireable when you are ready to exit your business. There are fees, of course, for doing this; however, it is a very creative and legal way to put your retirement money to work for you. Before you move forward with any loan, make sure the investment is a sound busness decision.

How does the softening economy affect business brokerage?

2008-04-17T14:23:00.000-07:00

With the economy softening, you would think that business would be slowing down.

What I have noticed for the last few months is that there are fewer buyers calling; however, those who are looking at businesses are dead serious. The buyers know what they are looking for, or at least the criteria for the business. They are able to evaluate the Confidential Business Review or Offering Memorandum and move towards a Letter of Intent (LOI) in a timely manner.

The selling market is still strong.

Seller's want to take advantage of the low capital gains treatment on the sale of their company before the new administration plans to raise them. They also know that there will be a glut of available businesses on the market and a downward price pressure in the next few years. They would rather sell before it becomes more difficult to compete with so many others.

There is a Private Equity Boom happening as well.

The interest level of private equity funds in middle-market companies is still very strong. More players and abundance of capital continue to fuel the growth. For smaller private companies, private equity funds can deliver much needed financial resources such as liquidity, growth or acquisition capital, and greater access to lender markets. They can also provide liquidity for companies that are turning the business over to their children or a change of ownership.

Ultimately, for those thinking about selling their business, there is no time like the present before there is too much competition in the marketplace.