Groom Your Company with a Buyer in Mind

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

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

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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

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

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.