2012 Business Sales, Avoiding Risks and Higher Rewards

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  The fire in the belly is gone and for many has been replaced by the desire to do something else.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.

Maintain Your Mental Well-Being

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.

How Do I Build A Valuable Company?

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

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

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.

What Goes Into the Sale Price of Your Business?

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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.

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

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