Selling a business isn’t always 100% about the price. It is not like selling a house where typically the most important factor is who places the highest offer. In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered.
The idea of selling to a competitor is one that seems attractive to many business owners. After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider. But while this point is quite valid, selling to a competitor comes with its own problems. Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.
A second avenue that sellers will often explore is selling to a financial buyer. A financial buyer is likely not to be a competitor. But on the downside, a financial buyer may be unwilling to pay the seller’s price. It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.
The highest selling price may come from a strategic acquirer. But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller. A strategic acquirer may not have the best interests of the company at heart. When a strategic acquirer takes ownership, key employees and management may be replaced. The company may even be moved. Many owners are unprepared for the shock that may come along with a strategic acquisition.
There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business. It is possible that the best buyer for a company could be one of its employees. However, this option comes with risks as well. Key employees and management may leave if the deal falls through, as they now know that the company is for sale.
Finding overlooked buyers is what business brokers do best. Matching the right buyer with the right business is both a science and an art. Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.
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Distressed businesses can represent a real and often overlooked opportunity for buyers, according to Howard Brownstein, President of The Brownstein Corporation.
Brownstein is an expert in providing turnaround management and advisory services to companies, as well as their stakeholders and is considered to be one of the world’s top experts in distressed businesses.
The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years.
However, not all distressed businesses are the same, Brownstein cautions. There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath.
Why is a Given Business Distressed?
Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses. Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future. It is essential to be able to convey “what went wrong” and how the problems can be fixed.
Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list. The first is cash flow issues, and the second is bad management. Often it turns out that the management was simply not rigorous enough. He also notes that companies will tend to blame external issues as a way to explain away their failure.
Of course, no two distressed businesses are failing from 100% identical causes. Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.
- What is the business’ potential value?
- Is there something of value under the problems?
- Under better or different circumstances, could the business be viable?
These are all questions that your business broker or M&A advisor can help you to answer. It’s important to gain a clear understanding of the business’ past, present and future before deciding to buy a business.
Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits. During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter. He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation. He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton. Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.
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Keeping a product or service around that isn’t pulling its weight might prove to not be a very good idea. You may have invested a good deal of time and resources into its development, but if that product or service is no longer contributing to your bottom line, it might be time to cut it loose. Even if your product is pulling its weight, but doesn’t fit into your overall core business, then you should still consider getting rid of this “orphaned product.” Let’s take a look at some of the reasons you might want to keep or remove, an orphaned product from your company.
Reasons why an orphaned product might be bad for a company:
- An orphaned product line can distract from core business operations.
- Funds allocated to an orphaned product could be used instead to build the core business or make improvements that are not in the current budget.
However, one company’s orphan could be another company’s adoptee. Some buyers, companies and private equity groups are looking for product lines they can use to augment their existing ones. In fact, some buyers may even want to build a new business around a given product line.
Of course, it isn’t always as simple as “pulling the plug” and moving on. It is important to step back and consider the negative impacts of jettisoning an orphaned product, such as the fact that the product line could have key employees attached to it. Or there could be company culture issues related to removing the product, such as causing disruption within your company. You must also consider if the orphaned product could ultimately play a role in the sale of your company.
At the end of the day, an acquiring company may feel that the orphaned product line is a great fit for their existing distribution chain. Additionally, your offering might fit into a new product line that the acquiring company has launched. It is important that you evaluate every aspect of an orphaned product before making the decision to remove it from your company.
Understanding the needs and goals of your most likely buyers should play a role in your decision making. Working with an experienced business broker is an easy way to increase your chances of making the right decision.
An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”
Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”
It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.
Sellers should understand that what they hope to accomplish in the sale of their business and the structure of the actual sale can both dramatically influence the asking price. Price is obviously important, but other factors can be even more important. Consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.
Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware of how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.
These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price. During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.
Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.
• Buyer Qualifications
• Full Price
• Amount of Cash Involved
• Commission/Selling Fees
• Closing Costs
• Exclusive Listing
• How the Business is Shown
• How a New Owner Continues the Business
By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.
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When you are buying or selling a business, you might very well end up making a deal with someone from another generation. Therefore, it only makes sense to take the time to understand that individual’s background and how that might change how they behave. It is important to understand their collective experiences and the trends that shaped their identities and perspectives. At the same time, you can identify your own biases, strengths and weaknesses that may be caused by your own upbringing.
The strategies in this article originated from Chuck Underwood who is considered a leading expert in the diversity of communication styles between generations. He is the author of a major book on the subject as well as host of the long-running “America’s Generations with Chuck Underwood” on PBS.
Underwood’s perspective is that people of each generation were molded by their unique formative years. The decisions that buyers and sellers make will be impacted by their generation. Mostly likely, the buyers or sellers you will be coming into contact with will be Baby Boomers, Generation Xers or Millennials.
Working with Baby Boomers
Baby Boomers (those born between 1946 and 1964) are a major force in the business world. While they often possess a patriotic passion to improve the country, they were also witness to a time of great change via many movements including the civil rights and women’s movement.
When you’re dealing with Baby Boomers, it is important to remember that they will want to build relationships and get to know you. Common courtesy is very important to Baby Boomers. That means they’ll expect you to show up on time and turn your phone off during meetings.
You’ll want to keep in mind that older Baby Boomers may be experiencing hearing and eyesight loss. As a result, you’ll want to keep your type and font size larger, and make text easy to read.
When you’re working with your clients, it only makes sense to pay attention to the generation during which they were raised and adapt your approach accordingly. Understanding generational differences will help you get a leg up on the competition while at the same time helping your clients achieve their goals.
What is Generation X?
Generation X (or Gen X) had a wildly different formative experience than the Baby Boomers. Generation X is generally defined as being born from 1965 to 1980. This generation spent its formative years from the 1970’s through the 1990’s. In stark contrast the relatively more pleasant and optimistic childhoods of the Baby Boomers, Gen X had a rougher ride.
America became more mobile during the time period during which Generation Xers grew up. As a result, many children were uprooted and separated from their friends, family and hometown roots. Growing up, these individuals witnessed a variety of scandals ranging from political and religious figures to sports figures. Gen Xers witnessed the systematic dismantling of the American middle class and with it a general lowering of quality of life, opportunities and confidence in corporations. In the end, Gen X was quite literally left home alone and lived as “latch key kids.” It is no wonder that this neglected generation has some issues.
Individuals growing up during this time learned early on that they had to be ready to fend for themselves. Since Gen Xers have been met with consistent and systematic disappointment and even wide scale institutional betrayal, this generation, on average, is more distrustful of organizations.
Gen Xers are self-reliant and independent and one of their core values is survival of the fittest. In his view, Gen Xers are self-focused, individualistic and want everyone to skip the nonsense and get to the point. They have no real interest in getting to know you or playing a round of golf.
Working with Millennials
Millennials spent their formative years in the 1980s and early 90s. They are a very optimistic and tech savvy generation. They are also the most classroom educated generation in history.
It is also very important to note that Millennials are the most adult-supervised generation in history. They are likely to be offspring of so-called “helicopter parents” who work to protect their children from setbacks. Employers find that Millennials are entering adulthood, but are still relying upon their parents to help them make decisions and even career choices.
Where Gen Xers are distrustful of the “wisdom of their elders,” Millennials actively seek out such advice. Likewise, Millennials tend to volunteer a good deal and look for ways to solve the world’s largest problems.
Millennials will enjoy building a relationship with you. Keep in mind these individuals tend to be quite socially conscious, and they may very well expect you to agree with their views. Additionally, there is a chance that they will have their parents involved in their business dealings.
Keep in mind that the de facto tech addiction, or at the very least acute overreliance on technology, has led to issues with Millennials’ soft skills. They can often lack the ability to read another person’s body language and adjust accordingly.
In the end, regardless of what generation you are working with, it is important that you continually adapt. This will greatly increase the odds of cementing a successful deal.
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