Many business owners expect to be able to sell whenever they like. In reality, owners can’t control when they are able to sell, according to a recent insightful Forbes article, “Study Shows Why Many Business Owners Can’t Sell When They Want To” penned by Mary Ellen Biery. An Exit Planning Institute (EPI) study revealed that many business owners are “woefully unprepared” to sell.
Christopher Snider, President and CEO of EPI, says a large percentage of business owners have no exit planning in place. This fact is made all the more alarming because most owners have up to 90% of their assets tied up in their businesses. Snider says most business owners will have to sell within the next 10 to 15 years, and yet, are unprepared to do so. Only 20% to 30% of businesses that go on the market will actually sell, Snider says. So what’s the problem?
Snider thinks it’s one of quality. True, it has been a seller’s market for businesses in the last year or more, Snider says that’s due to unattractive supply rather than to strong demand. “Multiples are historically high, but I think that’s more because the private equity companies and the strategic buyers don’t have a lot of businesses to pick from,” he said. In short, Snider says there’s a lack of good quality businesses to buy.
As of 2016, Baby Boomer business owners, who were expected to begin selling in record numbers, are waiting to sell. “Baby Boomers don’t really want to leave their businesses, and they’re not going to move the business until they have to, which is probably when they are in their early 70s,” Snider said.
The EPI survey of 200+ San Diego business owners found that 53% had given little or no attention to their transition plan, 88% had no written transition to transition to the next owner, and a whopping 80% had never even sought professional advice regarding their transition. Further, a mere 58% currently had handled any form of estate planning.
Two-thirds said “Getting full value for my business to fund retirement or other business interests” was a primary goal, but fewer than 40 percent had a formal valuation conducted in the last three years, and 65 percent have never had their financial statements audited.
Adding to the concern was the fact that a third of owners had not even thought about management succession, and only 25 percent were comfortable that their managerial team would be successful if the owner wasn’t involved after the transition.
In Snider’s view, the survey indicates that many business owners are not “maximizing the transferable value of their business,” and additionally that they are not “in a position to transfer successfully so that they can harvest the wealth locked in their business.”
All business owners should be thinking about the day when they will have to sell their business. Now is the time to begin working with an experienced business broker to formulate your strategy so as to maximize your business’s value.
By Robin Gagnon, GABB Business Broker
When selling a restaurant or other business, the potential or opportunity for the future is seen as a reason that a buyer should invest. That’s because a business’s future prospects make the listing more attractive to buyers. The buyer will see the listing as a better long-term opportunity.
When it comes to pricing the business for sale, however, Business Brokers must set a price according to common lending practices and standard valuation methods. That means that “Blue Sky” or potential for the future is not something buyers are willing to pay for, nor are lenders going to loan money upon. A buyer will only pay for the past performance and a bank will only lend on past results.
Here’s why buyers will not pay for the “potential” in your business.
Lending is trickier.
Most lenders avoid any open and operating businesses built on a pro forma. This is the Latin words for “to form.” It is standard practice to develop a pro forma in a startup situation where there are no existing metrics to rely upon for sales and earnings. The commonly accepted definition of a pro forma is, “assumed or forecasted information presented in advance of the actual or formal. The objective of a pro forma business plan is to give a fair idea of the revenue, expenses and earnings in anticipation of the actual occurrence
If a business is not open, it’s easy to formulate underlying data points and put them into a business plan to forecast the pro forma earnings. The only problem with this method is that pro forma financial statements estimate how the actual statements will look if the underlying assumptions hold true.
For open and operating businesses, the underlying assumptions have already been put to the test. Now we have actual statements and actual performance. The underlying assumptions may be revealed as flawed or inaccurate. If a restaurant owner built a pro forma based on sales of $6000 per week and the actual performance is only $4500 in sales per week, that fact is now known and therefore, must materially adjust the pro forma.
Riskier for the Buyer
The second reason that “potential” cannot be factored into the selling price of a restaurant is that all the risk, effort and financial commitment to meet the business potential belongs to the buyer, not the seller. If the business sales don’t live up to the touted “potential,” it’s the buyer who is still going to have to pay the employees, the rent and the loan.
Potential to Improve the Business
That doesn’t mean that business owners shouldn’t work on their business’s potential. In our earlier example, there is “potential” is to increase the number of customers each day and improve the volume to the original forecasted point. That, however, may require any of the following conditions be met:
- Investment in Advertisement
- Investment in Marketing
- Change of Concept
- Improvement in Service
- Change in the ingress/egress to the business
- New Residential or Commercial Development
- Improved Signage
- And the list continues
For an open and operating business, that means the buyer must invest some level of energy, effort and/or financial resources to improve the current performance of the business. That investment and effort is on the part of the buyer, not the seller. Therefore, the “up-side” or “potential” is still unknown, can’t be quantified and thus, can’t be sold on the front end of the listing.
The next time you consider selling your restaurant or other business and offer up “potential” as a reason to buy, just remember, it cannot factor into the listing price. It is a definite selling point and makes a business more attractive, but is not part of the valuation model.
This article was adapted from the blog of Robin Gagnon, co-founder of We Sell Restaurants. Robin has completed the study and testing to attain her Certified Franchise Executive (CFE) designation offered through the International Franchise Association.Read More
No one keeps a business forever. At some point, you’ll either want to sell your business or have to retire. When you’re ready to sell, it is important to streamline the process, minimize the stress, and also receive top dollar. In a recent Forbes magazine article, “How to Find a Buyer for Your Business,”serial entrepreneur Alejandro Cremades explores the most important steps business owners should take when looking to sell.
Like so many things in life, finding a buyer for your business is about preparation. Cremades, author of The Art of Startup Fundraising, says you should start thinking about selling your business on the day you found your company. Creating a business but having no exit strategy is simply not a good idea, and it’s certainly not a safe strategy either. Instead you should “build and plan to be acquired.”
For Cremades, it is vital to decide in the beginning if your preferred exit strategy is to be acquired. If you know from the beginning that you wish to be acquired, then you should build your business accordingly from day one. That means it’s essential to understand your market and know what prospective buyers would be looking for.
According to the the Kauffman Fellows Leadership Development Program, acquirers buy businesses for a range of reasons including:
- Driving their own growth
- Expanding their market
- Accelerating time to market
- Consolidating the market
- Reinventing their own business
- Responding to disruption
Startups should be prepared to answer these questions:
- How profitable is the company
- Size of total addressable market
- What are the top line revenues
- How much are gross profit margins
- Are customers retail consumers, SMB clients or enterprise level
- Customer churn rates
- Customer satisfaction ratings
- Value of contracts
Additionally, it is critical to make connections. “Strategic acquisitions are about who you know, and who knows you,” says Cremades. “Start making those connections early.” Buyers are not always who one expects in the beginning of the process. Keeping this fact in mind, it is important to stay open and always look to build solid relationships and keep those relationships up to date regarding your status. Getting your company acquired won’t happen overnight. Instead, it is a process that can take years. Therefore, networking years in advance is a must.
Like many seasoned business professionals, Cremades realizes how important it is to work with a business broker. Cremades says brokers “can help make introductions, hype up the opportunity, demonstrate the value, create a bidding war, manage the process and hopefully get you more for your company. That’s their job. The more they get you, the more they get paid.”
If you have failed to network properly over the years, then a broker is an amazingly valuable ally. They are about more than offering sage advice, as business brokers can also make potentially invaluable introductions and help you navigate every stage of the acquisition process.
“A talented team alone may warrant a bigger company buying your startup,” Cremades says. “So, hire the best. Who you put on your board can make it very easy (or more challenging) to get your company acquired as well. What experience do they have in M&A transactions? Who do they know that will also invest or may want to buy you out?”
Small business transactions have been enjoying record numbers. However, during the second quarter of 2019, the numbers have begun to take a small dip. Experts feel that the trade war with China is playing a role, according to a recent article posted by BizBuySell, “Q2 Small Business Transactions Down as Trade War Questions Remain.”
The number of transactions stood at 2,444 for Q2, a drop of 9.6%. On the other hand, businesses are still selling at record levels. There were 4,948 transactions reported in just the first half of 2019, according to BizBuySell. That means that 2019 could be the second most active business-for-sale market since BizBuySell began tracking data back in 2007. Certainly the Q2 9.6% drop doesn’t mean that the sky is falling.
Deals per broker are declining, and many are looking to the current trade war between the U.S. and China for answers. Increased tariffs and associated worries are behind the Q2 dip, according to many experts.
Amost half of business owners — 43% — are experiencing rising costs as a result of tariffs on Chinese goods, according to a recent BizBuySell poll. Small businesses across the board are feeling the effects of the trade war with China.
Ultimately, consumers will also feel the pinch as well with a whopping 64% of businesses noting that they will raise prices in order to address rising supplier costs. Another attention-grabbing statistic is that 65% of small business owners are considering switching to suppliers not based in China, and 54% are looking for U.S. based supplies. If this trend continues it could mark a dramatic shift.
There is, however, ample good news. According to BizBuySell, buyers looking for a business will discover that the supply of quality listings on the market is increasing. In short, now is a good time to buy a business, as the number of businesses listed as “for sale” grew by a healthy 5.2% in Q2 when compared to the same time last year.
The “business for sale” inventory is growing. According to Bob House, President of BizBuySell, “Businesses are performing better than ever.”
Some of the top performing markets by sales included Baltimore, Portland, Seattle, Austin and Dallas. Those interested in buying a business will find that now is truly a historically good time to do so. Working with a seasoned business broker can help you find a business that is right for you. While the trade war has injected some uncertainty into the overall climate, there is no doubt that now is a historically unique time to buy a business.
Selling a business is a complex process that boils down to this: Finding the right buyer. In a recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons, a former assistant editor of the Wall Street Journal, outlines the multifaceted process of selling a business.
Gibbons cautions small business owner to thoughtfully consider when, how, and to whom you sell your stock. “Create a for-sale plan that sets up the business for long-term success,” she recommends. To sell your business the right way, have a coherent and well thought out exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
If you’re like most small businesses, a large percentage of your wealth is tied up in your business. Unfortunately, studies indicate that only estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
To make a business attractive for sale at the best price, “the owner’s role has to be relatively easy to transfer, ” says Michael Lefkowitz, author of the exit planning book “Where’s the Exit.” “Before you make your exit, you have to take some time to step away from daily operations, polish the appeal of your brand, update your books, and build up the capability of your subordinates,” Lefkowitz says. In short, you have to become replaceable.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Three key variables must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
“Assuming you choose wisely, this person will know how to craft a unique and compelling narrative about your business to inspire people to pony up the necessary dough—all the while helping you navigate the emotional ups and downs that accompany the selling process,” says James Moran, founder and managing partner of ValueStreet Equity Partners, a San Diego-based small business investment firm.
Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.