The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.
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Every year many great deals, deals that would have otherwise gone through, are undone due to a failure to properly use and follow confidentiality agreements. Not adhering to this essential contract can lead to a myriad of problems. Employees discover a business is going to be sold and quit, competitors learn the business is for sale, or key customers learn of the potential sale and take their business elsewhere. Such issues can block a sale from successfully going through. Maintaining confidentiality throughout the sales process is of paramount importance.
Business buyers and sellers should fully embrace confidentiality agreements, often referred to as a non-disclosure agreements. Among the many and diverse benefits of working with a business broker is that business brokers know how to properly use confidentiality agreements and what they should contain.
Sellers who use a confidentiality agreement are protected from a prospective buyer disclosing confidential information during the sales process. Originally, such agreements were used to prevent prospective buyers from letting the world know that this business was for sale. Today, these contracts have evolved and now cover an array of potential seller concern such as ensuring that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information they learned during the sales process.
Every business and every situation is different. As a result, confidentiality agreements must be tailored to each business and each situation. A solid confidentiality agreement should include, first and foremost, what areas are to be covered by the agreement, i.e., specifying what is and is not confidential. Other areas to be addressed include how confidential information will be shared and marked, the remedy for breaches of confidentiality, the terms of the agreement such as how long the agreement is to remain in force.
One key area in a confidentiality agreement is that the prospective buyer agree not to hire any key people away from the selling company.
When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality. The last thing any business wants is for its confidential information to land in the hands of a key competitor. Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.
Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance. In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.
Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts. At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy.
In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families. In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits. In other words, it is about more than preparing to hand one’s business over to a new party.
Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business. The fact is that selling a business is usually a layered process that can even take years to complete. Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well. Additionally, selling can be an emotional and stressful process which further complicates the entire matter.
For most business owners, selling a business represents the single greatest financial move of their lives. As such, it is often accompanied with significant stress and anxiety. It is essential not to underestimate the emotional and psychological side of the sales equation. Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself.
A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling. Developing a succession strategy is a way to think through such issues well in advance.
Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold. As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business. If you want to receive the optimal price for your business, then your business should be in tip-top shape. This means diving into your books and records and getting everything in order. Working with an accountant or an experienced business broker can be invaluable in this process.
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