Owning a business and owning the right kind of business for you are, of course, two wildly different things. Owning the wrong kind of business can make you absolutely miserable. So if you are considering buying a business, it is prudent that you invest the time and effort into determining the best kind of business for your needs and your personality. In a recent Forbes article, “What is the Right Type of Business for You to Buy?” author Richard Parker explores how buyers should go about finding the right business fit.
Parker is definitely an expert when it comes to working with buyers as he has spoken with an estimated 100,000 buyers over his career. In that time, Parker has concluded that it is critical that you don’t “learn on your own time.”
His key piece of advice concerning what type of business to buy is as follows. “While there are many factors to be considered, the answer is simple: whatever it is you do best has to be the single most important driving factor of the revenues and profits of any business you consider purchasing.” And he also believes that expertise is more important than experience. Parker’s view is that it is critical for prospective buyers to perform an honest self-assessment in order to identify their single greatest business skill and area of expertise. The last thing you want to do is pretend to be something that you are not.
Parker makes one very astute point when he notes, “Small business owners generally wear many hats: this is usually why their businesses remain small. Remember that every big business was once a small business.” As Parker points out, whoever is in charge of the business will ultimately determine how the business will evolve, or not evolve. Selecting the right business for you and your skillsets is pivotal for the long-term success of your business.
All of this adds up to make the process of due diligence absolutely essential. Before buying a business, you must understand every aspect of that business and make certain that the business is indeed a good fit for you. According to Parker, if you don’t love your business, it will have trouble growing. This point is impossible to refute. Owning and growing a business requires a tremendous amount of time and effort. If you don’t enjoy owning and/or operating your business, success will be a much more difficult proposition.
Finding the right business for you is a complicated process even after you have performed a proper evaluation of your skills and interests. After all, do you really want a solid business with great potential for growth that you would hate owning? By working with brokers and M&A advisors, you can find the best business fit for your needs, personality, and goals. These professionals are invaluable allies in the process of discovering the right business for you.
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By Loren Marc Schmerler, President and Founder of Bottom Line Management, Inc., an Atlanta-based business brokerage, M & A and consulting firm.
1. Do You WANT to Sell? Make sure you really “want” to sell. Ask yourself if you are bored, burned out, ill, have a new child, have aging parents that need your assistance, etc. Or are you simply unhappy with how much money you are making? If this is the case, you do not “need” to sell. All you need is some guidance getting back on the right track.
An experienced business consultant can help you refocus and see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But if you conclude that selling is what you want to do regardless of how much money you are making, then you need to proceed to the next step.
2. Does Your Business Have Curb Appeal? After you positive that you want to sell your business, I suggest that you drive up to your business and review it objectively. Are there any holes in your parking lot? Fix them before a buyer shows up. Is any of the shrubbery dead or out of control? Replace dead landscape plants, weed where appropriate and get shrubs properly trimmed.
Clean any dirty windows. If the building exterior is dirty, get it pressure-washed. Paint the building. Get a new roof or replace bad shingles. In brief, make sure the “curb appeal” of your business has no obvious and easily correctible issues.
3. Is the Interior Appealing? Examine the interior of your business from top to bottom, starting with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Get on a ladder and replace burned-out lights with new and shiny bulbs. Does any of the furniture look ratty? If so, either repair it or replace it.
Repaint the walls to hide scrape marks on the walls. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. How about the restrooms? If they’re an embarrassment, clean them up and keep them clean. Are they handicapped accessible? If not, make arrangements to bring them up to code. Look at your office with a keen eye. Remember that when the buyer tours your business, you want them to visualize becoming the owner and being proud to do so.
4. Job Descriptions Updated? Review your job descriptions, policies and procedures. First, draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed. Make certain you have someone proofread the job description and correct any grammar or spelling errors.
After you are satisfied with your job description, ask all your employees to do the same. This process has several benefits. First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete and typed, place them in a binder labeled “Job Descriptions.” Then you will move on to policies and procedures.
5. Policies and Procedures? Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions in which employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.
When asking a prospective employee to complete an application, stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of Hispanics, you will need to consult with a labor attorney to ensure you do not hire illegal immigrants which could result in severe penalties. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked.
6. Employee Evaluations? Employees are critical to the success of a business, so you must be current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom they have never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.
That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.
7. Are Financials Current? Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told you cannot say when they will become available. Talk about red flags. How can you run a business without current and accurate financial statements? The short answer is that you cannot do so. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.
When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow-moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.
8. Are Taxes Up-to-Date? Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes. It is absolutely critical that you are current with all these returns to instill confidence in the prospective purchaser. If you have not filed and paid all sales tax returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last three years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.
Speaking of taxes, you need to have a heart-to-heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bonafide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after-tax position.
9. Prepared for Due Diligence? What is due diligence, and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc. With financial records, the process starts with the tax returns, goes backwards to the financial statements, then to the general ledger, then to all source documents that include bank statements, deposit slips, check stubs, canceled checks, vendor invoices, client/customer statements, etc.
To prepare for the financial scrutiny that accompanies due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last three years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.
10. Are You a Legal Entity? There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings? If you have outstanding liens for debts that have been paid off, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.
Have you paid all payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales taxes that are due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?
An experienced business broker can guide you through answering all of these questions, which will help to speed the sale of your business.
Loren Marc Schmerler‘s company, Bottom Line Management, Inc., (BLM) provides top quality, proven business brokerage services to buyers and sellers who want to control their own destiny and build future equity for themselves and their families. Since 1987, buyers and sellers have trusted Bottom Line Management, Inc., to provide ethical, professional and personalized business brokerage and consulting services based on the company’s in-depth knowledge of current market and industry conditions. BLM helps business owners successfully navigate one of the major financial business transactions of their lives, whether that transaction involves selling their own business or buying another business. The company’s headquarters are located in Atlanta, GA. Loren’s phone number is 470-990-0160
Stephen “Steve” Mariani, owner of Diamond Financial Services and a board member of the International Business Brokers Association (IBBA), spoke to business brokers this week about compiling a listing or offering memorandum.
In a lively talk, which you can hear online, Mariani talked about the top things that buyers look for in a business-for-sale listing, and what lenders look for in an offering memorandum, a detailed description of a business for sale.Buyers are also interested in the location of a business as well as whether there is growth potential in the industry, Mariani said. Financing options, especially owner financing, are very important.
After the price of the business, most buyers will want to know about its cash flow and seller’s discretionary earnings. While it may be common to have family members on the payroll, claiming a personal home mortgage as a business expense is likely to attract unwanted scrutiny from lenders. And lenders are required by law to report instances of flagrant tax fraud, he said.
Listings that go through the effort to be pre-qualified by lenders, or eligible for SBA loans, are automatically more attractive to buyers, Mariani said. That means an objective professional has examined the business’s financials and brings “immediate confidence in the numbers presented.”
“If the listing can service the debt at the asking price, then cash flow after debt service becomes apparent to a potential buyer,” Mariani told the brokers. “Most buyers understand this and calculate it for themselves.”
Today’s borrowers are learning that they can purchase much more cash flow than they once thought, he said. Most high net worth borrowers are looking to maximize their ROI by using financing options. In Mr. Mariani’s PowerPoint Presentation: Compiling Offering Memoranda, he covered items every lender will look for, including purchase price, working capital, SBA fees and closing costs, etc. The GABB, an IBBA affiliate, is the state’s premier organization dedicated to professionals who buy and sell businesses in Georgia.
What three things should be left OUT of your offering document? Avoid listing specific qualifications a potential buyer must have to purchase the business, because this could scuttle a sale, Steve said. Although most lenders like to see three years of direct or one year of related experience in a field, this varies greatly.
Avoid listing personal add backs. If more than 20 percent of the seller’s discretionary earnings comes from personal add backs, the lender will be concerned.
Designating anyone at the business as a “key” employee, i.e., one that is critical to the operation and success of the business, raises a lot of red flags, may necessitate a form 1919 or a “required” personal guarantee of the employee, Mr. Mariani said.
Mr. Mariani’s company has helped small business owners realize their dreams by funding more than $1 billion in acquisition loans during the past 24 years. Diamond has become the nation’s largest privately owned non-bank SBA acquisition loan generator that serves only the broker markets. Steve has also been producing and presenting broker training webinars and workshops for the last 11 years at various conference events.
After witnessing the difficulty and challenges some business buyers experienced securing business loans to acquire a business, Mr. Mariani learned the intricate, complicated world of the Small Business Administration (SBA) loan process. He mastered the SBA SOP (Standard Operating Procedure) rules and regulations and has become a major source for many national lenders. Business Brokers, lenders and owners nationwide seek Steve’s advice and he has become the “expert” in SBA loans. His understanding of SBA rules also allows for providing the most aggressive financing available nationwide.
The GABB is the state’s largest and oldest association of professionals who specialize in brokering the purchase and sale of businesses and franchises. Broker members help owners determine the asking price of their business, create marketing plans and strategies for selling their business, identify and qualify buyers, and have the knowledge, experience and skills needed to help maintain the confidential nature of the process. The professionals of GABB relentlessly pursue professional development so they can provide superior, ethical services for all customers and clients. Affiliate members include bankers, lawyers, appraisers, insurers and other professionals who work closely with brokers to help owners and buyers get to the closing table.
For more information about GABB, please contact GABB President Dean Burnette at 912-247-3209 or email@example.com, or GABB Executive Director Diane Loupe at firstname.lastname@example.org or 404-374-3990.Read More
By Greg Younts, CMAI, GABB Broker
A unique challenge of selling your business is that you cannot advertise certain confidential details about the business, and yet you have to target and attract the attention of the right buyers. Specific details about the business such as business name, exact location and unique products or services offered typically cannot be revealed to the public. It could be disastrous if employees, customers, competitors or other third parties discovered the business is for sale. So, how do you confidentially market your business for sale and attract the attention of the right buyers? In an article for the Atlanta Small Business Network, Greg described several possible options for developing a successful confidential marketing plan for taking your business to market, and you develop a custom plan that will best fit your unique business.
Your marketing plan and associated marketing documents should highlight what is unique about your business without revealing so much information that you risk compromising confidentiality. Second, you identify who would be the most likely buyers and structure your marketing plan and message to get the attention of these buyers. The right buyer could be an individual, another business, Private Equity Group and/or other possible groups of investors. And third, you determine the best strategy to get in front of your potential buyers.
If an appropriate method for taking your business to market is to advertise to the public; using business listing websites, business trade journals, trade shows or any other appropriate advertising medium can be effective. Or, a more targeted marketing strategy might be best for your business. You may know specific buyers who would be interested in your business, and industry research can be performed to identify a list of potential buyers within your industry. In this targeted approach, the best strategy may be a proactive direct mail and phone campaign to contact this group of buyer prospects. It also might be appropriate to execute a broader strategy that includes both public advertising and targeting a select group of buyer prospects.
Regardless of the marketing strategy that is right for your business, key tools that could be used in this process are some form of public advertisement and/or business profile that is often referred to as the “blind profile”. The profile is blind because it does not reveal confidential information, but does provide key facts about the operations and financial performance of the business that buyers need to see. Multiple versions of the blind profile might be required for your business if different types of buyer prospects are contacted. A blind profile typically contains more information about your business than a public ad. It is often sent to a buyer after they respond to an ad and is sometimes included with a letter in a direct mail campaign.
The most widely used form of public advertising for businesses on the market are the business listing websites. The Georgia Association of Business Brokers maintains a website where its members list businesses for sale in Georgia, and other businesses for sale by GABB brokers. This site and others allow business owners the flexibility to provide a comprehensive profile of their business without disclosing confidential information. Buyers mau search for businesses by criteria such as type of industry, geographic location, sale price, annual revenue, cash flow, availability of owner financing, etc.. And, there is the option to search by keywords to find a very specific type of business.
An experienced business broker knows how to write a listing site ad that will best describe your business such that it will be found and read by the right buyers. Too often, business owners provide a very poor description of their business. In my experience, business buyers are often frustrated by how difficult it is to find businesses that are accurately described with the key information they need to see if it is a business they want to pursue. This is one of the major reasons why some businesses do not generate strong buyer interest or catch the attention of the right buyers on listing sites.
Experienced business brokers and M&A professionals can help you develop a marketing plan and the related documents. They know how best to describe your business in an advertisement and blind profile, and make sure it reaches the right buyer audience. They know what appeals to buyers and how to make your business standout as an exceptional acquisition opportunity. They know how to impress and capture the attention of C-level executives, Private Equity Groups and individual buyers. And, as buyers express interest in the business, brokers know how to engage with buyers to further determine if they are qualified in terms of background, skills, experience, interest level and financial profile.
Top business brokerage and M&A firms have marketing and industry research staff to support their brokers in developing the marketing plan, blind profile and other marketing documents that will be used for their clients. They have access to various sources of industry data sometimes needed for identifying a list of potential buyers for a business. These firms have also developed several third party relationships that give their clients the best and broadest possible exposure to top buyers in the marketplace. They have relationships and affiliations with various state, national and international Business Brokerage and M&A associations. And, they are in contact with thousands of Private Equity Groups, corporations and other possible sources of buyers.
The successful confidential sale of your business largely depends on developing and executing the right marketing plan for your unique business. Failure to take a business to market the right way has resulted in businesses not selling or businesses being sold well below market value. If you are selling your business and need expert guidance through the confidential process, you should consider the services of a business broker. The investment in the services of a business broker could result in recognizing an after-tax gain on the sale of your business that will easily justify the broker’s fee.
Greg Younts is a Certified M&A Intermediary and has more than 30 years of experience working for companies in sales, marketing, and management capacities. He started his career in the information technology field where he focused on the design and sales of strategic technology solutions to meet the needs of companies that range in size from small business to the Fortune 100. He has served companies in every major industry throughout North America.Read More
It’s exciting to buy a new business. However, it’s very important to be realistic about future growth. In most cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
When evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized, writes Richard Parker, President of Diomo Corporation – The Business Buyer Resource Center. In a recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business,” Parker seeks to instill a smart degree of caution into prospective buyers. Parker, who works with investors buying and selling small businesses, says buyers should be very careful if they are buying into an industry that they know nothing about.
Buying into an industry you don’t know comes with a lot of potential problems. The opportunities that you see may not have been tapped into by the existing owner for many reasons, Parker says. Without knowing more about the industry, you’re unlikely to spot those problems. Since you are an outsider, you likely lack the proper perspective and understanding. The seller may have already tried and failed at the growth opportunities you’ve identified. Until you actually own the business and are running it on a day to day basis, you can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. “The key question to address is whether or not the business will maintain its revenue and profit levels after you take over,” Parker advises. A business that doesn’t have to grow to remain viable is a better value.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. It’s more important that the buyer “has the core skills to operate and drive the business than having direct industry experience.” What is not fine is paying a lot for a business because you believe you can greatly grow the business. If you can, that’s great and certainly icing on the cake. But Parker says you shouldn’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, you find ways to make that business grow. Just realize that many of your ideas for growing the business may fail completely.
“To be a successful business buyer, your approach has to be effective, realistic and practical,” Parker says. “Don’t fall in love with the business or fall prey to your own sales job. You have to evaluate all scenarios and adopt the philosophy that stability is a top priority.”
A professional business broker will be able to help you determine what business is best for you, and to determine a fair asking price for that business. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.