There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent many days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.
The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?
The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.”
Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.
Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.
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There are unique attributes of a company that make it more attractive to a possible acquirer and/or more valuable. Certainly, the numbers are important, but potential buyers will also look beyond them. Factors that make your company special or unique can often not only make the difference in a possible sale or merger, but also can dramatically increase value. Review the following to see if any of them apply to your company and if they are transferable to new ownership.
Brand name or identity
Do any of your products have a well recognizable name? It doesn’t have to be Kleenex or Coke, but a name that might be well known in a specific geographic region, or a name that is identified with a specific product. A product with a unique appearance, taste, or image is also a big plus. For example, Cape Cod Potato Chips have a unique regional identity, and also a distinctive taste. Both factors are big pluses when it comes time to sell.
Dominant market position
A company doesn’t have to be a Fortune 500 firm to have a dominant position in the market place. Being the major player in a niche market is a dominant position. Possible purchasers and acquirers, such as buy-out groups, look to the major players in a particular industry regardless of how small it is.
Newsletters and other publications have, over the years, built mailing lists and subscriber lists that create a unique loyalty base. Just as many personal services have created this base, a number of other factors have contributed to the building of it. The resulting loyalty may allow the company to charge a higher price for its product or service.
A long and favorable lease (assuming it can be transferred to a new owner) can be a big plus for a retail business. A recognizable franchise name can also be a big plus. Other examples of intangible assets that can create value are: customer lists, proprietary software, an effective advertising program, etc.
The ability to charge less for similar products is a unique factor. For example, Wal-Mart has built an empire on the ability to provide products at a very low price. Some companies do this by building alliances with designers or manufacturers. In some cases, these alliances develop into partnerships so that a lower price can be offered. Most companies are not in Wal-Mart’s category, but the same relationships can be built to create low costs and subsequent price advantages.
Difficulty of replication
A company that produces a product or service that cannot be easily replicated has an advantage over other firms. We all know that CPA and law firms have unique licensing attributes that prevent just anyone off of the street from creating competition. Some firms have government licensing or agreements that are granted on a very limited basis. Others provide tie-ins that limit others from competing. For example, a coffee company that provides free coffee makers with the use of their coffee.
Technology, trade secrets, specialized applications, confidentiality agreements protecting proprietary information – all of these can add value to a company. These factors may not be copyrighted or patented, but if a chain of confidentiality is built – then these items can be unique to the company.
There are certainly other unique factors that give a company a special appeal to a prospective purchaser and, at the same time, increase value. Many business owners have to go beyond the numbers and take an objective look at the factors that make their company unique.
The post What Makes Your Company Unique in the Marketplace? appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
1. Build a solid management team. A business with sales of $5 million or more needs a full complement of officers and directors. Such a team might include a COO, a CFO, a sales manager and, depending on the of type business, an IT director. It is also beneficial to create a Board of Directors with at least two outside members. This professionalization of management can remove the stigma of “the one man band.” Not only will this build a stronger company, it will increase the value to a possible acquirer. Smaller firms should also build a strong management team, and creating an outside advisory group is also a good idea.
2. Loyal employees. Happy and loyal employees make for a strong company. Top management should have non-compete and/or confidentiality agreements. Solid benefits plans for all employees should be in place. A company’s greatest asset is its employees and perhaps its biggest way to increase value.
3. Growth. Some smaller companies are kept small to maximize the owner’s benefits – the proverbial “cash cows.” However, if building value is the goal, then developing new products or services, building market share, expanding markets or opening new ones, is critical. This generally requires a financial investment, but building a strong growth rate also builds value.
4. Understanding your market. The value of a company may be contingent on its industry, its place in the industry and the direction of the industry itself. How big is the industry, is it headed up or down, who is the competition and how big is the company’s market share? Is it time to change direction or diversify?
5. Size counts. Companies with less than $5 million in sales and an EBITDA of less than $1 million can be perceived as small. Therefore, they may depend on continuing outside financing and lack the critical mass for both buying and selling power. These companies can be perceived as too small for acquisition or are penalized when it comes to value. However, over the past few years, corporate buyers and private equity firms have seen the advantages of purchasing smaller firms. Obviously, companies with $10 million or more in sales and an EBITDA of $1 million or more are considered to be solid and able to stand on their own.
6. Changing direction. Small companies can be very adept at changing course and implementing change. They have to be able to change and move quickly to take advantage of new markets, to fill voids in existing markets and even to add or change products or services.
7. Documentation. Business plans, financial plans and personnel plans should all be in writing and kept current. Terms of employment agreements should be spelled out and in writing. Business planning and company objectives, etc., should also be in writing and reviewed periodically. Contracts should be reviewed and maintained on a current basis.
8. Diversification. A major problem with many small companies is that their business is concentrated on one or two major customers or clients. Ideally, no customer or client should represent more than 10 percent of sales. Expanding to new markets, introducing new products, and finding new customers must be considered without deviating too far from the company’s core business.
9. Name and brand identity. Nothing beats the name Walt Disney, or Kleenex® or the soft drink called Coca-Cola® – they are household names. Small firms may not have the brand or name recognition of these companies, but they can work at it. This recognition is especially powerful in the consumer product area. But franchising has expanded this name or brand recognition to many different types of businesses.
10. Taking advantage of proprietary and other assets. Patents, brand names, copyrights, alliances, and joint ventures are all examples of not only proprietary assets, but, in many cases, valuable ones. Even equipment can be used in several different ways. Large landscape companies in cold climates put snow plows on their trucks, utilize their existing workforce and become a snow plowing company for their regular landscaping customers — office complexes, apartment and condo developments, etc.
11. “Lean and Mean.” Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle all of their logistical needs. Since all non-core requirements are done by someone else, the company can focus its efforts on what they do best.
12. Do it now! The owners of small firms, even large ones, have an attitude that says, “I don’t have time now, I’ll do it tomorrow,” or “I’m too busy now putting out fires.” So the real challenges of building the business and value get sidetracked or put off indefinitely. Creating value is critical to the long-term (and short-term) success of the business.
Keep in mind that the best time to consider selling a business is when business is good, the business is running profitably, and many of the above “value-adders” are in place. By contacting your local professional intermediary you can explore which of the above will add the most value to your firm, so it will be ready to sell when you are.
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We work closely with our clients to preserve the integrity of deals so that they have the best chance of a successful closing. An often-overlooked aspect of the process is understanding and embracing human psychology. In this article, we will explore some of the most common ways that psychology comes into play.
The Element of Time
It is critical that both buyers and sellers feel well prepared at every stage of the process. It is also essential that a certain momentum is established through every stage of the deal. When too many delays happen, this can start to derail deals.
Think about the Buyer and the Seller
For both parties, the buying or selling of a business is a life-changing event. For this reason, it is important that you invest the time to think about the point of view of the other people involved. No doubt, buying and selling can be stressful, so it’s important to take other people’s thoughts and feelings into account. You are not the only one who may be experiencing a little stress.
The Issue of Non-Active Partners
In some deals, non-active partners can pose challenges to finalizing deals. They often have different motivations than the seller who is in the role of running the business. In a situation where two sellers have divergent goals, it can pose a challenge to a deal. The best thing to do is to try to understand the point of view of each seller and help them both reach their respective goals.
Influencers and recommenders can have a powerful sway over both buyers and sellers. By influencers, this could mean accountants, lawyers, relatives, etc. In order for a deal to go through successfully, often these influencers must be identified and their viewpoints must be addressed. On a practical level, there are also other people involved that can interfere with a deal, such as landlords. It’s important to make sure that these individuals feel as though they will benefit from the success of the deal as well.
There are many moving parts needed to get to the finishing line. Human psychology plays a huge role in what decisions get made. It’s vitally important to take the time to consider what others involved in the deal might be thinking or doing. Your Business Broker or M&A Advisor will benefit you by getting to know all parties involved and taking the appropriate actions to ensure things are done to the satisfaction of all parties.
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Selling a business is a complex process that experienced business brokers know how to navigate. Here are common mistakes made by business sellers that can, in many cases, torpedo a sale.
1. Not knowing what the business should sell for
One of the most costly errors a business owner can make is not knowing the approximate value of his or her business prior to entering the selling process. Although the marketplace ultimately determines the final price, an owner needs to determine a reasonable asking price for his or her business before placing the business on the market. Before making the decision to sell, owners should work with someone qualified to place a price on their company.
An experienced business broker has both the technical ability and the market experience to produce the most realistic pricing opinion. The business broker will also be the only alternative for supporting his or her opinion by selling the business.
Fair Market Value
Asking Price is what the seller wants
Selling Price is what the seller gets
Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.
2. Not preparing the business for sale
Determining the starting price point is only the first step. Prior to exposing the business to the marketplace, the seller must prepare. Realtors always spruce up a house before setting out a for sale sign, right? A business is certainly not a house, but the same attention to appearance prior to sale is necessary. Financial and legal affairs should be current. Anything a potential purchaser might want to see should be up-to-date, accurate and available for review.
Momentum is very important in business transactions and can make or break a deal. The constant need to develop information for a serious prospect will destroy momentum and with it, possibly, the deal. Demonstrating preparedness places the business in a favorable light and prospective buyers will feel comfortable that everything is in order. Being unprepared can delay a closing, create costly expenditures to play catch-up, and cause prospective purchasers to lose confidence in the deal itself. Too much time almost always works against the deal happening.
3. Not seeing their business through the eyes of a buyer
This can be very difficult for any seller. It is only natural to see one’s own business in a most favorable light and overlook the blemishes or problems inherent in any business. Sellers have to approach their business realistically, knowing that a potential buyer will be doing the same. By recognizing the deficiencies of their business, sellers are in a much better position to deal with the concerns of the buyer. In fact, the best way to handle any potential problem areas is to bring them up in the very beginning.
4. Not really knowing the buyer
The better you know the buyer, the smoother the transaction. By knowing the buyers, their motives, their interests and their backgrounds, the better equipped a seller is to make informed decisions about whether they are the right people to operate the business. When final negotiations begin, knowing the buyers can help resolve some of the issues that will arise. Are their interests the same as yours? If you, as the seller, are financing the deal, do you feel confident that they can make the payments? The more you know about why a buyer wants to buy your business, the better position you are in to know when to be firm in the negotiations and when to be flexible.
5. Trying to sell the company to a buyer who doesn’t want to buy
There are usually many more potential buyers than there are businesses for sale. The crucial question is — how serious is the prospective buyer? A buyer may indicate a great deal of interest but when it gets down to the wire, he or she may back out of the deal. Some buyers want to buy only on their terms and conditions; some have too many decision-makers to please; and others only want to buy the “perfect” business. Wasting time on those who aren’t serious about purchasing a business takes away valuable time from those buyers who really want to buy.
6. Being your own worst enemy
Many business owners feel that no one knows their business like they do. They think they can do a deal by themselves. They don’t need, or want, any help. They think they are lawyers, accountants, business brokers and outside advisors all rolled up into one person. Then when the going gets tough, they become impatient and inflexible. They then blame others, usually the buyer, when the deal blows up. As the old saying goes: “The attorney who represents himself has a fool for a client.” The same could be said for the business owner who thinks he can sell his or her own business. Not using outside advisors, such as a professional business broker, is a serious and costly mistake.
7. Not understanding the structure of the deal
Regardless of the size of the deal, this could be the scenario: an offer is presented, the seller takes one look at the price, immediately says “no” and refuses to look any further. The price, within reason, is immaterial. The real crux of the deal is how it is structured. Consider the negotiating axiom: “You can name the price if I can name the terms.” The terms and conditions are important. A seller may be ecstatic about price only to find that the devil is in the details.
8. Not being able to walk away from the deal
Too many sellers get so involved in trying to put a deal together that they don’t see the big picture. They don’t realize when the deal isn’t a good one. In other words, they cannot see when it’s time to walk away from one deal and go on to the next one. Many sellers don’t want to let the deal get away. Since they have invested a lot of time and effort, and probably expenses, it’s often difficult to just end it. However, in some cases that’s exactly what must be done. If the deal isn’t right, and can’t be fixed, there is no other choice. It’s much better not to do the deal than to do a bad one!
9. Waiting too long to sell
Too many owners wait until the last minute to decide to sell their business. They wait until business is down, or they are completely burned-out, or their business partnership has soured completely. The time to sell is before the emergency happens. The time to sell is when business is good. The time to sell is prior to when exasperation hits. The old adage is that a business owner should think about and plan the eventual sale of the business the day after it is started or purchased.
10. Changing your mind
The sale is progressing nicely, the buyer is happy and the seller well, the seller is contemplating life without the business. He or she realizes that when the business is gone, they will have nothing to do. The business has been a major part of their life for many years. Just before the closing, the seller decides that he or she can’t live without the business and the deal starts to unravel. Sometimes, seller’s remorse arises because a business acquaintance says the price was too low, or there isn’t enough cash involved, or some other uninformed reason. If it was a good deal in the beginning, don’t let well-meaning outsiders influence the sale. And, if there is even a speck of doubt about selling the business, don’t begin the process. Wait until there is not one shred of doubt.
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