There is no denying the satisfaction that comes with obtaining a signed letter of intent from both the buyer and seller. However, it’s crucial to recognize that due diligence has yet to be completed. No deal is final until the seller undergoes this process and commits to proceeding. In Stanley Foster Reed’s insightful book, The Art of M&A, Reed emphasizes that the goal of due diligence is to “assess the benefits and liabilities of a proposed acquisition by investigating all relevant aspects of the business’s past, present, and foreseeable future.” Reed highlights the importance of thoroughly examining every aspect of a business and its potential trajectory. Due diligence is inherently comprehensive, and it’s no surprise that many deals falter during this critical stage. Therefore, it is prudent for both buyers and sellers to consult with key team members, such as lawyers and accountants, before embarking on due diligence. Reviewing All Aspects of a Business There are numerous … [Read more...]
The Critical Importance of Confidentiality in Selling Your Business
Maintaining confidentiality should be placed at the top of your “to-do” list when selling a business. The tremendous importance of maintaining confidentiality is difficult to overstate and stands as one of the key reasons that any seller should opt to work with a business broker or M&A advisor. Every seller should remember that a breach in confidentiality can quickly kill a deal, and for many different reasons. To be blunt, a breach in confidentiality is dangerous for your business. Such a breach can cause suppliers, vendors, key customers or clients, as well as employees and management, to become concerned or even alarmed. A change in the ownership of a business can translate into major changes in how it operates. Vendors and suppliers can worry about disruptions, and employees and management may become concerned for their jobs or positions. In turn, disruptions may take place, such as key team members finding new positions, which could make a prospective buyer nervous. These … [Read more...]
Understanding the Complexities of Buyer Motivation
Negotiations can often be both perplexing and delicate. A simple misstep can jeopardize what could have been a great deal. One key but often overlooked tool in any negotiation is to pause and consider the wants, needs, and desires of the other party. Contemplating the ideal outcome for them can work wonders. Understanding what motivates a buyer is crucial for a successful outcome. At the beginning of the sales process, it’s unlikely that you’ll know what your buyer really wants. This lack of knowledge about their desires, values, and standards presents a challenge, especially in the initial stages. Essentially, you’re operating with limited key information at the negotiation’s onset, necessitating caution. One effective approach is to emphasize the strong financials of the business. Emphasizing a business’s sound financial footing is generally well-received. Whether a buyer is a former corporate executive or from another background, highlighting a strong return on investment (ROI) is … [Read more...]
Considering Seller Financing
Many sellers are surprised to learn that seller financing is very common. In fact, sellers should realize that there is a good chance that in order to sell their business, they will have to consider offering seller financing. What is Seller Financing? Seller financing essentially occurs when the seller provides a loan to cover some part of the purchase price. It is common for the rest of the purchase price to be covered by a combination of a down payment and additional financing sources. Benefits of This Approach At the end of the day, seller financing means that the seller serves as sort of a bank for the buyer. While many sellers may not like this prospect, seller financing can offer many benefits. Two key benefits are that potential difficulties of working with a real bank are bypassed, and sellers often enjoy a higher final sale price. Most business brokers strongly encourage sellers to consider seller financing. One reason brokerage professionals favor the seller financing … [Read more...]
Unlocking Business Potential with Strong Recurring Revenue
Everyone loves recurring revenue and for good reason. When buyers see recurring revenue, they instantly know that a business is stable, has positive cash flow, and, importantly, has room for potential future growth. There is no way around the fact that buyers want a business to be predictable. In short, buyers want to see consistency and stability at every level. Recurring revenue means that a prospective buyer can be confident that they will see income from the first day they take over the business. There is a powerful psychological aspect to recurring revenue that sellers should keep in mind, as they put themselves in the buyer’s shoes. When a buyer sees that there is recurring revenue, they know that even if they are unable to develop the business as soon as they take over, there will be positive cash flow. Buying a business is a big decision, and recurring revenue can take some of the fear out of the equation. Recurring revenue also serves to strongly indicate to buyers that your … [Read more...]
Cultivating Success: The Impact of Business Brokers on Closing Rates
Business brokers and M&A advisors consistently improve closing rates. There are many reasons why this is the case and, in this article, we’ll explore some of the top reasons why brokerage professionals get results. When it comes to selling a business, few variables are as important as how your business is presented. A key area of expertise for business brokers is in presenting businesses. There are many factors to consider when presenting your business in the best possible light. An experienced business broker can help you prepare your business for even the most discerning buyer. Another key reason that business brokers are a great option for any seller is that they reach not only more buyers, but more qualified buyers. Brokerage professionals have years of experience in buying and selling businesses, and with that experience comes a long list of vetted buyers. When you start working together, they likely already have many qualified buyers in mind that they feel would be a … [Read more...]
How Does Your Business Compare?
When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look? [table id=4 /] The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition. As part of your overall exit strategy, what can you do to improve your company? © Copyright 2015 Business Brokerage Press, Inc. Photo Credit: kconnors via morgueFile … [Read more...]
Valuing the Business: Some Difficult Issues
Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate. Here are some issues that must be considered when arriving at a value for the business: Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms. Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue. Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value. Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption. ESOP Ownership – A … [Read more...]
Two Similar Companies ~ Big Difference in Value
Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference? One can look at the usual checklist for the answer, such as: The Market Management/Employees Uniqueness/Proprietary Systems/Controls Revenue Size Profitability Regional/Global Distribution Capital Equipment Requirements Intangibles (brand/patents/etc.) Growth Rate There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example: Are the company’s … [Read more...]
Three Basic Factors of Earnings
Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number. 1. Quality of earnings Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items. 2. Sustainability of earnings after the acquisition The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate. 3. … [Read more...]