Saturday, August 29, 2009

When Selling, the More Buyers the Better

I cannot tell you how many times I hear from business owners who are contemplating the sale of their businesses that they have someone interested in buying their business and that they are going to negotiate with that single party. I’m certain it will come as no surprise that most of those deals never get done and, even worse, the owner spent countless months on a fruitless exercise. There’s also a strong likelihood that the owner spent the majority of their time chasing this deal only to find that the business is now suffering. This is not a hypothetical or isolated situation, we hear these stories on a daily basis from countless owners.

One of the critical aspects for a successful business sale is to generate many interested buyers. Multiple buyers vying for a single business will significantly increase the odds that your business is sold at the highest price with the best terms and in the quickest timeframe. Selling in the quickest timeframe should be of primary importance. The longer the business stays on the market the higher the risk that confidentiality will be breached and the value of the business will be diminished.

To illustrate, in the last 45 days our firm has had 2 deals terminated by buyers. In both cases the buyers were dragging the due diligence process out and positioning the deals for a renegotiation (which is very common when an owner is trying to sell their own business and working with just one buyer). Because we continued to market these deals to other buyers, when the above deals were terminated, within days, we had new deals negotiated and buyers in due diligence. We not only maintained the selling prices but in one instance we obtained better terms for our client.

A good business brokerage firm should be able to give you the leverage needed to ensure the best price and terms in the quickest timeframe. To validate that you are working with an above average firm make certain they have:

· Been in business for more than 5 years
· A large database of buyers
· A large group of brokers who are trained
· A large list of seller clients which indicates the health of their business
· One or more broker who hold the professional designation of CBI – this is a designation earned through the IBBA and takes years of training and experience

Remember, more buyers equal more leverage. This will dramatically increase the odds of a successful transaction.

Wednesday, August 19, 2009

Financing A Business

In today’s economy, securing financing to purchase a business has become a full time job, and there’s no guarantee all the hard work will pay off in the end. Banks have all but disappeared from the process, leaving business buyers and sellers wondering how they can possibly get a deal done. This is in stark contrast to 2008, when loan origination fees were healthy and banks were vying for SBA-backed business loans. In fact, most of the banks our brokerage firm was dealing with in 2008 have completely abandoned these types of transactions. This leaves most business brokers, buyers and sellers competing for a shrinking number of financing options.

The government’s attempt to boost bank lending to businesses is falling on deaf ears. We have seen cash levels on bank balance sheets triple over the last year, while lending has steadily declined. In addition, the SBA, which serves as a guarantor for many of these loans, has taken steps that have made this market even more erratic. The good news is that the stimulus bill included new SBA plans for temporary fee reductions; guarantees increased to 90 percent for certain types of loans, deferred payment loans micro loans and several other improvements. The bad news is that the SBA, acting outside of the stimulus bill, has enacted a significant change to business acquisition loans by placing caps on goodwill financing.

On March 1, 2009, the SBA enacted a change which limits the amount of goodwill in a business acquisition loan to 50 percent of the loan with a hard cap at $250,000. Goodwill is the portion of a business that is in excess of the physical assets and inventory. Given the shift in the economy from asset-based businesses to service-based businesses, the majority of small business transactions now originate from such goodwill financing. This is devastating news for small business owners and potential buyers, as it has effectively negated any of the positive intentions of the stimulus bill.

Lenders, as well as the business brokerage industry, have united behind this issue and lobbied SBA officials with little success. Hopefully, the SBA will realize this change is causing banks to shy away from business acquisition deals, choosing instead to deploy their resources toward asset-based lending.

Despite these hindrances, buying a business in this economy is still a real option for people who have lost their jobs. Many retiring baby boomers--a large percentage of small-business owners in the nation--are looking to sell and now could be a great time to buy if you are prepared to explore financing alternatives.

Before determining a financing solution you must understand the historical earnings and current trends of the business you wish to acquire. Calculating the true earning power of a business can be a difficult task. Most business owners maximize tax strategies to minimize reported earnings so they pay fewer taxes. Therefore, when a prospective buyer looks at the net income, they may not be seeing the whole story. Business sellers and their advisors will often “recast” the earnings to show the earning power of the business. This recast number is commonly referred to as seller’s discretionary earnings.

Because bank financing is complex, has high closing costs and is almost impossible to secure right now, seller financing is quite common in business acquisitions, and a must in today’s economy. Seller financing can be as flexible as the buyer and seller need it to be and is only limited to what the buyer and seller can agree on. The seller, like a bank, will still be concerned with the buyer’s net worth, credit history and experience in the industry. The seller is also likely to want a higher percentage in down payment from the buyer because they are at more risk than a bank. Most buyers like the idea of the seller financing since it simplifies the financing and keeps the seller vested in the business’ future success.

There is no doubt that tough times are still ahead, and until the banks and SBA get back to the business of lending for business acquisitions, rather than deterring it, business sellers and buyers should know that there are alternatives. With the help of good advisors and creative thinking, buyers will find there are still plenty of excellent acquisition opportunities.

Wednesday, August 12, 2009

Should you Expand your Business through Acquisition?

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business. Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?
Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry. You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?
There are several benefits that could come with business expansion, but also a lot of assumed risk. Some things to consider include:

Economies of scale - Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.
Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.
Yourself - Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?
In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated. People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price. Consider how you will fund your expansion before taking any drastic steps.

Getting Started with Expansion
Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.

Wednesday, August 5, 2009

Peer-to-Peer Advisory Services can get your Business back into Selling Shape

Business is getting more complex. The current economic turbulence has added an extra layer of challenge to already overstretched business owners. Owners have always had to be nimble, but now they must be able to pick up new ideas and run with them faster than ever before. Missteps are virtually inevitable. We all need to learn from our experiences and be more efficient, but, are you having trouble picking up on your mistakes and correcting them rapidly? Have you been able to fully capitalize on all the opportunities that have presented themselves? In this economy, failure to do so can be fatal.
This complex environment, one that requires more expertise than ever before, needs to be handled differently. There is a solution. It has been said, “we all learn from experience, but it does not have to be our own.” Peer-to-peer advisory helps you capitalize on the experience of others and has helped thousands of business owners overcome these problems listed above as well as many others.
What is peer-to-peer advisory? It is a collection of non-competing owners, CEO’s or partners who get together on a regular basis to discuss business. The best groups gather to focus on solving specific, real business issues or identifying opportunities in order to help each other succeed. These groups are typically professionally facilitated to ensure that the meetings are as productive as possible.
The value of peer to peer groups is that they can serve as your board of advisors in the form of an informal kitchen cabinet. And, they create an opportunity to spend some focused time working ‘on’ the business not just ‘in’ it. The group can help to overcome the isolation of being at the top, serve as a sounding board for new ideas, offer practical solutions to business problems from people who have lived them, and create the accountability you need to thrive.
Since these groups include other owners like you, they have no vested interest in any one idea. They commit time to your questions knowing so that you will do the same for them. The combined horsepower of a group of experienced business owners tackling problems is far superior to that of any one individual so solutions come more quickly and are more effective when implemented. Peer to peer advisory may be the best way for small- or medium-sized business owners, those with far fewer resources than their larger company competitors, to achieve balance in the marketplace as well as in their own lives and find success in our complex world.