Thursday, November 25, 2010

How to use Powerful Accounting Practices to Improve a Business

The below blog provided by Jeffrey D. Bronswick of RP& Co.

Whether you are buying, selling, starting or growing a business, cash flow planning is critical to the success of any business. Businesses with proven techniques for cash flow planning are more successful and therefore more valuable than their competitors. If you are buying a business, make sure these practices exist. If you are selling, identify areas that need improvement and fix them in order to increase the value of your business in the eyes of a prospective buyer.

Planning should be done in advance and for at least one year out. The cash flow plan should be closely aligned with the strategic plan for the business. The purpose behind the plan is to:
1. Predict when, where, and how cash needs will occur
2. Predict what the best sources are for meeting additional cash needs
3. Be prepared to meet these needs when they occur (it helps to keep good relationships with bankers and other creditors)
4. Plan business profitability and growth

The starting point for avoiding a cash crisis is managing the balance sheet. Collection of accounts receivable and payments to vendors are two areas that require daily attention. A well run business will develop both short-term (weekly, monthly) cash flow projections to help manage daily cash, and long-term (annual and up to 5 years) cash flow projections to help develop the necessary capital strategy to meet business needs.

Remember, the plan should be by week or by month. NOT by year. Many businesses make this mistake. Most businesses have cycles and planned and unplanned major expenditures, so you need to see the highs and lows in the business on a weekly or monthly basis. If you plan properly, the cash needs will be very apparent on the cash flow projection in a given month. If you know in advance when the cash needs of your business are the highest, it will trigger actions on the part of the business for capital retention, cost reduction and bank borrowing availability.
How does a well-run business deal with these ups and downs? By negotiating in advance…
1. Vendor payment terms
2. Customer payment terms (and prepayments if warranted by the business)
3. Bank lines of credit
4. Long term debt
5. Equity capitalization

If the business has not prepared cash flow projections before, preparing historical cash flow statements and balance sheets will help you gain an understanding about the past cash flow performance and your potential needs in the future.

The process of planning future cash flows is very time consuming, but if it is done correctly, it will not only save you money, it could save your business.

Jeffrey D. Bronswick is President of RP&Co. - Certified Public Accountants located in Buffalo Grove, IL. Jeff works closely with his clients in helping guide their growth and financial success, assisting them with operational and financial issues, and in charting tax strategies to maximize their after tax income. Jeff received his Bachelor of Science in Accountancy (Cum Laude and with University Honors) from Northern Illinois University in 1988.

Tuesday, November 9, 2010

A Tale of Two Businesses by Guest Blogger Ed Cook

I recently listed two businesses of similar size with similar characteristics. Good management, good reputation and priced right. Yet one sold in less than 4 months and one is still for sale more than 9 months after listing. Can you figure out which one sold and which one did not?

Business A - Pet Care Business
$100,041(Cash Flow)
$297,000(Sales Price)
2.97(Multiple - Sales Price/Cash Flow)
$98,010(Down Payment Required)
$198,990(Seller Financing Offered)

Business B - Business Supply Company
(Cash Flow )
$390,000( Sales Price )
2.78 (Multiple - Sales Price/Cash Flow)
$331,500 (Down Payment Required)
$58,500 (Seller Financing Offered )

There was no doubt in my mind that Business B would sell quickly. It had the numbers, the reputation and a great location. I knew that Business A would sell, but assumed that would take a bit more time. Well guess what? The answer is A. That pet care business received 4 solid offers and sold within 4 months of listing, while the business supply company remains for sale 9 months later and has yet to receive one offer. Why the difference? Seller financing.

The pet care business went to market offering terms of 33% down payment with the remainder as a seller note. This opened up a huge pool of buyers, most from outside the industry, and allowed the seller to be selective with both prospective buyers and offers.

The business supply company went to market offering terms of 85% down payment and a 15% seller note. They have yet to receive an offer. Quite simply, buyers are looking to put as little money down as possible. If they are being asked to put down $330,000 on a business listed at $390,000 they will simply move on to the next deal. They will go out and buy a bigger business where the seller is offering financing.

But seller financing offers one more thing to the buyer that is even more important than the financial consideration. When a seller is willing to finance a large portion of the transaction it shows the buyer that the business is sound and that the owner feels it will be successful for years to come. That implicit guarantee from the seller sends exactly the right signal to the would-be buyer.

The business supply company eventually offered up more seller financing but it was literally too little, too late. The buyers had moved on to other deals. Here we sit nine months later with no offers. All because the seller was not willing to offer proper financing.

When you sell your business, offer the proper terms at the proper price with the initial listing. That gives you the very best chance to sell your business.

By the way, the pet care business accepted a cash offer as the buyer sought to differentiate himself from the other offers. It’s funny that the seller that offered financing ended up with cash while the one that wanted cash will end up taking terms.

Ed Cook is a professional business intermediary with Chicagoland Sunbelt. Ed has over twenty years of broad-based experience in every aspect of running a small business giving him the skills and knowledge needed to help buyers and sellers achieve their needs. Ed has been very successful in helping his clients navigate this difficult market. If you would like to learn more about the process of buying or selling a business, Ed can be reached directly at

Friday, October 8, 2010

It’s not a secret that 2009 was a tough environment for business sale transactions. With most of the nation struggling just to stay afloat, the market was bare. There were few candidates with the ability to buy, few business owners willing to sell with values so depressed, and few lending institutions with the desire to finance transactions. So everyone hunkered down, waiting for a recovery.

Now in 2010, we’re starting to see many of these buyers and sellers come out of hiding. More deals are getting done, and they are getting done in less time. Here at Chicagoland Sunbelt, we have seen some steady trends in this year’s sales.

To the surprise of many of our current and prospective clients, deals are being consummated in record times and at solid valuations. We attribute this strong rebound to many things including pent-up buyer demand and good companies that have been able to weather the recession.

Perhaps the most surprising trend has been the speed at which some of our engagements have been able to close. Deals closed this year took approximately 191 days from the signing of the engagement to closing date, with several high-profile listings taking less than 120 days.
The speed of closing is a very telling measure of establishing the proper pricing and marketing strategy to match the pent-up demand. To put these numbers into perspective, even in the best markets most business sales take 270 to 360 days to close.

The other trend has been the large percentage of deals receiving multiple buyer offers. Eighty-two percent of the deals closed this year have received multiple offers, with many of these deals receiving four or more offers. This market dynamic has enabled our clients to secure solid valuations and maintain an 85% selling price to original asking price.

A key driver of robust activity has been the shared risk by buyers and sellers. Without the leverage of a bank to finance an acquisition, buyers are coming to the table with a larger percentage of the down payment, and owners have realized that seller financing is the only viable alternative to secure a deal. In fact, 67% of our closed deals in 2010 have included seller financing and, in many cases, the percentage of the deal financed by the seller has exceeded 40%.

The business-for-sale market has clearly changed, but those parties willing to adapt and be creative can still get good deals done.

Thursday, September 30, 2010

New Small Business Law Could Make Buying or Selling a Business Easier

The financial markets have made it difficult for small businesses to get loans – but this may be changing, as the President just signed a new law aimed at making it easier. This new law could benefit those looking to buy an existing business or start a new business or franchise. The law could also benefit current business owners who have been thinking about selling their companies.

The law improves existing loan programs and includes multiple small business tax cuts. Some elements of the new bill include:

- Fee Waivers on SBA loans are now in place, but only while the money lasts. Buyers considering an SBA loan should act quickly to take advantage of fee waivers, as they will only last as long as the limited funding.

- Lending limits have been increased significantly on SBA loans. Transactions that previously may have been too large for SBA funding may now qualify. This is especially good news for sellers and buyers of companies who were previously too large to qualify for SBA financing.

- When small businesses buy new equipment, they may immediately write off the first $500,000 of that investment.

- For eligible small businesses, some long-term investments in the company will be subject to zero capital gains taxes.

- Entrepreneurs with a fresh idea will be able to deduct the first $10,000 of their start-up costs.

- Those who are self-employed will be able to deduct 100% of the cost of health insurance for themselves and their family.

SBA lenders are working to incorporate the new law into their lending practices. Sunbelt Business Brokers encourages those considering SBA financing to 1) make sure they are working with SBA preferred lenders, and 2) get a recommendation from a local business broker on banks that are friendly to small business loans. Just because a bank is “SBA preferred” does not mean they are SBA friendly. A business broker can make sure you are talking to a lender that won’t waste your time.

Saturday, September 25, 2010

Invest in Youself, Buy a Business

It’s part of the American Dream: owning your own business. While many of us dream or even casually explore the prospect of running our own business, few people take the leap. So, what takes a buyer from “I wish. . .” to “I will!”?

Buying a business is unlike any other venture you havve undertaken. You are not investing in a volatile stock market, gambling on others. You are not applying to yet another job where you work for someone else- investing in your coworkers, the economy, and your employer. Your chief investment will mean more than dollars and cents. This time, you’re investing in yourself.

Have a Plan-and Stick to It
Many first-time business owners become overwhelmed with the prospect of buying a business, simply due to the time involved. Buyers are already balancing their time between family, friends, and community involvement- all on top of 40+ hours a week at work. But a lack of time should never be the reason not to pursue your dream of owning a business. Think of how much time you spend watching TV or surfing the internet. If you committed just 1 hour of each day to your business search, you would have almost a full work week every month to dedicate solely to making your dream a reality. Once you have decided that you’ll dedicate a specific amount of time each day to your new venture, stick with it. When you invest in yourself, you are your own boss and employee. A good boss would not retain an employee who might show up for work every day. Take your search seriously, and set goals: “I will find 3 businesses that fit my criteria by March.” “I will meet with a broker in person within the month.” “I will meet with my accountant to discuss my capital resources next week.” “I will own a business by the end of December!”

Be Realistic about your Needs and Resources
Whether you start your business from scratch or choose to use a broker to buy an existing business or franchise, you will need to seriously consider how much capital you are willing to invest. Take a close look at your needs. You will need to look for businesses with cash flows which can accommodate your lifestyle. What can you realistically afford? I suggest calling in the professionals. Without guidance, you may find yourself doing more dreaming than acting. Look at your net worth, financing options, and available resources. How much are you willing to invest in yourself? Speak with your accountant, your business broker, and your banker early in your search.

Bring in the Professionals
Yes, as a business brokerage firm, Sunbelt has a vested interest in the matter, but using the expertise of professionals can help you navigate the minefield of buying a business. Contact your attorney, your accountant, and yes-your local business broker-and let them know you’re looking to buy a business within the year. They can advise you on the best way to go about your search, and they can also help you to avoid the costly mistake of buying the wrong business for your needs. And we do suggest enlisting the help of a business broker. They can keep you informed when new listings become available, when listing prices or terms change, and can even be hired as advocates on your behalf as you search for the right business.

Get in the right mindset
Let’s be honest. Few people become the CEO of their own company by casually surfing the net on a Sunday night. When you invest in yourself, you need to become passionate about the experience. Repeat it to yourself like a mantra: “I will become a business owner this year!” You would not invest in someone else unless you were sure they were 100% committed. Buying your own business is no exception. It will be a long and involved process. But having the right mindset can be the difference between casual exploration, and holding the keys to your own business.

Tuesday, August 10, 2010

2010 Fast Selling Businesses

It is no surprise that 2009 was a challenging year for business sales transactions. Most companies were experiencing sharp declines in revenues, customers and profits — not the sort of environment conducive to selling a business.

Before the economic meltdown, our firm had been forecasting that the large wave of baby boomers approaching retirement would fuel the business transaction marketplace, but those plans changed in late 2008 and 2009. The economy has altered those plans permanently for some of the unfortunate business owners who could not weather the downturn.

We had no reason to believe, given the weak economic forecasts, that the transaction markets would rebound in 2010. But rebound they did. We have experienced a very robust first half of 2010, with many of our transactions selling in record times with multiple offers. We have analyzed these business transactions and there were some key traits they share.

Seller financing: Banks are still not lending and buyers have few alternatives to fund a transaction. Motivated sellers have stepped forward with offers to finance the transfer of their businesses, and they are being rewarded for this approach. Seller financing has been the single biggest factor in securing a quick sale at a premium price. The earnings multiples these businesses are receiving are at least 20% higher than those received by businesses being offered with little to no seller financing.

Infrastructure: It is important that a new owner be able to work into a business that has a diverse client base, trained employees, documented systems and procedures and the capacity for growth. Buyers are flocking to businesses that are built with solid foundations and where the seller is not ‘the business.’

Recurring revenues: Businesses that have a certain amount of recurring revenue are garnering lots of attention. This structure is true in good and in bad economies, but it has been especially true in our current market. For example, we represented a business in which 70% of the revenues were recurring. The business was on the market for seven days and garnered nine offers.

Growth potential: Companies that have the capacity to grow with little or no capital investments are attractive. There’s an adage in our industry that “buyers pay for what the business is doing today, but they buy it for what it could be.” Every buyer wants to know that they can take the business to the next level and increase their ROI with little to no capital investment. These businesses can typically receive additional value in the form of a higher earnings multiple or future payments tied to the growth of the business. Businesses are selling in record times and at solid multiples of earnings.

If your business has some or all of the above traits then now can be a great time to go to market and maximize your value.

Monday, August 2, 2010

Alternative Exits

The below article about 'Alternative Exits' for a business owner was written by Monica Mehta a principal in the New York based investment firm Seventh Capital. There are many ways to exit a business and a combination of the right advisors, good planning and timing will increase your odds of maximizing the value. Below is a copy of Monica's article which recently appeared in Business Week online.

If you're looking to sell your company, it's time to get creative. While the small business mergers and acquisitions market is finally inching forward and deals are getting done, they better reflect seller motivation than attractive valuations. Bank involvement in acquisition financing deals also remains low. As long as buyers are forced to pony up bigger equity checks, sellers frustrated by anemic valuations are unlikely to see pricing snap back. Offers remain far from desirable.

Still, if you're looking longingly at an exit, fear not. Unconventional deal structuring can maximize a company's long-term value and do wonders to bridge the gap between a buyer's limitations and a seller's expectations. If there's just no way to get there via a traditional sale, there are alternative exit strategies that may yield better results.

1. Strike a deal with a third-party buyer.
Sellers who can look past a low valuation and embrace strategies that offer added, deferred payments can bump up a deal's overall payout over time. "Business owners that are flexible with terms and open to seller financing can still create a feeding frenzy among buyers," says Domenic Rinaldi, president and managing partner of Sunbelt Chicago, a leading business broker. He's seeing more creative deals than he did a few years ago and notes that sellers willing to assume greater risk regarding terms are netting premiums.

There are a variety of ways to sweeten a sale down the road. A low up-front price can be offset by a long-term consulting contract that pays the seller an outsized salary for minimal post-sale involvement. Sellers that own the real estate related to their business can also make up for a low purchase price by excluding the real estate from the deal and negotiating a long-term lease with the new buyer at favorable rates. Negotiated earnouts—bonus payments based on company performance—can also give a bounce down the road.

Deferred payments can also lower overall tax liability by spreading payments over an extended period, potentially during a period of years where your income will be in a lower bracket. If you are able to direct the downstream income to a separate business entity (for example, a consulting company or a real estate business), you may be able to write off certain expenses as well. A tax professional can help you think through related considerations.

Another way to bump up your company's value is to introduce healthy competition to the sale process. Start by making sure that your business is priced right. A realistic valuation is critical to generating interest. Today sellers can expect no more than two-times to three-times earnings for their business, excluding the value of hard assets such as real estate. If you can get enough potential buyers involved, the leverage swings back in your direction and you can negotiate the best terms.

Seller involvement in deal financing is also a prerequisite. A business owner unwilling to provide seller financing is generally not serious about making a sale. It is not unusual for purchasers to expect 30 percent to 50 percent participation from a seller. (For more about seller financing, see "Sellers Increasingly Play Banker.")

2. Sell to your employees.
If you can't make the numbers work with an external buyer, selling to your employees through an employee stock option plan, or ESOP, can be a good Plan B.

Here's how it works: A business directs up to 25 percent of its annual payroll before taxes into an ESOP trust. This pretax money can be used to buy a variety of investments, including shares of the founder's company stock.

The money held in the ESOP trust is managed exclusively by the company's board of directors, not employees, allowing the principals to maintain control of these funds until the owner is ready to retire.

An ESOP can buy any number of shares, from a minority position to a controlling interest. If the ESOP acquires more than 30 percent of the outstanding shares of a company, a seller can avoid capital gains on those shares indefinitely, giving this method of sale a huge leg up. Like an external buyer, an ESOP trust can also seek a bank loan, using the business's assets as collateral, to cover a portion of the purchase price.

An ESOP doesn't make sense in all cases. Only corporations—C or S corps—are eligible to form an ESOP. The business must be profitable, generating at least $100,000 in pretax income, and must have at least 15 employees. An owner selling shares to an ESOP must use a fair market value that can be supported by an appraisal.

A plan and trust will cost approximately $50,000 to set up and roughly $10,000 to $15,000 each year to maintain in legal, accounting, and appraisal fees. Ideally, ESOP experts advise that you set up a plan 10 years before you seek liquidity. In reality, business owners rarely plan that far in advance. A transaction can be structured in a matter of months.

With an ESOP sale, you will be ceding control to your workers. A transition plan is critical to make sure they are prepared to carry on once you leave the business. ESOP advisors such as the Menke Group specialize in these vehicles and can be a good source of information if you choose to explore this path.

3. Don't sell just yet.
When all else fails, your best option may be not to sell at all. Think about how you can rework your business to run without you and still let you collect a portion of its annual profits. If you can forgo a large up-front payout, you may make more money this way than by selling for a mere two-times to three-times earnings.

In order to step back from the day-to-day activity, you will need to promote existing employees or hire management to run the business without you. Finding such talent isn't easy, but a business that doesn't rely on its founders to survive is in a better position to sell. Bringing in management will also require you to be involved for a longer transition, but no more than would be entailed by a sale in which the seller's purchase price is tied up in back-end payments.

The profit your business generates after paying for additional employees may start to feel just like the staggered payments you would receive from a highly negotiated third-party sale. You might find that you net more over time this way. And if the economy improves in three to four years, you will be in great shape to sell for a premium, having already properly structured your exit.

Monday, June 7, 2010

Capital Gains Tax Rate to Increase in 2011 – Should you Sell your Business Now?

The current capital gain rates are scheduled to expire effective December 31, 2010 and will probably increase from 15% to 20% in 2011. The federal government will have little choice given the mounting deficits and soaring debt. In fact, most accountants and wealth mangers have been advising their clients to consider accelerating any tax liabilities as we may never see today’s tax rates again.

This tax increase will have a particularly devastating impact on business owners who are considering the sale of their business. Unfortunately, the recent recession has had a significant impact on the health and bottom lines of many small businesses and many of these business owners are waiting for the economy to turn around before considering a sale. The good news is that many small businesses appear to be getting healthy again. The bad news is that it will be just in time to realize these tax increases. If you have considered selling your business the below analysis of how much an owner would need to increase their bottom line (EBITDA) to stay even should cause you to think twice about the timing.

Assume the following:
• The federal capital gains tax rate is increased from 15% to 20% beginning in 2011
• The maximum personal federal tax rate is increased from 35% to 39.6%
• The company EBITDA is $500,000
• The sales price multiple is 4 times , resulting in the sale price and taxable gain of $2,000,000 (ignoring any basis issues for example purposes)

As a result, the federal capital gains tax on a $2,000,000 gain would increase from $300,000 (15% of $2,000,000) if the sale were completed in 2010 to $400,000 (20% of $2,000,000) if the sale were completed in 2011—an increase of $100,000. This is simply the capital gains tax calculation and does not include any federal or state income taxes which will be increasing and take an even larger chunk of your sale proceeds. When you consider all the proposed tax increases (Capital Gains, Federal and State) the net effect on your sale proceeds will probably be a decrease between 11% and 15%.

To mitigate the effect of these tax increases a business owner would need to grow their bottom line by a considerable amount. So, the question becomes should you consider a sale in 2010 or resolve to grow the business beyond its current levels and know a larger portion will go to cover the increases in the tax rates.

Sunday, May 23, 2010

Are You Emotionally and Financially Ready to Sell Your Business

Walking away from your life's work is a big step that doesn't come without its obstacles. Determining your readiness to sell your business -- sans any pressing circumstances to do so -- largely comes down to two factors: 1) your financial readiness to sell a company, and 2) your emotional readiness to sell a company.

Assessing Your Financial Readiness to Sell a Company
Your financial situation, the easier of the two factors to consider, is oftentimes the one most overlooked by sellers. The key question is whether the proceeds you will receive from selling your business will give you the financial means to leave the business. For most business owners, the value of their business is a large chunk of their net worth. Unleashing that value is critical to reaching their post-sale goals. You're one of the lucky ones if the proceeds of your sale are not required for you to retire or move on.

On the flip side, selling a business involves cutting off your access to the money you've been drawing out of the business every year. Ideally, the proceeds from the sale of your business will be large enough to cover your obligations going forward. How much money do you need and what sale price will give you what you need? Can your business command that price or anything close to it? If not, now may not be the right time to list your business for sale.

To best assess your financial readiness to sell a company, it's often a good idea to engage the services of a reputable wealth manager, an individual who can analyze your entire portfolio and calculate your post-sale needs. One of the key steps in completing this financial analysis is engaging with a knowledgeable independent third party to value your business. As business valuation is a complex matter, it should only be undertaken by professionals with the appropriate certifications, years of experience and access to a database of comparable transactions. Most business intermediaries will have a handful of appraisal and valuation firms that they work with on a regular basis, and can offer a recommendation.

After receiving a completed business valuation, your wealth manager can now appropriately analyze your portfolio and understand whether or not a sale will yield enough money to fund your projected retirement and allow you to sustain the lifestyle you want post-sale.
If the proceeds from the business sale are not enough to allow you to leave the business, you may need to focus on spending a few years to build up the value before you sell, or you might consider lowering your targeted financial spend after the sale. Alternatively, you might need to come up with a way to supplement your income and bridge the gap.

Assessing Your Emotional Readiness to Sell a Company
The more elusive part of evaluating your readiness to sell is your emotional readiness. Can you really walk away from the business you built for so many years?

While most transitions will require the seller to stay in touch with the new owners for some period of time, there is still that moment when your services will no longer be needed. What are your plans for when that day arrives? It's best if, as a business owner, you can detail exactly how you are going to spend your days after the sale. This gives a clear indication of whether or not you are ready to sell. For instance, will you plan trips and activities with friends, kids and/or grandkids? Will you pursue a hobby? Or perhaps even run a smaller business in a completely different field? If you cannot describe post-sale life, you should question your sale decision.
While there might be some legitimate reasons an owner has not planned this next phase – burnout, a partnership break-up or an illness – a seller's motivations matter in so many ways.

Knowing the seller's 'next steps,' and motivations for selling, can be extremely important in the actual transaction process. It can be an indication of how they will handle a business negotiation, their willingness to provide the necessary training and transition to a new owner, their flexibility and patience with a deal, and most importantly, their receptivity to heeding the advice of any professionals helping to manage the transaction.

The story of a seller who owned a niche manufacturing business illustrates the importance of assessing emotional readiness to sell. The seller's business was very unique and had great fundamentals. It was in a great position to attract multiple buyers and, in fact, six very substantial offers were made to the owner shortly after it was listed for sale. Unfortunately, none of those deals were consummated. Why? It really came down to the fact that the owner was just not emotionally ready to walk away unless he received an exorbitant -- and unrealistically high -- offer. He had engaged the expertise of a business intermediary, took the time to meet with many different prospective buyers, and appeared to be committed to selling. Yet when the moment arrived, he could not disengage from the business and he created veiled objections that boiled down to the fact that he just wasn't ready to sell. The net result was that the time, energy and capital of many involved parties was wasted.

To this end, it's really important to ask yourself the tough questions before pursuing the difficult and long task of marketing your business for sale. Will you have the necessary funds for your desired post-sale lifestyle, and are you emotionally ready to pursue a life after business ownership? If you cannot develop a post-sale picture of your life, you may need to keep running the business -- assuming you have the will and drive to remain competitive and relevant.

Saturday, April 17, 2010

Staying on After the Sale

Selling a business and walking away can be very difficult and very rare in this marketplace. Oftentimes, there is a transition (“training” and/or “consulting”) period dependent on the size of the company and the role of the owner. Transitions may be as short as a month or two or as long as several years. Given the instability of the markets right now, buyers are very interested in retaining the seller to shorten the learning curve and help with the smooth transfer of key relationships.

In the typical business sale, a transition period of two to three months is included, and sometimes a “telephone consulting period” is added (e.g., 6 months of telephone consulting not to exceed 5 hours per month). Also, the seller may additionally be retained as a consultant at a negotiated rate. In some instances, a long-term employment contract is negotiated and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, which is fairly uncommon these days, the focus should be on the development of a strong management team. Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities. The more the customers think they are interacting with “the company” versus the “owner” the easier the transition. If you have established a good management team, less time will be required for the transition to the new owner. In addition, a well developed team usually adds value to the sale.

Occasionally there are owners who want to sell but just are not ready to quit working. They may be looking to sell early and slowly transition away from unwanted or overwhelming administrative and management duties. This is a perfectly acceptable strategy and may be very welcomed by a new owner - assuming the parties can work well together on a go forward basis. Working well requires that both parties be respectful of their new roles and it is incumbent upon the seller to not second guess or undermine the new owner as he or she begins to put their footprint on the business.

Either way, long-term employment contracts can be included in the sale agreement. The seller can stay on board and work with the business a few more years while still drawing an income and benefits.

If you are selling your business, in most cases you will not be able to walk away the day after the sale and in most cases you probably do not want to. Talk to your business intermediary about the true timeline of the sale and transition. If you want to sell while the price is right, but you are not quite ready to leave immediately, consider the options available to sell now and maintain a role with the company.

Sunday, March 21, 2010

Thinking about Buying a Business - Answer these Questions

At face value, the life of an entrepreneur may seem glamorous. You run the show, make your own hours and don’t have to answer to anyone but yourself.

Unfortunately, it does not always work in your favor. It often takes hard work and determination to create a thriving business poised to become the next big success story. Before rushing out to buy a business, new entrepreneurs would be well-advised to take a step back and consider five important questions prior to jumping into business ownership.

What Are My Strengths and Weaknesses as an Entrepreneur?
Do you really understand your strengths and weaknesses, and how those compare to the norms for successful entrepreneurs? The skill set of successful entrepreneurs, which has been studied and modeled for many years, requires more than a just a well-rounded background consisting of functional and strategic experience. Knowing your strengths and weaknesses, as it specifically pertains to business ownership, will typically guide you towards acquiring a business that showcases your assets while at the same time downplays your limitations.

On the other hand, it can help gauge what kind of support may be required in a co-owner or business partner. For instance, if you have a high numerical aptitude coupled with low numerical reasoning, there’s a strong likelihood you can manage the books and records of your business -- but may need assistance building business models. This serves as only one of countless examples that demonstrate the importance of assessing your skills.

It's tough to be objective when assessing your strengths and weaknesses. As such, it may be worth investing in a third-party Entrepreneurial Assessment. My business brokerage firm works with an industrial psychologist who conducts Entrepreneurial Assessments of would-be business buyers. The feedback we get from the buyers is that these assessments are very helpful in streamlining their path to business ownership.

As an unbiased, scientific assessment of your skills and background, Entrepreneurial Assessments can give you a snapshot of how you might succeed as an entrepreneur, as well as what type of businesses would best suit you.

What Is My Tolerance For Risk?
To reference an overused but oftentimes ignored cliché, small business ownership is not for the faint of heart. Even under the best of circumstances, steering the ship of a small business takes a healthy combination of intelligence, hard work, perseverance and sheer guts. Unlike what many new entrepreneurs anticipate, there is no such thing as a day off.

All business decisions require your complete involvement, as any capital investment is either coming out of your pocket, or you are guaranteeing the loan. Sleepless nights and the feeling of living on the edge can easily permeate your lifestyle unless you practice counter-balance measures.

If you are easily troubled and the worry paralyzes you, it may be wise to think twice before buying or starting a business of your own. It’s imperative you understand your risk thresholds, as well as those of your family or significant others, prior to taking the plunge into entrepreneurship.

What Is My Financial Profile?
It is absolutely critical to fully understand your ability to financially leverage the purchase of a business.

As lending has become difficult amidst a struggling small business economy, what works one month may not work the next. Your comprehensive financial profile should take into account not only your personal net worth, for example, but also the other factors banks are now considering when processing loans.

A contact of mine who works with buyers to secure loans for business acquisitions, recapitalizations and debt restructuring recently mentioned how he urges today’s business buyers to complete a lending profile prior to embarking on a business search. A lending profile will ultimately guide you on a more focused search, giving you information about the size and type of business you can afford to purchase, its cash flow requirements, working capital needs, the most appropriate investment vehicles and a pre-approval for lending you may need. The latter can give you a leg up with sellers, as they receive comfort in knowing you are indeed financeable.

What Type Of Business Is Best Suited To My Talents?
Buying a business is your opportunity to do what you love, so your passion for the specific industry should be one of your primary objectives when looking for a business. Nearly all of the 350 new buyers who seek help from Chicagoland Sunbelt each month, for example, are focused on the cash flows of a particular business over the type of business. A high percentage of these buyers are middle-to-senior level executives who are attempting to buy a business to replace lost income.

It’s usually a good idea for new buyers to engage in a brief educational session surrounding tactics involved in business acquisition. During these sessions, buyers learn the steps involved in buying a business and the first rule of focus: concentrate on your career goals first, and worry about the financial benefits second. If you cannot say you would love running a particular business, skip it and keep looking.

In fact, the process of buying a business could last anywhere between six months and two years. New entrepreneurs are lucky if they find something immediately. More often than not, you are turning over many stones to find the prize. Don’t let the long process discourage you from finding the business that truly meshes with your career goals, passion, personality and core strengths.

One of the best ways to know where to focus your energies is to think about all the jobs, tasks or situations throughout your career that seemed effortless. We have all been in situations where work did not seem work -- you could not wait to get up in the morning; you put in extra hours; you collaborated; you had tons of energy even though you were working harder than usual; and everyone around you knew you loved what you were doing. Think about those moments and then compare the attributes of a particular business to those situations. Once you find a business that invokes this type of passion within you, commence your due diligence to test your assumptions.

It is hard work and you may have to recalibrate along the way, but there’s a good business out there for every personality and skill level.

Who Are My Advisors?
From day one, assemble a competent team of advisors who are skilled and committed to the business-buying process. Your team should include an attorney, accountant, banker, insurance advisor and business broker. All of these professionals should be highly skilled in business acquisitions.

While many professionals will tell you they understand the work of business acquisitions, there are few who make it their living to focus solely on this type of work. This is an important distinction since buying a business is fraught with many challenges and obstacles. It is easy for an unskilled professional to tell you to walk away from an opportunity that might be ideal for you.

Sunday, March 14, 2010

Top 10 Tips for Selling your Business

Most business sales are usually once-in-a-lifetime events. For many business owners, the prospect of selling their business after years of hard work can be emotional and difficult. This is not the time to take short cuts – it is critical to use the same care and patience that it took to grow and sustain your business.

Based on our 30 years of experience helping people sell their businesses below our Top 10 list of tips to help make the experience a positive and successful one.

1. Know the value of your business.
Inflated expectations interfere with your advisor's ability to negotiate the best value for you. A third party independent valuation will help you establish the true market value of your business.

2. Carry on business as usual.
Don't become so obsessed with the transaction that you ignore day-to-day demands. Your eventual buyer will need to see a healthy business, not one suffering from neglect.

3. Keep the sale process strictly confidential.
A breach of confidentiality surrounding the sale of a business can alter the transaction dramatically. When clients, employees or vendors become aware of a potential sale they get nervous with the unknown and the natural instinct is to leave. Avoid this uncomfortable scenario by maintaining confidentiality.

4. Prepare for the sale well in advance.
Be sure your records are detailed and complete for at least the past few years and do all pertinent legal or accounting housecleaning as well as a physical sprucing up of the plant or office.
5. Anticipate information the buyer may request.
In order to obtain financing, the buyer will need appraisals on all assets, plus information to satisfy any environmental regulations that may apply.

6. Achieve the highest price through buyer competition.
Since this can be tricky, you're advised to let your intermediary, as a third party, create a competitive situation with buyers to position you for the best transaction value.

7. Be flexible.
Do not be the kind of seller who wants all cash at the closing especially given the current market conditions. Be prepared to provide seller financing and other creative financing solutions to attract the right buyer.

8. Negotiate, do not dominate.
You may be used to being your own boss, but the buyer may be used to having his way too. With your intermediary's help, decide in advance what is most important to you and be prepared to give and take.

9. Time kills deals.
To keep the momentum up, work with your intermediary, your accountant, your lawyer and other experts who may be required to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.

10. Be willing to stay involved.
Even if the process has been exhausting, realize that the buyer may want you to stay within arm's reach for a while. Consult with your intermediary to determine how you can best achieve a smooth transition.

Above all, remember that planning ahead is key. Too many business owners fail to plan for the day when they will want to sell. Then something happens - most often a health problem - and they are forced to sell quickly. Rushing to sell can result in a failure to recoup the true value of the business. The best time to sell is when you don't have to!

Monday, March 1, 2010

Setting Exit Objectives

Article Contributed by Ted Thomas, President of Sun Exit Advisors

"When a man does not know which harbor he is heading for, no wind is the right wind." So said Seneca almost 2,000 years ago. Today, speaking to business owners he might likely say, "Exit Planning for business owners must start with knowing your exit goals and objectives; otherwise, failure may be inevitable."

Why is Seneca's wise counsel so true today? In this first and most indispensable of The Seven Exit Planning Steps™, owners form their goals and objectives. But what should an owner’s objectives be and why is it so vital to fix them before taking the next Step?

I recently met with Ben, the owner of a 45-employee plastic extrusion company. He had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. After years of procrastination, at age 58, he was finally ready to retire.

"Ben, it's helpful that you've decided on two of the critical Exit Objectives all business owners must face and answer. You've determined how much longer you want to work in the business. It seems you want to leave sooner rather than later. And second, you have decided to whom you wish to transfer the business, in your case your son and a key employee. But you still need to determine a third, critical, Exit Objective, how much money do you want or need when you leave the business? And, does that money need to be in cash or would you accept a promissory note?"

Like many owners, Ben had two choices. First, he could retire now and sell the company for cash — but not to his son and key employee. They had no cash and no bank would lend an amount even close to the amount of money necessary to close the deal. If Ben wanted to sell now and achieve financial goals, he would have to sell to an outside third party with sufficient cash. His alternative was to sell the company to his son and key employee — knowing he would have to wait six to ten years to receive the entire purchase price.

Ben's situation illustrates why setting consistent and achievable objectives early in the Exit Planning process is so critical.

The three principal objectives common to nearly all business owners (and the questions that must be answered in setting these objectives) are:
1. Leaving the business on your timetable. How much longer do you want to remain active in the business?
2. Leaving the business financially stable. Think of financial stability as a stream of after-tax income, adjusted for inflation. How much income will you need for the rest of your life after you leave the business? Do you want to be cashed out when you leave the business or are you willing to receive the purchase price over many years?
3. Transferring the business to a particular person. To whom do you want to transfer the business? To a child? Key employee? Co-owner? Or perhaps to an outside party who can pay top dollar for the company?

If you don't answer these questions and thereby set your basic Exit Objectives, you may end up like Ben. He was left without a means to exit his business in style because he wanted to transfer the business to a key employee and he wanted cash. Your failure to set consistent and achievable objectives can leave you without the means to exit your business as well. If you prefer to "leave your business in style" you must formulate specific, consistent, attainable goals and objectives. Your Exit Objectives are the foundation for all subsequent planning, or in Seneca's words, "the harbor you must head for."

Know, however, that many owners may not reach their objectives. Why? Because they may not have a plan to achieve them. They may be too hurried, too focused on their businesses, and they may not know how to go about planning. Many owners understandably lack Exit Planning experience — they may not even know where to start. We suggest you begin your Exit Planning process by working with experienced advisors. Financial and insurance advisors often have the software and experience necessary to help you determine your financial needs based on your current net worth.

Wednesday, February 3, 2010

The Importance of Working 'ON' your Business

Do You Really Want to Grow Your Business? Make Time to Work ‘On’ It, Not Just ‘In’ It.

What Owners Tend to Do
As a business owner, what did you have at the top of your to do list today? If you are like most owners, you probably had numerous details to handle, most or all of which fit into the category of ‘urgent.’ But what made those items high priority? By and large, the majority of our daily tasks do not add lasting profit or real value to the business. Typically, we get caught up in small items that seem pressing but do not qualify as genuinely important. We take care of things because they are easy and we can quickly check them off our list, because they are more enjoyable to do, or because they seem time sensitive (but are not necessarily important). At those moments, we are not working on the business, we are working in it.
Working in the business is necessary much of the time, but as an owner you must carve out time to work on it if you are seeking to drive significant growth, profit and value. If you never spend time focusing on where the business is going and how you will get there, you will not maximize the results. You are just treading water.

How you can drive growth
How do you refocus your energies and carve out the time necessary to work on the business more strategically? One very powerful solution is to join a peer advisory group. A peer advisory is a collection of ten or so non-competing owners who get together on a regular basis, along with a professional facilitator, to discuss business issues or opportunities. Their sole mission is to help each other succeed. Owners who commit to this process rank it as one of the best business decisions they ever made.

By their very nature, peer groups create an opportunity to work ‘on’ the business. Your peers can be more objective about your business, and as such, they see your blind spots. They point out when you are focused on your goals and when you are wasting your time. They 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 needed to thrive. Since these groups include other owners like you, they have no vested interest in any one idea. You hear what you really need to hear, not what someone wants you to know because of their own self-interest. What makes peer groups work is the fact that the combined experience of a team of business owners tackling problems is far superior to that of any one individual.

Owning a business is a challenge. For those owners who are truly committed to working on their business and growing their companies, peer groups can be a powerful tool.

Thursday, January 28, 2010

Build your Business with the End in Mind

Most business owners do a very good job of planning and executing their business strategies. Few, however, think about what to do when they can no longer continue to manage the business.

Ted Thomas of Sun Exit Advisors offered his insights on this topic in a interview with Mark Goodman of SCORE Chicago. Ted had three suggestions to aid in the planning of the eventual transition of your business.

1. Clear, up-to-date accounting practices.
Understand where your cash is coming from and where it is going. For some businesses, the only time when the financial situation is understood is the one day a year that taxes are filed.

2. Create operating systems that are documented and repeatable.
What is the sales process? When does inventory need to be replenished? How are invoices paid in order to avoid late payment fees? Who authorizes payments if the owner is not available?

3. Identify a second in command.
Who will be in charge if something happens to the owner? This information can be known to employees and partners or can be kept private. However, pushing a spouse or child into a role that they have not been prepared for can create significant difficulty at a very difficult time.

The above are only some of the important phases in preparing for an eventual sale. Click here to see Ted's entire interview or contact Ted directly.

The question is not IF your business will be transferred but, rather, will you transfer it on your terms and realize the maximum value for a life's work.

Friday, January 15, 2010

When Is It Time to Sell

As a business broker who's been involved in hundreds of deals, I can tell you with certainty that the best time to sell your business is when it's doing well. I can also tell you that this is exactly when most business owners have the hardest time pulling the trigger on a sale. If things are going so well, they ask, why should they sell and potentially leave money on the table?

An entrepreneur's dream is to build a successful and profitable business, so to many owners it might seem illogical to walk away. Using a recent example involving a client, let me illustrate how it can pay off to sell when things are good.

This client hired our firm to determine the value of his business and market it to potential buyers. This company had all the attributes buyers are seeking--a great track record, increasing revenues and profits, long-term clients, key employees, a niche product, and very healthy margins. In fact, this business was just wrapping up a record year, and the future prospects were outstanding. At first glance, this was a model seller who had made the tough decision to sell when things were going well.

As anticipated, our firm generated multiple offers--several of them well above the value placed on the business. This was great news, and we thought the toughest part would be deciding which of the many qualified buyers the owner would choose. Wrong.

Because of all these offers, the owner began to second-guess the value of his business and became convinced that the buyers were undervaluing it. As such, we could not get a deal done, and the buyers went on to pursue other deals. Just four months later, the business started to slow. Today, it's not as valuable as it was when offers were on the table, and it will be some time before it regains its previous value.

The timing of a business sale can be a nebulous thing, especially in the current environment. Many people are surprised to hear that there are plenty of businesses performing well and generating healthy returns. There are great opportunities to successfully sell a business right now and maximize your investment. Even if sales are currently flat, don't misread that as a bad sign. Many analysts and economists like to toss around the phrase "flat is the new up." So if your business is holding its own--or if sales are slightly up or slightly down--consider it good news in this economy.

Selling a business has always been an individual decision, and timing the sale right can be tricky. It's always best for sellers to plan their exits so they can leave when they want and under the circumstances they want.

As such, it would be wise to plan an exit strategy even as you launch your business, but most people can't fathom taking that step just as they are getting started. What follows is a 10-year timeline to help you plan for the eventual sale of your business.
Let's assume you're thinking of retiring and selling your business when you turn 65. (That number could be 55 or 75, of course.) This timeline, a rough guide, will help you put the pieces in place to prepare your business for sale. If you create a plan from day one, most of your time will be spent running the day-to-day operations of your business so you won't need to scramble when you're ready. It also helps you better calibrate the best time to sell so you can get top dollar and achieve your personal goals.

7 to 10 Years Before Selling

This is the education and reading stage. Learn about successful business transitions, attend seminars on how to sell a business, and talk to retirees who have sold a business. Essentially, get familiar with the notion of what you'll need to do as the process continues. Take your time; this phase can last for several years.

3 to 5 Years Before Selling

Start to assemble a team of advisors (accountant, attorney, wealth manager, insurance agent, business broker and exit planner) for the express purpose of designing a plan that will meet your needs post-sale. These advisors may be different than the people you use to help you manage your business, and they should be well-versed in business transactions, tax planning and wealth maximization. An experienced exit planning professional should be retained to quarterback this process and ensure that all the parties involved are working toward a common set of objectives and goals. The outcome of this process can range from minor tweaks to your financial record-keeping and legal structure to significant changes in your business operations to ensure that you maximize the value of your asset.

2 Years Before Selling

At this stage, you should be revisiting the exit plan every six months to a year to ensure you are on pace to achieve your goals. If so, you can begin the window dressing necessary to prepare for a sale. If not, you may have to consider a course correction, modification of your goals, a delay in your exit or any combination thereof. If things are on track, this is the time to firm up your vendor and client agreements and ensure key employees are in place and that you have a complete operations manual that documents all processes and procedures.

1 Year Before Selling

Make sure you can answer this question with clarity: Why are you selling? That will be the first question every potential buyer will ask. By now you know what your business is worth and you have prepared all other aspects for a sale. Work with your business brokerage firm to start developing the "go to market" strategy. Ensure that you have a mix of strategic and financial acquirers identified, as well as a broad-based marketing plan to attract the largest number of buyers. Finally, when everything is ready, take a step back. Just focus on managing the business so it's running smoothly and let your brokerage firm manage the life cycle of the business transaction. This will lead to a graceful and profitable exit.