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.