Business Value Driver #2: Reliable Financial Data

The lack of financial integrity is one of the most common hurdles encountered during the process of selling a business.

Reliable financial records are not only a critical element of business management but also support the business' leverage, profitability, operational efficiency, and its solvency.

In the purchase of a business, the buyer will perform some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past financial performance, there is no deal, or at best a reduced value for the company.

If a buyer faces a seller of a business who asserts that the company has been making $1 million per year for the past three years, the seller will be required to prove it. If the seller then produces past financial statements that do not support that claim, are incorrect, or incomplete, the buyer would most likely be gone.

Therefore, it is a good idea to know everything you can about your business financials now, so you avoid surprises later when a buyer is performing due diligence. You should be ready with the answers to the questions that will assuredly be asked.

Manage your business financials so they are transparent, reliable and up-to-date. Buyers want to see a detailed financial history in well-kept books and will not pay top dollar for mediocre records. To make sure your company remains attractive and can win top dollar when it is time to sell, here are nine tips for keeping your business in sale-ready shape:

1. Understand and know your profit margins on each line of business.
2. Know which products are winners and losers.
3. Know which territories are winners and losers.
4. Know your largest customers and your profitability in those relationships.
5. Regularly evaluate your costs and pricing.
6. One-time expenses and expenses for start-up programs and businesses should be separately identified.
7. One-time expenses and costs associated with certain types of business growth need to be isolated in your internal reporting so that you can tell how the underlying business is doing without these non-recurring costs.
8. Compare each year's performance to the prior years. Create a document that compares performance from year to year. In the document, explain the reason for the variances. Doing this yearly increases the probability that you'll remember the specifics when you sell your company.
9. Regularly compare your company's performance to industry benchmarks. For instance, if you have inventory three times higher than the industry standard, too much cash is tied up in excess inventory. If inventory is kept right-sized, the company would be more attractive to a buyer.

If you can put these tips into practice, your business should command a higher price over other competitors in the business-for-sale marketplace. While other owners may be scrambling to prove the worth of their business, you will be on your way to a secure retirement.

Sports teams and individual athletes compete against each other. They keep score and know who wins and who loses. Every player on a team and athletes in every arena have statistics on their performance. They meticulously measure their performance against themselves and others and use their numbers to find ways to improve.

Is running a business any different?

See an overview of the other top value drivers:
Ten Value Drivers That Increase Sale Price of a Business

Tip #25: Excessive Personal Expenses Can Jeopardize Business Value

Burying excessive personal expenses in the business financials can lower business value!

The most popular method of valuing a business uses a multiple of earnings over a period of years. Business owners should be aware of that while attempting to reduce the bottom line with personal expenses to minimize taxes. Though there are a number of deductions that may be added back to determine true cash flow, not all add-backs are considered legitimate by buyers or lenders. Being too aggressive in minimizing taxes today may cost a business owner big dollars at closing.

Click here for "Addbacks Frequently Used to Maximize Business Value."

Buying a Business and Purging Liability of Unpaid Taxes

If you plan to buy an existing business, be sure to get a Certificate of No Tax Due. Failing to do so makes you, the purchaser, liable for any past due state taxes or fees, plus any interest and penalties that are owed by the business.

CBB will assist a buyer in obtaining this certificate prior to closing the sale of a business.

Read complete information from Texas Comptroller of Public Accounts

Tip #13: Keeping Up With Technology Adds Value to Your Business

Not all businesses need to have cutting edge technology, but a company can't fall too far behind. Buyers will be concerned if they must make a large investment in the latest technology to get the company to a competitive level. A business owner should do the research and purchase the necessary technology to keep the company on par in its industry or be prepared to accept a lesser value for the business.

Also see: A Strong Online Presence Adds Value

Value Driver #4: Human Capital and Quality of Workforce

When a business for sale is being evaluated by a prospective buyer as a possible candidate for purchase, the quality of the human element will be considered. The staff is a major component and the backbone of any successful business operation.

Any aspect that reduces risk in the continuity of the business under new ownership adds value. A stable, skilled, quality workforce is one of the top value drivers that contributes to the purchase price of a business for sale.

It is important, therefore, that you, as the business owner, keep your key employees, they are your business. Buyers look for situations where management and / or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge will be considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. If a company’s success is reliant on capable, well-trained employees – not the owner – it means the business will not be negatively impacted under new ownership.

Human capital refers to the stock of competences, knowledge and personality attributes embodied in the workforce that has the ability to produce economic value. A workforce that can lead to increased production, innovation and good word of mouth advertising is more valuable and less risky than one with lack of job performance and employee turnover that would result in missed business opportunities and increased costs.

In analyzing risk, as far as labor is concerned, the following are key areas that may be considered.

• The availability of a qualified labor pool. Are potential employees hard to find or is the labor pool adequate for the skills required if employees need to be replaced or added?
• Are key employees and management due a significant salary increase?
• What are the ages of the employees and key management? If many of the key managers are close to retirement age, they may just retire when ownership changes.
• What is the liability risk with the employees? Have the employees been trained sufficiently in safety procedures? Is safety an ongoing program for the employees? If the company has delivery vehicles, a check of accident history would be in order.
• Will key employees stay once the company changes ownership?
• Has management been efficient? Are they up to the challenges of the future? Do they have the education or expertise to take the company to the next level?
• How many of the key managers are relatives? If all or most of the key managers are relatives, and will be gone after the company sells, there is no management.
• Who is responsible for the majority of sales? Does the company have a sales force or is the owner responsible for most of the sales and if so, how hard would it be to replace the owner?

See an overview of the other top value drivers:
Ten Value Drivers That Increase Sale Price of a Business

5 Months to Capital Gains Tax Hike

The capital gains tax rate is presently at historic lows at 15%. However, effective Jan 1 2011, this rate will increase to at least 20%, which represents a 33% increase overnight. Congress has not yet finalized the amount of the increase and it may be significantly higher. This does not include any other taxes that kick in on Jan 1, 2011. It is not too late for business owners considering a sale to get the business on the market with the goal of selling by Dec 31 2010 in order to keep more of their proceeds.

Avoiding the Deal Breakers When Selling A Business

Most small business owners are not familiar with the dynamics of selling a business because they have never sold one before. Most people only buy or sell a business once in a lifetime. While there are lots of potential deal breakers, avoiding the following ten mistakes will mitigate the possibility of an aborted transaction.

1. Neglecting running your business as usual.
2. Overpricing the business.
3. Breaching the confidentiality of the sale.
4. Not preparing for the sale far enough in advance.
5. Not anticipating buyer requests and questions.
6. Not expecting to stay long enough for the transition period.
7. Not expecting to sign a non-complete agreement.
8. Being inflexible in structuring the transaction, expecting an all-cash deal, for instance.
9. Being unwilling to negotiate.
10. Not faciliting the closing process in a timely, efficient manner. Time is the killer of all deals.

You Can't Always Get What You Want

The title to the 1969 song by the Rolling Stones seems to echo what the market is telling many business owners these days. There is no question that prices for many businesses are down and for various reasons. But if there are offers on the table, a business owner must take a hard look at any offers and be realistic as to what has to change in the business or the economy for the price to go up. Enjoy the tune, sing along, or just listen while you work.

Huddle with the Experts when Buying or Selling a Business

Acquiring a business is a team effort and finding the right business broker (intermediary) is just the start of building your squad.

Oftentimes, buyers do not know how to go about tackling the whole process of investigating the business they like or how to evaluate the financial data. This questions represents a common real- buyer inquiry:

"I'm ready to purchase the freight company I've been looking at that's currently listed for $1.2 million. I've never bought a business before and I need someone who can help me through the various phases so I don't overpay and don't miss key legal issues that might be involved. Where can I find such a person?"

The answer is: You need more than one person.

Making a business acquisition is a team effort, and your business broker, also known as a business intermediary, is the quarterback. The broker drives the deal by acting as the buffer and go-to guy with the buyer, the seller, the attorney and the accountant. We do everything to move the deal along, including coaching and some tactical rationale therapy.

It's an extremely emotional process. Sometimes, the reason deals don't get done is that emotions get in the way. A good intermediary will take the emotion out of the transaction. Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process common sense must be injected into the game plan.

As the coach, the broker sees the big picture. S/he keeps the ball spiraling towards the goal and creates the synergy needed to prevent false starts, fumbles and needless setbacks.

Your broker can help you find your other team members, including an attorney to act as your blocker to protect you in the legal aspects of the transaction and an accountant to tackle the numbers and tax issues.

As a general rule, small business owners sell a business only one time -- and buyers purchase a business only once in their lives. A business owner's professional advisors who have counseled them on the operations of their business consists of their attorney who does general business law and their accountant who does their books and tax filings. New buyers, too, have probably called on attorneys for various reasons such as preparing a will, for example, and have used accountants to file their income taxes. It is important to note that these types of professional advisors may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller's tax situation and vice versa. Negotiations are opposing in nature and require creative solutions by experienced business brokers....the negotiators.

Good brokers will have a list of professionals with whom they have worked with in the past - deal makers versus deal breakers. You need an accountant and attorney that specialize in business transfer transactions.

You wouldn't call an eye doctor to perform foot surgery, so why call a patent attorney or a general accountant to help you perform due diligence on an acquisition candidate. You need specialists.

Professional advisors can make or break a deal. You must articulate your wishes to your team in order to have them working together towards the common goal. Each advisor, such as a business broker (intermediary), an attorney or an accountant, has a specific role in the transaction and should be working on behalf of their client to achieve the objective for which they were engaged.

Your advisors should provide the information you need in the time period required -- so you can make the decision on the purchase. You are the ultimate decision maker in the deal.

Communication between all of the parties involved is a priority to prevent the deal from dying. Each advisor should clearly understand the wishes of their client.

The accountant needs to know from the client that this is an earnestly desired transaction and that, unless something completely unanticipated is discovered, his or her job is to provide, review, and verify the financial records of the business in order to get the deal done.

If there is no one monitoring and leading the progress of the transaction, the ball can be dropped somewhere along the way before the final yard...before breaking the plane of the goal line.

The use of a professional business broker to captain the effort can alleviate communication problems, avoid needless delay, and keep the momentum rolling.

The experienced business broker has been through the due diligence and closing process many times, much more often than any of the attorneys or other advisors involved. They keep the deal on track and act as the captain that keeps the team working together towards the common goal.......the successful consummation of the sale.

As long as all advisors in the huddle understand the game plan and are all getting the same signals from their respective clients -- the buyer and the seller -- the odds are good that the effort will have the desired result -- a win.

Self-Assessment is Important Before Searching for a Business to Buy

Why is self-assessment important?

Not only is the acquisition of a business one of the most important financial decisions you will ever make, but it is also quite often a major lifestyle change. While there is certainly no requirement that your personal interests conform to your business purchase, a thorough and realistic assessment of your personal interests may help to minimize the risk of acquiring a business that may quickly become monotonous or uninteresting to you.

For those individuals who do not have firm ideas of what type of business they might be interested in or would be suited for, a list for personal consideration shown below may help bring your thoughts into focus.

It would be unlikely to find all of your ideal options and conditions embodied in one, single business. For practical purposes, however, you may choose to trade off the negative aspects of a low status business for the benefits of high income potential or trade off your reluctance to work on weekends for the opportunity to travel. The important thing is to give clear consideration to each option and condition as you analyze each business opportunity.

Self-Assessment: A List of Things to Consider

1) Take an inventory of your financial resources. You should identify the actual availability of all financial resources in the following categories:

• Actual liquid funds (cash) available for a down payment.
• Actual liquid funds (cash) on reserve for transition expenses, start up costs, working capital, business charges, learning curve
• Other current sources of income expected to continue into the future
• Future (anticipated) funds to be received
• Unencumbered assets available as collateral, notes receivable which could be factored, real estate
• Other sources of financing including business partners, relatives, friends
• Retirement funds such as 401K and pension funds that qualify for tax free benefits

2) Examine your resume and work history. Construct a “red lined” version that very accurately reveals your actual skills, work experience and extent of business knowledge. It should be used as a reference as you consider different business opportunities. Additionally, it can be extremely useful in enabling a business broker (or other professional advisor) to direct you toward the business most suitable to your background.

3) Hobbies, interests, talents, and skills are a good source of inspiration for the types of businesses you might enjoy and in which you may have some knowledge.

4) Do you want to be an Absentee Owner or run the business yourself? Do you intend to operate the business with a manager? This may be important to you if you have a limited amount of time available to personally operate the business. Remember, not all businesses “lend themselves” to absentee-ownership conditions.

5) Have you carefully determined your minimum income requirements? Do you need a fixed amount of earnings every month from the business? Do you need to pull money out immediately or can you wait six months or a year before making any withdrawals?

6) Do you want to manage a staff or prefer non-personnel intensive? Do you consider yourself a “people person?” Some people shun or fear taking management responsibilities. Do you enjoy (and are you comfortable) supervising and motivating others? If not, consider businesses which are not labor intensive.

7) How much importance do you place on high growth or expansion? Are you very concerned about operating a business that has full potential to grow and continue expanding into the future? Or, would you be satisfied to maintain a business at its current level of operation?

8) How important is High Status or Unpretentiousness of the business? Is it important that you own a business that has a name, product, service or asset base which will project a certain image? Or, would you be happy with an unpretentious business as long as it was profitable and met all of your other requirements?

9) Do you require time freedom or have issues about the kinds of hours involved in the business you choose? Is it important that you own a business which allows you to “come and go” as you please? Or, would you be satisfied with a business that required fixed hours? If time freedom is really important, avoid a franchise business that requires owner-involvement and specified hours of operation, as well as certain retail businesses which require that the owner be available to serve the customers.

10) Will your family be involved? Is it important that you own a business where you can employ other family members? Are you wanting to create a certain number of jobs for your family members or close friends? Do your family members really have the needed skills and qualifications to help you succeed with the business? Are they willing to make the same sacrifices you are making?

11) Does it matter if the business has travel requirements or do you prefer not to travel?

12) Do you want a business in which you would need some or a substantial amount of training? Are you willing to learn new skills, new business “buzz words,” new techniques and procedures? Or, is it very important that your business be one with which you are already quite knowledgeable and experienced?

13) Is it important that your business not require your personal involvement on weekends? If so, does the business have dependable employees capable of handling weekend operations without your supervision?

14) Are you a morning or night person? Do you like to retire early in the evening and wake up early in the morning? How important is it to you that the demands of the business not disrupt your present life style?

Cash Flow is the Kingpin When Selling Your Business

Think of the bottom line cash flow of your business as the first introduction to a prospective buyer. If that bottom line is not attractive, buyers will look elsewhere. The right strategy towards achieving a successful sale is to pin your bets on improving cash flow to stand out in the marketplace when it comes time to sell.

Most small business owners spend their time trying to beat their competition by building the latest and greatest gadgets or providing the best customer service. They can become so focused in the daily details of working in the business that they lose sight of the end game. The most important thing an owner can build is value so they can one day sell the business. The more value created the more money a buyer will pay. So, how do you create that value?

Value is determined by available cash flow and the risks associated with obtaining it. Yes, the other aspects of the business that drive value, such as product, service, market, and growth potential matter too. But how will buyers judge those aspects? How will they ultimately gain perspective of all the virtues of the business? The main component will be how much cash flow it generates.

Not only is cash flow the best indication as to the quality of a business and its market, it is the single greatest reason that people go into business for themselves. It’s great to love what you do but if you can’t make money doing it, you can't make a living. Prospective buyers will evaluate a business for potential purchase based on the cash flow it generates, whether it be an individual looking for enough cash flow to support their lifestyle or a company looking for a strategic purchase that offers quick expansion and a good return on their investment.

When you go to market to sell your business, you will no longer be trying to beat your old competition for customers looking for the latest and greatest gadgets. You will be competing for buyers with every seller in the business-for-sale marketplace. But if you played your cards right, you will reign like a king among buyers by holding a crown jewel, a prized cash flow available for purchase.

Houston: Model City -- Forbes Article by Joel Kotkin

Do cities have a future? Pessimists point to industrial-era holdovers like Detroit and Cleveland. Urban boosters point to dense, expensive cities like New York, Boston and San Francisco. Yet if you want to see successful 21st-century urbanism, hop on down to Houston and the Lone Star State.

You won't be alone: Last year Houston added 141,000 residents, more than any region in the U.S. save the city's similarly sprawling rival, Dallas-Fort Worth. Over the past decade Houston's population has grown by 24%--five times the rate of San Francisco, Boston and New York. In that time it has attracted 244,000 new residents from other parts of the U.S., while older cities experienced high rates of out-migration. It is even catching up on foreign immigration, enjoying a rate comparable with New York's and roughly 50% higher than that of Boston or Chicago.

So what does Houston have that these other cities lack? Opportunity. Between 2000 and 2009 Houston's employment grew by 260,000. Greater New York City--with nearly three times the population of Houston--has added only 96,000 jobs. The Chicago area has lost 258,000 jobs, San Francisco 217,000, Los Angeles 168,000 and Boston 100,004.

Politicians in big cities talk about jobs, but by keeping taxes, fees and regulatory barriers high they discourage the creation of jobs, at least in the private sector. A business in San Francisco or Los Angeles never knows what bizarre new cost will be imposed by city hall. In New York or Boston you can thrive as a nonprofit executive, high-end consultant or financier, but if you are the owner of a business that wants to grow you're out of luck.

Houston, however, has kept the cost of government low while investing in ports, airports, roads, transit and schools. A person or business moving there gets an immediate raise through lower taxes and cheaper real estate. Houston just works better at nurturing jobs.

It's not just smug coastal places getting smoked by Texas. Since the collapse of the housing bubble Houston has outperformed Sunbelt counterparts like Phoenix, Las Vegas and Los Angeles. A big factor has been that manufacturing, professional services, international trade and technology industries have been the primary drivers of the city's economic growth--rather than construction and speculation. Ironically, this has increased home values. Since 2007 prices of homes in Houston have ticked slightly higher, while those in Las Vegas, Phoenix, Los Angeles and the Bay Area each are down by more than 35%.

Some traditional urbanists will concede these facts but then try to shift the focus to "qualitative" factors: the best-educated residents, the highest salaries, the most expensive real estate. Although it also attracts a large number of low-skill migrants, Houston has considerably expanded its white-collar workforce. According to the Praxis Strategy Group, Houston's ranks of college-educated residents grew 13% between 2005 and 2008. That's about on par with "creative class" capital Portland, Ore. and well more than twice the rate for New York, San Francisco or Los Angeles.

But Houston's biggest advantage cannot be reduced to numbers. Ultimately it is ambition, not style, that sets Houston apart. Texas urbanites are busy constructing new suburban town centers, reviving inner-city neighborhoods and expanding museums, recreational areas and other amenities. In contrast with recession-battered places like Phoenix, Houston remains remarkably open to migrants from the rest of America and abroad.

Houston, perhaps more than any city in the advanced industrial world, epitomizes the René Descartes ideal--applied to the 17th-century entrepreneurial hotbed of Amsterdam--of a great city offering "an inventory of the possible" to longtime residents and newcomers alike. This, more than anything, promises to give Houstonites the future.

Published 05/20/10 Forbes.com
Joel Kotkin is a distinguished presidential fellow in urban futures at Chapman University, adjunct fellow at the Legatum Institute and executive editor of Newgeography.com. His latest book, The Next Hundred Million: America in 2050, was published in February by Penguin Press.

Texas No. 1 on 'Best-for-Business' State List for CEOs

Texas ranked as the No. 1 state for business in a recent survey (May 24, 2010) of CEOs published in “Chief Executive” magazine.

Closely following in the poll of 651 CEOs were North Carolina, Tennessee, Virginia, and Nevada. Rounding out the top 10 were Florida, Georgia, Colorado, Utah, and South Carolina.

As for the bottom of the barrel, California led the way, followed by New York, Michigan, New Jersey, and Massachusetts.

"Texas is pro-business with reasonable regulations, while California is anti-business with anti-business regulations," one CEO told the magazine.

The CEOs ranked states in three main categories: taxes and regulation, skill of the workforce, and quality of living.

Perhaps not coincidentally, nine of the top 10 — Colorado is the exception — are among the 22 right-to-work states in the country, meaning that state law forbids forcing employees to join a union to be able to work. Meanwhile, all five of the states the CEOs ranked on the bottom do not have such laws.

In addition, six of the 10 states CEOs like rank below the national median for household income, while four of the bottom five are above the median.

Texas is where 70 percent of all new U.S. jobs created since 2008 are based, according to Chief Executive. The Lone Star State’s tax credits and incentives for businesses that move or expand there are among the most generous in the country.

So it’s no wonder that CEOs like Texas.

"You feel like state government understands the value of business and industry to create jobs and growth," one CEO said.

As for the golden state, "California is terrible," one CEO said.

"Even when we’ve paid their high taxes in full, they still treat every conversation as adversarial. It’s the most difficult state in the nation. We have actually walked away from business rather than deal with the government in Sacramento."

Bill Dormandy, CEO of San Francisco medical device maker ITC, said, "California has a good living environment but is unfavorable to business and the state taxes are not survivable. Nevada and Virginia are encouraging business to move to their states with lower tax rates and less regulatory demands."

Full article by Dan Weil, Newsmax.com

In this apropos April 22, 2010 excerpt from National Review Online, Kevin D. Williamson describes the Texas economy in Texas vs. California: Unions, Taxes, and Spending:

"Texas today is home to 6 of the 25 largest cities in the country, more than any other state. Texas has a trillion-dollar economy that would make it the 15th-largest national economy in the world if it were, as some of its more spirited partisans sometimes idly suggest it should be, an independent country. By one estimate, 70 percent of the new jobs that were created in the United States in 2008 were created in Texas. Texas is home to America's highest-volume port, the largest medical center in the world, and the headquarters of more Fortune 500 companies than any other state (Houston having almost double the number of any other city in Texas) having surpassed New York in 2008. While the Rust Belt mourns the loss of manufacturing jobs, Texans are building Bell helicopters and Lockheed Martin airplanes, Dell computers and TI semiconductors. Always keeping an eye on California, Texans have started bottling wine and making movies. And there's still an automobile industry in America, but it's not headquartered in Detroit: A couple thousand Texans are employed building Toyotas, and none of them is a UAW member. "

Read all our Texas Economy Blog Posts

Who Are The Buyers For Privately-Held Companies

When selling a business, it is important to know who the buyers are for privately-held businesses and why they buy.

Most owners of small and medium-sized businesses do not think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them do not even realize that their business may be an attractive acquisition target.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner's readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: The Individual Buyer, The Investment Buyer, and The Strategic Buyer. Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

THE INDIVIDUAL BUYER CATEGORY

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 to $3 million. Why? Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. These qualifiers give Individuals confidence in the business' continuity and stability. Employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

THE INVESTMENT BUYER CATEGORY

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, they number in the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five to seven years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

THE STRATEGIC BUYER CATEGORY

The Strategic Buyer is usually a public company or a larger privately-held company. Their targets are businesses that would compliment their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that joining the two companies will produce more, or be worth more, than just the sum of their parts. Here's a simplified example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2-3 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.

Texas #2 State in America for Small Business Development for 2010

The Small Business and Entrepreneurship Council (SBEC) has ranked Texas the second-best state in America for small-business development for 2010.

The council released its Business Tax Index: Best to Worst State Tax Systems for Entrepreneurship and Small Business report. The report analyzes and combines 16 different tax measures into one tax score for all 50 states and the District of Columbia, including income, capital gains, property, death/inheritance and unemployment taxes. The report also takes into account various consumption-based taxes such as state gas and diesel levies.

"Taxes at the state and local levels matter by diverting resources from and reducing incentives for productive, private-sector risk taking that generates innovation, growth and jobs," says Raymond J. Keating, chief economist for SBEC and author of the report. "Quite simply, economic recovery will be restrained by high or increasing taxes, or boosted by low or falling taxes. Governors and legislators have a choice."

The Small Business and Entrepreneurship Council is a nonpartisan, nonprofit small-business advocacy organization. The full report is available here.

Should the Buyer Take Over the Business Before Closing?

The answer is a resounding NO! Confusion and misunderstandings often occur if the soon-to-be new owner takes over or works in the business before closing. In our experience this has never been a winning scenario.

There are times when the buyer and seller think it would be a great idea if the buyer began operation of the business prior to the closing of the sale. Why? Here are some typical reasons:

• The buyer needs the income.
• The seller has really "had it."
• The time it takes to close a deal has been excessively long.
• The seller is in poor health and can't operate the business (or something similar.)
• The buyer feels the business is deteriorating and wants to get in before it all goes too far downhill.

These sound reasonable because both the seller and the buyer have a shared goal - to maintain the business and transfer ownership successfully. In analyzing the reasons for early possession, does the end justify the means? The answer is a resounding NO. Sellers, who often are as enthusiastic about early possession as the buyer, should remember that the sale has not closed and the buyer may still have second thoughts. Early possession of almost any business can create a real obstacle to a closing. It makes good business sense to let the early possession "idea" remain just that -- an idea and nothing more.

Excerpts for this article taken from Business Brokerage Press Article, "Early Possession."

Tip #4 - Low Owner Energy, Low Company Performance!

If a company is on a downward trend, many business owners think they can bring their companies back from a valuation that doesn’t meet their expectations. But it takes energy that many business owners no longer have. Very few companies can make that leap back to new heights without a strong drive, vision and leadership from the owner. Sometimes it’s best to recognize the reality of the situation and sell the business before it continues to go downhill.

Buy a Business Using Retirement Funds

Put your money to work! Invest it in your own business and let your money work for you! You can use cash from your 401(k) or IRA account to purchase a business without incurring early distribution penalties, with no taxes, no loan repayment, and no hassle.

For example, a Texas resident using $100,000 from a qualified retirement fund can keep the extra 31% that would have been paid in taxes, leaving an additional $31,000 to fund the new business by adopting a transfer trust plan versus withdrawing the funds outright.

With the adoption of a pension transfer trust, you are allowed to convert 401(k) and IRA funds into privately-held stock in your new business. Pension and tax advisors can provide all the specific components necessary to make sure the transaction is in compliance with all applicable IRS Code Sections, ERISA Law, and Department of Labor Letter Rulings.

We can refer you to a reputable representative. For more complete information on using qualified retirement funds to purchase a business, you may wish to read this article, Retirement Funds Can Finance A Business Acquisition, and visit websites such as these:

DRDA
Pension Transfer Advisors
BeneTrends, Inc.

The purpose of this article is to alert prospective buyers of alternatives for financing the purchasing of a business and not to provide tax advice. Contact proper legal or tax professionals for more information on this subject.

When Should You Tell Your Employees That You Are Selling the Business?

How can you nail that inevitable meeting with your employees when the time comes?

The issue of what you tell your employees when you’re trying to sell your business is a tricky one that requires careful thought. Maintaining confidentiality surrounding the sale typically takes precedence over other concerns, yet it may be impractical — or even impossible — to keep employees in the dark.

The most common approach is to keep information about the sale limited to as few people as possible. “The general public typically knows nothing about the small-business-for-sale marketplace because it happens below the radar,” said Rose Stabler, managing partner of Certified Business Brokers in Houston. The primary reason for strict confidentiality is to prevent customers, vendors and employees from assuming that there is something wrong with the business and putting a successful sale at risk.

“As with the public, it is natural for employees to think negatively if they learn that the business is for sale,” Ms. Stabler said. “They may look for employment elsewhere — possibly with competitors — and then there goes confidentiality. The general rule we use is that there is nothing to gain by telling employees that the business is for sale before it is sold. National statistics say that only 30 percent of all businesses on the market actually get sold. Therefore, coming clean with employees could be all for naught.”

The potential downside in not telling employees is the shock they may get when they arrive at work one day and learn the news. Last June, when Randy Hughes purchased Industrial Maintenance Assistance, a metal fabrication and millwright business, the company’s 17 employees remained unaware of the sale until a meeting the afternoon of the closing. At that meeting, the seller announced that the company had been sold and Mr. Hughes was introduced as the new owner.

“Everyone looked kind of frozen,” Mr. Hughes recalled. “Their primary questions were about me, my background and what changes I planned to make as the new owner. I reassured everybody that my philosophy was, if it ain’t broke, don’t fix it."

In fact, the sale of a business can be a good thing for all involved. A new owner may bring increased financial strength and greater dedication to building the business. Many buyers are more concerned with keeping employees than with eliminating them.

“Individuals who are familiar with the business-transfer process know that a new owner usually wants to keep the employees,” Ms. Stabler said. “The employees are one of the valuable assets that a new owner is counting on to keep the business running without a hitch. The employees, on the other hand, are in new territory — never having had experience with a business being sold out from under their feet. The employees’ perception can be one of uncertainty, or perhaps even betrayal.”

An alternative approach is to inform employees about a pending sale to allay their fears up front and avoid that sense of betrayal. Many sellers have a fierce sense of obligation to employees, especially to those who helped build the business.

I encountered one such seller who prepared a two-page letter for employees, thanking them for their dedication to the company and explaining that he no longer had the skills required to manage the business at its current size. He went on to explain that the continued growth and success of the business were dependent on a new owner stepping in, and that person would more than likely need to be in hiring — not firing — mode.

This second approach may be a way to avoid employee disappointment at not being trusted with information and to prevent the rumor mill from starting and becoming destructive to the business. It also recognizes that it can be impossible to keep the decision to sell from at least a few employees, particularly a bookkeeper or manager who may need to pull together financial information or other key documentation requested by a buyer.

Sooner or later, you will have to tell employees about the sale of your business. Whether it’s before or after the sale may come down to a combination of factors, including the type of business you own, the type of buyer you expect to find and your relationship with employees.


Here's the link to the full article.
Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Arkansas. Article written for The New York Times Company, NYTimes.com 620 Eighth Avenue New York, NY 10018.

Recasting Financial Statements When Selling A Business

When selling a business, the right way to present financial data is through recast financial statements. This will maximize the perceived value of your business.

Financial statements and tax returns for most privately-held businesses are prepared for tax purposes, not for business sale purposes. The objective of business owners and their financial advisors is to use all available accepted accounting methods to minimize taxable net income. This is effective for minimizing taxes, but may paint an incomplete picture for business valuation purposes. The goal when presenting financial information to a potential buyer is to maximize net income by clearly outlining the owner benefits, net income, and cash flow of the business.

Since bottom-line earnings is the primary factor that influences business value, maximizing the presentation of the financials is essential. Prospective buyers must be able to appreciate the full benefit of owning the business and be able to understand its actual income-generating ability. By recasting or adjusting the financial statements, the "real" financial performance of the business can be demonstrated.

A "recast financial statement" is a reconstructed representation of the earnings that a buyer would be able to enjoy from the business. It removes not only one-time or extraordinary income and expenses, but also adjusts for accounting anomalies, identifies owner compensation, owner "perks"or fringe benefits, non-cash expenses such as depreciation and amortization, interest, investments in future growth such as new facilities or expansion, and other items that are common in privately-held businesses.

The following are some of the most common recasting adjustments:

Owner Salaries

The amount of salary or bonus that an owner takes is completely discretionary. Some owners take little or no salary, while others may take more extravagant annual sums. In recasting financial statements, the salary of one owner is added back. If there are other owners receiving compensation and would need to be replaced under new ownership, those salaries would be replaced with “normalized” compensation. Normalized compensation is best defined as what would have to paid to someone to replace the owner's operational role in the business. Compensation for family members not actively working in the business but being paid through the business should also be added back. It is important to differentiate between salary for working in the business and salary just for owning the business.

Owner "Perks" or Fringe Benefits

In addition to cash compensation, most business owners receive numerous "perks" or benefits that are not required for the daily operation of the business. For example, while a vehicle may be required, a high performance sports car or luxury automobile is not normally necessary. There may also be discretionary expenses reimbursed to the owner that may not be applicable to a new owner and do not affect the profit performance of the company. These include items such as the following:

• insurance expenses
• travel and entertainment expenses
• family employees
• a large life insurance contract or pension plan
• personal-use assets such as a Hawaii condo or a sailboat
• income or expenses that may be transacted between more than one company that is owned by the same seller

In some instances, nothing short of going through the income statement line by line to gain an understanding of what lies behind the numbers will do.

Non-Cash Expenses

The most common non-cash expense is depreciation and is added back to net income.

Interest

A business is typically transferred free and clear of debt and interest-bearing liabilities. Accordingly, interest expense is added back since it will not be incurred by a new owner.

Non-Recurring Income or Expenses

Adding back one-time, extraordinary, or non-operating income or expenses is meant to remove items that appear in the financial statements but are either unlikely to be repeated in the future or are unrelated to the company’s business operations and will not be incurred by a new owner. Common examples include things such as the following:

• unusual legal expenses
• moving expenses incurred during a company relocation
• expenses related to expiring equipment leases
• receipt of a one-time contract payment from a new client
• payment of a lump sum bonus to an employee
• expenditures made for a new facility or expanded operations
• a gain on the sale of an asset
• receipt of insurance proceeds (from a hurricane, for example).

If you are a seller of a business trying to establish value, you will want as many dollars as possible added-back to your financial statement to improve business profitability and thus its value. Buyers will question all add-backs. Therefore, adjustments should be provable. If you cannot prove it, the buyer will not want to give you credit for it. Sellers want to maximize value and buyers want to minimize it. This tug-of-war is usually part of the negotiation process in buying and selling a business.

Texas Comptroller's Economic Outlook

Updated April 10, 2010

The Texas economy, the world’s 12th-largest, continues to fare better than those of many other states. But Texas felt the effects of the worldwide recession during 2009.

According to the National Bureau of Economic Research, the U.S. economy peaked in December 2007 and entered recession. The Texas economy continued to grow through most of 2008, with employment peaking in August that year, then Texas joined the nation in losing jobs. During 2009, Texas’ gross state product (GSP) declined more slowly than the U.S. economy (-1.7 percent versus -2.5 percent.)

Despite the state’s economy contracting in 2009, Texas’ relative economic advantage should continue as the state and U.S. economies turn around and expand again in 2010. Although job growth will continue to lag the renewed expansion of economic production, the Comptroller’s office estimates that the Texas’ GSP will grow by 2.6 percent during calendar 2010. The U.S. economy should grow at a slower rate of 2.0 percent during the year.

Jobs

• Texas’ February 2010 unemployment rate was 8.2 percent, unchanged from January. The February U.S. rate was 9.7 percent, unchanged from January.
• Total nonfarm employment in Texas decreased by 13,000 jobs in February. Texas has gained nearly 6,700 jobs in the past five months, while the nation lost 331,000 over the same five-month period.
• The U.S. lost 3.3 million jobs from February 2009 to February 2010.
• The Texas unemployment rate has been at or below the national rate for 36 consecutive months.

Housing

• Thus far, Texas has weathered the national real estate crunch without significant damage to property values but sales and construction activity have slowed. Despite its continuing resiliency, Texas is not immune from the national real estate crunch.
• 5,722 building permits for single-family homes were issued in February 2010, 1,514 permits more than during February 2009. This is the fourth consecutive month that permits have been higher than the same month in the previous year. The total number of permits in the 12 months ending in February 2010 was 66,228, a decrease of 4 percent from the previous 12-month period.
• Multi-family building permits are down, from 1,883 units in February 2009 to 390 units in February 2010. The number of permits issued in the 12 months ending in February 2010 was 13,355 a decrease of 69 percent from the period one year earlier.
• Sales of existing single-family homes increased by 28 percent in February 2010 over the previous month, to a total of 13,064. However, compared to February 2009, home sales declined 2.1 percent.
• In Texas, the median price for existing single-family homes increased by 2.1 percent from February 2009 to February 2010.
• The Texas foreclosure rate has remained largely stable for the past three years. Texas experienced 12,225 foreclosure filings in January 2010.
• In January 2010, the Texas foreclosure rate was one in every 785 mortgages. This was substantially better than Nevada’s one in 95, Arizona’s one in 129 and both Florida and California at one in 187.

Consumer Confidence Index

• U.S. consumer confidence rose by 6 points from February to March 2010, and still remains pessimistic at a level of 52.5, almost 48 percent below its 1985 baseline level. Even so, nationwide consumer confidence has rebounded from its recent low in February 2009, and now stands 95.2 percent higher than its level a year ago.
• Texas and surrounding states fared better than the rest of the nation, with the Texas regional index down 25 percent from its 1985 baseline. Texas’ regional index rose from 74.1 in February to 75.3 in March, and is now up 62 percent from its level a year ago.

Oil and Natural Gas

• The all-time high crude oil closing price was $145.29 on July 3, 2008, which preceded a 7-month decline to a low point of $33.98 in February 2009.
• Crude oil futures closed at $85.39 per barrel on April 8, 2010, more than double the level of one year ago.
• In fiscal 2008, production tax collections for natural gas were up 42 percent over fiscal 2007. Tax collections for oil were up 72 percent.
• By contrast, in fiscal 2009 production tax collections for natural gas were down 48 percent over fiscal 2008. Tax collections for oil were down 39 percent.
• Natural gas and oil production tax collections combined are significantly lower for the first seven months of fiscal year 2010 compared to the same period in fiscal year 2009.

Taxes

• Texas sales tax receipts for March 2010 were 7.8 percent lower than for March 2009.
• For fiscal 2009, state sales tax receipts are down 2.7 percent from fiscal 2008.
• Motor vehicle sales tax collections for fiscal 2009 were $2.569 billion, down 22.5 percent over fiscal 2008 amount.
• The nationwide core transaction price for a new car or truck during the first 15 days of March 2010 rose 4.18 percent to $26,027 from $24,983 in March 2009.
• For the first 15 days of March 2010, total national industry auto sales were 563,624 units, up 16.0 percent compared to first 15 days of March 2009.
• Nationally, the lease share of new vehicle purchases increased to 24.8 percent of new vehicle purchases; that's 16.4 percent higher than in March 2009.

Stimulus Package

• In Texas, an estimated $18 billion in federal stimulus money is flowing to state and local governments. The Comptroller’s office is tracking the $14.3 billion that comes through the state Treasury. The Comptroller’s analysis is ongoing. For the latest information, visit our ARRA Web site, A Texas Eye on the Dollars.

Cap and Trade

• Efforts to reduce greenhouse gas emissions could negatively impact the Texas economy. The state could see 173,000 to 425,000 fewer jobs than expected in 2030 as a result of increased energy prices from the cap and trade portion of the recently proposed bill. The resulting decline in gross state product is estimated to be between $25 billion and $58 billion.
• The Comptroller’s office is continuing to analyze potential implications and assess how green jobs and energy efficiency programs in the proposals could offset negative impacts. For the latest information, visit our Cap and Trade Web page.

Ten Value Drivers That Increase Sale Price of a Business

Business Value -- What Drives It?

A valuation is not about determining what a company is worth in the current owner's hands, it is about evaluating the company's transferable value. The purpose of this article is to help you evaluate your company through the eyes of a buyer. From that perspective we will ask you to focus on ten value drivers. Each driver is a characteristic of a business that either reduces the risk associated with owning the business or enhances the prospect that the business will grow significantly in the future. Simply put, the better your performance in these areas, the greater the selling price of your business. The likely result is that you will sell at the higher range of the multiples normally associated with your industry.

Value Driver #1: Stable and Predictable Cash Flow

Think of revenue and the bottom line cash flow of your business as the first introduction to a buyer. Revenue and cash flow is the number one attraction. A business with an established pattern of growth will bring a premium price when it is sold. The value associated with acquiring the available cash flow is directly related to risk. The lower the risk of losing that cash flow in a transfer of ownership, the higher the price will be to acquire it. If recurring revenues comprise a material portion of a company’s overall revenues, the recurring revenue stream can be valued at a higher level than the non-recurring revenues. Examples of recurring revenues are maintenance contracts, monthly support agreements, annual license agreements, warranties, subscriptions, or other revenue streams that are contractual and repeating in nature. Buyers are willing to pay the highest amount when their perception is that cash flow is predictable and will increase into the future.

Value Driver #2: Reliable Financial Information

Reliable financial records are not only a critical element of business management but also support the claim that a company is consistently profitable. In the purchase of a business, the buyer will perform some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past financial performance, there is no deal, or at best a reduced value for the company. If a buyer faces a seller of a business who asserts that the company has been making $1 million per year for the past three years and is projected to make at least that much in the future, the seller will be required to prove it. If the seller then produces past financial statements that are incorrect, insupportable, or incomplete, the buyer would most likely be gone. The lack of financial integrity is one of the most common hurdles encountered during the sale process.

Value Driver #3: Customer Diversity

A broad customer base in which no single client accounts for more than 10 percent of total sales helps to insulate a company from the loss of any single customer. It reduces the risk of serious cash flow issues if one or more customers do not stay under new ownership.

Value Driver #4: Human Capital / Quality of Workforce

Keep your talent, they are your business. Buyers look for situations where management and / or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge, is also considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. If a company’s success is reliant on capable, well-trained employees – not the owner – it means the business will not be negatively impacted under new ownership. This reduction of risk will pay off with increased purchase price.

Value Driver #5: Growth Potential

When an owner can describe realistic opportunities for growth that specifically illustrate the reasons why cash flow and the business itself will grow after it is acquired, a higher value can be achieved. A documented growth plan demonstrates the viability of the company’s future and may identify opportunities that a buyer had not considered. Some areas to consider in developing a growth plan:

• Is your business in a growth industry?
• Are there additional markets that a new owner should pursue?
• What additional products could be delivered to existing customers?
• Where are the best profit margins realized and can they be expanded?
• Can your technology be licensed?
• Will demand for your product or service increase as population grows?
• How will enhanced marketing campaigns and sales efforts affect growth?
• Are there opportunities to grow through acquisition?
• Can growth be achieved by expanding territory or manufacturing capacity?

Value Driver #6: Operating Systems and Procedures

The establishment and documentation of standard business procedures and systems demonstrate that the business can be maintained profitably after the sale. Business systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, as well as the methods used to track how customers are identified and how products or services are delivered. The following are examples of business systems that enhance business value.

• Personnel recruitment, training and retention
• Human resource management (an employee manual)
• New customer identification, solicitation, and acquisition
• Product or service development and improvement
• Inventory and fixed asset control
• Product or service quality control
• Customer, vendor and employee communication
• Selection and maintenance of vendor relationships
• Business performance reports for management

Value Driver #7: Facility and Equipment Condition

The business facilities and equipment should be well maintained to realize maximum value. A buyer will not pay a premium, and may very well discount an offer, for a disorganized warehouse, office or other building. Seeing disorganized or poorly maintained facilities and equipment may cause the buyer to perceive that other aspects or the business may be similarly disorganized (employee records, financial records, compliance records, etc.). Owners should ensure that facilities and equipment are organized and maintained in peak condition before beginning the sale process. Buyers will appreciate that their investment will not include major repairs and that all equipment and inventory will be easy to locate and identify. Lastly, are the facilities large enough and machinery sufficient to accommodate some level of modest sales growth? A buyer does not want to have to look for additional space or immediately invest in new equipment shortly after closing.

Value Driver #8: Goodwill

This value driver involves stability and consistency. Name recognition, customer awareness, history, ongoing operations, and reputation are all part of business goodwill and influence value. Even if the company does not have many hard assets, relationships are key. The fact that customers have been with the company for a period of time does matter. Brand recognition, service or product reliability, and high customer satisfaction are distinguishing factors that add value. This driver of goodwill should not be overlooked in a valuation because it is helps mitigate perceived risk.

Value Driver #9: Barriers to Competitive Entry

Features that give a business an advantage over its competitors, strengthen its strategic position, or that can be leveraged for future gain boost value and lessen perceived risk. Buyers will pay a premium for a niche that has barriers to competitive entry. One way to describe this Barrier Value Driver is to use Warren Buffet's term, "Business Moat." Buffet compares a castle's moat to the protection that a business needs to encroaching competitors. For instance, the wider the moat, the more easily a castle could be defended. A narrow moat did not offer much protection and allowed the castle to be breached. To Buffett, the castle is the business and the moat is the barrier that protects the business' competitive edge. The following are example barriers that widen the moat and hinder competitors from breaching the company’s castle.

• Copyrights
• Trademarks
• Patents
• Trade Secrets
• Developed Processes
• Proprietary Designs
• Proprietary Know-How
• Brand or Trade Names
• Engineering Drawings
• Customized Software Programs
• Step-by-Step Training Systems
• Customized or Proprietary Databases
• Published Articles or Industry Press
• Hard-to-get licenses, zoning, permits, or regulatory approvals
• Contracts with difficult-to-penetrate entities (government, for example)

Value Driver #10: Product Diversity

A narrow product set increases risk and drives down value. Diversity of revenue sources lowers the inherent risk of the business. Therefore, businesses with a healthy product mix, good gross profit diversification, or with products or services sold into multiple industries, receive a higher perceived value from prospective buyers.

Also see:
Key Factors That Add Value to a Small Business
Factors That Negatively Impact Business Value
Value Driver #2: Reliable Financial Data
Value Driver #4: Human Capital and Quality of Workforce

Tip #16 - What About That Big Customer

Many companies have a few large customers that dominate their overall sales. After all, nobody wants to turn down business! But when it comes time to sell the company, this becomes a huge problem. Most buyers won't look at a business whose revenues could drop dramatically from the possible loss of one or more of those customers. Business owners have to find a way to diversify their customer base before they ever decide to sell their business.

A Strong Online Presence Adds Value When Selling a Business

In today's business climate a strong online presence is vital. Prospective buyers of your business are googling you and your competitors to determine your standing.

Today's buyers of businesses are much more sophisticated than they used to be. One of the very first places a potential buyer will go to be introduced to and learn about your business is the Internet. What will the potential buyer find?

Is your website getting top rankings in search engine results? Are you actively using Internet marketing to keep your clients and customers engaged?

Dominating the major search engines for your profession or industry is an important asset when it comes time to sell the business. It takes time, perseverance, and dollars to get there and is viewed favorably by prospective acquirers of the business. Keeping in tune with modern technology is key to staying relevant and competitive.

If today's buyers, and your customers for that matter, cannot find you on the web, your business is loosing out. Lack of an Internet presence makes your business look old and antiquated. If you are thinking that a buyer of your business can implement a site, you are right. But it is going to cost you dearly. The buyer will "discount" any proposed offer they might make by their "assumed" cost of setting up a web presence and getting good rankings in the search engines.

The value of your business is based on "perceived value" in the eyes of the business buyer. Having a good presence on the Internet adds to the favorable perceptions of potential buyers.

Valuation - The First Step Towards Selling Your Business

"I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business. However, my children aren't involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process."

Since most business owners only sell a company once in their lifetime, it is quite understandable when an owner makes such an inquiry. While the thought of selling their company may seem overwhelming to many business owners, if thought in terms of small steps instead of giant leaps, it is really quite simple.

What is the initial question that comes to mind when you think about selling your business? One might guess that you wonder how much someone would pay for it.

Well, your first thought is the very first step you should take towards the ultimate goal of selling your business. Get a valuation to get an objective price range that you could expect to receive in the marketplace. It's that simple.

Typically, the documents needed to determine the preliminary most probable price range of a company are tax returns and financials for the most recent three to five years, current year-to-date financials, and an equipment list. Again, as you can readily see, the required items for a valuation is not complicated. Several years of financials helps paint a historical picture and current trend of the company. Upward trends are the desired scenario.

Since profits on financial statements and tax returns of privately-held businesses are usually minimized in order to reduce income taxes, the financial statements are restated in a valuation to demonstrate the actual income-generating ability and financial performance of the business.

As part of that process, a professional business broker / intermediary will ask easily-answered questions that will help determine which expenses are discretionary in nature or are not strictly necessary. There will be other expenses that may be non-business related benefits going to the owner and family members, or one-time, non-recurring or unusual expenses that would not be borne by a new owner of the business. These expenses will be part of the true discretionary cash flow that would be enjoyed by a new owner.

This valuation should clearly outline the details that buyer prospects and their advisors would need and can understand. It should be assessed on the same premises lending institutions use for the purpose of determining if the price makes sense.

Formalized business valuations or appraisals of a business in a self-contained written report are sometimes required. This type of valuation is known as an Appraisal Report. If a valuation has the potential to go to court, or if the report needs to be reviewed by others, such as the IRS for tax implications, this type of report explains in full detail how the value was derived. .

Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company's fitness for the marketplace. A valuation is an unbiased examination of your company's marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.

Other considerations in determining the business value will include competition, regional demand factors, proprietary products or processes, what type of buyer the company would attract, favorable lease terms, advantageous supplier relationships, management's desire to exit or stay with the business, concentration of customers, and many other relevant factors.

Your company's history of earnings represents its financial health and can establish the baseline for the monetary worth of the enterprise. The single most important factor for valuation is how much money the business makes. This figure should be maximized and be shown to be maintainable under new ownership in order to get the best price possible when the time is right. Buyers pay for the past, but buy for the future.

Most owners never take the necessary steps to plan their exit and end up selling because of unexpected events or crisis-driven reasons rather than on their own terms. According to members of the International Business Broker Association, 75% of business owners do not know the market value of their company. This is too large a number considering how painless a task it is to achieve.

The sooner you take the first step in determining the value of your business, the more informed and comfortable you will be in planning your next step.....whether it be deciding the time is right to sell now, or making improvements for a future sale.

Understanding the value and what drives the value of your business is the next stride in the small-step approach.

The Property Lease is a Factor When Selling a Business

With rent typically being the second largest expense after salaries for small businesses, the property lease becomes a very important document if you are thinking about selling your business.

When was the last time you reviewed the lease on your business premises? When you signed it years ago? The following aspects of your lease should be reviewed before selling:

• Is the lease transferable to a new owner?
• Is there a transfer fee involved?
• What does the Landlord require to approve the new owner on the lease?
• Is there an option to renew the lease after the current term?
• When does the Landlord have to be notified to renew?

A lease is a contract that represents the right to operate a business from rented premises. It is a legally binding contract between the landlord and the tenant. It sets out the terms, conditions and rights as well as the obligations of both parties in relation to the occupancy.

Before selling a business make sure the lease can be transferred or renegotiated. You want to get this part of the sale process done relatively early. Landlords don't like surprises. A deal can fall apart quickly if a Landlord is informed at the last minute that a new owner is about to take over the current business. It is better to work with the Landlord to iron out the details before you get too far into the deal. Determine the Landlord's willingness of renewing or transferring the lease to a new owner and what qualifications of such new owner are expected.

Also of importance is how much time is remaining on the lease and whether there are any extension periods. The purchaser would want to evaluate the lease to determine what impact it might have on the future viability of the business.

The proper time to involve the Landlord would be when a contract to purchase the business is in place and is likely to work out. But the examination of your lease should take place prior to putting the business on the market.

The Initial Buyer Seller Meeting in the Business Sale Process

Most people will purchase or sell only one business in a lifetime. Therefore, as business brokers, a large part of what we do is educate buyers and sellers about the intricacies of the process. People rely on us to help them understand the steps involved in buying or selling a business. They understand that the better informed and prepared they are the more likely they are to achieve their goal. Therefore, in the beginning stages, we're the ones doing most of the talking.

When it comes time for the buyer seller meeting, however, our role is to make the introductions, be an observer, and be quiet for the most part. We may interject questions or comments when appropriate to guide the flow of information. This meeting is an important event for the buyer and seller. It is their time to understand each other's objectives, establish a rapport, and size each other up.

An appointment for a buyer and seller to meet is usually made when a buyer is considering making an offer to purchase the business. The buyer would have already reviewed the business profile and financials, and asked preliminary questions that had been answered by the broker. It is common for business owners to require that all such meetings be during non operating hours to avoid premature disclosure to employees and customers.

This is the chance for the buyer to tour the facilities, to learn about the operations of the business, the employees, the growth opportunities, the financial aspects of running the business, and to get a feel for what it would be like to walk in the owner's shoes. However, this meeting is not the time to discuss the price and terms of the sale. The business broker is the intermediary and will be the liaison for the two parties on that subject.

From a buyer's perspective, purchasing a business is a huge financial risk – most likely the largest in their life. While they know they will have the right to perform all the due diligence they deem necessary, a healthy amount of trust is involved. The buyer must gain a sufficient comfort level about the seller, the business, and its sustainability under their ownership in order to take the proverbial leap of faith.

The seller, on the other hand, usually has their net worth tied up in the business. Typically, the seller has invested many years building and nurturing the business. Retirement may depend on successfully selling the business at a just price. In today's market, a seller note is usually required. Even if a buyer is well funded, a lender will often want a seller to carry a note in order to reduce their own liability and exposure. It is a huge financial risk for the seller – most likely the largest in their life – just as it is for the buyer. In order to realize full payment, the seller has to trust in the buyer's ability to manage and successfully run the business.

In our experience, the first meeting usually takes about two to three hours. First impressions will be made during this short period. Each will be making their respective judgement of the other and pondering the possibility of a deal being formulated. This is usually the time when the buyer decides if this is the business they wish to pursue. If all went well, an offer to purchase is tendered. If the seller accepts, the due diligence process begins.

Core Principles That Increase Business Value

Small business owners often run their companies and treat their employees like a family — which has cultural meaning. A successful small business 'family' has clear core principles and goals that directly impact growth. When we talk of a strong "corporate culture," that’s what we’re talking about, shared values, shared goals, and a single vision directed from the top.

If the culture fosters revenue generation that is repeatable under new ownership, the business is more valuable and will bring a higher price when it is time to sell.

According to a new Bain & Company 10-year study of more than 2,000 companies, there are five key principles that the most successful companies had in common. These principles help companies create a repeatable formula to stay focused on what really makes them profitable:

• Principle #1—having a well-defined core to your business, and understanding how you have made it work for you
• Principle #2—having up to 10 non-negotiable principles or beliefs about the business
• Principle #3—having a strong bias to distributed leadership, which means having fewer layers of management and a larger percentage of decisions being taken on the front line
• Principle #4—having a powerful, closed feedback loop system of information coming in from customers. This keeps the company attuned to the outside world
• Principle #5—having a small number of key operating measures - known and believed at all levels—keeps the organization on track