Effectively Utilizing Confidentiality Agreements

Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements.  A failure to adhere to this essential contract can lead to a myriad of problems.  These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere.  Needless to say, issues such as these can stand in the way of a sale successfully going through.  Maintaining confidentiality throughout the sales process is of paramount importance.

Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace.  There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.

By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process.  Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale. 

Today, these contracts have evolved and now cover an array of potential seller concerns.  A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.

Creating a solid confidentiality agreement is serious business and should not be rushed into.  They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential.  Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed. 

A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company.  Every business and every situation is different.  As a result, confidentiality agreements must be tailored to each business and each situation.

 When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality.  The last thing any business wants is for its confidential information to land in the hands of a key competitor.  Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.

Copyright: Business Brokerage Press, Inc.

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The Hidden Benefits of Planning Your Succession Strategy

Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance.  In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.

Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts.  At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy. 

In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families.  In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits.  In other words, it is about more than preparing to hand one’s business over to a new party.

Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business.  The fact is that selling a business is usually a layered process that can even take years to complete.  Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well.  Additionally, selling can be an emotional and stressful process which further complicates the entire matter. 

For most business owners, selling a business represents the single greatest financial move of their lives.  As such, it is often accompanied with significant stress and anxiety.  It is essential not to underestimate the emotional and psychological side of the sales equation.  Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself. 

A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling.  Developing a succession strategy is a way to think through such issues well in advance.

Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold.  As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business.  If you want to receive the optimal price for your business, then your business should be in tip-top shape.  This means diving into your books and records and getting everything in order.  Working with an accountant or an experienced business broker can be invaluable in this process.

Copyright: Business Brokerage Press, Inc.

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Great Tips for Helping You Find a Buyer for Your Business

No one keeps a business forever.  At some point, you’ll either want to sell your business or have to retire.  When the time comes to sell, it is important to streamline the process, experience as little stress as possible and also receive top dollar.  In Alejandro Cremades’s recent Forbes magazine article, “How to Find a Buyer for Your Business,” Cremades explores the most important steps business owners should take when looking to sell. 

Like so many things in life, finding a buyer for your business is about preparation.  As Cremades notes, you should think about selling your business on the day you found your company.  Creating a business but having no exit strategy is simply not a good idea, and it’s certainly not a safe strategy either.  Instead you should “build and plan to be acquired.” 

For Cremades, it is vital to decide in the beginning if your preferred exit strategy is to be acquired.  If you know from the beginning that you wish to be acquired, then you should build your business accordingly from day one.  That means it’s essential to understand your market and know what prospective buyers would be looking for.  

According to the Leadership Development Program, Kauffman Fellows, acquirers buy businesses for a range of reasons including: 

  • Driving their own growth
  • Expanding their market
  • Accelerating time to market 
  • Consolidating the market

Some of the more potentially interesting reasons that acquirers buy a business include to reinvent their own business and even to respond to a disruption.  At the end of the day, there is no one monolithic reason why a given party decides to buy a business.  But there are indeed some general factors that acquirers are known to commonly seek out.

Additionally, Cremades believes that for those serious about finding a buyer, it is critical to make connections.  Or as Cremades states, “strategic acquisitions are about who you know, and who knows you.  Start making those connections early.”  He also points out that buyers are not always who one expects in the beginning of the process.  Keeping this fact in mind, it is important to stay open and always look to build solid relationships and keep those relationships up to date regarding your status.  Getting your company acquired won’t happen overnight.  Instead, it is a process that can take years.  Therefore, networking years in advance is a must.

Like many seasoned business professionals, Cremades realizes how important it is to work with a business broker.  If you have failed to network properly over the years, then a broker is an amazingly valuable ally.  They are about more than offering sage advice, as business brokers can also make potentially invaluable introductions and help you navigate every stage of the acquisition process.

Copyright: Business Brokerage Press, Inc.

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The Variety of Variables Involved in Selling Your Business

Selling a business is more than a big decision, as it is also quite complex.  Finding the right buyer for a business is at the heart of the matter.  In the recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons outlines that selling a business is a multifaceted process with a lot of moving parts.

A central variable for those looking to sell a business is to have a coherent and well thought out exit strategy in place.  She points out that at the top of your to-do list should be selling your business the right way, and that means having a great exit strategy in place.  In fact, many experts feel that you should have an exit strategy in place even when you first open your business.

Another key variable to keep in mind is that, according to Gibbons, only an estimated 20% to 30% of businesses on the market actually find buyers.  This important fact means that business owners, who usually have a large percentage of their wealth tied up in their businesses, are vulnerable if they can’t sell.  It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.

This article points to author Michael Lefkowitz’s book “Where’s the Exit.”  This book outlines what business owners need to do to get their business ready for their exit.  Updating your books, ensuring that a good team is in place and ready to go and taking steps to “polish the appeal of your brand” are some of the important topics covered. 

Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.”  Mentioned are three key variables that must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.

In the end, working with a business broker is the fastest and easiest way to check off all three boxes.  An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers.  Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business. 

In her article, Gibbons supports the fact that working with a business broker is a smart move.  Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.

Copyright: Business Brokerage Press, Inc.

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Dealing with Inexperience Can Ruin the Deal

The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire.  He interviewed a highly recommended intermediary and was impressed.  However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money.  He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew.  Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal.  He had read a lot of case studies and was confident that he could “do the deal.”

Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement.  The nephew felt he could handle the financial details.  Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.

Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations.  There was no mention of Confidentiality Agreements.  Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets.  It would only be a matter of time before the word that the business was on the market would be out.

Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser.  Confidentiality didn’t seem to be an issue.  There was no screening process, no interview by the nephew.

Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum.  He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about.  This obviously impacted the numbers.  There were no projections, no ratios, etc.  This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest.  In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.

Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far.  Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.

Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together.  The owner decided to call most of the shots without any advice from an experienced deal-maker.  Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak.  The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .

The facts in the above story are true!

The moral of the story – Nephews are wonderful, but inexperience is fraught with danger.  When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals.  A professional intermediary is a necessity, as is an experienced transaction attorney.

Copyright: Business Brokerage Press, Inc.

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The Variables that Drive and Influence Business Valuations

If you’ve never bought or sold a business before, then the factors that drive and influence business valuations likely seem a bit murky.  In a recent Divestopedia article from Kevin Ramsier entitled, “A Closer Look at What Drives and Influences Business Valuations,” Ramsier takes a closer look at this important topic. 

Business brokers and M&A advisors play a key role in helping business owners understand why their business receives the valuation that it does.  No doubt, the final assessed value is based on a wide array of variables.  But with some effort, clarity is possible.

In his article, Ramsier points out that “value means different things to different buyers” and that the “perceived value depends on the circumstances, interpretation and the role that is played in a transition.”  It is important to remember that no two businesses are alike.  For that reason, what goes into a given valuation will vary, often greatly. 

Looking to EBITDA

Ramier points to several metrics including return on assets, return on equity and return on investment.  Another important valuable for companies with positive cash flow is a multiple of EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.”  EBITDA is widely used in determining value.  On the flip side of the coin, if the company in question has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.

Primary Drivers to Consider

Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation.  In total there are 25 different variables listed, which underscores the overall potential complexity of accurately determining valuation. 

In the Primary Drivers of Valuation list, Ramsier includes everything from the size of revenue and revenue stability to historical and projected EBITDA as well as potential growth and margin percentages.  Other variables, ones that could easily be overlooked, such as the local talent pool and people training are also listed as variables that should be considered.

Support for the Business Owner

The bottom line is that determining valuation is not a one-dimensional affair, but is instead a dynamic and complex process.  One of the single best moves any business owner can make is to reach out to an experienced business broker. Since business brokers are experts in determining valuation, owners working with brokers will know what to expect when the time comes to sell.

Copyright: Business Brokerage Press, Inc.

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7 Big Questions to Ask Yourself Before Moving Forward

The first step towards successfully selling a business is finding a qualified business broker to work with.  Sellers should also ask themselves an array of important questions.  A recent article, “7 Questions to Answer Before Selling Your Business,” published by Good Men Project, has a great overview of questions sellers should answer before moving forward.

Author Troy Lambert believes that at the top of the list is one very simple and powerful question, “Are you ready?”  For example, your financial reports should be ready to show.

The second question is, “What’s it worth?”  Determining what a business is worth means you’ll need a professional business valuation.  A great deal can go into evaluating your business and you need an expert to help you determine that value.

Third, Lambert believes that prospective sellers should ask themselves, “How’s the health of my industry?”  He emphasizes that honesty is key here for a variety of reasons.  If your industry is in a transition period, for example, then it might be better to wait until a better time to sell.

The fourth question on Lambert’s list is, “How long will it take?”  In short, you need to remember that selling a business can take a long time.  Successfully selling your business may even mean that you have to stay on and work with the new owner during a transition period.

The fifth key question is, “Who is my buyer?”  You don’t want to waste a lot of time with potential buyers who are simply not a good fit.  Finding the right buyer for your business helps to ensure that a deal will be finalized.

Sixth, Lambert wants sellers to think about how they will get paid.  Are you willing to finance part of the deal?  What about balloon payments over time?  Understanding, before you put your business on the market how you want to be paid and how flexible you can be in terms of payment is essential.

For most sellers, selling a business will stand as the largest financial decision of their lives.  With this realization comes more than a little pressure.

Considering the enormity of the decision, having good advice is simply a must.  A seasoned and experienced business broker understands what it takes to buy and sell a business.  Working with a business broker is an easy and efficient way to begin the process of selling your business.  Brokers know what it takes to successfully sell a business and can help you answer these questions and many more.

Copyright: Business Brokerage Press, Inc.

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The Historic Levels of Small Businesses Being Sold Drops Slightly

The number of small business transitions continues to be strong for the first quarter of 2019.  In fact, despite a small decline, small business transitions remain at historically high levels.

Looking at the Statistics

According to a recent BizBuySell article entitled, “Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers and Sellers,” now is still very much the time for both buying and selling a business.  It is true that the number of businesses sold in the first three months of 2019 dropped by 6.5% when compared to 2018.  Yet, it is important to keep in mind that the number of completed transactions remains very strong.  Likewise, inventory is increasing, with a 6.1% increase in listings in Q1 of 2019 when compared to the same period in 2018.

While the market is indeed strong, the BizBuySell article did note that some experts feel that there are signs that the market could become more challenging moving forward.  In part, this is due to the prospect that interest rates and financing could become increasingly challenging and more expensive.  These factors indicate that now is a smart time to both buy and sell a business.

Likewise, the financials of sold businesses in Q1 remains strong.  In fact, the median revenue of sold businesses jumped 6.5% when compared to Q1 2018.  Now, the median revenue stands at $540,000.  However, cash flow continues to hover around the $100,000 for five years in a row.

What are the Top Regions?

Currently, the top markets by closed small business transition are Miami-Fort Lauderdale-Miami Beach, Los Angeles-Long Beach-Santa Ana, New York-Northern New Jersey-Long Island, Tampa-St. Petersburg-Clearwater and Dallas-Fort Worth-Arlington.  The top markets by median sale price are Charlotte-Gastonia-Concord, San Francisco-Oakland-Fremont, Denver-Aurora and Dallas-Fort Worth-Arlington.

A Consistently Strong Market

Overall, the experts at BizBuySell believe that the market remains very strong and active.  They believe that the wave of retiring baby boomers looking to exit their businesses, historically low interest rates and the rise of the next generation of entrepreneurs are helping to fuel a great deal of activity.

According to Matt Coletta, Co-Founder and Managing Partner, M&A Business Advisors, “We are seeing more quality businesses coming on the market with good, clean books than I have seen in my 25+ years in the business.”

If you are considering buying or selling a business, then now is an excellent time to jump in.  Working with a business broker is a great way to ensure that you find the right business for you at the right price.

Copyright: Business Brokerage Press, Inc.

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IBBA and M&A Source Market Pulse Survey Report Predicts Major Changes

The IBBA and M&A Source Market Pulse Survey Report for the fourth quarter of 2018 has a range of interesting insights.  The survey’s purpose is to provide an “accurate understanding of market conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM-$50MM).  This national survey was designed as a tool for business owners and their advisors and has the support of both the Pepperdine Private Capital Markets Projects and the Pepperdine Graziadio Business School.

One of the most striking facts to leap out of the report is the fact that a full one-third of advisors fully expect the strong market to end this year.  Overall, advisors are not optimistic that the current climate will continue through 2020.  In fact, advisors are encouraging sellers to consider placing their businesses on the market now, while the market is still strong.  This is according to Craig Everett, PhD and Assistant Professor of Finance and Director of the Pepperdine Private Capital Markets Project.

One fact from the report that could be overlooked is that only a mere 8% of advisors expect the current climate to last for 48 months or more.  Additionally, only 9% believe that the current climate will last between 24 to 48 months.  Perhaps most striking of all is the fact that 60% of advisors feel that the current climate will end within the next two years.

Business owners who are considering selling should be advised that almost two-thirds of advisors now feel that there will be a significant shift in the next two years.  Considering that it can take a year or more to sell a business, business owners would be wise to consider this important fact.

The report sites Neal Isaacs, Owner of VR Business Brokers of the Triangle who states, “Deals are taking longer in due diligence as buyers work hard to validate their investment and make sure that what they’re buying is worth the premium price today’s sellers are commanding.”

So, is now the time to sell?  Many experts feel that it is possible to lose a sizable amount of value if one waits too long to sell.  Even just a few months can make a huge difference in terms of perceived value and the ultimate sales price.  Working with a proven business broker is a key way to ensure that you are selling at the right time and secure the best possible price.

Copyright: Business Brokerage Press, Inc.

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The Deal Is Almost Done — Or Is It?

The Letter of Intent has been signed by both buyer and seller and everything seems to be moving along just fine. It would seem that the deal is almost done. However, the due diligence process must now be completed. Due diligence is the process in which the buyer really decides to go forward with the deal, or, depending on what is discovered, to renegotiate the price – or even to withdraw from the deal. So, the deal may seem to be almost done, but it really isn’t – yet!

It is important that both sides to the transaction understand just what is going to take place in the due diligence process. The importance of the due diligence process cannot be underestimated. Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Prior to the due diligence process, buyers should assemble their experts to assist in this phase. These might include appraisers, accountants, lawyers, environmental experts, marketing personnel, etc. Many buyers fail to add an operational person familiar with the type of business under consideration. The legal and accounting side may be fine, but a good fix on the operations themselves is very important as a part of the due diligence process. After all, this is what the buyer is really buying.

Since the due diligence phase does involve both buyer and seller, here is a brief checklist of some of the main items for both parties to consider.

Industry Structure

Figure the percentage of sales by product line, review pricing policies, consider discount structure and product warranties; and if possible check against industry guidelines.

Human Resources

Review names, positions and responsibilities of the key management staff. Also, check the relationships, if appropriate, with labor, employee turnover, and incentive and bonus arrangements.

Marketing

Get a list of the major customers and arrive at a sales breakdown by region, and country, if exporting. Compare the company’s market share to the competition, if possible.

Operations

Review the current financial statements and compare to the budget. Check the incoming sales, analyze the backlog and the prospects for future sales.

Balance Sheet

Accounts receivables should be checked for aging, who’s paying and who isn’t, bad debt and the reserves. Inventory should be checked for work-in-process, finished goods along with turnover, non-usable inventory and the policy for returns and/or write-offs.

Environmental Issues

This is a new but quite complicated process. Ground contamination, ground water, lead paint and asbestos issues are all reasons for deals not closing, or at best not closing in a timely manner.

Manufacturing

This is where an operational expert can be invaluable. Does the facility work efficiently? How old and serviceable is the machinery and equipment? Is the technology still current? What is it really worth? Other areas, such as the manufacturing time by product, outsourcing in place, key suppliers – all of these should be checked.

Trademarks, Patents & Copyrights

Are these intangible assets transferable, and whose name are they in. If they are in an individual name – can they be transferred to the buyer? In today’s business world where intangible assets may be the backbone of the company, the deal is generally based on the satisfactory transfer of these assets.

Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.

Buying a Business – Some Key Consideration

  • What’s for sale? What’s not for sale? Is real estate included? Is some of the machinery and/or equipment leased?
  • Is there anything proprietary such as patents, copyrights or trademarks?
  • Are there any barriers of entry? Is it capital, labor, intellectual property, personal relationships, location – or what?
  • What is the company’s competitive advantage – special niche, great marketing, state-of-the-art manufacturing capability, well-known brands, etc.?
  • Are there any assets not generating income and can they be sold?
  • Are agreements in place with key employees and if not – why not?
  • How can the business grow?  Or, can it grow?
  • Is the business dependent on the owner? Is there any depth to the management team?
  • How is the financial reporting handled? Is it sufficient for the business? How does management utilize it?