Regardless of what we’re doing, if the outcome is important, and anyone else must agree, then negotiating becomes a critical matter. The following observations are a result of over a decade “doing deals” in the context of M&A. In each case the outcome was absolutely vital to the parties involved, and required their agreement. It has therefore been surprising how many participants on both sides of the table appeared to go into the process lacking an understanding of the fundamentals of negotiating to ensure a positive result. The lack of knowledge and experience is compounded by the high emotional content in many transactions, and becomes more critical due to the high risks involved in a bad result.
If there’s one over-riding mistake that we’ve seen people make which threatens their desired outcome it’s picking unnecessary fights. We advise our clients to create win-win: Always focus on how to get the outcome you desire, while avoiding win-lose. It’s not always possible, but more often than you’d think. With that uppermost in mind, the other suggestions make even more sense.
1. Be prepared—it’s much more than the Boy Scouts’ marching song! Do your homework. Set goals, and to the extent possible, define the boundaries of what you will deem “success.” Be prepared by knowing as much as possible about the overall situation, both from your point of view, and, equally important, from the vantage point of the people with whom you are negotiating. Of particular importance, at the outset and throughout the process, validate your own data, and the information provided by those with whom you are negotiating. Don’t make assumptions. They can be extremely costly.
A road map helps to guide the effort. Build an agenda for the negotiations. And continually be alert to any “hidden agendas” across the table.
2. HAB (hot air balloon) factor: Frequently leave the immediate scene and look down upon the situation from 10,000 feet. From that height you will see the total picture, be able to make a realistic assessment of progress, and, most importantly, avoid becoming sidetracked down the wrong alleys, blind alleys, or spending time on picayune details which really are not central to your goals.
3. Walk in the other person’s moccasins: Project your thinking to imagine you are across the table from you. Attitudes and priorities will likely be different from there, and that awareness may prompt you to adopt a different strategy. In any event, as a result, you will probably be able to advance your cause much more effectively when you are able to predict response, rather than being blind-sided by it.
4.Leave your EGO at home: Being more right and more smart is rarely productive. Remember it’s the outcome that’s important, not your need for self-importance or superiority. Assume the people you are negotiating with are every bit as smart as you are. ( It’s hard to find stupid people to negotiate with.) Be mindful of the need for “face”. (It’s not just a Japanese concept.)
5. Don’t sweat the little things: In negotiating it’s usually referred to as “nickle and diming”, even when it involves non-monetary matters. Being adamant about the less important things does at least two things-neither of which is desirable. It creates a frustrating and negative environment, and it results in a “you owe me” mind-set across the table. When this exists, it’s harder to get the outcome you desire on the really important factors.
6. Don’t start from outside the box: Some people picture all negotiated agreements as ending up “in the middle”. And therefore to alter where the middle gets defined, they start with an extremely exaggerated position. In my experience, this kind of posturing is seen for exactly what it is, and as a result it doesn’t work. In fact it often backfires when one party is deemed to be “posturing”, advancing unreasonable demands. Such behaviour creates bad faith, which is the stuff that destroys productive negotiations.
7. Hang tough……selectively: In every negotiation there are a few critical matters which are central to the outcome you want. (They become very clear when you employ the HAB factor.) Be prepared to trade off other items to get your way on these. Be prepared to redefine your approach, and even redefine the item to accomplish what you want. Put your creative juices to work to find a way to create a win-win around these items. And then hang tough.
8. Differentiate between needs and wants-your and theirs: Unless you’re the only game in town, you can’t negotiate away things the other side needs. You’ll only frustrate the process-and yourself by trying. The most probable outcome is a break-off in negotiations. Similarly you can’t give on those items which are must-haves in the context of your goals. Wants on the other hand are dispensable. One confuses the two at their peril.
9. Drama is a dangerous negotiating tool: We’ve all heard stories about one party with their hand on the door, leaving the negotiating room, only to be called back by the other party—capitulating. Unfortunately we don’t hear about the number of times that the bluff is called, and they’re forced to keep on walking. A temper tantrum is a similar high risk ploy. Treat the other side with the respect you appreciate. If you want to act, join a theatre group. If you want to negotiate for positive results, behave like a responsible adult.
With the above in mind, in most cases you can get what you need in even the toughest negotiations… and you may learn to enjoy it.
This article was written by John Woodcock
As I write here about business plan outlines, please remember that your plan should be only as big as what you need to run your business. While everybody should have planning to help run a business, not everyone needs to develop a complete formal business plan suitable for submitting to a potential investor, or bank, or venture contest. So don’t include outline points just because they are on a big list somewhere, or on this list, unless you’re developing a standard business plan that you’ll be showing to somebody else who expects a standard business plan.
And in that case, if you do need a standard plan, then there are predictable contents of a standard business plan. For example, a business plan normally starts with an Executive Summary, which should be concise and interesting. People almost always expect to see sections covering the Company, the Market, the Product, the Management Team, Strategy, Implementation and Financial Analysis.
If you have the main components, the order doesn’t matter that much, but here’s the order I suggest.
1. Executive Summary: Write this last. It’s just a page or two of highlights.
2. Company Description: Legal establishment, history, start-up plans, etc.
3. Product or Service: Describe what you’re selling. Focus on customer benefits.
4. Market Analysis: You need to know your market, customer needs, where they are, how to reach them, etc.
5. Strategy and Implementation: Be specific. Include management responsibilities with dates and budgets. Make sure you can track results.
6. Web Plan Summary: For e-commerce, include discussion of website, development costs, operations, sales and marketing strategies.
7. Management Team: Describe the organization and the key management team members.
8. Financial Analysis: Make sure to include at the very least your projected Profit and Loss and Cash Flow tables.
I don’t recommend developing the plan in the same order you present it as a finished document. For example, although the Executive Summary obviously comes as the first section of a business plan, I recommend writing it after everything else is done. It will appear first, but you write it last.
Standard Tables and Charts
There are also some business tables and charts that are normally expected in a standard business plan. Cash flow is the single most important numerical analysis in a plan, and should never be missing. Most plans will also have Sales Forecast and Profit and Loss statements. I believe they should also have separate Personnel listings, projected Balance sheet, projected Business Ratios, and Market Analysis tables. I also believe that every plan should include bar charts and pie charts to illustrate the numbers.
Expanded Plan Outline
1.0 Executive Summary
1.1 Objectives
1.2 Mission
1.3 Keys to Success
2.0 Company Summary
2.1 Company Ownership
2.2 Company History (for ongoing companies) or
Start-up Plan (for new companies)
2.3 Company Locations and Facilities
3.0 Products and Services
3.1 Product and Service Description
3.2 Competitive Comparison
3.3 Sales Literature
3.4 Sourcing and Fulfillment
3.5 Technology
3.6 Future Products and Services
4.0 Market Analysis Summary
4.1 Market Segmentation
4.2 Target Market Segment Strategy
4.2.1 Market Needs
4.2.2 Market Trends
4.2.3 Market Growth
4.3 Industry Analysis
4.3.1 Industry Participants
4.3.2 Distribution Patterns
4.3.3 Competition and Buying Patterns
4.3.4 Main Competitors
5.0 Strategy and Implementation Summary
5.1 Strategy Pyramids
5.2 Value Proposition
5.3 Competitive Edge
5.4 Marketing Strategy
5.4.1 Positioning Statements
5.4.2 Pricing Strategy
5.4.3 Promotion Strategy
5.4.4 Distribution Patterns
5.4.5 Marketing Programs
5.5 Sales Strategy
5.5.1 Sales Forecast
5.5.2 Sales Programs
5.6 Strategic Alliances
5.7 Milestones
6.0 Web Plan Summary
6.1 Website Marketing Strategy
6.2 Development Requirements
7.0 Management Summary
7.1 Organizational Structure
7.2 Management Team
7.3 Management Team Gaps
7.4 Personnel Plan
8.0 Financial Plan
8.1 Important Assumptions
8.2 Key Financial Indicators
8.3 Break-even Analysis
8.4 Projected Profit and Loss
8.5 Projected Cash Flow
8.6 Projected Balance Sheet
8.7 Business Ratios
8.8 Long-term Plan
This article was written by Tim Berry of Bplans.com
Consider this scenario.
A wife and husband are in the starting stages of negotiating a price for a florist shop that is being sold by an elderly lady who is selling, “because her children want her to retire.” Since her husband died five years ago, the business has been going downhill, and for the past three years it has been “underperforming.”
However, as they try to get financial information about the current business health, she is pushing to use the numbers that are over three years old to value the business. Is this a recipe for a fair valuation?
First, remember, it is her business and if she and her late husband ran the business for many years, she may indeed have a good feel for the value of the business and its potential for growth. Conversely, her valuation may be heavily weighted by her memories and emotional attachment to the business. This ‘value’ is very real to her, though maybe not to a potential buyer.
Next, be aware that “fair” really is an ambiguous word. Consider that “fair” will be whatever all parties finally agree on at the end of negotiations. If the buyer does not like the number that the seller is asking, they have the right to pass.
If the buyer can build a case that three years ago the business was doing $100K and over the last three years it has averaged $60K, they can point out that this is a trend that may likely continue.
The seller may say that for reason-1 and circumstance-2 revenue has slumped but it would bounce back with the potential buyers (younger, energetic, enthusiastic) at the helm.
One way to address both these issues would be to put a future performance clause in the purchase contract:
- the buyers pay the higher price but if the business does NOT come back, a certain amount of the purchase price is returned, or
- the seller accepts the lower price and the buyers agree to pay an additional amount when the business growth passes a predetermined amount or attains its previous level of business.
You can work a win-win purchase here with a carefully worded contract, some trust by both parties, and the desire, commitment and genuine effort on the buyers’ part to succeed.
This article was written by Angelo Meneguzzi of Bplans.com
Buying an existing business is an excellent option that is often overlooked by entrepreneurs, but it does have advantages. You will have an established name, existing customers and an immediate revenue stream. However, searching for a business to buy can be difficult, and finding the right one to buy is tougher yet.
The process can be time consuming, costly and frustrating. Even the most skilled businessperson may find this experience challenging. To provide some “structure” to this very complex decision, the following process-oriented steps may serve as a checklist to help you go through the process.
Personal assessment and criteria
Based on what you know about yourself and why you are interested in this business, you must constantly assess if the concept and the business is right for you. Does it fit with your interests and your resources? Cash, credibility, skills and contacts: do yours match what this business will demand?
Ask for the business plan
Does the seller have a current business plan? Do they have any business plan? The business plan—or its absence—may tell you a lot about the business, its history, the owner’s view for its future, and their interest in selling.
The seller
If you should purchase the business, you are going to be dependent on the seller for information, contacts and resources. Based on what you know now, what do you think your relationship with the seller is going to be like? Can you expect that to be a positive experience? If you see signs of a “difficult” person in the initial purchase investigation stages, it may become more stressful for both parties as things progress.
Figuring out the numbers
Regardless of the response to the business plan question, access to the “real numbers” behind the business is crucial. This may be more challenging that one might expect. Business owners are often reluctant to share operating and financial data, often for tax and competitive reasons, even when they are in a “selling mode.” Ask if the financials that you will review are “recast financial statements” and, if so, what adjustments have been made to these statements? Be as specific as you can when you gain information about the source of these statements. You may not receive any meaningful financials until after signing a confidentiality agreement and proving you have the financial ability to make the purchase.
The help of professionals
You may decide to approach a business broker to help you find the right business for you, but remember that the broker’s loyalty may lie with the seller. You will want to retain a Certified Public Accountant and an attorney who is knowledgeable in business acquisitions. A CPA will to help guide you through the financial analysis process, and you may benefit from legal counsel as agreements are drafted and signed. Their expertise and the emotional separation from the process can make the costs for their services your wisest investments in the entire process.
Business valuation
Ultimately, negotiations will lead to a business valuation to determine what the business is actually worth. There are several ways to estimate the value of a company, such as the value of the company’s assets, how much debt does it hold, and from what sources are the company’s current revenues and profits? All of these are going to have a different impact on the value of the business. Other factors to consider in the valuation process include:
- Level of risk: How volatile is the business?
- Competition: What is the competitive environment like—sleepy or cutthroat?
- Growth: Is this a growing or declining industry, how does that compare to the trend of the business, and what are profitability trends?
- Organizational stability: How established is the business itself in terms of infrastructure and personnel?
- Management team: Is there a competent management team in place and will they stay? Will that be an issue or opportunity for you?
- Overall desirability: Will the business be desirable for the “next” buyer?
The structure of the deal
The phrase “it’s all in the terms and conditions” applies here. Based on a valuation that you find acceptable, the specific arrangements of the financial transaction may determine if this is a “go” or something to walk away from and feel good about. For example, a one-time cash offer is going to result in a radically different figure than an arrangement where a down payment is followed by a seven-year buy-out. Ideally, the structure of financing will meet the needs, resources and interests of all parties involved.
Adding value
Determine if you are going to be able to add value to the business or if your goal is simply to keep “the machine” running. Once you have purchased the business, what are your objectives? Are you planning on owning the business for the next twenty years, or growing it over the next five years and then looking for the opportunity to sell? This will impact the intangible assessment of what the business may be worth to you and help assess the potential challenges ahead. Beginning your business plan will help to clarify your objectives and the business potential ahead.
The bottom line
- Take your time.
- Be methodical about gathering all the information you can.
- Pay attention to the details.
- Get help when needed and leverage available resources.
- Continue to “test” to see if the business and its demands fit who you are and what you want your business to be.
If the deal doesn’t feel right, keep looking.
This article was written by Tim Berry of Bplans.com
Here is a collection of tips we’ve gathered from years as business buyers and sellers, and from talking with other business buyers, business sellers, and brokers.
It’s simplest and best to keep your listing anonymous, unless you’re completely comfortable with any and every supplier, employee and knowing that you’re selling. We recommend not sharing a phone number or address, and it’s best to use an email address that’s not linked to your business. At www.businessplace.co.nz, all enquiries are sent through a private messaging system - in part, for this reason.
Give LOTS of detail in your ad. Think about the information you can share that will help to reduce the number of enquiries you receive that go nowhere. You’re not sharing your business name, remember, so it’s not crazy to talk about your level of profit. Roughly speaking, the business buyer market can be divided into people who are comfortable with buying an owner-operated business; people who are looking for something bigger but not necessarily making lots of money; and those who are looking for a business that’s already humming. Don’t waste your time or the time of potential buyers by making them guess whether your business fits their general criteria! If you clean homes by yourself in your neighbourhood, don’t conceal this with wishy-washy language and euphemisms. You’ll save time and you WON’T lose prospective purchasers by telling it straight - there’s nothing wrong with saying that you’re selling an owner-operated home cleaning business.
To summarise:
- Don’t make people guess at the approximate size of the business
- Don’t make people guess at how many staff are involved
- Don’t make people guess whether yours is a startup business or has been around for 20 years
The same goes for the great things about your business too, of course:
- If you’re making great money, tell them!
- If you’re growing, say so!
- If you’ve won awards, brag! Do this in general terms, though, so the business can’t be identified
- If there really is potential for expansion, tell them! Don’t make the mistake if throwing this into your ad in the hope of attracting a few more enquiries - if the potential isn’t there, you’ll just be wasting your own time and theirs
- If it’s a great sector, tell them so, and why it’s so good
Sophisticated business buyers find it very useful to see an indication of the valuation method that has been used to establish a price for the business. Why make them guess? If you’ve used a sensible method to arrive at a fair sale price for your business, explain the valuation method you used. There are thousands of enquiries generated every day that go nowhere, because an owner advertises something that boils down to ‘Good business - $1 million dollars’. That might be a great deal if the business is generating a profit of a million dollars every year, but not so great if it’s never made a dime. Justify your price in your ad, unless there are very good reasons for not doing so. By sharing this logic, you show buyers that you’re rational, intelligent and fair, and you cut out many time-wasting enquiries.
Make sure the title of your ad is attention-grabbing, and makes people want to read on. Have someone else read it and give feedback. The first sentence of the ad is also very important.
Tell people why you’re selling. Be honest! Avoid using stock phrases like ‘family commitments force sale’. It’s ten times better to say that you’re wife has just given birth to quads, and you don’t have the time to run your newspaper delivery business.
Respond to enquiries promptly, and professionally.
Specifying an approximate price for your business may - in theory - discourage a few people who could have been interested if they heard about the business in person before being told the price. In reality, though, this number must be incredibly small. The numbers stack up or they don’t, and a person has cash to spend or they don’t. We strongly recommend specifying a price, and believe it will save you a lot of time without disadvantaging you at all.
Keep tweaking your ad, based on the kinds of enquiries you’re getting. Answer the questions you didn’t think about, and take time to refine the copy to make your business sound more attractive. You won’t get it perfect first time, so jump in and adjust it until it sings.
When determining your allocation of marketing dollars, consider your target audience and what they are likely to read. Advertising in national newspapers can be very expensive! Ads in trade and local publications can be much more cost effective, but the reach is much less. Advertising on online business sale directories like www.businessplace.co.nz makes your business listing visible to an enormous pool of qualified business buyers in New Zealand and around the world.
When you place advertising online, remember that business buyers are seeing very long lists of business opportunities - your ad title and short description are likely to be all they will see, if you don’t grab their attention. Sell the future potential of the business in your title and brief blurb, and many more visitors will read your entire ad. Emphasise what’s unique about your business, and especially its strong points.
Make sure that you have sound financial and legal advice from from advisors who are experienced in the process of selling a business. Local business groups or business leaders may be able to point you in the right direction.
Prepare a profile of the kind of person who is most likely to buy your business. This will help you to filter out clearly unsuitable buyers, as well as to stimulate ideas for other ways of marketing your business.
Some advertisers receive many enquiries from ‘buyers’ who are extremely unlikely to ever purchase a business - car dealers call this type of visitor a ‘tyre-kicker’. These people can chew up time very quickly, so have a short list of key questions so that you can determine how serious they are about purchasing your business. If you decide that someone isn’t a serious candidate for purchasing your business, withdraw from the negotiations without offending them, and put your time into cultivating the serious prospects. Spend a couple of minutes deciding how to phrase this in a conversation or an email - it’s worth taking the time to make sure that you do it gracefully. The same goes for your filtering questions.
Respond quickly when you receive an enquiry about your business for sale.
You should have an overview information pack that you send to prospects in the first instance, covering a summary of the company’s activities and history; its unique selling proposition; its financial performance; and anything else that makes your business special. Don’t give away everything, but make it easy for buyers to decide whether or not they’re interested. Remember that this pack will be going to many people who will NOT end up buying your business, and even some of your competitors, so think carefully about what you share. (Incidentally, it should not be easy for competitors to get this information - even this pack should only be given in response to enquiries that have been quickly screened for legitimacy.) There are ways of putting across information that allow buyers to get an accurate general impression without telling them everything!
You should also have a detailed information pack including financial history; testimonials; customer overview (without naming them); and financial projections. This pack only goes to prospects who have made it past the initial stages, and with whom you feel comfortable sharing quite sensitive information.
When things progress with a prospective buyer, make sure that they sign a non-disclosure agreement.
You’re not the only party who needs to be checked out! Do some homework on prospective purchasers, including their web site and company information, a Google search, and possibly even references from trade or professional services providers.
Customer lists and supplier lists must only go out at the very last moment - a lot of people only release these details after an initial agreement is reached, and the due diligence phase is entered. This is completely acceptable.
Always be polite and courteous. You’ll never regret it, and sometimes you might even thank your lucky stars!
Keep track of prospects, and don’t be afraid to follow up with them. Business buyers often get swamped after contacting many businesses, and they will appreciate a seller who asks them politely if they’re still interested. Use an email template for this, and send it out if someone who seemed interested hasn’t been in touch for a time. It’s useful to have a set time period for doing this, as then you don’t have to ask yourself every time whether or not the timing is right - if it’s been X days, the follow-up email should be sent!
This article was not written for a New Zealand audience, so you may see some unfamiliar terms, but it contains some very useful information. We hope you enjoy it!
Successful partners in professional practices and service business owners have found it profitable to grow their businesses through the acquisition of competitors. These buyers can be owners of accounting firms, engineering firms, consultants, training companies, sales companies, and many others.
Some of the immediate benefits of purchasing a practice are:
- Instant goodwill when you buy the competitor’s name and employee contracts.
- An established phone number. Make sure this is redirected to you for a substantial period of time. If you are changing the acquired firm’s name, make sure your staff is trained in handling calls from slightly confused customers.
- Acquisitions can be financed. Generally the seller provides the financing. Other sources are SBA loan providers and local banks.
More Benefits Include:
- Often a business purchase will provide significantly lower customer acquisition costs than obtaining new clients from scratch. This is particularly true if you accurately capture all of the costs associated with traditional customer acquisition such as advertising, marketing, networking, preliminary meetings, proposals, commissions, etc.
- Acquisitions provide instant cash flow.
- Additional staff have immediate work instead of waiting for work though a painful and expensive ramp-up period.
Two Final Benefits are:
- In some markets, it is almost impossible to obtain talented skilled employees. This is another route to achieve that goal.
- Often a desirable location is obtained. Rarely will you obtain all these desirable benefits from an acquisition, but you can obtain the ones most important to you.
Compatibility is No. 1
Compatibility is a very important factor in the success or failure of an acquisition-based growth strategy. Compatibility needs to work on many levels. Certainly employee and owner compatibility between the two firms is very important. Customer compatibility is also essential to receive satisfactory results. In larger firms, management control and computer technology compatibility become major factors.
There are many areas of due diligence that need to be investigated. Many of these areas can be delegated to consultants. Because compatibility runs to the core of the acquisition, it should not be delegated. This gut call will determine long-term success or failure of the transaction.
A topic directly related to compatibility is customer care. Many customers will be very accepting of the changes at “their” firm. A few will need tender loving care. Remember to treat your “new” customers with kid glove care and you should have no problem retaining them.
Price Matters
Before we conclude, we need to talk about price. Small- and mid-size acquisitions of service businesses typically range between 1.5 to 3 times yearly cash flow to the owners. (Accounting and professional practices may be in the 1 to 1.25 revenues range.) The final figure depends upon the type of practice, the profitability of the firm being acquired, and the likelihood of maintaining the purchased customer base.
Usually there are three components of the price. The first component is the base price that is paid at settlement. The second component is a salary that is paid while the old owner works for the firm to help ensure a smooth turnover of clients. The third component of the price is the final payment.
Often the final payment is partially based on the success of the completed transaction. This might be calculated based on employee retention, customer retention, dollars of revenue or other agreed measure. These provisions usually are win-win because they provide a fair splitting of the risk of customer retention vs. price.
Be Successful
There are a myriad of details in any service business acquisition. Your acquisition will be successful if you ensure compatibility, pay a fair and reasonable price, and provide excellent care to your “new” customers. If these steps are taken, acquisitions can be a great tool in your arsenal to fast track the growth of your service firm.
This article was written by Greg Caruso, Principal at Harvest Associates, Maryland USA
This article was not written for a New Zealand audience, so you may see some unfamiliar terms, but it contains some very useful information. We hope you enjoy it!
Know the Sales Value of Your Business.
When you are anticipating selling your business you should obtain a valuation to plan appropriately and, in some cases, to use as a negotiating tool. For smaller businesses your broker should be able to prepare a simple valuation. For larger businesses it is worth having a valuation properly prepared by a valuation professional. This person may be independent, work with your accountant or be part of the broker’s firm.
Preparing a detailed valuation is beyond the scope of this article. Formal valuations often calculate values three or more ways. These valuation reports can be 50 pages or more.
What we cover here is a simplified valuation based on the market approach to valuing businesses. Do not use it for anything other than general planning without seeking the advice of your trusted advisors and an expert in business sales, mergers, and acquisitions.
Small, owner-operated businesses with an active working owner who performs day-to-day tasks such as sales, production, direct management etc., can be valued using the following formula:
Owner’s salary plus profits plus expenses benefiting the owner (such as underemployed family member on the payroll; exotic travel to conventions; auto; heath insurance; pension to owner etc.) plus one-time charges (perhaps a large legal bill in one year only) plus interest plus depreciation and amortization equals the Seller’s Discretionary Earnings or SDE.
If you are an absentee owner in a business that is usually owner run, you can add your manager’s salary back to the cash flow. If you have cost advantages your Buyer will not have, subtract these. Those often involve rent where you own the building the business occupies. Most Sellers adjust the rent to market cost at the time of the sale so that should be factored into the formula.
Some people call this “normalizing” the cash flow. The idea is to show a Buyer what her normal discretionary earnings will be. They are called discretionary earnings because the owner decides what to reinvest and how to pay herself. You can pull many of these figures directly from the company income tax return. The total is then multiplied by a value called a multiplier. In most cases the multiplier is 1.5 to 5 with between 2.3 to 2.7 being about average and above 3 rare for small businesses.
Example of Calculating Value:
Consider this example of Bob Smith who owns Smith Electric. Bob has a steady base of service work with some new construction mixed in. Bob has four service crews and still often performs remodeling jobs himself. Bob makes about $100,000 in salary. His wife makes $35,000 working one day a week as the bookkeeper. Bob drives a company truck all the time. He has health insurance through the company. He spent $12,000 last year on interest and had $35,000 in depreciation. Bob runs the business from an office warehouse which he owns. The business does not pay rent to Bob for Smith Electric’s 2500 square feet of space.
The valuation math would work like this:
Salary $100,000 plus excess salary to wife estimated at $20,000. Plus personal use of truck estimated at $5,000 plus health insurance at $11,000 plus interest at $12,000 plus depreciation at $35,000 minus $24,000 estimated rent. This totals $159,000. Assuming Bob has a high percentage of service work which tends to be predictable then his multiplier might be around three. That would put the value of his business at about $477,000. If Bob mainly performed new construction work obtained from competitive bids, his multiplier would be around two because of the risk involved in obtaining future work.
With small businesses, you take the last three years’ tax returns and make these adjustments. Compare the three to identify the trend. If the trend is rising, select the average to high figure. If the trend is falling, select the average to low figure. If there is no trend then use the average against the multiplier.
Unfortunately, most small business owners are disappointed with the valuation of their business. Small businesses tend to be owner operated. This means that owners are getting paid for their labor and receiving a profit for their business risk. Only the profit portion of what has been earned is available to pay the purchase price of the business.
Unprofitable businesses are very difficult to sell. Obviously, the above formula results in a value of $0.00. They generally sell for asset value and asset value is usually not very much. Of course, superior locations that are owned or come with below market leases, grandfathered licenses, and other tangible or intangible assets have value and can be sold.
Because most owners view these resulting values as low, most business sales occur only when the owner needs to move on to something new. It is not because the price is something the Seller could not refuse. I recommend that you calculate your value every year as part of a planning session. Improve your profits and improve your value.
This article was written by Greg Caruso, Principal at Harvest Associates, Maryland USA
Buying a business in Maryland or any other location and valuing a business for purchase is a major life decision that needs to be carried out methodically and thoroughly. If you are thinking about buying a business in Maryland or elsewhere make sure you follow the steps outlined below.
1. Understand and Know What You do Well and Like
You must really look at the activities you like to do and find a business that allows you to do them. For instance some people want customers to come to them. A retail store may work well for them. On the other hand some owners would loose their minds staying in a store all day; perhaps something with outside sales will work for them. Are you a people person, a thinker, a leader, or a salesperson? Do you like steady hours, flexibility etc. How much money do you have to purchase with? How much money must you make every week?
Remember the process of buying the business is not the same as running one. Do everything possible to make sure you buy one you will love running.
2. Make a Comprehensive Search for a Business
Make sure you know how to look for a business. Don’t just go to one source but really check multiple reliable sources to find the business that is right for you. Systematize your notes so you know what you looked at. Make sure you compare your strengths and weaknesses with the day-to-day tasks of running the business.
3. Understand and Value the Business
Properly Understand the basic financial techniques to value a business; it’s cash flow and other assets. Know how to prepare a basic business plan in order to make projections into the future.
Understand how the business is getting its customers. Know how it delivers goods and services. Know the cash flow and how you will keep the current cash flow and then grow the cash flow.
4. Know how to structure and finance a business
Have a basic understanding of how the business valuation and related cash flow tie together. Make sure you know a number of possible ways to put a transaction together to overcome different risks. Understand what may be financed by a conventional bank loan, a SBA loan or seller take-back. Understand how to take your outline deal and putting it into a final enforceable contract.
5. Perform Due Diligence Thoroughly and Correctly
Know what to look for when investigating a company. Know how to tie accounting records into source documents. Understand inventory, equipment, vehicle titling and other problems. Understand what should occur at settlement. Make sure you are getting what you have agreed to pay for.
Bonus Tip
Recognize that the Broker almost always represents the Seller. In commercial transactions if the Seller is paying the brokerage fee (even for “your” broker) he almost always represents the Seller. For most small business purchases you, the buyer, will go through most of the process on your own or you need to find and pay your own experts. Make sure you know enough to select the right business, the right experts, and negotiate a fair deal.
This article was written by Greg Caruso, Principal at Harvest Associates, Maryland USA
When looking to buy or sell a business in Maryland or elsewhere it is very important to select the right professionals. A key professional for a market business purchase or sale is the business broker. They will help you find the right business, prepare a valuation for the business sale or purchase, and negotiate your business purchase.
References and Community Involvement:
- Does the broker have written references? Can you call the references? (Don’t ever let an broker tell you that you can’t talk to references because of confidentiality. Think about it, they must have some satisfied closed customers)
- Does the broker belong to local business, charitable groups, churches that indicate a place in the community?
- Does the broker Belong to Industry Associations that have ethical codes?
Questions to help you determine if the broker is knowledgeable:
- What is the broker’s formal education?
- Has the broker obtained continuing education in his field of practice?
- Does the broker belong to associations that relate to his field of practice?
- Has the broker authored or spoken professionally on his areas of expertise Questions to help you determine if the broker has experience:
- Has the broker ever owned a business? Was it sold?
- How long has the broker been brokering?
- Has the broker sold a business like yours?
- Does the broker have any related experiences from selling other businesses?
- Ask them to explain a typical transaction? Does that sound reasonable?
- Did the broker’s past experiences relate to his role here?
Questions that can help you determine if the broker is organized and has a system:
- Ask about how they would find a buyer?
- How do they screen prospects?
- Does the broker work for a firm? If so what does that add to the process?
Compatibility:
Through all of the above questions you should be thinking about experience, integrity, and ability to get the job done.
The Crux of the Matter:
If you are not 100% comfortable with your broker, interview another one. Keep looking. Sooner or later the broker is going to have to tell you bad news and how to overcome it. If you don’t trust the broker, this is even more difficult.
This article was written by Greg Caruso, Principal at Harvest Associates, Maryland USA
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