Unlock Your Business’s Potential
The value of a small business is primarily driven by its profitability. In most small businesses, there are numerous opportunities to enhance revenues, increase gross margins, and reduce costs. Improvements in each of these areas can result in significant increases in the value of your business. For many small businesses, every dollar in increased profitability will produce approximately three dollars in increased business valuation.
Many small business owners do not have the capability to re-evaluate their whole business on their own. However, a quick way to start, if an advisor is not in the budget is to look at a business’s waste. This can be in the form of raw materials or time. A reduction in waste almost always directly correlates to a reduction in costs and an increase in revenue. Looking at a business from this perspective often leads to other insights for process improvements resulting in higher revenue.
Although many changes can be made quickly, to maximize the benefits of the business sale process, the improved profitability has to be reflected in the financial statements for at least two (2) years before the sale. In other words, if you begin to implement changes only three (3) months before selling, the business valuation will not reflect the positive changes of your last three (3) months. It is never too early to implement profitability improvement efforts, but it is best to try to do so at least four (4) to five (5) years in advance of a business sale.
To gain a better understanding of how small businesses can improve their margins thus improving their business valuations, please consider reading this article: 5 Simple Ways to Improve Your Profit Margins
The first step in the right direction is deciding to use a business broker because you don’t know what you don’t know!
Ask questions, expect questions and review standard documentation.
Be Bold and Ask Questions
This is your business and selling it should be handled professionally and with transparency.
Credentials such as being affiliated with the national IBBA and local state associations such as TABB in Texas are marks of a knowledgeable broker. However, this information is not always right out in the open. Ask if they have any affiliations. If they are not of these, look up the ones they provide.
Prior business ownership, regardless of the exact type of business, is a foundation of understanding from both sides of the process. Though not necessary, our firm believes in having that connection to better facilitate the transfer.
Expect and be Ready to Answer Questions
The right broker will have a solid understanding of financial analysis and more specifically, an explanation of their own financial analysis process. If they cannot do this…walk away. The first meeting should include them asking you about your business’s financial health and how they plan to market to the right buyers. They should be able to explain these two topics logically and ethically. If they cannot do this…run away. This is not an area of “feeling” the numbers but rather there should be a clear and coherent way they can explain to the seller how they plan to market a business for the price that is dictated by financial and transparent market analysis. From this, options for the deal structure should be presented. The seller should not be railroaded into one plan of attack. Ask about past closed deals and how they were closed, especially for ones that mimic the current company for sale.
First Impressions Really Do Matter
When meeting a prospective buyer, will your business broker be presentable? Will the location or office? Set up a meeting early on to see what the prospective buyer will see. During your meeting, do not be afraid to ask for copies of blank documents such as LOIs, Listing Agreements, Confidentiality Agreements (CA) and Sample Marketing Packages/Plans. These can make or break a deal before negotiations begin. Are they visually presentable? Do they contain viable and valuable content for the buyer?
A major topic of your first meeting or even prior to your first meeting should be that of confidentiality. The broker should initiate this conversation early on. The timing of when it is brought up is indicative of how it is handled in general throughout a deal and even after a deal is closed.
To choose the right business broker to sell your business, be prepared with your questions and with the deliverables the broker should bring up to you. If you cannot check off those boxes in your first meeting, continue your business broker search.
To learn more about choosing the right broker for you, get EXIT – A Business Owner’s Guide To Selling a Company, by Alex Vantarakis.
Murphy’s Law – “If something can go wrong, it will.”
In this case, a deal killer or Murphy’s Law surrounds the concepts of communication and being mindful of a proven process.
The Vant Group was engaged to assist the buyer in a business transfer purchase. They hired us to find a business, and quickly, the buyer ended up finding a business on his own through another source as it was not yet on the market for sale. We met with the buyer and seller and had a great meeting. We indicated at the meeting that we would offer him full price, and the seller was pleased with this arrangement.
The seller, who was not our client, called us back the same day and told us that he was very impressed with the meeting and wanted to know if he could use our services moving forward in the future or at least utilize us for advice. Every aspect of this business transfer deal was going quite smooth.
Here is where Murphy’s Law comes into play, and here is how one simple step can kill a deal.
We, our team at The Vant Group, assumed (and assuming will always make an ass out of you and me) that the seller understood that we wanted the business and would provide the LOI to the seller after we had done some very preliminary work up front. The meeting and follow-up had been effortless and with the business not even being on the market, we felt we were already ahead of the game. Well, the assumption was incorrect. Because he did not hear from us, and he did not want to be pushy to call us for our letter of intent, he did not know that we had an LOI already written up. We were under the impression that we were all on the same page.
Since we did not keep up our usual constant communication with him for where we were in the process, another buyer came along and offered him full price, and he signed the deal. So, though from our end, we did everything within a reasonable amount of time, what we did not do is make a simple phone call or send an email saying, “We are on it, let us know if you have any questions. We will get you an LOI.”
Murphy’s Law (as we state here, it is communication or lack thereof that kills deals) came into effect; because if we had done things in our usual manner, even though we were under the impression that it was a done deal, it would not have slipped through our fingers.
– Like Anything In Life, There Are Pros And Cons
Buying a franchise provides resources that can bridge the gap between learning a new business and industry by having a franchise system in place which ensures the likelihood of success through the initial transition years.
The largest benefit of buying a franchise is having that proven system and training for the new owner and their employees. As a franchisee, you don’t have to be the idea man; just follow the system that has the proven success record.
One of the other great advantages is customer exposure by the way of location. One of the resources of almost any franchise is site selection assistance with a professional real estate marketing partner. Having access to a tried and proven demographic model will greatly improve the probability of success.
Other than the initial purchase period, and depending on the particular franchise, the franchisor may not provide much assistance or value for the franchisee. The monthly franchise fee, which is between 3-7 percent of gross sales, is mostly allocated to the approved advertising budget. This usually focuses on a national audience and can sometimes be ineffective for the franchisees business and/or area if it doesn’t take into account for current local market trends.
Another disadvantage is the restrictive nature of expanding the business. As the franchisee develops their business, the franchise opportunity often begins to feel confining to an entrepreneurial spirit. Traditionally, it is not possible to implement unique branding or issue process changes into the franchise system.
It is important to ask questions up-front of other owners, vendors, or see an existing franchise location to help answer any of the questions associated with what the owner is willing to accept when moving forward with a franchise purchase.
Exit Strategies Available
Many franchisors have buyout options for franchisees that have outgrown the program. The guidelines of a franchise, the Uniform Franchise Offering Circular (UFOC), will have the procedures for buying out or selling the franchise.
Some franchise programs will even have a transition team that helps sell the franchise, which is often the best opportunity to obtain the highest price when selling the business.
To learn more about franchise business pros and cons get “ENTRANCE“– A Business Owner’s Guide To Buying a Business”, by Alex Vantarakis,
When surveying buyers on why they decided to buy a business, the most common answer is, “I’m tired of working for someone else”.
While being your own boss can be a very rewarding experience, the desire to become a business owner does not automatically mean you should. As an employee with a steady and mostly consistent paycheck, a person can typically just focus on their role in the company and not have to worry about the other facets of running a company.
When becoming a business owner, every decision and responsibility now falls to this person. Being a business owner takes a certain mindset and skillset, and sometimes buyers think they can buy their way to success. Like anything else, buying a business is a process and asking the right questions and creating the right timing for action is critical, even when buying an existing successful business.
Here’s a great article for buyers looking to purchase a business. It details the top questions a person should ask before buying a business.