Boost Your Chances of a Successful Sale
By JoAnn Lombardi, President ofVR Business Sales/Mergers & Acquisitions
From a lack of preparation to proceeding without the help of a skilled intermediary, these are some of the most common mistakes made by sellers.
Selling a business for a satisfactory return and within your preferred timescale can be a challenging prospect. Attracting buyers requires a focused approach, careful groundwork, and realistic expectations.
Here are some common pitfalls you should avoid to boost your chances of a successful outcome.
Lack of preparation
Owners frequently underestimate the time required to prepare for a business sale. Most business brokers advise allowing significant time to thoroughly prepare for a market listing.
This allows you to formulate a viable exit strategy, which should include an effort to make the business more appealing. For example, cutting wasteful costs, putting your financial history in order, and tidying or even renovating your premises will positively influence the selling price.
Overconfidence
As elsewhere in your business activities, confidence can be a useful tool – provided it is grounded in reality. Purchasers will generally only pay what your business is worth – and their assessment of that figure will be based on independent valuations based on profit, asset values and other measurable factors, not on your own personal estimate.
Obtaining a professional business valuation at an early stage will keep your expectations realistic and give you an idea of the work required to realize enough cash to fund your next venture or a comfortable retirement. It’s also useful to research the online marketplace to check the asking price of similar businesses and to ask your VR Advisor about the current sales climate, prevailing trends, and the factors driving prices.
Overvaluation
Any business valuation must be a logical and transparent assessment of the worth of the enterprise. Prospective buyers will inevitably query the figures in order to understand the applied rationale – so any significant overvaluation will soon become apparent.
They will want to examine supporting evidence to verify profitability and things like the value of long-term depreciable assets. To convincingly refute accusations of overvaluation, you should adopt one of the standard business valuation formulas based on assets, income or even a multi-method approach – whichever suits your type of business best.
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What Buyers Look For In A Business Opportunity
By Peter C. King, CEO of VR Business Sales/Mergers & Acquisitions
You have built a great business with love and care. It has grown larger than you’d ever imagined and generates a nice profit that has allowed you and your family to live comfortably. Now you’re ready to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.
Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.
What do Buyers Look For?
There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear, and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
1. Cost and terms
What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?
2. Continuity
Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example, The current owner has personal relationships with customers, distributors, or vendors that the new owners may have to struggle to maintain, the owner has special expertise that is undocumented and difficult to learn, Key personnel isn’t committed to staying, or outside competition looms. Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.
3. Growth
Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product nationally or internationally. A buyer that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities.
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What is Actually Being Appraised?
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This is a very important question! When I receive a request to appraise a business, one of the first things I attempt to find out, is what aspect of that business exactly, am I being asked to appraise.
There are several different business valuation assignments that I could be asked to complete for any specific business, and each will arrive at a different answer, so you can see why I would need to figure this part out rather quickly.
I could be asked to appraise a controlling equity ownership in the company stock, and member units, depending on how the entity is organized. I could be asked to appraise a non-controlling equity ownership interest, or I could be asked to appraise what many business brokers refer to as the “Most Probable Selling Price” (MPSP). I tend to refer to these projects as an appraisal of the “Assets That Typically Transfer in a Sale”.
Each one of those options includes different underlying assumptions, assuming each is governed by the standard of value of Fair Market Value. (If another standard of value needs to be used, then many of the following assumptions are modified again.)
If I am appraising a controlling equity interest, I am going to be looking for discretionary expenses to add back, I am going to be looking for non-operating assets and/or liabilities to adjust out, and I am going to be working this appraisal from the perspective of a potential buyer buying into the scenario as presented with all the assets and liabilities held by the business being considered.
If I am appraising a non-controlling equity ownership interest, I am not necessarily going to be adjusting out discretionary expenses, I may still be looking for non-operating assets and liabilities, but as a non-controlling equity interest holder cannot decide to sell those assets, I am also not going to be adjusting them out. I am working on this appraisal scenario from the perspective of an investor considering the risk of buying into a partnership where distributions to non-controlling shareholders are reduced by the need to fund non-operating assets. I will also be including discounts for lack of control and marketability IF I am using the fair market value standard of value.
If I am appraising only those assets that typically transfer in a sale or MPSP, certain adjustments need to be made to many of the methods used. (However, sometimes a buyer will request to purchase some working capital, and that request could throw another wrinkle into the appraisal. Most of the time, that adjustment can be handled by adding a dollar-for-dollar increase to the appraised value for the requested working capital. Most of the time.)
Let’s look at some of the modifications an appraiser must make to the application of commonly used valuation methods in order to deliver an analysis of the MPSP.
Any use of the adjusted book value method considering the tangible assets held by the business will need to have cash, and accounts receivable excluded, and the liabilities removed as a buyer in this scenario will not be taking possession of any of those.
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Analysis Reveals Business Broker Impact on Lower Middle Market Companies
Business brokers have become more active within the private markets, almost doubling in number over the past decade. Their role in mergers, acquisitions, and overall investment activity has also expanded. And the deals they execute run the gamut — from medical billing, property management, or commercial cleaning operations to electrical contractors, medical offices, law firms, urgent care, or senior care facilities. They also include e-commerce sites and Amazon storefronts, software companies, digital marketing firms, internet registrars, or hosts.
To classify business brokers as such, Axial employs the following criteria:
1) Deals are listed on a public website (their own or external)
2) Are affiliated with a broker franchise or self-identify as a business broker
3) Work on Mainstreet deals (i.e., single-location mom-and-pop shops)
Since the start of 2017, business brokers have brought to market 19,828 deals via the Axial platform. Thus far this year, business brokers have already added 3,130 deals to the pipeline — 15.8% of all deals brought to market over the past five years and 27.1% more than the full-year results for 2017. With these prospects spanning the LMM, the recent surge in business broker activity illustrates its diversity as well as its concentration by vertical and geography while underscoring the strengths of its fundamentals.
As a result of this rapid expansion, business brokers have played an increasing role in facilitating transactions and connecting buyers and sellers across LMM sectors — helping business brokerage expand to a $1 billion+ industry in its own right.
And as the intermediary between parties of all types, business brokers can offer small business owners a wide-ranging perspective on market trends and can help identify potential growth opportunities.
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Exceptional Bicycle Business--Resort Community for Sale in St. Simon's Island, GA
This business offers a rare opportunity for the right buyer to acquire a very successful, high-end, bicycle sales and service shop and has substantial growth potential. It is located in an ideal "Low Country" setting. The owner offers two superior bicycle brands. One is high-end and has been rated #1 globally. The other brand offers more affordable models that are well-designed and built for style, comfort, and leisure. All are accompanied by impeccable service.
The owner is a zealot in driving business success. His attention to detail, including quality, structure, and premium pricing, has resulted in consistent, attractive cash flows at high net profit margins. The seller's cash flow has been over 25% of sales in 2019, 2020, and 2021 in spite of the negative impacts of covid and logistical issues.
The Low Country island location has been a magnet for those "escaping" northern locations, either permanently or looking for a relaxing getaway destination. Conde Nast Travelers ranked the Isle as the 3rd "Best U.S. Island" in 2019. The bike shop is ideally situated to service the local resort and regional communities.
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VR Office in Apollo Beach, FL Sold A Multi-million Dollar Food Manufacturing Company
VR of Tampa Bay facilitated the sale of a 100-year-old, multi-million dollar food manufacturing company in Central Florida. Negotiations were conducted with several strategic buyers and roll-up funds, but the ultimate buyer was an insider that wanted the legacy to continue. VR facilitated the financing package for the land and business along with working capital so that the new ownership group could invest in plant modernization, the introduction of new product lines, and the hiring of a new management team.
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Thinking of selling your business or looking for an established
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Growth, Strategy and Value
In business, many believe they know what growth looks like and how to achieve it; the problem is that most don’t. There are a lot of mindsets and assumptions around business growth that render the efforts of many businesses futile. Leaders should step away from the accepted norm, bring their team together, deconstruct the group’s think on growth, and reconstruct their entire approach to align with strategy and value.
Active knowledge question:
How do you know your growth is on track to build an enduring business?
Profit is not the answer
Suppose your growth strategy is about driving up revenue while lowering costs to achieve budgets, deliver on profit forecasts, and the accompanying bonuses and dividends for the current cycle. In my view, such outcomes are not growth but actions to achieve short-term outcomes.
Many businesses operate on this immediate result imperative, driving to achieve one short-term result and then chasing another. But, unfortunately, a profit-first motive rarely, if ever, delivers longer-term growth that builds enduring strength and performance.
Profit is an outcome, not a catalyst, and while many businesses believe they are in the business of making profits, such an approach leaves untapped potential on the table. And the prospective profits that would come along with it.
Any growth strategy should commence with a clear image of what you seek to build and then the outcomes you seek will be delivered from what you have built. It represents an enduring asset upon which to compound all efforts. To continually chase outcomes is to submit your business and all its people to continual repetitive effort rather than building the engine that will produce the desired results.
Growth must always be strategic and be a source of building better, not just bigger.
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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Have You Ever Considered Selling Businesses?
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