Failing to Plan = Planning to Fail

There are many reason why business owners fail to deal with their exit planning. Here are some of them:

1. Indecision delays action. Most spend time trying to figure it out which ultimately leads to procrastination. 
2. It is not a priority right now. All seems fine right NOW. There is no need for any urgency. 
3. There is no clear vision. They have no idea what exit plan will look like for them. 
4. They are too busy working IN the business and has not put time aside to think about their exit strategy. 
5. They are afraid to address the question of “What is the value of the business” and “Is there someone out there who might buy/take over my business”?
6. Lack of understanding on the entire exit planning process. What is involved, who will be involved, what it will cost, how long will it take, etc. 
7. The owner assumes too much about the future of the business such as:
   • the business will be sold quickly;
   • their children will take over the business;
   • the business can be left to the surviving spouse;
   • the business can be sold to the employees;

I am sure that there are several more that can be stated here. My point however is that exit planning is still an area that most business owners know very little about, and are doing even less in trying to find out about it and get the process started. In my experience of selling businesses, we note that business owners who has completed some form of an exit plan, tends to the sell their business for a much better price and quickly. This is mainly because as part of the exit plan process they learn what they need to do to make the business more valuable. As part of the business exit plan we take the time to help business owners improve their business in the areas of Leadership, Marketing, Financial, Operations and Staffing. These are important areas that help a business grow and improve so that it can be positioned in the market as more attractive and valuable.  As the trend continues with more baby boomers exiting their business, the business that is presented more attractively in the market place will be the ones that will be sold faster and for higher price. 

Welcome to Baby Boomer Business Owners

An article in this month’s Profit magazine called Tsunami Warning – Why your business could be next to worthless in the coming years … naturally peaked my interest. The article talked about how within the next 3 – 5 years we are going to be experiencing a large number of businesses that will be coming up for sale due to aging baby boomers needing to sell their business to retire.

It was a very good article which captures what we in the business brokering industry have been preaching to business owners all along for the last 5 years now. Unfortunately it surprises me as to how little business owners still spend so little time in planning their exit from their business. I find business owners spend more time planning their next vacation compared to planning their exit from their business. With the number of businesses available for sale increasing every year, business owners really need to plan their exit and more importantly differentiate their business from the other in order to make their business more attractive to a buyer. We find buyers today are taking more time to buy a business today compared to 10 years ago. According to statistics compiled by business brokerage industry leaders, it takes on average 9 months to sell a business today compared to 7 months in the past. This is mostly due to two reasons: 1) the availability of more information over the internet allows  buyers to do more research and ponder on their decision plus compare other businesses in the market all from a click of a button; 2) the ever increasing number of businesses in the market place, forcing prospective buyers to say, “let’s wait and see what comes up next week”.

As such it is important for a business owner who is planning to exit from their business to plan early. Plan on how you are going to exit from the business; plan on when you are going to exit from the business; plan on how much you need to sell your business for in order to retire and enjoy the second season of your life…

Those that take steps to plan and implement some strategies will come out ahead and possibly also sell more a higher value. Plan to increase revenue today, reduce expenses, increase profits, do a valuation to determine what is the value of your business to that you know what you need to do to increase the value of your business.

If you are interested in reading that article, click here for the link: Tsunami Warning – Profit Magazine article

8 Rules to Selling Your Business

I was recently asked by a business owner, what are the basic rules one need to follow to successfully sell a business.  After going through with a few that came to my mind, I realize how unprepared most business owners are when it comes to the topic of selling their business. Unfortunately as the majority of baby boomer business owners get older, this topic will become more important and one that is often discussed between partners, families and friends.

So here are the 8 Basic Rules that I believe one need to observe in order to successfully sell the business:
Rule #1: Do not try to sell your business yourself.

Rule #2: Have a clear understanding of why you are selling your business.

Rule #3: Have a realistic understanding of what it is you have to sell and how valuable it really is.

Rule #4: Have a good understanding of why someone would want to buy your business.

Rule #5: Get your house in order.

Rule #6: Plan to sell a business opportunity, not a pile of assets or a set of financial statements.

Rule #7: Plan to have multiple, enthusiastic buyers for your business.

Rule #8: Do not get attached to a particular price for your business; plan to let the market give you the best idea of what your business is worth. 

10 Tips for Selling a Business

1. Ensure all of your financials are up to date. Usual requirement is the last 3 – 5 years of historical Income Statements and Balance Sheet that are prepeared by a qualified and certified accountant with a CA, CGA or CMA designation. For small businesses if you do not have an accountant prepared statement than your Revenue Canada tax return T2 filing should be acceptable as well.

2. Tidy up your business as if you are about to move to a new house. Get rid of all those old inventory, papaerwork that you have been collecting for the last 10 years, bad debts, problem customers, unproductive employees, and assets that are not being utilized and/or old. A Buyer is not interested in inheriting your problems nor will they pay you for those. You are better off selling it yourself for a reduced price than thinking that a Buyer is going to pay you full dollors for those. As for the documents, a general rule of thumb is that if you have not looked at it for 3 years, most likely you will not, so get rid of it. A great tool which we recommend is to hire a part time employee and invest in a good shredder and scanner (both can be had for less than $600, I recommend the Fijitsu ScanSnap from Costco), and have the employee go at it.

3. Start thinking about how you can delegate some of your day to day activities of the business. Buyers do not want to buy a business that relies on the you doing every aspect of the operations. Create a lists of all the things that you do on a daily basis for the business and see what 3 – 5 areas that you might be able to delegate or train an existing employee to take over.

4. Check your existing lease, contracts and any agreements that you have in place. Some obvious ones are: lease, franchise, customers, etc. Some not so obvious ones are: website, yellow pages, long distance service providers, garbage disposal, etc. Ensure that they are up to date and can be assigned to the buyer.

5. Get your accounts up to date with GST, payroll taxes, federal taxes, suppliers, customers, etc.

6. Create a lists of everything that you would have to show or teach the buyer. Place the information on a binder or provide the lists to your business broker. We find that buyers typically due to ignorance want the seller to stay and teach the buyers the business for a very long time, if you had created a lists ahead of time and be able to show it to buyers, they are more at ease that you have thought through this process and can see no need for you to stay in the business for 6 months when just 2 months might be sufficient.

7. Contact an experienced Business Broker to get advise on what you should do and could do to maximize the price that you get for your business.

8. Visit with your accountant and get their advice on taxation and capital gains issues so that you do not have to pay more than you need to.

9. Plan what you are going to do after you sell your business as this will affect timing, advise from your accountants and future requirements.

10. Don’t try and selling your business on your own. Leave that up to your Business Broker. It is more imprtant that you concentrate on ensuring that your business performs to best ability during the sale process.

Pay Taxes and Increase the Value of Your Business

I recently took a call from a business owner who wants to sell his business. He was in the specialty wholesale food distribution business. He primarily supplies a certain food product to the grocery stores in Alberta, Manitoba, British Columbia and Toronto areas.

After our first meeting and before reviewing his financial statements, I concluded that this is a viable business, it has good customer lists, niche product with steady suppliers, dedicated employees and the owner has created a good systems for its employees that allows him to continue to grow the business and work “on” the business. However, the seller had developed some health issues and needs to exit from the business.

I suggested the seller provide me with the financial statements in order for me to determine the most probable selling price for the business before we head to market. I was told that I will receive it in a few weeks since the year just ended and the accountant is completing the financials. But the owner provided me with the breakdown of the revenue, costs of goods sold, labor costs and general expenses of the business in order for me to have an understanding of how the financials are made up. The numbers made sense and it all looked good until……when I actually received the financials.

The income statement showed revenues of less than 30% of what I was told and the costs of labor was significantly lower. So I decided to meet with the seller to find out why the numbers look so different.

That is when I was told that the some of the sales are paid in CASH and therefore are not recorded, and for the cost of labor, the employees are only paid for 37.5 hours a week although they work approximately 45 to 50 hours a week. The balance of the wages are paid in cash.

This scenario occurs more common than one might think in many small businesses across the country. One of the common reasons for business owners not recording their income is to avoid paying taxes.  However most business owner do not realize that when it comes to selling a business, having a higher net income and paying taxes, increases your chances of selling the business and for a much higher price.

Let’s do a simple scenario on two similar businesses operating in Alberta.

Company A did not record all of its revenue and only chose to record revenues of $500,000 and had a net income before taxes of $100,000. Assuming a corporate tax rate of 25%, this company would have then paid taxes of approximately $25,000.

Company B on the other hand recorded all of its revenue of say $600,000 and let’s assume that it had a net income before taxes of $150,000 Again assuming a tax rate of 25%, Company B would have paid taxes of $37,500.

Now let’s see how the value of this business differs between Company A and Company B.

Let’s say that businesses in this Company’s industry sells for 2.5x’s of net income before taxes. So Company A is valued at $250,000 ($100,000 x 2.5) and Company B is valued at $375,000 ($150,000 x 2.5) or a difference of $125,000.

If you now factor in the taxes that was paid by the owners of the two companies, Company A paid $25,000 in taxes and Company B paid $37,500. So the taxes saved by Company A for not recording its full gross revenue is ONLY $12,500, while it could forsake over $125,000 ($375,000 – $250,000) when it goes to sell the business due to it recording methods.

In addition, business owners often do not realize the risk of revealing their “CASH” income to strangers who inquire about their business.  My recommendation when it comes to cash income is to report it, especially 3-4 years before the owner plan to sell his/her business.

There is Something About Gas Stations

Over the years we have been fortunate to have had the opportunity to sell a few gas stations and c-store businesses in the Greater Edmonton area. Most of this gas stations and c-stores are independently owned and sometimes also comes with a car wash. We have noticed that each time our office has a gas station listed our number of buyer inquiries spike up by about 5 to 6 times. Our typical buyer inquires each week is approx. 20 to 30 and when we have a gas station on the mix it typically increases to about 100 that week. I recall on one particular gas station we recently sold, we received a total of over 1,400 inquires to our office over a period of 3 months on that one listing alone. I have no clue if a gas station owner can handle that number of inquires on their own nor would they want to deal with that many of the so called “curious lookers.” Because at the end of the day out of all those inquires we were only able to narrow down to about 3 or 4 serious buyers who was willing and able to buy the business.

One interesting observation that I was able to pick up while dealing with most of the buyers is the myth that gas stations are easy to manage and operate and it requires low skill employees and/or management. Most buyers want to buy a gas station and hire low wage store clerks to run the business while they cash in the profits. Unfortunately I have to DISAGREE with this assumption completely. Gas station business is one of the most demanding and challenging businesses to operate in the retail industry. For one, it is a cash business hence the importance to have good management control of the cash that comes in each day. Secondly it is an inventory intensive business, where it is very important for an owner to manage the inventory and knows what to buy and what not to buy based on sales patterns. Thirdly, gas station and c-store businesses are changing rapidly. Today this businesses sell more than just your average gas and chocolate bar. Today they include services like money transfer, phone cards, groceries, etc. as such an owner needs to be constantly involved in understanding what the consumer demands.  Furthermore, an owner who spends time observing his or her customers and gets to know them might be able to add products most desirable by its customers base and increase the revenue of the store.

When buying a gas station, there is also the issue of financing. As most buyers will find out that banks are very hesitant to finance gas stations due to both the lack of capital assets in the business and the potential environmental risk associated with it.

Most buyers are also misinformed on the profitability of gas stations and c-stores. Most of them talk to us with the expectation of wanting to make over $100,000 a year owning a gas station while not putting in 100% of their time and effort. Unfortunately the reality has been that most successful gas stations with good profit margins are family owned and operated and the owners are involved in the business 120% of the time. In my experience as a business broker, I have seen very few small businesses with absentee owners able to generate high profit for the owner and yield a return of over 15% on the cash investment. So for all those buyers out there thinking that owning a gas station business is an easy business to run…..please think again and I encourage you to speak with an experienced business broker first before planning to go further.

What the Market Tells You

It never fails to amuse me how at least once a week I will come across an owner of a business that will tell me how he came up with the price of the business.

It often goes like this, the Seller will call our office for a meeting to discuss selling their business. I will then visit them at the appointed time (if it is at their place of business it will usually be after hours or weekends). We will then have a general discussion about their business, what they do, how long they have been around, some of the challenges and opportunities in the business….etc. sooner or later the discussion will star to narrow down to the business financials, revenue and the value of it. Most business owners will tell me that they have “no idea” on what is the value of their business. And most will tell me, “my accountant told me…“, “my lawyer told me…“, “my financial advisor told me…“, “my banker told me…“, etc…it seems like these days there are no shortages of “free opinion” on business values and suddenly everyone is an expert in business valuation.

I then try and educate them about what really matters about the business value……..”What the market tells you”, after all that is the one that matters most. Anyone can come up with a value of the business on paper, but what matters is what someone is willing to pay for it and produce a cheque with that number.

So my advice to all business owners who are thinking of selling their business in Alberta is this, get a business value opinion of your business from someone who has actually sold businesses…..not from those who can only tell you, but do go out and has to defend the price and get you that value.

Can You Sell Something with No Value

As I go on appointments to meet prospective clients wanting to sell their business,  I caution them that there are two ways in which one can normally value small businesses (notice the word “normally” and “small”). One way values Tangible Assets, such as inventories, receivables, furniture, fixtures and equipment. The other uses a multiple of Owners Benefit (Operating Profit plus owner’s salaries, depreciation, amortization, interest and personal benefits charged to the business). In other words, if your business generates minimal or no Owner’s Benefit, what you are really selling are the business’ tangible assets — what we call an Asset Sale. Ordinarily, you would not be able to sell your business for an amount greater than the market value of those assets — market value is in the “eye of the beholder”. However, buyers normally define Market Value at 25-35% of the assets’ original value.

Now, there are cases in which sellers pay more than the value of the net tangible assets—creating Goodwill in the seller’s balance sheet equal to the amount in which the purchase price exceeds the net tangible assets of the acquired company. Goodwill, however, normally has a value—such as competitive advantage, brand, employees, customer base, etc.

In summary, if your business is not generating profits, what you have is an Asset Sale and those assets need to have a realistic value assigned to them for buyers to want to buy.  In my opinion, you cannot sell anything that does not have a value attached to it that is equal to or better than the buyer’s expectations. So, if you are selling, take a hard look at what you are REALLY selling and consult with your business broker on pricing your business properly.

Selling Your Business Confidentially

Once you have an established asking price and terms, your search for the right buyer begins. Buyers may be found through a targeted search of potential candidates in your industry, or by a business broker in contact with a number of qualified prospective buyers. Regardless, a business broker can assist in the discreet search and screening of qualified buyers.

Confidentiality
Confidentiality is KEY in maintaining the goodwill of your business and in minimizing the disruptions at the work place during the sale process. If employees, customers and suppliers learn about the potential sale of the business too soon through other channels, they could begin to look elsewhere for employment and services. It is usually best to wait until a transaction looks imminent before key individuals are told of a sale.

To help minimize exposure, specific information regarding your business should be revealed only to qualified prospective buyers after they have executed a confidentiality and non-disclosure agreement. A qualified prospective buyer is someone that has established the following:

* A desire to purchase your business.
* Has sufficient financial capability to complete the transaction.
* Has the qualifications and resources necessary to manage your business.
* Has the willingness and ability to move forward in a timely fashion.

The information presented to a qualified purchaser after execution of a confidentiality agreement may include:

* A history of your business
* An overview of your business, including information about its products and services, operations information and personnel structure
* Information regarding your market, including customer mix, competitor, and industry trends.
* A list of the fixed assets included in the sale.
* Information regarding your facilities, including lease terms etc.
* Financial information that may include: balance sheets, income statements, details of liabilities to be assumed, equipment leases, etc.
* Details on the price, terms, and sale structure of which you are offering your business.

In-depth confidential information need only be revealed during the due diligence proces