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. 

What Are the Costs of Buying a Business?

One of the most important considerations of any business activity is cost and the cost to buy a business is no exception.  While I have no doubt most people we deal with at VR understand the importance of this simple financial measure we find a number of our prospective (typically first-time) buyers do not have a clear idea of all of the necessary costs involved in buying a business.

With that in mind we’ve created the following worksheet to help you: 

Cash Requirements Worksheet

Many of these costs are self explanatory but this sheet should provide a complete picture of the necessary costs when buying a business.  A quick overview:

Initial Cash is the total cash tendered by the purchaser.  It includes cash funding provided by the purchaser as well as bank financing provided to the purchaser and encompasses inventory not included in the sale price.

Existing Encumberances are any liabilities the new owner is assuming from the old.  With the exception of payments on capital equipment there is typically very little included here.

The availability of Seller Financing has steadily become more important in recent years and can have a drastic effect on the saleability of a business as well as its final selling price.  (See Jey’s article here for more detail.)

Closing Costs are miscellaneous costs involved in closing a deal.  The skills of several different professionals factor importantly into this stage of the process and ensure that the interests of both parties are protected and observed.

Startup Costs include licensing fees, and other support activities/costs the new owner must cover in order to complete the transfer of operations to his or herself and ensure the business continues to operate.

If you are a prospective buyer or have any further questions regarding this worksheet or the selling process in general please do not hesitate to contact us at the VR Edmonton Office and one of our friendly, knowledgeable staff will be happy to assist you.

Submitted by Kenji Miki

What You Should Know When Selling Your Business

What can Business Brokers Do – And, What They Can’t Do?

Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what professional business brokers can do – as well as what they can’t. As your business brokers, we can help you decide how to price your business and how to structure the sale so it makes sense for everyone – you and the buyer. We can find the right buyer for your business, work with you and the buyer in negotiating, and every step of the way until the transaction is successfully completed. We will also help the buyer in all the details of the business buying process.

A business broker is not, however, a magician who can sell an overpriced business. Most businesses are salable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but whether the business sells or not.

How Long Does It Take to Sell My Business?

It generally takes, on average, between four to six months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner we have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice the business. This theory often “backfires,” because buyers will often refuse to look at an overpriced business.

It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time it usually takes to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.

Why Is Seller Financing So Important to the Sale of My Business?

Surveys have shown that sellers who ask for all cash receive on average only 70 percent of their asking price, while sellers who accept terms receive on average of 86 percent of their asking price. That’s a difference of 16 percent! In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically, and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases, it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What Happens When There Is A Buyer for My Business?

When a buyer is sufficiently interested in your business, we will help in the preparation of an offer or proposal. This offer or proposal may have one or more contingencies. Usually they concern a detailed review of your financial records and may also include a review of your lease agreements, franchise agreement ( if there is one), or other pertinent details of the business. The buyer’s proposal will be presented to you for your consideration. You may accept the terms of the offer or you may make a counterproposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time.

We will submit all offers to you for your consideration. At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider.  There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any, offer – just that all offers should be looked at carefully.

When you and the buyer are in agreement, we will work with both of you to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help him review the information. When all the conditions have been met, final papers will be drawn and signed. Once the transaction has been completed, money will be distributed, and the new owner will take possession of the business. As your business broker professional, we will work with you throughout the entire sales process.

What Can I Do to Help Sell My Business?

You can cooperate fully with us and any other professionals that you are using. A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure he is familiar with the business closing process and the laws of business sales in Alberta. You might also ask if his schedule will allow him to participate in the closing on very short notice. If you and the buyer want to close the sale quickly – usually within a few weeks, unless there are licenses and/ or permits required that might delay things – you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.

And, finally, your team of advisors must all be working towards the common goal of selling your business for the best price and terms available in the marketplace, and closing the sale as quickly as possible! Remember that, as your professional business broker, we are on your side. Only by your being as cooperative as possible with us, can we best handle your business interests.

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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

Another 10 Tips for a Successful Business Sale

1. Be reasonable about the price of your business. Inflated expectations interfere with your business intermediary’s ability to negotiate the best price for you.
   
2. Continue operating your business as usual. Don’t become so obsessed with the transaction that you ignore day-to-day demands. Your prospective buyer will need to see a healthy, functioning business, not one suffering from neglect.
3. Keep the sale process strictly confidential. A breach of confidentiality surrounding the sale of a business can alter the transaction dramatically. Any potential purchaser looking at a business for prospective purchase must sign a confidentiality and non-disclosure document. Your business intermediary should prepare such a document for you.
4. Prepare for the sale well in advance. Be sure your records are detailed and complete for at least the past few years, and do all pertinent legal or accounting housecleaning as well as a physical sprucing up of the plant or office.
5. Anticipate information the buyer may request. In order to obtain financing, the buyer will need financial statements, asset lists, year to date financials etc., plus information to satisfy any environmental regulations that may apply.
6. Achieve the highest price through buyer competition. Since this can be tricky, you’re advised to let your intermediary, as a third-party, create a competitive situation with buyers to position you for the best transaction value.
7. Be flexible. Don’t be the kind of seller who wants all cash at the closing, or who won’t accept any contingent payments or an asset transaction.
8. Negotiate, don’t dominate. You may be used to being your own boss, but the buyer may be used to having his way too. With your intermediary’s help, decide in advance when to hold and when to fold.
9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary, your accountant, your lawyer and other experts who may be required to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.
10. Be willing to stay involved. Even if the process has been exhausting, realize that the buyer may want you to stay within arm’s reach for a while. Consult with your intermediary to determine how you can best achieve a smooth transition from owner to past owner.

Are Your Ready to Sell Your Business?

Selling your business is not necessarily just a matter of signing a contract. It involves a consideration of all aspects of your business and as a seller the best time to do this is before you have found a buyer.
If you are unsure about what will be expected of you or don’t know what to expect from the sale process, seek advice from a professional who is experienced in business sale transactions. Don’t be afraid to ask your proposed advisor about their experience, you want someone that specializes in this type of transaction.

Presenting your business for sale professionally and being able to supply information quickly will show potential buyers that you are organized and will ultimately lead to a smooth sale process.  As a seller you need to be prepared to let a buyer carry out a due diligence on your business. Due Diligence is the process where the buyer undertakes a close examination of all aspects of your business, not just financials but all things necessary to carry on your business day to day.  The easiest way to prepare yourself for this process is to take a good look at your business from the buyer’s prospective. Prepare and implement a detailed plan of action to get your business ready for sale and due diligence:
– Identify and make a lists of all the business assets that will form part of the sale;
– Identify all contracts/licenses/agreements that are required to carry on the business;
– Ensure that all legal documents relating to the business are up to date;
– Make sure your financial records are accurate and up to date;
– Ascertain if your assets are transferable and whether third party consents are necessary.

Being organized is key, knowing what a buyer may want to see as part of it’s due diligence will mean a request is not unexpected and there will be no delays in providing the information sought. In addition to the financial statements and books and records of your business, a buyer will be entitled to see every document critical to the operation of your business including premise leases, material contracts with suppliers and customers and plant and equipment hire purchase agreements and leases.

Below are some tips for getting ready to sell:

IDENTIFY BUSINESS ASSETS THAT WILL FORM PART OF THE SALE:  

• Unencumbered equipment – items of equipment, machinery, furniture, fixtures and fittings that you own outright. These are also known as fixed capital assets which are used for carrying on the business.
• Inventory – Identify each item of inventory by type.
• Intellectual Property– registered and unregistered trade marks, copyright materials, domains, business names, websites.
• Contracts – purchase agreements, equipment leases, premise lease, supply agreements, service agreements, hosting agreements, customer agreements, third party rights to use intellectual property.
• Statutory Licenses – many businesses require a statutory license to operate, for example if your business is a recycling depot that license from Alberta Recycling Management Authority will need to be transferred.

DO YOU OWN EACH ASSET IDENTIFIED ABOVE?
Make sure that you own or have rights to transfer the above assets. As an example:

• Domain names: A quick online search will verify who the domain registrant is for your domain name. If you as the seller are not the registrant steps should be taken to rectify this before a buyer is found.

• Inventory: Check your supply agreements. If you purchase inventory on credit, it is likely that the supplier retains title to the inventory until such time as it has been paid for in full. The general rule is that you cannot sell what you do no own.

CAN THE ASSETS BE TRANSFERRED?
Is each of the contracts you have identified transferable to the buyer? Some contracts require the consent of a third party before a transfer can be effected. Most commonly the space you are leasing  requires the consent of the landlord before an assignment can take place.  If a statutory license is required to operate your business, the license may be personal to you and not transferable, find this out early.

CONTRACTS
Prepare a copy of all the contracts you have identified so that these are ready to be given to a buyer upon request.  If there are contracts to be transferred to the buyer your sale agreement will need to provide sufficient time to obtain the consent of any third parties.  Always bear in mind that it is in your best interest to clearly identify all of the contracts required to carry on your business. Failing to do so could mean you are left with the burden of a contract which is of no use to you after settlement.

Addressing the above matters as soon as you decide to sell will ensure that you are prepared for the process and being prepared usually results in a smooth handover at settlement.

8 Common Mistakes to Avoid When Selling a Business

Now that you’ve decided to sell your business you need to consider your best options. Although you may be eager to jump the ship and put your company on the market, unplanned action can negatively impact your financial state and result in the loss of thousands of dollars. Before you take action, here are eight common mistakes sellers make and how you can avoid them:

Mistake #1: Not planning ahead.
You wouldn’t try to sell your house overnight, so why would you try to sell your business that way? Selling a business takes time so allow yourself that luxury. To receive the most reflective price of your business, you have to be patient and you have to be organized.  Review your records and make sure all this information is up to date, as any potential buyer will want to see that this information is current, accurate, and available.

Mistake #2: Not understanding the value of your business
Remember: Asking price is what the seller is asking, selling price is what the seller is receiving, and the fair market value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

If you don’t know what your business is worth, what price will you ask? Before you put your business on the market make sure you know an approximate price to ask for your business. Before making the decision to sell it’s important to meet with an experienced broker who can provide you with the most realistic pricing option for your business.

Mistake #3: Assuming that you can be your own business broker.
While there are some tasks you can undertake yourself, this is the stage where overestimating your abilities may be to your great detriment. Selling a business is not as easy as putting up a ‘for sale’ sign, it’s a complex and lengthy process carried out by a variety of professionals – so let the professionals do their work.

Mistake #4: Assuming that the highest value quoted = best value for your business.
Speaking of professionals…overly zealous brokers may quote you higher asking prices for your business, which if you’re looking to make a significant profit (who isn’t?) this is highly appealing to you. However you need to consider the true value of your business and what this this means on the market. A too high asking price will likely result in an unsold business, meaning that the profit you’re chasing is unattainable and you will end up with nothing.

Mistake #5: Spending too much time on buyers who are not serious
Your business may generate a lot of interest but most of this will not result in a sale. It’s important to distinguish between buyers who are truly interested in your business and those that are merely shopping around, as this may divert your efforts from buyers who truly want to buy your business.

Mistake #6: Not taking enough time to understand a serious buyer
The better you understand the buyer and their interests, the more likely you will be to make the correct decision about whether they are the right person to take over your business. Knowing the buyer will help ease the negotiation process and allow the transaction to run more smoothly.

Mistake #7: Not knowing when to say ‘no’
Although you may be eager to sell your business make sure the deal is a good one. Even if you understand the true value of your business (and have successfully avoided mistake #2) you may be eager to sell. It’s crucial that you do a through analysis of the offer and whether this is beneficial to you. It’s better to hold off until a good deal is offered than settle for a bad deal as this may result in great losses for you.

Mistake #8: Being unsure
So you’ve managed to avoid all the previously mentioned mistakes and the negotiation is going smoothly: this will result in a win-win situation for all involved. However, you’re beginning to realize how much you’ve invested in this business and feel you cannot afford to part with it, so before closing the deal you decide to back out at last moment. If there is ever any shred of doubt prior to beginning the selling process it’s important to address it. If that doubt still persists, you are not ready to sell your business. Simply do not begin the process all together and spare yourself the headache.

Submitted by Alexandra Ciungan

Survey of Business Financing

Biannual Survey of Suppliers of Business Financing Statistics (2011 data analysis): This document represents the first public release of information from the new biannual Survey of Suppliers of Business Financing. The survey collects hard data on business lending activities.

Industry Canada recently released its first survey results on the suppliers of business financing. The overall trend points to an increase in business lending activities by the Banks. This is good news if you are a business with tangible assets that can be easily securitized by the Banks.

However if you are buying a business in the service industry and/or business with little tangible assets, than you might just have locked yourself out from borrowing from the Banks. Also an established and profitable business will sell for more than just the value of its assets. So the question in Canada remains, how does a small business owner sell his business and ensure that the Buyer can obtain reasonable amount of financing from the Banks for his business.  Unfortunately the answer today is this is NOT possible.

Here is what we know of small business sales. A typical buyer is willing and able to put down between 20 – 30% of the purchase price towards the price of the business. The Banks are often able to finance 40 – 50% of the purchase price secured against the assets of the business. And the GAP of  20 – 40% is financed by the Seller.  This is just the reality of small business sales today and I do not see too many ways around it, especially if the Seller wants TOP dollars for his business. Of course he can choose to sell the business for a discount and get paid in all cash, typically this will be at 60 – 70% of the price.

Seller financing is a reality and a very important aspect of the sale of a small business. Why?
A seller who provides financing often will have a higher probability of successfully selling his/her business. In addition, seller financing often convey the message that the owner is confident that his/her business is capable of continuing to generate the cash flow to repay the loan after the sale. Other benefits of seller financing is also it may reduce your tax liability at the time of sale, provide you a higher value for your business since the portion that is financed also generates additional interest income.

So if you are planning to sell your business, my advise to you is to select a Business Sales intermediary who is able to price your business appropriately,  who understands financing and able to help a buyer negotiate the most amount of financing for your business, and then securitize your financing portion appropriately with the Buyer.

For more information on different financing options when buying or selling a business please click here. 

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. 

How Do You Calculate Profit?

The following article was written by Tom West and published in his Newsletter “The Business Broker”. I thought that it is very amusing yet it is true and I have came across a number of small businesses in Alberta where the true measure of the business profits had to be determined using one of this methods.  While we at VR Business Sales do not advocate the below accounting system, we find the owner’s perspective amusing and informative. 
A Greek restaurant owner had his own bookkeeping system. He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in a cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register. When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods. “I don’t know how you can run a business that way,” he said. “How do you know what your profit is?”
“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back. Today, your brother is a doctor, your sister is a speech therapist, and you’re a CPA. Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement. We have a good business and everything is paid for. Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”