Posts Tagged ‘selling a business’
When Should You Start Planning Your Business Exit Strategy?
June 18th, 2010
The essence of any for profit business enterprise is to generate a positive net cash flow over time from business operations for the benefit of the owner or owners.
If the above would be considered the primary goal, then the secondary goal would be to increase the businesses ability to produce more profits and cash flow over time. The more consistently the business can produce positive returns, the more valuable the underlying business is to others.
Ultimately, the strength of the businesses ability to create profits, value, and cash flow is the essence of any profitable and successful business exit strategy.
The most successful business exits will occur when the market is most interested in what the business has to offer and the business itself has demonstrated a strong business model that has taken advantage of the opportunity in the market.
So while the best business exit strategies have a lot to do with a point in time or the right timing when market opportunity and business performance come together, most business exit strategies are more focused on how to sell the business or liquidate the business assets at the retirement age of the business owners.
The odds that this selected point of exit is going to create optional or even above average results is slim.
There are two main reasons for this.
I’ve already talked about the first reason and that being the timing of peak market interest will exist when it exists. While it may be possible in some situations to create the demand for the business during the owner preferred time period, its more likely that larger market forces in play like the state of competition and customer demand at any point in time will significantly determine the potential success of a business sale.
The second reason is that at the point of business sale, the business is not properly set up for sale. There are a number of things that go into getting a business into a sale-able position. Financial statements need to show solid business returns and hopefully growth over the last 3 to 5 year period. The financial statements need to be prepared under a higher level of review than most businesses would typically undertake. There needs to be systems in place that will allow others to believe they can take over the business without a large risk of business transition failure. Core staff and management will not only need to be trained and committed to the ongoing business, but also be prepared to continue on in the event of business sale. Basically, the business needs to clearly demonstrate its value to interested parties through clear and acceptable representation of all critical aspects of the business including marketing, operation, and financial structure.
So when should you start planning your business exit strategy?
If you haven’t already started, right now is a good time, especially if you have any interest in having a successful and profitable business exit.
For an optimal business sale, the business needs to always be in a sales position to take advantage of the opportunities as they arise.
For those businesses where the business owner is committed to exit at a certain time period in the future, its perhaps even more important to create and maintain a sell-able position versus scrambling to make the business look more appealing near the end of the owner’s working life. Once a state of business decay creeps into a company, it can take a tremendous amount of business capital and effort to return the operations to an optimal level of performance and repair.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Evergreen Exit Strategy
December 30th, 2009
The Exit Strategy That Keeps Your Bags Packed
One of the many challenges in creating a viable exit strategy for selling off your business interests is how to determine the timing.
Its one thing to say you want to work until your 55 and then sell the business, but it could be quite another to actually have a motivated buyer show up willing to pay your price.
So I propose the evergreen exit strategy whereby the business is always up for sale in a figurative sense i.e. there is no permanent for sale sign sticking out of the lawn or hanging from the side of the building.
With an evergreen exit plan, the business owner has developed the mind set that he or she cannot control when the best time is to sell, so they have to focus on what they can control, which is making sure everything in the business is up to date and supportive of a potential sale, and making sure that the day to day actions of the business are directed towards increasing the overall value of the business.
This mind set is not easy to develop as many business owners are more locked into the thinking that they will sell at retirement, period.
But an evergreen mind set always allows for the ability to consider and react to any opportunities that may arise at any time.
Think of it this way. If you’re 10 years away from your expected time of exit and a highly motivated buyer comes along for some reason and wants to offer you considerably more for your business than even you think its worth, would you not want to seriously consider any potential offers that interested party is prepared to make?
Even if you develop the proper mindset, there’s still some work that needs to be done to allow you to even seriously consider opportunities that may arise.
First, the business must maintain what I call a “sell-able” state of being. There has to be a continual effort to make sure that the financial statements are up to date, that all equipment and facilities are in a good state of repair, that regulatory issues or legal issues are dealt with quickly and not left to linger, that employee, customer, and supplier contracts are up to date, that the business has developed sufficient management depth to allow profitable operations to continue once the owner is gone, and so on.
If your business can’t stand up to the due diligence process of the prospective buyer and his or her advisers, then any opportunity that does materialize may just as quickly pass you buy.
Second, the business owner(s) has to be prepared to look at any opportunities quickly as motivated buyers don’t tend to stand still very long and could very well move on to the next best option.
Following this strategy also doesn’t require you to do anything if you don’t want to, or don’t feel the benefit is sufficient to sell. What it does do is allow you to be as opportunistic as you want to be.
Over a period of 10 to 30 years, the future is going to be very hard to predict. So when opportunity comes knocking, it may very well be worth opening the door and seeing what’s on the other side.
Business FinancingSelling A Business Can Be A Real Chicken And Egg Process
December 18th, 2009
When Selling A Business, Which Comes First, The Deal Or The Dough?
Its late Friday afternoon and I’m getting a bit cute with my terminology. When I speak of dough here I mean the financing required to complete a business acquisition. When I speak of the deal, I’m talking about the purchase and sale agreement between the buyer and the seller.
One of the key reasons that business acquisition financing can be so tough to secure is because of the which comes first dilemma.
From the buyer and seller points of view, if they have a basic letter of intent signed up between them, then the assumption is that financing should be able to be secured before proceeding further.
From a prospective lender or investor point of view, until there is a binding purchase and sale agreement in place, there will not likely be a commitment for financing issued due to the fact that the source of financing a) doesn’t want to complete all its due diligence before an actual deal is binding and b) doesn’t know exactly what they’re financing until the final agreed upon terms and conditions of purchase and sale are known.
The buyer doesn’t want to spend money on due diligence unless he/she knows they can get financing. The buyer and seller together don’t want to pay their lawyers to hammer out an agreement of sale without knowing if the financing will work out.
The lender doesn’t want to commit time and resources to assessing the financing application until there is a completed deal.
In many cases, the deal goes nowhere as nobody wants to go first.
From the lender or investors point of view, I clearly understand where they are coming from. Yes, they can initially screen the deal and provide a term sheet outlining what they could potentially do if an agreement for sale was finalized and all the related due diligence supported a positive financing decision.
But to expect a commitment to fund prior to full review and the completion of a purchase and sale agreement is a tad bit unrealistic.
The resulting stand off goes nowhere and the deal is called off.
So how do you avoid destroying a perfectly good deal that, like most deals, requires some amount of outside financing?
First and foremost, its up to the buyer and seller to get comfortable with 1) the buyer’s ability to finance the deal and 2) the acquiring business’ ability to support and repay a financing facility.
Short of getting a commitment or even a straight answer from a prospective lender or investor, the next best thing is to talk to a business financing specialist and get a third party opinion of the likelihood that financing can be arranged.
If the buyer and seller don’t want to take this step, then they can commence to try and bang out a purchase and sale agreement and make it conditional on financing, pay their lawyers for their time, and hope it all works out.
The key here is that the onus is on both the buyer and seller to work together to get the deal done. Even if a lender were to go first, there could still be gaps in the financing requirements that need to be filled by a combination of the buyer and the seller, so their ongoing collaboration is going to be essential to create a win/win scenario that isn’t going to cost them an arm and a leg to figure out.
Business Financing5 Key Points To Getting Your Business In A Sellable Position
October 21st, 2009
How Do You Sell Your Business For Higher Profits?
Yes, in most cases, it does takes a bit more than the decision to sell and sticking a for sale sign in the ground to get the most profit or return from selling your business interest when you decide to exit.
Here are a few points to consider that can individually and collectively increase your probability of higher returns and a faster sales process once you put your business interest on the market.
#1. Develop a business exit mindset. As you grow and develop your business, remember to do so keeping the end in mind. Part of being in business is to develop asset value that someone will want to pay you for someday. Too often, when business owners are ready to sell, their business is not in what I would call an optimal sell-able position whereby buyers are not rushing to place high value offers to purchase.
#2. Related to the first point, continually focus on building assets, especially as you get closer to your projected time of exit. If you are in a service business, building a bigger and more responsive customer list will create more value. If you are in a more asset intensive industry, keeping your assets up to date, and investing in a physical location will also create more asset value and buyer interest.
#3. Build proof of performance. The preparation of financial statements and tax strategies can strategically save you money, but can also reduce the historical performance of the business. Sometimes your accountant can be too cleaver where you may save some taxes in the short run, but loose out on your sales price in the long run. Remember that while business valuations are done in a number of ways, the primary method will always be some multiple of generated net cash flow. So the closer you get to business exit, the more cash flow you want to be able to book in the financials, which could end up costing you some taxes short term, but also gaining you even more long term sales proceeds.
#4. Make yourself Dispensable. Too often, business owners do not transition the management and control of the business to others or create systems that do not require their direct involvement. One of the key things that can scare off buyers is the fear that the business may not be able to profitably continue without the presence of the owner.
#5. Develop a financing friendly scenario. In most cases, optimal profits from selling a business and quick business sales, have everything to do with the buyer being able to finance a portion of the business purchase price. Third party business financing is more likely when lenders can clearly see the historical performance of the business, a solid transition plan, and business assets that have significant market value. The other business financing aspect of getting an optimal sale price is for the business owner to supply part of the financing. While this limits the cash proceeds in the short term, it can also make or break the potential for higher total returns.
Vendor financing can also significantly speed up the sales process as third party lenders are more interested in participating in deals where the vendor is also prepared to contribute. Why? There are a couple of reasons. First, the amount of third party financing required will likely be less so less risk to the lender. Second, the vendor financing will create risk for the vendor and should motivate the vendor to support the transition of ownership and disclose all risks and issues that may impact the business in the future. This will also reduce the risk of a third party lender. Third, lenders are not typically interested in financing goodwill, so when goodwill is built into the sale price, vendors are many times expected to finance all or part of the goodwill valuation, creating a more comfortable position for third party lenders to provide business financing
Business Financing