By JoAnn Lombardi, VR Business Brokers/Mergers & Acquisitions, President

Business owners own life-long dreams, not businesses. When the time comes to pass on that dream, care should be taken to get the best price. The following tips can help business owners successfully sell their businesses.

1. Position your business for sale.
This process should begin the day you purchase or start the business. To build long-term value, develop and maintain a tracking system of customer transactions, financial records, licenses, equipment, and inventory.

2. Determine the fair market value of your business.
Because the market determines value, business intermediaries are the most qualified professionals to value your business. They have the most complete and current information on actual business sales and pricing formulas, and can therefore provide businesses with accurate market values.

3. Manage your business.
A common mistake made by sellers is to relax once they have decided to sell their business. To maintain maximum value, continue to manage your business with complete dedication and keep up your inventory, maintenance, advertising, and customer service levels.

4. Maintain confidentiality.
Your business value could suffer if employees, customers, or suppliers know your business is for sale and they no longer treat you “as usual. “Executing a representation agreement for your business with a qualified business intermediary assures you of confidentiality as well as step-by-step assistance through the selling process.

5. Negotiate effectively.
Don’t let inflexibility prematurely end a deal with a qualified buyer. At this stage you benefit tremendously from the professional help of a VR business intermediary who is trained to develop creative (and responsible) terms that both help close the deal and ensure all interests are met.

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By JoAnn Lombardi, VR Business Brokers/Mergers & Acquisitions, President

How to Develop a Successful Exit Strategy

Recently, many entrepreneurs fulfilled their life-long dreams of buying a business. Others have seen their businesses grow gradually over the years. They are pursuits these business owners have enjoyed and cherished. However as a business owner, you have to remember there will be a time you will have to pass your dream along to somebody else.

Whether you’re selling the business because of burnout, retirement or the desire to move on, when the time arrives to do so, do it right and receive the optimal sales price.

Often when you contemplate, plan or pursue the opportunity to sell your business, you discover the selling process doesn’t give you the flexibility needed to make the best deal. But you don’t need to fear, feel manipulated by or go through the resale process alone.

You will be at an advantage as an owner if you start thinking about selling the business before you actually proceed. You will easily be able to identify the important elements of the resale process, and have some control over them in the future. Preparing to sell before you move forward will help you better understand the business transaction, your needs as an owner and be in a better position to develop a strategy to make it through the sale efficiently and profitably.

There are five obstacles in the sale process you will have to examine as you proceed. With each one, there are some helpful tips every VR business intermediary will recommend to you. This will assist you in understanding the process better and successfully sell your business.

1. Position Your Business for Sale.
2. Determine a Fair Listing Price.
3. Running Your Business during the Marketing Period.
4. Finding the Qualified Buyer.
5. When to Consider Selling Your Business.

Position Your Business for Sale

The day you purchase the business is the day you start positioning your business for sale. You might not think so, but thinking about building long-term value for your business is just as important as making money in the short term. You want to maintain detailed records of finances, permits, licenses, equipment and inventory through your ownership. This will be critical when you are trying to sell your business, so don’t neglect this part!

Determine a Fair Listing Price

There are many methods you can use to price your business. The most common method(s) includes a multiple of cash flow or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The best method, and the multiples will vary depending on the size of the business and the industry.

There are many factors contributing to pricing your business:

• Financial terms.
• An earnout.
• Non-compete clause.
• General attractiveness of the business.
• Future potential.
• How the business fits with the buyer’s strategic plan.
• Size of the business – larger businesses bring a higher multiple.
• Rarity of the business.
• Whether the business is a service business tied to the seller’s relationship with customers, retail or other business with a skilled staff in place.

Any VR business intermediary will help you determine the right method to use, given our 40-plus years standing as a contributing innovator of business sales, understanding the marketplace, taking into account the various ways a business can be sold and a comprehensive database of comparable sales.

Running Your Business during the Marketing Period

Just because you are planning to sell your business doesn’t mean you neglect it during the process. You have to continue to personally attend to the business and not place too much time and effort in the selling process. If you do, a deterioration of revenue and ultimate the resale value will happen.

This is where your VR business intermediary will be beneficial in assisting you in finding qualified buyers, while you concentrate on managing your business to ensure you maintain the maximum resale value possible.

Finding the Qualified Buyer

Not every potential buyer is qualified to take ownership of your business. Your VR business intermediary will attempt to find a qualified buyer through examining their capital and source of that capital, motivation to buy, needs and expectations, background and skills. Your VR business intermediary will sit down with the buyer, asking all the pertinent questions to determine if the business will transition successfully to them.

When to Consider Selling Your Business

The right time to sell a business will vary from one owner to another. You may have a complete realization it’s time to move on. Thinking and planning the sale of your business before you decide will be much more satisfying and profitable; whether it’s when the business is doing well, in a non-seasonal downward trend, hitting its peak of growth, deciding it’s time for retirement, family issues, health issues or simply tired of being the owner. This question can only be answered by you.

Is now the time to consider selling your business?

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A new decade always comes with a slew of predictions that can be scary. Will a new superbug take hold? Will the stock market crash? Will the economy tank?

These are all excellent questions, but without a crystal ball, you can feel helpless. However, there are three practical steps you can take to inoculate yourself from whatever the coming years will bring:

Inoculation Strategy #1: Stop Trying To Time The Market

Many founders try to time the sale of their business to coincide with the peak of an economic cycle, reasoning they will get the best price for their business when the economy is booming.

While this is true in theory, when you sell your company, you need to do something with the money. Perhaps you’ll consider investing in real estate or buying stocks. Still, most investments are impacted by the same macro-economic environment your business enjoys, which means you’ll be buying into just as frothy a market.

The alternative to timing the market is to consider selling when your business meets two criteria:

First, if your company is on a winning streak, it will command a premium compared with average performers in your industry. Pick a time to sell when your revenue is growing, gross margin improving, employees are happy, and customers satisfied.

Second never sell before you have all of the information you’ll need to survive due diligence. After you agree to terms with an acquirer, they’ll need some time to verify your business is as advertised. A sophisticated buyer will look into every aspect of your operations, including your financials, customer contracts, employee agreements, the way you produce your product or service your sales and marketing approach and just about every other facet of your business.

You can’t wait until due diligence to prepare this package of information. The volume of questions will suck up too much of your time. React slowly to an acquirer’s request for information and “deal fatigue” will set in. This malaise happens when an acquirer loses interest in closing an acquisition because it is taking too long.

The way to immunize yourself against whatever the economy may be in the years ahead is to sell when you’re on a winning streak, and you have the data assembled to skate through due diligence with ease.

Inoculation Strategy #2: Pick Your Lane

The global economy has been expanding for several years, fueled by low-interest rates and optimistic consumers, which can be a dangerous time for founders. When the economy is hot, it’s tempting to expand outside of your original product and service category as customers seem to be willing to buy just about anything from you.

The problem with diversifying too broadly is that you can become less attractive to an acquirer over time. Acquirers buy what they could not quickly build on their own.  When you diversify too broadly, a buyer may pass reasoning, that it would be relatively easy to compete with your similar products or services.  They know you’ll want to get paid for all of your business, yet they may only want a small part of it.

Remember that acquirers only buy what they could not quickly build themselves, so they place a premium on buying a business with a definite competitive advantage — for example, a proven brand that consumers prefer or a protected technology innovation.

No matter what the economy has in store for the years ahead, do one thing better than anyone else, and you’ll always have a ready pool of potential acquirers for your business.

Inoculation strategy #3: Create A Vision Board

A vision board is a display of images that illustrate where you want to be in the future. Creating one by grabbing a stack of magazines and cut out pictures that appeal to you and communicate the life you want to lead.

A vision board is a compelling way to immunize yourself from the inertia that sets in once the startup years of your company are behind you. When you’re no longer struggling to find the next customer or wondering how you’ll make payroll, running a business may become less exciting. When you no longer need to draw on your creativity and problem-solving skills, one day may flow into the next, and you can become content, but perhaps not truly happy.

Think about a time when you were happiest. You were probably doing something new, perhaps in a new place with new people, learning, contributing and growing. Most owners are happiest when they are starting and growing a business, but when a company matures, it can become stifling.

The problem is, it can be challenging to leave a successful business. Your lifestyle needs are satisfied through your company, so why go? That’s where a vision board can be handy. It allows you to decipher the difference between being happy and merely content.  When you find yourself feeling comfortable but not necessarily happy, that might be the perfect time to sell – regardless of what’s happening in the economy at the time.

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If you find yourself in a position where your customers always insist on speaking with you directly instead of your employees, then you might want to consider shifting your structure so you can improve the value of your business.

Here’s why: a business that can thrive without the owner at the center of all its operations is more valuable because processes can run smoothly with or without you. If you’re too stuck in the weeds, you’ll have a difficult time improving or evolving – and your employees won’t have the opportunity to grow and become advocates for your brand.

To maximize the value of your business, you should set a goal to quietly slip into the background and let your staff take center stage. Here are five ways to make customers less inclined to call you:

1. Re-rank

If you display the bio of key staff members on your website, re-order the list so that it is alphabetical rather than hierarchical.

2. Re-brand

If your surname is in your company name, consider a re-brand. There’s nothing that makes a customer want to deal with the owner more than having the owner’s surname featured in the company name.

3. Hire a President

Giving someone the title of president conveys the message that they have real authority to solve customer problems.

4. Use an email auto-responder

Tim Ferriss, the author of The 4 Hour Work Week among other books, made the email auto-responder famous, and it can serve you well. Set up an automatic response to anyone sending you an email explaining that you are travelling or attending to a strategic project and unable to answer their questions immediately. Instead, train customers to direct questions to the person best suited to answer them quickly.

A word of caution using this strategy: if you continue to answer customer emails after setting up an auto-responder, it’s going to become transparent that you’re just trying to hide behind your autoresponder, which could diminish your credibility. If you set one up, you need to be ready to let others step in.

5. Play hookey

If you have the kind of business that customers visit in person, set up a home office so you can spend more time away from your location.

For a hard-charging A-type entrepreneur, the steps above can be complicated and feel counterintuitive. They may even have a short-term negative impact on your company’s sales, but once you get your customers trained to go to your team, you’ll be able to scale up further and ultimately maximize the value of your business.

Is your business creating maximum value?

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Article written by Meghan Daniels and provided courtesy of Axial.net

At the end of last year, an all-time high — 73 percent — of middle market company executives reported that their company’s overall performance exceeded that of last year, according to the National Center for the Middle Market. In Q3 2019, that number was 60 percent, down from 68 percent in Q2, according to the organization’s Q3 2019 Middle Market Indicator report, released last week.

This figure is indicative of the report’s overall findings — while performance is still relatively solid among middle market organizations, growth rates are declining, hiring rates are slowing, economic confidence is wavering, and companies are adjusting their expectations for expansion in the coming year. “Overall, leaders appear to be taking appropriate steps and hedging their bets for the time being, perhaps responding to growing national and global economic uncertainty. As attitudes and behaviors shift toward conservatism, many leaders are focusing internally on ways to cut costs and drive efficiency to ensure they are prepared for whatever the coming months bring,” according to the report.

Here are four takeaways from the National Center for the Middle Market’s Q3 report. For more, read the full report.

1. The percentage of companies adding jobs dips under 50% for the first time in 2.5 years:

For the past 2.5 years, more than half of middle market companies reported adding jobs, vs. 46 percent of companies this quarter. Year-over-year employment growth also fell this quarter vs. Q2 2019, from 6.4 percent to 4.1 percent, and the projected rate of growth for the next year is only 2.5 percent — the lowest number since 2014. Companies with annual revenues under $100 million were less likely to have added jobs than those with revenues between $100 million and $1 billion.

2. Middle market leaders are confident in their local economics — the global economy, not as much:

While 81 percent of middle market executives remain confident in their local economies, the figure for the global economy is much lower at 55 percent. This reflects a major decline from Q1 2018, when the figure was 82 percent. Confidence in the U.S. economy was 76 percent this quarter — lower than the five-year average of 79 percent.

3. Talent management is a persistent challenge:

Even as company’s hiring plans become more modest, today’s middle market companies struggle with retaining workers given low unemployment rates and persistent skills gaps, particularly in certain sectors. According to the report, 55 percent of companies cited talent management as a pressing short-term challenge and 46 percent as a long-term concern.

4. Nearly half of companies are consciously tightening their purse strings:

Forty-six percent of executives said they had “accelerated cost-cutting and efficiency efforts in the last six months.” This is likely tied to declining hiring rates and may lead to a decrease in raises for existing employees as well. In addition, “this suggests that bosses may be more Scrooge than Santa when merit increase time rolls around,” according to the report. These cost-cutting efforts come amid a widening gap between cost and profit expectations — this quarter, middle market executives reported their profit margin growth over the next year as 1.7 percent, compared to reports of 3 percent throughout 2018 and earlier this year.

The data seems foreboding — “this quarter’s report shows the biggest one-quarter drops in revenue and employment growth in the eight-year history of the MMI,” notes the study’s authors. However, they also note “it’s important not to make too much of these downward-pointing numbers,” as they only reflect a quarter’s worth of data and may prove to be an anomaly. Tracking growth and hiring, investment activity, and executive sentiment over the coming quarters will help determine whether this data is an outlier or a true reflection of economic softening.

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Walk down Nashville’s Lower Broadway any night of the week, and you can hear aspiring artists belting out cover tunes from Elton John to Garth Brooks.

In many cases, these musicians come to Nashville to be discovered but pay their rent using the tips they get by playing other people’s songs. Most are lucky to eke out a modest living while the stars they impersonate run thriving empires.

Forbes estimates[1] that Luke Bryan, country music’s highest-paid star last year, earned 52 million dollars on the back of his stadium tour and duties as an American Idol judge and Chevy spokesperson.

What’s going on here? Is Bryan that much more talented than the dozens of artists playing his songs in Nashville every night?

Probably not.

The difference comes down to who controls the product. In Bryan’s case, he owns the music and the personal brand he has created to perform it. The cover artist is just reselling his stuff.

The Value Of Your Brand

The music business can be a helpful analogy in explaining why creating a unique brand is such a big contributor to the value of your company. Acquirers want what they could not easily copy. If you’re reselling other people’s products and services, an acquirer will likely argue that there are probably dozens of competitors driving down your margin next to nothing. Further, they may even conclude that they too could earn a license to resell whatever you’re distributing and will, therefore, place little value in the company you’ve built.

However, if you have something exclusive – a unique product or brand that makes people believe what you do is different – an acquirer will pay more, arguing it is difficult to reproduce what you have created.

If you find yourself reselling other people’s products or services, you can still drive up the value of your business by creating a brand around the way you do it. You could argue that Peloton is just selling a stationary bike. Still, it is the unique company they have created around the bike –including the community of riders that subscribe – that has recently driven Peloton’s value north of $7 billion (almost eight times trailing twelve months revenue at the time of their recent Initial Public Offering).

To drive up the value of your company, own the stuff you sell. If that’s not possible, create a unique brand that makes consumers feel as if you do.

[1] http://www.nashcountrydaily.com/2018/08/14/forbes-list-of-the-highest-paid-country-stars-of-2018-includes-luke-bryan-garth-brooks-kenny-chesney-more/

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Article written by Meghan Daniels and provided courtesy of Axial.net

The letter of intent (LOI) is an important step in most M&A transactions. The LOI allows buyers to signal that they’re serious about a potential deal and to make sure that their vision lines up with the seller’s before they spend significant resources on a full due diligence process.

Here are the answers to four frequently asked questions about the LOI.

1. What does the LOI include?

A letter of intent serves in some ways as a preview or summary of the deal terms that would be expected to appear in the purchase agreement down the line. LOIs typically vary in length from about two to 10 pages, depending on a number of factors. Some argue a shorter LOI can help speed up the negotiating process as it centers the conversation around the most important elements of the deal: if there’s not agreement there, the logic goes, there’s no need to discuss other factors. Others prefer to address all potential issues upfront to avoid any surprise dealbreakers later on.

Here are some of the typical terms you’ll see in an LOI, though of course this varies depending on the deal.

1. Deal Structure: Is the transaction a stock or asset purchase?
2. Consideration: What are the forms of payment? This can include cash, stock, seller notes, earn-outs, rollover equity and contingent pricing.
3. Closing Date: What is the projected date for closing the deal?
4. Closing Conditions: What are the tasks, approvals, and consents that need to be obtained before or on the closing date?
5. Exclusivity Period: This is typically a binding clause requested by the buyer, who wants to ensure that sellers are negotiating in good faith. It’s typical for buyers to request an exclusivity period from 30-120 days, while sellers will typically want as short a period as possible.
6. Break-up Fee: This clause is also typically binding, though break-up fees are less common in the lower middle market. In larger deals (>$500MM), break-up fees of approximately 3% are typical.
7. Management Compensation: Which members of the senior management will stay on? Who will be provided equity plans? This aspect of the deal may be vague at the LOI stage before due diligence has been conducted.
8. Due Diligence: How will due diligence will be conducted? This includes the nature of information that will be disclosed and the manner in which it will be disclosed.
9. Confidentiality (Binding): Both parties have likely already signed an NDA earlier in the process, but this clause further ensures that all discussions regarding the proposed transaction remain confidential.
10. Approvals: Does the buyer or seller need any approvals (e.g., from a board of directors, regulatory agencies, customers) to complete the transaction?
11. Escrow: This may not appear until the purchase agreement, but sometimes the buyer will include summary terms of their expected escrow terms for holding back some percentage of the purchase price to cover future payments for past liabilities.
12. Representations and Warranties: This also may not agree until the purchase agreement, but if there are contentious or non-standard terms the buyer may include them in the LOI.

2. Is an LOI binding?

LOIs are generally non-binding, though sometimes there will be terms that are specifically called out as binding, e.g., exclusivity periods or break-up fees. It’s important to note, however, that in certain cases courts may interpret letters of intent as binding documents if the buyer and/or seller treats it as a contract. Still, sellers shouldn’t expect that the terms outlined in the LOI will necessarily be the final terms offered by a buyer. Buyers are looking to portray themselves in the best possible light at this point in the deal process, and have not yet conducted full due diligence and therefore don’t have a complete sense of the business’ risk factors that may impact their ultimate purchase price and terms.

3. Are LOIs mandatory?

No. It’s not unheard of for buyer and seller to skip over the LOI and go straight to the purchase agreement. However, an LOI can be useful for a number of reasons. It helps ensure that buyer and seller have similar (or at least similar enough) expectations around deal structure, scheduling, and other big concerns. It also means that any potential deal-breakers come up earlier in the process, so that the parties can either a) stop the transaction process before significant resources are spent on due diligence and drafting deal documents or b) figure out a resolution sooner. The letter of intent also is a nice way to ensure that seller and buyer are on the same page about how due diligence will be conducted. In addition, the LOI’s terms serve as important protection for all parties in a deal (e.g., exclusivity periods product buyers, while break-up fees protect sellers). Creating a shared vision of the future transaction means that there are fewer unpleasant surprises down the line and can make the overall deal process run a lot more smoothly.

4. What happens after the LOI is signed?

The next stage is typically due diligence. The buyer may have been conducting informal due diligence already, but the formal process begins now, and the seller will be expected to provide detailed financials and customer information along with other requested materials. These findings will inform negotiations down the line as buyers aim to lower their risk and sellers look to optimize purchase price and terms. At the same time that buyers are conducting due diligence, they also begin to plan for integration — doing so early on helps buyer and seller think through potential roadblocks and concerns and address those prior to the deal close. The final stage, of course, is drafting and signing the purchase agreement, which may require significant negotiation to get to a place where both buyer and seller are comfortable.

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Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now: