At least once a month, you should be doing an analysis of your business, and making sure that your books and records are in working order.

It’s  not only good to see the progression of your business, but to verify that both your accounts payables and receivables are in the black. If you are thinking about selling your business somewhere down the line, you should have everything in shape. Additionally, you should have dashboard reports that pinpoint exactly where your revenues are coming from (or not) along  with industry analysis reports that show how your business stands up  against others.

Specifically, you should be paying attention to profit and loss statements (P&Ls) when analyzing  your business. You’ll be able to account for all the income that your business has earned as well  as all incurred expenses.

There are two ways to cast a P&L:

1. For tax purposes, a P&L is slanted to show maximum expenses and minimum profit.

2. To help sell your business for top dollar, the P&L is re-casted to show the actual ongoing  business expenses and maximum profit.

Remember, buyers are looking for a business that’s making a profit. So when reconstructing the  P&L statement, pull out the personal expenses, overstated inventory, non-deductable expenses,  owner’s personal insurance, salary, promotion expenditures, travel and entertainment, depreciation on equipment, auto expenses, bad debt, donations, interest and income tax. Once  you remove these items from the “losses” category, the money gets added to the “profits”  category. Now, you should be left with a truer net profit.

Realistically, you should have in order the last three years of P&Ls, especially, if you are selling  your business. You can prove to the buyer that your business is worth your asking price.  Establish a record of steady profitability as well that will help you see not only how your business is progressing, but can show a potential buyer that it is a proven money maker. Most buyers are  looking for a well-run operation that is efficient. You can show this by having accurate and timely  bookkeeping records.

An important aspect to inventory is all your furniture, fixtures and equipment. In addition, note  which items are leased or rented. If you’re preparing to sell, you are going to want to make a  complete list of everything that is included in the price.

For example, many potential buyers will assume that when they tour an establishment,  everything they see is included at no additional cost. Therefore, you want to have a separate list  that describes everything that is being rented, leased or will not automatically be included.

It cannot be stressed enough that you need to keep good business records, regardless if you  plan to be in business for several years or sell within the near future to a prospective buyer.  Knowing what your value is will only help you in the long run.

Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers? Complete the Sellability Score questionnaire today and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Sellability. Take the test now:

Did you see the news that Facebook has recently acquired Internet messaging service WhatsApp or $19 billion? It represents the largest-ever acquisition of an Internet company in history.

WhatsApp is a pearl for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.

At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?

Nobody know for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.

And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.

There can be many strategic reasons why a big company might want to buy yours. Here are a few to consider:

1. To control their supply chain – In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.
2. To give their sales people something else in their briefcase – Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.
3. To make their cash cow product look sexier – Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.
4. To enter a new geographic market – Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.
5. To get a hold of your employees – Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.

Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.

Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers? Complete the Sellability Score questionnaire today and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Sellability. Take the test now:

:

The recent Sochi Olympic Games caused us to reflect back on some of the big events of the 2010 Olympic Games in Vancouver.

In the Men’s Downhill race at Whistler, for example, the winning time of 1:54:31 was posted by Didier Défago of Switzerland. The time among medalists was the closest in Olympic history, and while Mario Scheiber of Austria posted a time of 1:54:52 – just two tenths of a second slower than Défago – he finished out of the medals in fourth place.

In ski racing, one fifth of a second can be lost in the tiniest of miscalculations. And when it comes to selling your business, markets can be equally cruel. Get everything right, and you can successfully sell your business for a premium. Misjudge a couple of minor details and a buyer can walk, leaving you with nothing.

Here is a list of six little details to get right before you put your business on the market:

1. Find your lease. If you rent space, you may be required to notify your landlord if you intend to sell your company. Read through the fine print and ensure you’re not scrambling at the last minute to seek permission from your landlord to sell.

2. Professionalize your books. Consider having audited financial statements prepared to give a buyer confidence in your bookkeeping.

3. Stop using your company as an ATM. Many business owners run trips and other perks through their business, but if you’re planning to sell, these treats will artificially depress your earnings, which will reduce the value of your company in the eyes of a buyer by much more than the value of the perks.

4. Protect your gross margin. Oftentimes, when leading up to being listed for sale, companies grow by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.

5. If you’re lucky enough to have formal contracts with your customers, make sure your customer contracts include a “survivor clause” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business. Have a lawyer paper the language to ensure it has teeth in your jurisdiction.

6. Get your Sellability Score. Take 13 minutes to answer the Sellability questionnaire now. You’ll see how you performed on the eight key drivers of sellability and you can identify any gaps you need to fill before taking your business to market.

Like competing in the Olympics, selling a business can be an all-or-nothing affair. Get it right and you will walk away a winner. Fumble your preparation, and you could end up out of the medals.

If you’re curious to benchmark your company on the 8 major factors that drive your company’s value, take 13 minutes and get your Sellability Score without any cost or obligation

:

Do you ever wonder if you have done all the right things to maximize the value of your business? SOME DAY – you will want to sell your business, unless you are passing it on to family members. Even if that is the case, you probably want to leave the business in its very best shape!

John Warrillow, the bestselling author of Built to Sell: Creating a Business That Can Thrive Without You, will lead a one-hour presentation on building a sellable business. Built to Sell was ranked by both Inc. and Fortune Magazine as one of the best business books of 2011. During this unique session, John will discuss the principles of increasing the value of your company – John will also take your questions directly.

VR Business Brokers of McKinney utilizes the principles behind John’s book to help business owners generate a quick and concise assessment of their business in relation to how well it is “Built to Sell”.

The webinar is FREE and will be conducted on Wednesday, February 26, 2014 at 11:00 AM – 12:00 PM CST.  Reserve your seat now at https://www4.gotomeeting.com/register/258626647 using my name – Larry Lane, in the “advisor” field when you register for the webinar.

I hope you find the webinar beneficial to your planning process.

In the mean time, if you’re curious to benchmark you company on the 8 key drivers that can affect the Sellability of your business, take 13 minutes and get your Sellability Score without any cost or obligation.

When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. The analysis of 5,364 businesse found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit.  In reviewing just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when analyzing just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.

If you’re curious to benchmark your company on this topic and the other seven factors that drive your company’s value, take 13 minutes and get your Sellability Score without any cost or obligation

The results through the 4^th quarter of 2013 are in and according BizBuySell.com the Internet’s largest business-for-sale marketplace, small business transactions grew 49 percent in 2013 compared to 2012. The full-year totals represent the first year of extreme improvement in the business-for-sale industry since levels reached record lows in mid-2009.

In addition to full-year totals, BizBuySell.com reported a strong fourth quarter to end 2013. Total small business transactions increased 38 percent over the fourth quarter of 2012. This comes after 56 percent growth in Q1 of 2013, 62 percent in Q2 and 42 percent in Q3.

Not only are the total number of transactions on the increase, but we are now seeing some stability in the value of the transactions.  According to Pratt’s Stats, the premier source for private business transaction details, the value of business transactions continued to improve in 2013. Pratt’s Stats includes up to 88 data points that highlight the financial and transactional details of the business sales, and includes both private and public buyers.

As of the publication date, the Pratt’s Stats database contains 13,883 transactions in which the buyer was a private party.   The database includes a total of 20,543 transactions in which a privately held company was sold to either a private or public buyer.

Listed below are various statistics, based on “median” results, excerpted from the Pratt’s Stats report.

Transaction Sales Price as a % of the Net Annual Sales for all transaction sizes increased over 2012 results.

Transaction Sales Price as a multiple of EBITDA came in at the highest level since 2008.  The “Construction” industry reported the highest overall multiple of all business segments.

The broad industry categories, ranked by transaction sales price, are as follows:

1. Manufacturing
2. Construction
3. Wholesale trade
4. Transportation
5. Services
6. Retail

The gross profit margins reported by all companies acquired in 2013 were even with 2012.

If your company’s revenue has stalled after a period of rapid growth, you may have fallen into The Mile Wide Trap.

Consider the case of Kim (not her real name) who runs a public relations firm. Kim studied marketing at school and went on to work for a big advertising agency where she spent ten years learning a variety of marketing disciplines, from public relations to advertising to direct marketing and social media.

Then Kim decided to leave her job to start a public relations firm. Given her depth of experience and connections, she quickly landed tractor giant John Deere as a client and was asked to handle their regional dealer events. She hired some helpers and her start-up agency quickly began to grow. Kim did a great job with the dealer events, so John Deere asked her to handle their annual sales conference. Again she delivered with style and creativity.

Impressed by Kim’s innovative approach to the event, John Deere asked her to handle some of the creative for their next advertising campaign. Kim had started her company to do PR, not advertising, but John Deere was a great client so she agreed to help out with the ads.

Then John Deere asked her to take a look at their website. Kim’s new employees had no experience with web design, but Kim had done some website jobs back at the ad agency. Not wanting to disappoint John Deere, Kim started to personally handle projects that her employees didn’t have the ability to execute.

Kim didn’t worry about new business development for own firm because the more John Deere asked Kim to do, the busier – and more profitable – her firm became.

Then one day Kim looked at her monthly P&L statement and realized that, for the first time, their sales were flat on a month-over-month basis. The next month it happened again and then again. Kim had run out of hours in the day to sell – she had inadvertently fallen into The Mile Wide Trap.

The Mile Wide Trap

The Mile Wide Trap ensnares you when you do an excellent job serving a small number of great customers and they ask you to handle more of their work. You keep delivering, and they keep broadening the list of products and services they want you to supply.

Your company is wildly profitable serving the expanding needs of this small list of “great customers” so you keep falling deeper and deeper into the trap.

Pretty soon, you’re an inch deep and a mile wide in offerings and the only person in your company with the depth of industry experience to deliver all of the services is you. But you’re trapped because your expenses have crept up as your revenue has exploded – leaving you dependent on the sales you get from a small group of demanding customers.

With no more hours in the day, your company stalls and you run on a hamster wheel just trying to keep what you’ve got.

The Solution: Sell less stuff to more people.

Instead of selling more things to a few customers, concentrate on selling a few things to a lot of customers.

Nashville-based Ethos3 is a successful design firm that has avoided The Mile Wide Trap. Most design firms are founded by a designer who gets himself in trouble by offering a broad range of design services (brochures, websites, signage, advertising) to a handful of clients. But founder Scott Schwertly knew that in order to scale up beyond himself, he needed his employees to execute the work, and therefore he decided to focus on one very small corner of the design business: PowerPoint presentations.

Schwertly’s focus on PowerPoint has allowed him to train his employees to follow his system for designing presentations. Everything is standardized – from the proposal to project management to the final invoice – so employees can follow a system that doesn’t require Schwertly. Ethos3 has scaled up nicely and counts Microsoft, Google and Cisco among its 300+ customers.

Another example: Flikli.com is a video production studio, but instead of making videos of all kinds, they’ve decided to focus exclusively on two-minute animated “explainer” videos that explain a company’s value proposition simply and effectively. Their focus on creating one specific type of product allows them to standardize their pricing and give employees a step-by-step guide to making great explainer videos. Flikli has scaled up to 22 employees and their work has been featured in everything from Wired Magazine to The Washington Post.

You can fall into The Mile Wide Trap innocently enough: you do great work and a customer wants more of you. But it’s a trap that will eventually choke off your growth. The way out is to follow Flikli and Ethos3 and focus on selling less stuff to more people.

If you’re curious to benchmark your company on growth potential and the other seven factors that drive your company’s value, take 13 minutes and get your Sellability Score here:

You have built a great business with love and care. It has grown larger than you’d ever imagined, and generates a nice profit that has allowed you and your family to live comfortably. Now you’re ready to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.

What Buyers Look For
There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
1. Cost and terms.
What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?

2. Continuity
Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example:

• The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain,
• The owner has special expertise that is undocumented and difficult to learn,
• Key personnel aren’t committed to staying, or
• Outside competition looms.

Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.

3. Growth
Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities.
What sellers should do?

It may seem counter intuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast that their company could run just fine without them or that there are plenty of opportunities they’ve failed to exploit. Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.