Posts Categorized: Sellers

Foreseeing the Future

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Use VR to Help Form an Exit Plan for Your Business

The owner/chef of a lucrative and well established restaurant was diagnosed with a terminal illness and suddenly was unable to work.  The business was highly dependent on the owner. While his bereaved wife struggled to run the business and hire a replacement chef, food quality, service, profitability and the reputation of the restaurant plummeted and never recovered. When the lease came up for renewal a year later, she shut the business down and walked away with nothing.

At the age of 66, the owner of a profitable construction company seeking to retire sold the business to his son, who was also an employee. His son had minimal savings so was only able to make a small down payment, and the price was discounted significantly. He also lacked the exceptional people and leadership skills of his father. The son began clashing with a key, more senior executive, who subsequently left the company to start a competitor, taking several other employees with him. At the age of 70, the father began working full time again, seeking to salvage the business, as he was dependent on the sale proceeds for a comfortable retirement.

The two entrepreneurs above had something in common with more than 85% of small business owners – they never developed an exit plan.

Without an exit plan, a business could quickly be severely damaged by a sudden crisis, such an illness, death, divorce, partnership dispute or rapid change in market or competitive environment. Or a business may deteriorate gradually as the owner burns out and neglects the business, or transfers it to a weak leader. Either way, the result is the same – greatly diminished business value. With tens of millions of baby boomers approaching retirement age, and controlling trillions of dollars of private company wealth, the issue is becoming acute.

By contrast, private equity groups and venture capital firms, perhaps the world’s most sophisticated owners and financiers of businesses, rarely fund or purchase a business without first having a formal exit plan in place. At VR Business Sales, we can help you create an exit plan so that you will be prepared for when you’re ready to step down as a business owner.

Understanding the Basics

So what is an exit plan? It’s actually a series of continually evolving and interrelated plans that will help you address at least the following critical questions:

  • What are your preferred options and timing for exiting the business? For example, sale to outsider, sale or gift to family or employees, merger with competitor, buyout by a partner, etc.
  • What family members are involved in the business and what are their objectives?
  • What are your financial objectives and retirement plans?
  • What is the value of your business now?
    • What key actions are necessary to increase business value and position it for sale at the optimum after tax amount needed to achieve your financial objectives?
    • What actions are necessary to manage estate, trust and tax issues you will face through retirement and beyond?
  • What actions, programs and agreements are necessary to ensure continuity of the business in the event of departure, death, or incapacitation of any of the owners or key executives? Examples include training programs, system development, buy/sell agreements, key man insurance, and non-compete agreements.
  • Who will replace you or other owners upon departure? Are any current executives and/or family members capable of doing so, and if so, what additional skills, training, licensing, etc. are needed? If not, what is the strategy for recruiting and developing a replacement?
  • What changes in the business and your role are needed now to preserve your quality of life and your passion for the business?

Developing a comprehensive exit plan is a demanding task that generally takes 3-6 months to complete and as long as 2 to 4 years to implement, depending on the complexity of the business. It will address a wide variety of intricate strategic, operational, financial, tax, human resource and legal issues. While a primary focus is meeting the owner’s objectives, it should ideally reflect the desires and concerns of all important stakeholders, including a spouse, children, business partners, other shareholders and employees, and in some cases customers, suppliers and the community. Input should be gathered from key advisors, including your CPA, wealth planner, estate planner, business consultant, insurance broker, appraisers and mergers and acquisitions advisor.

An exit plan is decidedly not a fancy written report that sits on a shelf gathering dust. To have any meaning, it must be regularly updated to reflect changes in your life, family, health, goals, finances, and the business. It must be action oriented and offer prescriptions that are implemented, not ivory tower theories. An ideal plan will take a long term view and continually assess actual progress of implementation against the plan timetable and take any necessary corrective action needed to keep on track with the plan.

If an exit plan sounds like a lot of work, it is. But having one can be the difference between your business shuttering when you depart and leaving a legacy that endures for generations. Contact  VR Business Sales today to learn how to put an exit plan together for your business.

What Buyers Look For In A Business Opportunity

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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.

Separating Yourself from the Market

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Creating an Innovative Strategy for Your Business

Strategy is fundamental in creating significant value in your business, and leads to sustained growth and returns.

To create a successful strategy, you must ensure that it has the following:

• Uniqueness;

• Ability to create new markets;

• Provides elements that inspire excitement and intrigue;

• Focus on specified markets;

• Employee-driven value.

Uniqueness

Given that the market is very competitive, you don’t want to present so many options that will overwhelm prospective customers. Having a strategy that is unique and innovative will place you ahead of the pack. A good example of this is what Dell achieved in the 1990s with their built-to-order product customization and direct-to-customer sales channel. As a result, they revolutionized their industry; placing them as the dominant force through the present day.

Creating New Markets

When putting together your strategy, it’s important to focus on creating new markets so that you can gain new customers. This is imperative if you’re in an industry where the competition is large. FedEx were able to do this effectively with their overnight delivery. You want to be the leader of your market and the consumers in it to demonstrate value instead of just responding to trends.

Provide Elements that Contain Excitement and Intrigue

Through stellar functionality, design and execution; a strategy should be able to provide excitement and intrigue. When Sony created the Playstation game system, a $20 billion computer game industry erupted.

Focusing on Specified Markets

The marketplace has changed considerably from one mass market to hundreds of specific ones. Capital One recognized how the market was changing, and created a digital system to canvas thousands of possible combination instantaneously, so no two card holders have the same terms.

Employee-Driven Value

Today, a strategy needs to provide an employee-driven value system, where the business is fully invested in its people; so they can capitalize off of their talents. There is much value that is generated within the parameters of the strategy and accountability.

Why Have a Business Valuation?

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A business valuation helps determine what the market price for your business is, and shows a qualified buyer the value of owning it.  At VR, we will assist you in determining the value of your business when you are considering selling.

When you consult with a VR business intermediary, we will examine a variety of different areas, starting with your business’ financial information. This will include profit/loss statements, balance sheet and tax returns for the past three years, which we will recast to reflect the true earning power of a privately-held business. We will also take into consideration your company operations, customer base, goodwill and intellectual property and how your results compare to past transactions of other businesses in your industry.

Analyzing and Recasting Financial Statements

Recasting your business’ financial statement is an important tool to present the real earnings history to prospective buyers. Since most small businesses will report net income as low as possible to minimize the taxes, it’s critical to ensure we are able to arrive at an accurate value for your business. It will also provide a qualified buyer with a common baseline in Discretionary Earnings (DE) to compare earnings from different businesses to yours as well as a way to calculate potential earnings after they purchase the business.

If you own a mid-market business, we will utilize the Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). This is a good earnings measure for large corporations where the professional management team is operating the business with no owner benefits being expensed through it.

Examining a Business’ Strengths and Weaknesses

A strong advantage to having a valuation is that it forces the owner to re-evaluate the direction that they are going; not only with the business but with themselves. If you’re putting a lot of time and energy into the valuation process, leaving no stone unturned, you will be able to see how the business is doing financially and operationally compared to other competitors in the market.

What many people don’t understand about business valuations is that they are not only for generating a fair market price, but can indicate areas of improvement. You can look at it as an annual checkup from a physician. The worst thing to happen is to have a qualified buyer approach your business, and you don’t have an accurate analysis of its worth.

Each VR office worldwide assists businesses in performing extensive and thorough valuations, which will not only situate them better in the long-term but achieve the maximum fair market price.

Is Private Equity for Me?

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Private Equity Basics
Private equity investors buy shares in a private company intending to help grow and, eventually, sell the business. Limited partners provide the funds, and general managers select and manage the investments. Private equity groups usually take a controlling or significant interest in companies in one of three ways:

1.  Venture capital
Here, investors focus on early-stage companies expected to produce strong revenue in a few years, or later-stage companies that are likely to generate increased profit in a year or two.
2.  Buyout and acquisition financing
Private equity investors use a new business plan and, sometimes, new management to improve a company’s financial performance.
3.  Expansion or merchant banking capital
With this approach, investors focus on established companies expanding their operations or entering new markets.

Plenty of myths surround private equity investors. For example, some business owners fear that, if they partner with a private equity group, it might make off with the value of their company by buying low and cutting them out of the rewards when it later sells the company at a premium. This kind of concern generally is unfounded. Private equity can be an excellent way to obtain the funds and expertise you need to grow your company. Before taking the leap, however, you should know the facts about these types of investors.

Shared Control
A partnering company can use the private equity group’s cash infusion to launch new products, make acquisitions or pursue other growth opportunities. Selling to a private equity investor doesn’t mean losing control of your company.
Owners generally retain a substantial interest in the business and, thus, also benefit as the company grows and is eventually sold. In fact, selling less than half of your company allows you to retain full control. Even if you keep only a minority interest, you may be able to work out an agreement with the investor that keeps operating and strategic decisions in your hands.

Early Exits
Another misconception among some business owners is that private equity investors are only interested in their exit strategy. It’s true that these groups realize a profit when they sell — so they can’t be expected to hold on to an investment forever. However, they typically expect to work with your company over a period of five to seven years. When it’s time to sell, you may even have alternative exit options. You might be able to use bank debt to repurchase shares and recapitalize your company, find a new private equity investor to guide you to the next level of growth, or raise capital from a strategic partner.

Importance of Expertise
Getting a fair price for shares in your company is vital to a successful private equity partnership. Before you seek financing, work with a professional business valuator to determine your company’s current market value. But price shouldn’t be your only criterion for a private equity partner. You don’t want to give up a chunk of your business to a high bidder that doesn’t understand your company and industry, and that may have unrealistically high expectations for growth. This type of relationship is likely to sour when expectations can’t be met. Instead, partner with an investor that shares your goals and understands the challenges you face. Many private equity groups specialize in particular industries — so look for one with multiple business investments in your sector. Expertise investing in similar companies means your partner may be able to recognize patterns that aren’t obvious to your management team. The private equity group also can introduce best practices from other businesses and give you access to a network of professionals to help — from recruiting talent to business partners.

Know Your Goals
Private equity investors can help your business grow in ways that you would never be able to on your own. A thorough review of your strategic plan, the market environment and your other financing options will enable you to decide if private equity is a viable option.

Small Business Transaction Market Place Continues to Improve

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After showing a slight improvement in 2012 versus 2011 in small business transactions, the 1st quarter of 2013 has started with a bang!

According to BizBuySell, the internet’s largest business for sale marketplace, small business transactions increased by 56% over the 1st quarter of 2012.    The number of transactions reported represents the highest number of businesses sold in a quarter since the 2nd quarter of 2008!

Financials Strengthen
Sales price on transactions, as well as revenue and profits reported in those transactions, all increased significantly in Q1 2013. Sales prices increased by over 20% in year over year comparison.

Dallas / Fort Worth area shines!
In reviewing the total number of business transactions during 2012, the Dallas – Fort Worth metropolitan area reported the sixth largest number of transactions in the country during that period.

There are many factors to consider when determining the right time to sell a business.  Clearly, the economy is one factor, and in particular, the market place for business transactions.  The last few years have been a very difficult time to maximize the sales price for a business, but we are now seeing the pendulum swing back in the right direction.  2012 marked the third year in a row for improvement in the market place, and Q1 2013 report is further validation of the continued improvement.  However, that doesn’t mean that it is the right time for every business.  Let us help you assess your business, and help you determine if you are positioned properly to maximize the sales price for your business!