Posts Categorized: Sellers

How much goodwill do you have in your business?

goodwillThe term “goodwill” is often thrown around in conversation as though it is a subjective description of how much your customers like your business.

In fact, when it comes to valuing your business, there is nothing subjective about the definition of goodwill. It is defined as the difference between what someone is willing to pay for your company minus the value of your hard assets.

Let’s imagine you own a plumbing company and the main physical assets in your company are the five vans you own and some tools with a total value of around $100,000. If you sold your plumbing company for $1,000,000, the acquirer would have paid $900,000 in goodwill ($1,000,000 – $100,000).

When a company sells for the value of its fixed assets, it is often a distressed business one step away from closing down. One way to think about your job description as an owner is to maximize the difference between what your business is worth to a buyer and the value of your fixed assets.

Marriott buys more than bricks and mortar

For an example of the difference between valuing a business for its hard assets vs. its goodwill, take a look at the recent acquisition of Starwood Hotels & Resorts Worldwide by Marriott. Neither Starwood nor Marriott own many of the hotels that bear their name. Instead, they license the name to operators, franchisees and the owners of the bricks and mortar.

So why would Marriott cough up $13 billion for Starwood if they don’t even own the hotels they run? In part, Marriott wanted to get its hands on the Starwood Preferred Guest program, a loyalty scheme which has proven more popular than Marriott’s program for frequent travellers.

Similarly, Uber is worth something north of $50 billion because more than one million people per day hail a ride using Uber, not because they own a whole bunch of cars.

Chasing hard assets at the expense of goodwill

Many owners focus on building their stockpile of hard assets, not understanding the concept of goodwill.

Accumulating hard assets like land and machines and equipment is fine, but the savvy owner, looking to maximize her value, focuses less on the tangible assets and more on what those assets allow her to create for customers. There is nothing wrong with owning hard assets unless they take away from capital you could be investing in creating goodwill. Then the opportunity cost may exceed the value of owning the stuff.

Arguably both Uber and Starwood would be a shadow of the companies they are today had they pursued a strategy of accumulating hard assets. Would Uber ever have made it out of San Francisco if they had to buy a Lincoln Town Car every time they wanted to add a driver to their network?

In your case, focus on what creates value for customers and you will maximize the value of your business far beyond the value of your hard assets.


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How Three Moves Quadrupled the Value of this Business

Are you stuck trying to figure out how to create some recurring revenue for your business?

You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.

Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.

Steward set about to transform her business into a more valuable company and made three big moves:

1. Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.

Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime.

90% of her customers switched from hourly billing to the Angel Watch program.

2. Doubling Rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.

Survivor Clause
Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.

Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.

Would you like to find out how well positioned your business is to be sold?

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20 M&A Mistakes to Avoid

Business NotesBy Meghan Daniels, Axial | September 7, 2016

Deals can be difficult. Whether you’re exiting, recapitalizing, going public, or making an acquisition, it can be hard to balance the transaction with day-to-day operations, get the support you need, and be confident you’re making the right choices.

We talked to 10 professional CEO coaches who have worked with hundreds of business owners to get their advice on mistakes to avoid when going through a transaction.

  1. Conflating your identity and your business

“Although business owners intellectually understand their identity is not their business, it can be hard to separate the emotional attachment. Understand what your business goals are and what your personal goals are. Remember that you have value as a person, and not just as a business — this is crucial. There is a life after the business.”

-Bob Berk, Master Chair, Vistage Chicago

  1. Forgetting the three P’s

“Your purpose, your people, and your processes. If you focus on the three P’s, you’ll have a successful acquisition. Do we have the right people in place? Do the cultures align? Do we have the processes and systems in place to execute properly?”

-Roger Blackstock, Vistage Chair, Atlanta, GA

  1. Exiting when things are bad

“When things are going well for an organization is the best time to look for an exit. Unfortunately, most business owners aren’t looking to exit because that’s the time they’re having fun.”

-Bob Berk, Master Chair, Vistage Chicago

  1. Not getting objective advice

“The role a CEO coach plays is vastly different than a deal negotiator, advisor, lawyer, or accountant. The coach doesn’t have skin in the game, so he can provide objective advice to business owners to make better decisions when circumstances are confusing and help ensure the CEO is confident with their decision making.”

-Tom Leonard, Vistage Chair, Seattle, WA

  1. Forgetting the day after

“A big part of what we do as coaches is challenge business owners to look to the future. Some will sell for financial gain, others to take the chips off the table, but many don’t think about what they’re going to do on a day-to-day basis after the exit. Where a coach adds value is in asking really tough questions about their future.”

-Arturo Lopez, Vistage Chair, Houston, TX

  1. Forgetting your exec team

“If you’ve done right by your hiring, you need to lean on your C-suite during a transaction. The business of doing a deal becomes a full-time job. I’ve seen many situations where owners have taken their eye off the ball — their trailing revenue suffers, and it’s reflected in the purchase price. Some buyers even get scared away.”

-Jack Gelman, Vistage Chair, New York, NY

  1. Not holding yourself accountable

“Sometimes [coaches] tell owners what they don’t want to hear. As they’re going through the process, we help them through the challenges. We always ask them, ‘are you sure you want to do that?’ and we’re always honest through the process. Most of the time they find value because they know that they are going to get the complete truth. Everyone needs to be accountable to someone. Absolute power corrupts.”

-Stephen McFarland, Vistage Chair, Indianapolis, Indiana

  1. Underestimating stress

“I tell people, you think it’s going to be difficult, but it’ll be 10-100 times more difficult than you anticipate. That’s an important thing, because during stressful times, sometimes we look the other way on things we shouldn’t. The process can have a way of wearing us down, and we need to stay strong on the long haul.”

-Kirk Dando, Dando Advisors, Loveland, CO

  1. Letting a good opportunity go

“Timing is critical. If you lose an opportunity it may never come again… Market conditions often dictate the time to sell.”

-Hank O’Donnell, President of Positive Traction LLC, Philadelphia, PA

  1. Forgetting about the customer

“During a transaction or not, you’ve always got to keep the customer at the center of whatever you’re doing. The customer is depending on you to add value and so if that’s already built into the way you operate, it’s going to help during the deal too.”

-Kirk Dando, Dando Advisors, Loveland, CO

  1. Losing discipline

“Structure is crucial. Have regular disciplined check-ins with your management team. The urgency of the deal is important, but it can quickly overcome the operational issues of the business. You need to delegate as much as you can. Slowly bring key members into the process. Schedule at least 50% of your time to the deal.”

-Hank O’Donnell, President of Positive Traction LLC, Philadelphia, PA

  1. Not knowing what you want

“It always gets back to the question of what you want. Do you want a check, do you want a legacy, do you want to go out and acquire before you sell? I’m constantly coaching CEOs to help them clarify what their goals are so that they can formulate a strategy for their decision-making process. At the end of the day, many don’t know what they want so it can be hard for them to get there. CEOs and owners are constantly coming from a place of fear. It comes back to security and safety, and sometimes they just need a little bit of reassurance.”

-Phil Akin, Vistage Chair, Waterloo, IA

  1. Forgetting your family

“Be real with your family about how hard a process this will be. There are seasons when you are busier than others, and this process may go on for a year or more. You need people to support you in that. If you don’t have that support, it can be very difficult.”

-Kirk Dando, Dando Advisors, Loveland, CO

  1. Not creating a deal team 

“Selling your business is an exciting and emotional time. Having objective feedback and being challenged will maximize your outcome.  When you decide to sell your business, you will need a team. So many times CEOs focus on the deal and forget to run the business. “

-Arturo Lopez, Vistage Chair, Houston, TX

  1. Trying to keep a secret

“If you’re going to share that you’re going through a transaction with your employees, depending on how open your organization is, my advice would be to keep people informed. If you try to keep a secret, it adds another layer of complexity. I strongly encourage you to have a contingency plan in that case, because it will leak. Even when people sign NDAs, it always leaks. Think about whether you want to be on the front end telling people, or the back end reacting.”

-Kirk Dando, Dando Advisors, Loveland, CO

  1. Banking on sweat equity

“You don’t get paid on sweat equity. Sure, you built this business, and that sounds really nice. But it’s not worth anything. I would have appreciated somebody telling me that at the beginning of the process.”

-Ken Proctor, Vistage Chair, Houston, TX

  1. Falling in love 

“Often times the owner gets emotionally involved in a transaction, so as the deal ebbs and flows, we work through the issues. We try to keep the owner from falling in love. You need to be able to step back and understand whether the deal is really a good thing or not. You need to constantly ask yourself, ‘Does this still make sense?’”

-Stephen McFarland, Vistage Chair, Indianapolis, Indiana

  1. Not having the right network

“Oftentimes, CEOs seem to be the most well-connected people — they have a large reach as far as people around them, but they don’t necessarily have people who can help them pressure-test their ideas and expand the way they’re thinking and broaden their perspective. This is hard to do with a board member — they have certain expectations. It’s hard to do with your team — you don’t want to scare them by thinking out loud without full-formed thoughts. It’s hard to take it home to your family. A coach has experience and is an objective person who can help pressure-test ideas.”

-Kirk Dando, Dando Advisors, Loveland, CO

  1. Assuming the deal is done

No deal and no promise is done until there’s actually ink on the paper. There are so many things that can go wrong up to the transaction being completed.”

-Jack Gelman, Vistage Chair, New York, NY

  1. Leaning on hope

“Hope is not a strategy. You don’t have to have a perfect plan, but you need a strategy with goals. You need a management framework and a cadence to review that framework on a monthly or quarterly basis. Everyone needs to obsess over the strategy, otherwise going through a transition is going to be even more difficult.”

-Kirk Dando, Dando Advisors, Loveland, CO


Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

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Business Valuation, an Analysis of Risk

Business Colleagues Working Together And Analyzing Financial FigAnalyzing risk is the predominate factor in valuing a business. The appraiser must analyze every aspect of the business and quantify his or her analysis of the company’s risk into value. A study of the significant risk factors in the business must be identified and then rated as to the degree of risk each carry. The following are some of the factors to analyze in a business.


There are many key factors to analyze as far as labor is concerned. Are employees hard to find? What educational skills or level is required and is the labor pool such that they could be replaced? If the company is highly technical, there may not be many individuals in the area that have those skills and thus make it difficult for the company to grow. On the other hand, many of these companies can outsource or use virtual offices with employees in any part of the country.

Are key employees and management due a significant salary increase? Again, many employees are faithful to the owner and feel that once the company grows a little more, they will be rewarded both in salaries and advancement.

What are the ages of the employees and key management? If many of the key managers are close to retirement age, they may just retire when ownership changes. After many years on the job and very close to retirement, many in management don’t want the changes they perceive with new ownership.

What is the liability risk with the employees? Are the jobs they are performing such that accidents are a normal occurrence in the industry? If this is the case, have the employees been trained sufficiently in safety procedures? Is safety an on-going program for the employees? If the company has delivery vehicles, a check of the accident history is in order.


Will key employees’ stay once the company changes ownership? It is not uncommon for key employees to leave the company for a more lucrative position with a larger competitor. Many times, the key employees stay with the company as they are close to the owner and are in a position to contribute to the company’s growth and success and feel they will be rewarded heavily someday.

Has management been efficient? Are they up to the challenges of the future? Many companies have employees that grew up with the business but now the company has outgrown them. They do not have the education or expertise to take the company to the next level. How many of the key managers are relatives? If all or most of the key managers are relatives, and will be gone after the company sells, there is no management.

Who is responsible for the majority of sales? Does the company have a sales force or is the owner responsible for most of the sales and if so, how hard would it be to replace him.

Financial Strength

Is the company solid or are they in a cash crunch? Some ratio analysis can tell you what kind of financial position the company is in and how it compares to other companies in its industry. An analysis of the company’s account receivables is necessary to see how they are getting paid. An abundance of slow paying customers can drain the company’s working capital. Insufficient working capital can prohibit the company from growing because it can’t buy enough raw materials or inventory to meet an increase in sales.

Does the company have the ability to buy from several suppliers or are they enslaved by one that can raise prices whenever they want? Another question that pops up is how stable is the supplier? The cost of sales is usually the largest expense for a company. If you have no idea what the future costs are going to be, you can’t make any kind of meaningful future projections or budgets.

Facilities & Location

What is the length of the lease? Is it likely to increase? Are the facilities sufficient for the business and possible expansion? What about the company’s location? Are any major roadways or changes in the area likely to affect the company?

Diversity of Accounts

If the company loses one or two accounts will they be out of business? Many companies have one account that equals a large portion of their business. Unless these large accounts are under contract for several years, a buyer may be hard to find. Will the accounts stay with a new owner is the heart of the analysis for the appraiser.


How strong is competition? What is the level of ease of entry into this industry? Are technological changes going to give a major competitor with more cash a significant advantage?


What has the historical financial picture shown? What would it tell a buyer as to what he or she can expect in the future?


How hard would it be to sell this company? How many buyers would be interested in this type of business? Does the company have a really unique niche? What is the future of its customer base? Do they manufacture sewing machines or medical equipment?

Future Outlook

Always remember that a business is bought on the assumption of its economic benefit to its owner. The more stable the financial future, as well as other factors like technological changes, environmental regulations, and public attitude, can have an effect on a buyer’s emotion. This relates to how long the buyer is willing to risk his or her money and therefore how fast he or she would want it back and thus the multiple of earnings he or she is willing to pay.

In business appraisal, value has its basis in “anticipated future benefits” (earnings). What the company will do in the future is what its value is based on. The risk factors mentioned in this article are the key to the projections that have to be made in the appraisal process and are all critical points that the appraiser must consider.


Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

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What is EBITDA and Why is it Relevant to You?

bigstock-142593530If you’ve heard the term EBITDA thrown around and not truly understood what it means, now is the time to take a closer look, as it can be used to determine the value of your business.  That stated, there are some issues that one has to keep in mind while using this revenue calculation.  Here is a closer look at the EBITDA and how best to proceed in using it.

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization.  It can be used to compare the financial strength of two different companies.  That stated, many people don’t feel that EBITDA should be given the importance that is frequently attributed to it.

Divided Opinion on EBITDA

If there is disagreement on EBITDA being able to determine the value of a business, then why is it used so often?  This calculation’s somewhat ubiquitous nature is due, in part, to the fact that EBITDA takes a very complicated subject, determining and comparing the value of businesses, and distills it down to an easy to understand and implement formula.  This formula is intended to generate a single number.

EBITDA Ignores Many Key Factors

One of the key concerns when using or considering a EBITDA number is that it is often used as something of a substitute for cash flow, which, of course, can make it dangerous.  It is vital to remember that earnings and cash earnings are not necessarily one in the same.

Adding to the potential confusion is the fact that EBITDA does not factor in interest, taxes, depreciation or amortization.  In short, a lot of vital information is ignored.

Achieving Optimal Results

In the end, you simply don’t want to place too much importance or emphasis on EBITDA when determining the strength of a business.  The calculation overlooks too many factors that could influence future growth and prosperity of a business.

Business brokers have been trained to handle valuations to determine the approximate value of a business.  Since valuations take many more factors into consideration, they also tend to be far more accurate.


Copyright: Business Brokerage Press, Inc.


Thinking Vs. Doing: The Owner’s Dilemma

There’s a steady breeze from the northwest, which cools the warm Caribbean afternoon. Framed between a palm tree and the turquoise water, you notice a man reading. He appears to be working, which seems strange given his appearance: shaggy blonde hair, linen shirt, surf shorts and flip-flops.

You squint and realize the man is Richard Branson and he just happens to be running Virgin Group Ltd., a multibillion-dollar conglomerate. He is working where he usually does, at Necker Island, a 74-acre retreat he owns in the British Virgin Islands.

Branson, of course, is far from a negligent founder, he has managers running the various businesses that make up the Virgin Group and visits his companies regularly, but he does not manage the day-to-day operations of any of his businesses, which frees up his time to think.

The train conductor vs. the thinker

Your role as a CEO can be divided into two buckets: one for managing and the other for thinking.

The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.

When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.

The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.

Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.

The most valuable companies

The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—our data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.

For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, we have discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.

Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.

Finally, in a recent survey of merger and acquisition (M&A) professionals, we asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.

In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their business.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

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Reasons Why Your Business Won’t Sell

You’ve been thinking about selling your business for a while and now you’re finally ready to pursue a sale. But is your business prepared to withstand the scrutiny of a buyer and their professional advisors? If you haven’t been through this process before, then you may be unaware of some issues present in your business that a savvy entrepreneur is looking out for and seeking to avoid. These barriers to selling will undoubtedly show themselves during a buyer’s due diligence and likely derail your deal. So let’s take a look at some of the common issues that arise so you can start working on them in order to maximize your value in a successful sale.

1. You aren’t mentally prepared for the process
You thought you were ready, but now that you’re discussing it in depth with your trusted broker you realize that you have no plan for your life after the sale. Your identity and self-worth are very closely wrapped up in your business, or perhaps you’ve worked so hard at growing your business that you simply didn’t have much room for a social life or hobbies. What are you going to do with all of that free time? The great unknown looms large and you’re getting cold feet at the prospect of reinventing yourself.

This is an opportunity to draw up some goals and gain a clearer understanding of how your life will change and benefit from the sale of your business. Maybe you desire to spend more quality time with your spouse or grandchildren, finally enjoy some uninterrupted holidays, or pursue a completely different business venture. Write it all down and start filling in the blanks until you feel it becoming tangible. Because it’s crucial that you’re fully committed to the transition both emotionally and mentally.

If you’re on the fence, then your business will suffer in the meantime, your broker will get frustrated trying to drag you along and any buyer you meet is going to confuse your reluctance of selling with disapproval of them.

2. You have unrealistic expectations of the timeline required
If you thought you could walk away six months after the day you decided to sell, the reality is going to be a difficult adjustment to make. Especially if you’re already mentally burned out or suffering from health issues. It’s better that you know now what it all entails so you can realistically prepare yourself to do what it takes to ensure a successful transition.

So how long does it take to sell your business through a brokerage? On average you’re looking at nine to twelve months to locate a suitable buyer, however, some businesses may even take up to two or three years. The length of time will often depend upon the type of business you have, how much financing you’re willing to extend, whether or not your price is market friendly and who you’re using to represent your business for sale.

It may also take a couple of years of pre-sale planning to resolve ignored or unknown issues or to implement a tax friendly strategy. And depending on your business, you may be required to stick around for one or two years to play a key role in the transition.

The best advice I can give anyone is to start planning your exit today, regardless of when you think you’re going to sell.

3. You don’t have the documentation required
You have to be prepared to disclose a fair amount of information to a serious buyer in order for them to gain the confidence required to move forward. I’ve had numerous business owners approach me over the years with a request to help them sell their business, however they weren’t even willing to share their financials with me. I simply won’t allow a buyer to potentially risk their life’s savings on a mystery box, so these are business owners I will not work with.

What are the basics you should start getting ready today? In addition to a copy of the lease, current inventory status, itemized list of furniture, fixtures & equipment, you will also require accountant prepared financials for the past 3 to 5 years. A serious buyer needs to understand the revenues and expenses of a business, as does their accountant and lender. Not having accountant prepared financials will unnecessarily introduce a level of risk to the buyer that makes it impossible for a business to sell.

The more detailed and confidential information such as client lists and existing business contracts aren’t made available until the period of due diligence after an accepted offer is in place, however, you need to have it ready to go. Delays will kill your deal by eroding the confidence of your prospective buyer while also giving them time to find another option.

The bottom line is don’t expect a buyer to simply take your word for anything, they’re going to require proof.

4. You have internal issues that haven’t been fixed
The buyer of your business isn’t going to pay you top dollar if they have to come in and sort out a mess. They want to be able to plug themselves or a manager in and start immediately growing the business.

Common issues we encounter are inventory management concerns, missing or outdated systems & processes, decreasing revenue, poor earnings, a cash component that’s throwing off the expense to revenue ratios, a missing safety program, or the lack of key staff in place that can assist the new owner after your departure. If you’re doing three roles and all of your customer relationships are with you personally, get a manager in place and train your customers to call the business instead of your cell.

These are all matters that can be fixed, however, they can take a varying degree of time to address and correct. Make a list of all your known issues and start working on it. You may also want to consider hiring a small business consultant or contract CFO who can discover additional unknowns and assist you in improving them.

5. You are asking too much
An ill-informed expectation of value is going to cause you frustration as you watch buyer after buyer pass you by. Since they’re primarily purchasing your cash flow, the package it comes in is often less important to many buyers than the payback period, risk and ROI. An experienced entrepreneur won’t pay for your location, client base or name recognition if it’s not translating into profit.

Get a professional business valuation completed immediately so you can set your expectations of fair market value. This will also help your broker in establishing and justifying the value of your business to a buyer, their accountant and the bank.

If you’re asking too much then you’re not going to sell, and if you’re asking too little then you’re cutting yourself short and leaving good money on the table.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score

The above article written by Ryan Jorden, the Managing Partner with VR Business Brokers in Calgary, Alberta

Did Microsoft Overpay For LinkedIn?

Microsoft’s recent $26.2 billion acquisition of LinkedIn provides an illustrative example of a strategic acquisition – the type of sale that usually garners the most gain for the acquired company’s shareholders.

You may be wondering what a billion-dollar acquisition has to do with your business, but the very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.

The financial vs. strategic buyer

A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.

One might argue that Microsoft overpaid for LinkedIn given that LinkedIn only generated a few hundred million dollars in EBITDA last year, meaning the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings.

But earnings are not the only thing strategic acquirers care about when they go to make an acquisition.

Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The Redmond-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.

Take Microsoft Office for example. Many businesses have started to use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office 365.

In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a sales person and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect.

Now you can make small talk about where they went to school, the previous jobs they have held and know the scope of their current role – all without ever leaving Outlook.

Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your company is likely smaller than LinkedIn, the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score

Why Bother Doing It The Hard Way?

Whether you want to sell your business next year or a decade from now, you will have two basic options for an external sale: the financial or the strategic buyer.

The Financial Buyer

The financial buyer is buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include de-risking it as much as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, etc.

The Strategic Buyer

The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.

For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.

Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.

Preparing For Every Eventuality

The question is: why bother making your business attractive to a financial buyer when the strategic buyer typically pays so much more?

The answer is that strategic acquisitions are very rare. Each industry usually only has a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and a whole raft of other variables can all impact a strategic acquirer’s appetite to buy your business.

Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles: injury, the wrong coach, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she does her homework, so if her dream fades she has her education; you make sure she has a back-up plan.

The same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score

Rich vs. Famous

Have you set a goal for your company this year?

If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.

Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.

But growth can come at a steep price and can even detract from your ability to build your personal wealth.

The Contrasting Exits of Michael Arrington

For example, let’s take a look at an entrepreneur named Michael Arrington. Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company’s expansion.

Achex was ultimately sold to First Data Corporation for $32 million in 2001. Unfortunately, because Arrington had been focused on growth above all else, he had not only raised two rounds of financing but also reduced his personal stake in the company down to next to nothing. As he told Business Insider, “When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”

Arrington then went on to start the technology blogging website TechCrunch in 2005. This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.

Apparently Arrington had learned his lesson—growth is good, but not at the expense of all else.

The Alternative to Growth at All Costs

The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:

  • You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
  • Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
  • Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
  • You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.

Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Value Builder Score.