If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

According to the latest analysis of some 20,000 business owners who have used The Value Builder System, the average offer being made by acquirers is just 3.7 times your pre-tax profit.  Companies with less than a million dollars in sales garner significantly lower multiples, and larger businesses may get closer to five times the pre-tax profit, but regardless of size private company multiples are still significantly less than those reserved for public company stocks.

Given the paltry offer multiples, you may be tempted to hold on to your business and “milk it” for decades to come. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic – let’s call it the “Just Milk It Strategy” – seems sound on the surface, but there are some significant risks to consider.

1. You Shoulder the Risk
The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders.

2. Disk Drive Space
If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory you can do other things like play golf or enjoy a bicycle trip through Tuscany and still own your business, but as long as you are the owner, your business will always occupy a large chunk of your brain’s capacity. This means family fun, vacations and weekends are always tainted with the background hum of your brain’s operating system churning through data.

3. Capital Calls
Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

4. Tax Treatment
Depending on your tax jurisdiction, the sale proceeds of your business may be more favourably treated than income you would garner by paying yourself handsomely with the Just Milk It Strategy. You may actually need to pay yourself $2 or $3 for every $1 you can net from the advantageous tax treatment of a business sale.

5. You Can Do Better
Finally, you may be able to attract an offer higher than three or four times your pretax profit. The businesses we work with who have a Value Builder Score of 80 + get offers that are, on average, 6.1 times their pretax profit. Some of the owners we work with do even better, stretching multiples into double digits.

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BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported today that the number of annual small business transactions stabilized in 2015, ending the year down just 3.6 percent from 2014’s record high.

A total of 7,222 closed transactions were reported in 2015, nearly matching the 7,494 transactions in 2014, which was the highest year-end total reported since BizBuySell started tracking data in 2007. Part of the reason transaction activity stabilized in 2015 may be that small businesses continue to grow financially healthier, allowing owners to ask for more money, creating a more balanced market.

Noted statistics from the report are:

• Average revenue for businesses sold in 2015 increased by 8% over 2014.
• Average Net Income reported by businesses sold in 2015 increased by 2% over 2014.
• Average sales price for transactions reported in 2015 increased by 7.6%
• The Dallas / Fort Worth metro area reported the 5^th highest number of transactions out of the top 67 markets in the US.

The breakdown of business transactions by broad categories are as follows:

• Retail 50%
• Service 38%
• Manufacturing 5%
• Internet/Tech 3%
• Wholesale/Distribution 8%
• Construction Related 8%

The top 5 individual categories for total transactions are as follows:

• Restaurants
• Health / Medical
• Dry Cleaning / Laundry
• Liquor Stores
• Business Services

Is now the time to consider selling your business?

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You’ve done the hard work of winning a new customer, but it’s what you do in the next 90 days that determines if it’ll stick around.

The first 90 days of any new relationship are critical:

• A president has about three months to inspire the electorate and gain the political capital he needs to govern.
• A young team prospect has but a few months to impress his coach before being sent down to the minors.
• A new CEO has 90 days to learn her job before the rank and file start expecting tangible leadership.

The Onboarding Window:  The First 90 Days

For a young company, the first 90 days of a customer relationship are equally important.  Research into the subscription business model shows that getting a customer to effectively start using your product in the first 90 days leads to an increase in lifetime value of up to 300 percent for some companies.

Take a look at marketing software provider Constant Contact, which used to struggle with the first 90 days of a new customer relationship. In the old days, Constant Contact took a “who, what, when” approach to onboarding new customers. Who stood for who a customer wanted to send an email campaign to; what stood for what the customer wanted to send; and when described the timing of the campaign. After users signed up for its service, Constant Contact would ask customers to upload their email database (the who in the three-step onboarding process). This required the new user to upload a customer list–which is the trickiest part of the onboarding experience. It required the customer to leave Constant Contact’s site and struggle with how to export a contact list–often from a jury-rigged database kept in Excel or Outlook. The process was awkward, and many new customers stopped using Constant Contact because they hit a barrier before they had a chance to fall in love with the Constant Contact software.

What, Who, When

Wanting to stem new customer churn, Constant Contact changed its on boarding to focus first on the what. Immediately after signing up, new users were encouraged to create their first email campaign. Suddenly customers were seeing their campaign come to life in front of their eyes. Constant Contact offered customers a library of stock images that looked more beautiful than anything a business owner had used in the past. Customers could see firsthand how professional their company was going to look.  Only after the customer had completed the what stage and earned the emotional reward of seeing its first campaign come to life, did Constant Contact switch to the who part of creating a campaign. The difference was, by this point, Constant Contact had enough relationship equity with the customer to get it over the hump of uploading its database.

This minor reordering of the onboarding flow led to a dramatic reduction in customer churn–which is the death knell of any subscription business.

Whether you’re in a subscription business, or still using a transaction business model, how you treat a customer in the first 90 days will go a long way in determining their overall satisfaction.

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Becoming wealthy may not be your primary goal, but if it is, there is a reasonably predictable way to get rich in America.

Step 1: Ignore Your Parents

Parents around the world typically encourage their kids to get educated so they can get a ‘good job.’ This may mean becoming a doctor or lawyer, although neither tends to be a path to significant wealth. High-paying professions provide an excellent income stream, but two insidious forces undermine the professional’s ability to create significant wealth: tax and spending.

Tax

It is difficult to become wealthy on the basis of a salary alone. Since income is taxed at the highest possible rate, you’re left with not much more than 50 cents on the dollar.

Spending

The other problem with having a high income is that it creates a ‘wealth effect’ that triggers spending. Thomas J. Stanley, the famous author of the research-driven classic The Millionaire Next Door, points out that some professionals—in particular, lawyers—spend a large portion of their income to give the impression that they are successful, in part because they do not enjoy much social status from their job. In other words, when you earn $500,000 a year, you buy a Range Rover or send your kids to an elite private school at least in part because you want people to think you are wealthy.

Step 2: Start Something

Most wealth in America is created through owning a business. Recently, Mass Mutual looked at the proportion of business owners that make up a number of wealth cohorts. They found that 17 percent of people with between $100,000 and $500,000 to invest were business owners.

Keep in mind that there are about 8 million employer-based companies in the United States, meaning that the incidence rate of business ownership (the natural rate at which you find business owners in the general population) is about three percent. Said another way, if you grabbed 100 people walking down the street, on average three of them would be business owners. On the other hand, if you took a random sample of 100 people with investable assets of between $100,000 and $500,000, 17 of them would be business owners, meaning you’re over five times more likely to find a business owner in the $100,000 to $500,000 wealth segment than you are to find an employee in the same segment.

The trend becomes more pronounced the higher up the wealth ladder you go. If you look at wealthy investors with between $500,000 and $1,000,000 in investable assets, you’ll see that the proportion of business owners in this segment goes up dramatically—to27 percent.

The Very Rich

Among investors with between $1 million and $10 million in investable assets, the proportion of business owners jumps to 52 percent. As for those investors with $10 million to $50 million sloshing around in their bank account, 67 percent are business owners; and for investors with $50 million dollars or more in investable assets, 86 percent are business owners.

Simply put, if you meet someone who is very rich, it’s highly likely they are (or were) a business owner.

Step 3: Get Liquid

The next step for you as a business owner is to focus on improving the value of your business so that you can sell it for a premium. Just being a successful entrepreneur is typically not enough to become rich. You have to find a way to take the equity you have locked up in your business and turn it into liquid assets. When it comes to selling your business, the three most common options are:

• Acquisition: This is the headline-popping way some entrepreneurs choose to trade their shares for cash. When Facebook acquired WhatsApp for $19 billion, founders Brian Action and Jan Koum got very rich.
• Re-capitalization:A minority or majority “re-cap” occurs when you sell a stake in your company (often to a private equity firm) yet continue to run your business as both a manager and part owner, with a chunk of your wealth in liquid assets outside of your business.
• Management Buyout:In an MBO, you invite your management team (or a family member) to buy you out over time, usually with a mixture of some cash from the profits of your business as well as debt that the managers take on. There are other, less common ways to turn your equity into cash (e.g., an IPO), but the key is turning the illiquid wealth in your business into diversified liquid wealth. The best part about selling a business is that the wealth created is taxed at a very low rate compared to employment income, so you get to keep most of what you make.

You might argue it is better to keep all of your wealth tied up in your business as it grows, but that can be a risky proposition—just ask Lululemon’s Chip Wilson or BlackBerry’s cofounder Mike Lazaridis. If you keep your money locked up in your business, it also means you may not be able to enjoy the benefits of wealth. You can’t use illiquid stock in a private company to buy an around-the-world plane ticket or a ski chalet in Aspen. You actually have to get liquid first.

There are many good reasons to build a business; and for you, wealth creation may not be as important as making an amazing product or leading a great team. But if money is what you’re after, there is no better way to get rich than to start and sell a successful business.

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By James Cassel, Cassel Salpeter & Co., LLC 

There may not be better time to sell a business in the next few years than now. Values are high and interest rates are low. They may not stay that way for long. If you would like to sell your business now or any time in the foreseeable future, the time to begin planning is now. This can help minimize many of the obstacles that often delay or kill deals and help maximize your value and ensure a successful outcome.

Based on my experience as an investment banker helping clients during the sale, merger, and acquisition process, here are five tips to consider and act upon now:

1. Early in the process, consult key decision-makers and those who will be affected by the deal. Determine who will have a say in the deal and consult with them, even if they are minority owners. If your business is family owned, talk to your family members as soon as possible. Involving your family at the outset can help minimize potential family problems later. This is particularly important if a second or third generation is involved and family members expect to take over or profit from the business. Making sure that family members understand what is going on can help keep harmony in the family.
2. Determine whether and for how long you would like to continue to work after the sale.This can be a tough one. You have to be honest with yourself. It is not a bad idea to discuss this with your significant other. This decision is dictated for many by their age, health, and lifestyle preferences. Older business owners may be more prepared to retire and step away than younger ones who may need or want regular incomes to support their lifestyles or remain active. In general, at a minimum, it is a good idea to be prepared to continue working in some capacity during a transition period. In some cases with financial buyers, you might continue to run the business for years until the next sale.
3. Organize your documents in advance. Well-structured corporate and financial documents and sound record-keeping practices always make good business sense. Getting your books and records in order now will help keep you from scrambling for documents when potential buyers conduct their due diligence. Keep all your financials, vendor contracts, and customer contracts easily accessible. You will derive immediate benefits from this, as you will be in better shape running your business today with good, timely information.
4. Determine whether you want a partial or total exit. Private equity firms and other financial buyers can either buy control or minority positions. In a total exit, you might maximize the consideration you receive, especially if you sell to a strategic buyer (although financial buyers are currently aggressive when it comes to pricing). In a partial exit, there are many social issues to consider that might be just as important as what you receive. If you are going to partner with a private equity firm, the comfortability factor may be more crucial than the dollar amount, since you will not get that until the final exit when you sell your remaining ownership interest.
5. Have realistic expectations of value. Ask your advisors to provide realistic guidance on the value of your business. Too often, I hear stories from frustrated sellers who regret having hired advisors who gave unrealistic valuation numbers just so they would get the job. It is equally important for sellers to be realistic and not merely pick whatever numbers they think they need to sustain their lifestyles. A multiple of earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization) is the way most buyers determine what they are willing to pay for a business. The more you earn, and the higher your future projected growth, the more you can expect buyers to pay for your business. The amount buyers are willing to pay also will vary depending upon factors including your company’s size, stability, industry, and working capital needs. It also is important to have a diverse customer base, as your valuation will be hurt if your revenue is heavily concentrated with one or two clients.

Without a doubt, a little planning now can go a long way to help ensure you obtain the maximum value for your business and achieve your specific goals associated with the sale of your business.

The above article provided courtesy of Axial.com

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By Gary Ampulski, Midwest Genesis

There has been much talk about the strength of the current seller’s market over the next six to twelve months. But how do business owners know that these market conditions will last? Most qualified M&A advisors will tell you that to maximize the value of your company, you have to consider three factors: business optimization, personal readiness, and the state of the capital markets.

Critical Factors that Influence Value

1. Business Optimization

This is an internal factor controlled by the owner. It identifies the risk of generating an attractive future earnings stream for the business. Various performance drivers impact investment risk and therefore value through a discounted cash flow projection. Owners can continuously improve the strength of these drivers (planning, leadership, sales, marketing, people, operations, financials, and legal) over time to enhance business value.

1. Seller Satisfaction

The second factor, also internal, focuses on how satisfied the seller will be with a potential transaction. Are you ready to sell your business, and what do you want your life to look like after the sale? When thinking about this, sellers should rely on personal financial, estate, tax, and wealth management plans; it’s important to establish the target amount the seller needs to fund his or her lifestyle post-transaction.

1. State of the Capital Markets

The last component differs from the others in two critical ways. First, the capital markets are outside an owner’s control. They depend on various economic conditions that influence how available funding for an acquisition can generate an acceptable return on the buyer’s investment. The state of the capital markets is cyclical, consistently moving from a “sell” environment, to a neutral or “protect” environment, to a “buy” environment — in that order. These segments repeat approximately every ten years, as illustrated below:

Figure I: 10-Year US Capital Markets Transfer Cycle

The Role of the Advisor  

As Yogi Berra once said: “Predicting is really difficult, especially when it’s about the future!” All three factors have multiple dimensions; understanding what drives them is not often top-of-mind for a successful entrepreneur. In fact, if an owner focuses on any of the above factors while trying to run a business, the distraction can put the business and the seller in jeopardy — at a time when both need to be rock solid. The role of an advisor is to identify what needs to be done to optimize each of the internal factors, forecast their outcome, and accurately project the capital market conditions over time to identify an acceptable situation for the seller.

Key indicators drive the transitions between phases in the capital markets. These indicators can improve the accuracy of a market prediction. Wealth management advisors are experts in monitoring and communicating these trends. They formulate opinions on the timing of public market conditions for the benefit of maximizing the return on their clients’ portfolios. Their predictions can also help facilitate a private seller’s transition timing and support the transformation of an entrepreneur (with a highly concentrated, illiquid asset in the business) into an investor (with a properly balanced asset allocation that can be used to fund post-transition needs). The major elements that influence capital market conditions are shown in the chart below.

Figure II: Factors Influencing Capital Markets

Cost of debt, leverage multiples, industry betas, and public company valuations are elements that characterize the current state of the market. The economic outlook provides a perspective on the future state and is influenced by currency, the Federal Reserve policy, unemployment rates, GDP growth, shocks (terrorism, wars, disease outbreaks, etc.), and bubbles (technology, real estate, etc.)

The trick is to be able to accurately predict the economic outlook far enough out into the future to be meaningful for a private business owner, especially if he or she is considering a sale transaction sometime in the next 2-5 years. This is not much of an issue for an investor in public securities, which are normally highly liquid. Wealth advisors rarely bother with making long-term predictions about the market since they are much better at predicting the present and most investors today can act on advice in a fraction of a second. But it normally takes a business owner of an illiquid privately held company 12 months to complete an ownership transfer. By then, depending on where you are in the cycle, things can change dramatically.

The Value Trade-Off

So how do the various business, personal, and market conditions interact to influence value? The table below shows an example of how the strength of these readiness factors can shape value in a qualitative fashion.

Figure III: Relative Impact of Drivers of Business Value

It is not unusual for an owner contemplating a sale transaction today to have a business (three years into the seller’s market cycle) whose quality is half of what it could be, and have little idea of what life after a transition would look like. The value of this business in the current seller’s market might be indexed at 1. With no change in economic conditions over the next year, a seller can enhance value by 20% through a) execution of a solid plan to reduce business risk and b) clarification of funding needs for the next stage of his or her life.

The improvement in value continues until the economic cycle causes a retraction (in this case, year 3) despite advances in business and personal readiness. When the market moves into this segment, the owner has missed the high multiple window and has to wait for a recovery to return value to its previous state. The good news is that during the next seven years, prudent actions on the part of the owner can continue to improve business and personal conditions. As the economy recovers, a huge bump in value can take place for the owner (if the owner has the patience and motivation to wait that long).

Many business brokers and investment bankers promote and respond to the owner’s sense of urgency to capitalize on existing multiples paid for a business. They will often accept sub-optimum business performance or the owner’s undefined personal needs to get a deal done. This may or may not be in the seller’s best interest: It’s a trade-off between cashing in on what you have now versus trying to understand the options and potentially enhancing value in the future. Recognizing that all this takes time, there is risk that the loss of purchase price multiple due to a changing market situation might outweigh any achievable improvement in operating performance. Alternatively, without developing a realistic appreciation for what the business can offer and the personal side of life after a sale, the owner may be reduced to rolling the dice on value and may have a change of heart when the time comes to close.

Advice from Capital Market Analysts

At a recent conference, Jeff Mortimer, Chairman of BNY Mellon’s Wealth Management Asset Allocation Committee, shared his thoughts on today’s M&A environment. Barring a major market shock, Mortimer doesn’t see a good reason that the frothy multiples paid for privately held companies over the last two years will change any time within the next year and a half. But after that, his market model predicts a softening and evolution of the current seller’s market to a “protect” market, then a buyer’s market, which will require perhaps another five years to return to its current seller’s market state.

Given that it takes a year to sell a business, Mortimer’s advice to owners contemplating a sale transaction is “don’t dawdle.” The message is clear: Get some help now to understand your objectives, array your options, evaluate your business, and establish a plan of action. Map this against market conditions and, if appropriate, plan to complete a sale by the end of 2016. After then, Mortimer feels that buyers who are also tracking these market cycles will have pretty good visibility on what their future holds causing multiples to be depressed.

Other investment advisors are saying it might already be too late. Peter Schiff, CEO of Euro Pacific Capital (who predicted the great recession) believes that the US dollar is very overvalued. He anticipates a collapse of the US currency bubble caused by the recent Chinese move to decouple their currency from the dollar. “We’re on the verge of a much worse financial crisis than the one we went through in 2008 and it’s going to take the form of a currency crisis. You’re talking about currency wars. America is going to win the currency war, which is a race to the bottom, and you don’t want to win that war because a currency war is different from most wars in that the object is to kill yourself and unfortunately, we’re going to succeed,” warns Schiff.

To Sell or Not Sell

In about three to six months, an experienced transition-planning advisor can help owners make a well-informed decision if it is better to “sell now” or “hold, grow value, and sell later.” While the owner continues to run the business and improve its profits and cash flow, an advisor can help plan and execute improvements in the business and aspirations of the owner as market conditions evolve. It’s easy for owners to put these kinds of assessments on the back burner in favor of dealing with day-to-day operational issues. But doing so never gets the job done. So, if you are an owner contemplating a sale sometime in the next 2-5 years, the sooner you quantify your options, the more time you will have to execute a solid plan. The cost of delay may be significant. So, follow the advice of top wealth managers: get some help and “don’t dawdle.”

The above article provided courtesy of Axial.com

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

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Have VR Appraise Your Business Periodically

If you’re a business owner, do you know how much your business is worth? If you don’t, you’re not alone. The majority of small business owners in today’s market do not know the value of their business. Additionally, there are fewer who have exit strategies in place.

Most people have an annual physical checkup to monitor their health; receive a monthly or quarterly review of their financial portfolio to see what needs to be changed. Having your business appraised and periodically updated should be no different. If you had your business valuated years ago, it’s time to update.

Planning for the Future
A business valuation isn’t only used for when you’re selling your business. It’s also to improve your business, and plan for the future – retirement, new endeavors, etc.

VR will help you properly valuate your business, and prepare an exit strategy. No one is ever too busy to do something now; especially when it comes to something you’ve invested time and money. If you’re heavily invested in your business, you owe it to yourself to have valued representation in make sure your interests are met.

Here are some main reasons why you should have your business valuated:

• Transferring ownership to other members of your family on a tax-deferred basis;
• Resolving an exit strategy with a partner;
• Implementing incentives for employees besides promotions and bonuses;
• Determining a fair market price for selling the business;
• Examining the possibility of a minority investor such as a venture capitalist.

The Internal Reasons
Why you should really have a business valuation is to discover what initiatives need to be taken in order to improve your infrastructure and prepare for a visit from a prospective buyer.

More importantly, you should be aware of what your business is worth compared to your competition. Each VR business intermediary will be able to do an industry report detailing other similar businesses, and help explain why some maintain a higher multiple of earnings than others.

This analysis should include:

• Growth rate;
• Profit margins;
• Sales per employee;
• Return on investment; and
• Overhead allocation.

In addition to the financial analysis, there are other areas that will need to be evaluated such as:

• Brand equity;
• Long-term contracts with vendors;
• Customer base;
• Partnerships;
• Intellectual property;
• Trained employees;
• Patented products and copyrights;
• Risk factors such as seasonal products.

At VR Business Sales, we will help uncover the areas of your business that have been overlooked to make it stronger and run more effectively; both financially and non-financially. For example, we will be able to determine if you should be focusing your customer concentration elsewhere or whether you need additional management.

Through the business valuation, you will be able to improve and correct on the required areas, helping you increase the value of your business.

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: