Buyers, as part of their due diligence, usually employ accountants to check the numbers and attorneys to both look at legal issues and draft or review documents. Buyers may also bring in other professionals to look at the business’ operations. The prudent buyer is also looking behind the scenes to make sure there are not any “skeletons in the closet.” It makes sense for a seller to be just as prudent. Knowing what the prudent buyer may be checking can be a big help. A business intermediary professional is a good person to help a seller look at these issues. They are very familiar with what buyers are looking for when considering a company to purchase. Here are some examples of things that a prudent buyer will be checking: Finance Is the business taking all of the trade discounts available or is it late in paying its bills? This could indicate poor cash management policies. Checking the gross margins for the past several years might indicate a lack of control, price erosion … [Read more...]
A “Pig in a Poke"
Due Diligence: Once a buyer has negotiated a deal and secured the necessary financing, she is ready for the due diligence phase of the sale. The serious buyer will retain an accounting firm to verify inventory, accounts receivable and payables; and will retain a law firm to deal with the legalities of the sale. What’s left for the buyer to do is to make sure that there are no “skeletons in the closet,” so he is not buying the proverbial “pig in a poke.” The four main areas of concern are: the business' finances, management, buyer's finances, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry with which they are not familiar. The seller, because of his or her experience in a specific industry, has probably developed a “sixth sense” of when the business has peaked or is “heading south.” The buyer has to perform the due diligence necessary to smoke … [Read more...]
What’s The Value of Your Business?
There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a box on the right side of his cash register. When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?” “Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your sister is a doctor, your brother is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a beach house with an ocean view. We have a good business and everything is paid for. Add that all together, subtract the clothes, and … [Read more...]
The Pre-Sale Business Tune-Up
Owners are often asked, "do you think you will ever sell your business?" The answer varies from, "when I can get my price" to "never" to "I don't really know" to everything in between. Most sellers may think to themselves when asked this question, "I'll sell when the time is right." Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, "it is a good idea to sell your horse before it dies." Four Ways to Leave Your Business There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don't have enough cash, or interest, to purchase the business. … [Read more...]
Considering Selling? Some Things to Consider
Know what your business is worth. Don’t even think about selling until you know what your business should sell for. Are you prepared to lower your price if necessary? Prepare now. There is an often-quoted statement in the business world: “The time to prepare your business to sell is the day you buy it or start it.” Easy to say, but very seldom adhered to. Now really is the time to think about the day you will sell and to prepare for that day. Sell when business is good. The old quote: “The time to sell your business is when it is doing well” should also be adhered to. It very seldom is – most sellers wait until things are not going well. Know the tax implications. Ask your accountant about the tax impact of selling your business. Do this on an annual basis just in case. However, the tax impact is only one area to consider and a sale should not be predicated on this issue alone. Keep up the business. Continuing to manage the business is a full-time job. Retaining the best … [Read more...]
Can You Really Afford to Sell?
In many cases, the sale of a small company is “event” driven. That is, the reason for sale is often an event such as a health decline or illness, divorce, partnership issues, or even a decline in business. A much more difficult reason for selling is one in which the owners simply want to retire and live happily ever after. Here is the problem: Suppose the owners have a very prosperous distribution business. They each draw about $200,000 annually from the business plus cars and other benefits. If the company sold for $2 million, let’s say after debt, taxes and closing expenses, the net proceeds would be $1.5 million. Sounds good, until you realize that the net proceeds only represent about 3 1/2 years of income for each (and that doesn’t include the cars, health insurance, etc.). Then what? The above scenario is not atypical, especially in small companies. These are solid companies that provide a very comfortable living for two owners. In the above example, the owners obviously … [Read more...]
Surprises CEOs Face When Selling Their Companies
Surprise #1: Substantial Time Commitment Unlike the real estate business, where there is very little for the owner to do (other than keep the property clean) until the broker presents offers from the potential buyers, in the M&A business, there is a substantial time commitment required of the CEO/Owner in order to complete the sale properly, professionally and thoroughly. The following examples are worth noting: Offering Memorandum: This 25+ page document is the cornerstone of the selling process because most business intermediaries expect potential acquirers to submit their initial price range based on the information presented in this memorandum. The intermediary will depend heavily on the CEO/Owner to supply all the necessary facts. Suggestions of Potential Acquirers: Chances are that the sales manager will know the best companies to contact and those not to contact (generally, competitors). The intermediary will play a key role in generating this information, … [Read more...]
Company Weaknesses
Take two seemingly identical companies with very similar financials, but one of the companies was worth substantially more than the other company. One company will sell for $10 million “as is” or some changes can be made and the same company can be sold for $15 million. Following is a partial list of potential company weaknesses to consider in order to assess a company’s vulnerability. Customer Concentration: First, one has to analyze the situation. The U.S. Government might be considered one customer but from ten different purchasing agents. Or, GM might have one purchasing agent but be directed to ten different plants. One office product manufacturer with $20 million in sales had 75% of its business with one customer…Staples. They had three choices: 1. Cross their fingers and remain the same; 2. Acquire another company with a different customer base; or 3. Sell out to another company. They selected the third choice and took their chips off the table. The acquirer was a … [Read more...]
Buying or Selling a Business: The External View
There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history. The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times? The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.” Both owners … [Read more...]
What Would Your Business Sell For?
There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register. When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?” “Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s … [Read more...]