CNN Money put out a great Q&A article a couple of weeks ago: How to sell a million dollar business. If you are planning or hoping to sell your 1-2 million dollar small business in the next 2-3 years, save this to your favorites. Highlighted topics include:
- A business broker can be your best ally in selling a business of that size
- Questions to ask a business broker
- Business broker fee and service expectations
Due to the overwhelming importance of the sale of a small business, conducting an independent business valuation is of utmost important in the first step to selling: setting the price right. Most quality brokers should be able to assist you in preparing for a third-party valuation, serving as a conduit.
The NY Times tackles a very important topic for today’s business owner: what to do when partners want to split. A buy-sell agreement protects all owners in a business for events when a minority, majority or equal owner decides or is forced to leave a business. In most cases, a buy-sell agreement will include a provision for determining “fair market value” via a credible third-party business valuation.
If you own a business and share that ownership with other partners, it is important that you create measures to protect everyone’s best interests in the form of a buy-sell agreement. Seek your attorney for such matters so that it is fair, carries goodwill and is responsible to all shareholders within your business. In the absence of a buy-sell, ownership claims and buyouts are at jeopardy in most cases leading to litigation and exorbitant legal fees with few winners in the end.
Serial entrepreneur Mike Doernberg used this saying in a business owners workshop and it has always stuck with me. In particular, he used this phrase as it relates to start-up business owners who have reached a point of no return and are about to “cross the chasm”. Either sell your business (run from the lion) at this juncture, or bear down for the next 3-5 years to really refine & develop the business (chase the naked lady).
Now, this catchy phrase should be at the top of every business owners’ mind (not just start-ups) as we enter what analysts project to be a tumultuous next couple of years. Rob Slee, investment banking guru, paints a very grim future for today’s business owner based on 10-year, US economic cycles over the past few decades:
- “Owners are currently faced with an adult decision: to either get strategic about their businesses or to get out as soon as possible.”
- “A further challenge to owners is the uncertain US economy. Actually the economy tipped to the dark side toward the end of 2007.”
- “…..private equity and hedge funds also have had too much money for their own good. These classes, which represent trillions of dollars, will be reset over the next 3-4 years, making the sub-prime thing seem like a drop in the bucket.”
- “…..business owners have until the 2nd quarter of 2008 to sell out, or they will need to hold their companies until 2015 or so before they can maximize a sale. Yikes!”
- “You still have a few months to sell-out before the nasty economic front settles in. We’re about to face capitalism at its coldest.”
No one can foretell the future, but Rob Slee uses historical trends of economic trends to validate his points. With the US still recovering from the sub-prime crisis, being locked in to a nasty war, and trying to determine who will become the next President, business owners are at more risk in possibly declining SMB valuations and opportunities to sell their business.
Our recommendation: Run from the lion and sell your business (if you’ve been debating this over the past couple of years).
For additional insight and to add to this discussion, please read our article on Baby Boomer Business Owners flooding the marketplace with “for sale” companies.
If you own a business and are thinking about selling, it is important you recognize the value of a defined plan & strategy and the value of professional advisors. An article featured on Financial Post summarizes a recent study of business owners who sold their business within the past 5 years (more than 100 business owners were surveyed about selling and what they would recommend to other business owners following their own personal experiences):
- 74% recommend a professional business valuation to determine a fair, credible asking price
- 71% recommend hiring a professional (such as a business broker) to coordinate & facilitate the entire selling process
A common sentiment amongst these business owners who decided to manage the entire process independent of outside assistance was “the process was often lonely, emotional and conducted without proper planning”. Two other key quotes & findings from this study when business owners did it themselves:
- “Business owners are waiting till they get an offer before they address key issues in selling a business, which means they’re not negotiating from strength, and are leaving money on the table.”
- “….the former owners regret their failure to get the best deal not just for themselves, but for their management, staff and customers.”
If these trends are important to you and the sale of your business, take time to read the entire article and then strongly consider the involvement of professionals who understand and are experienced in the complexities of business valuation and business transactions. website domain
In a NY Times article, “Failure Isn’t Always a Bad Thing”, an interesting formula on determining a start-up’s potential for success is presented which was extracted from venture capitalist David Sliver’s book “Smart Start-ups”:
V = P x S x E
Valuation = Problem solved x Solution’s elegance x Experience of management
The maximum score for P, S, & E is 3; where the highest score is 27. The higher the score, the greater odds for start-up success. If “V” (valuation) is less than 5, it can be assumed the business idea is destined for failure.
If you are a business owner, take a moment to apply this very simplistic yet eye-opening formula to your own business valuation. On the surface, this is a good exercise for budding entrepreneurs, investors, and/or potential partners. Give it a try and let us know your thoughts.
Putting this model to the test, we examined our own business, Fair Market Valuations:
P = 3
S = 2.2
E = 2.2
3 (P) x 2.3 (S) x 2.3 (E) = 15.9 (V)
You’ll obviously have a bias towards your own company or business idea, but ask a handful of mentors or trusted advisors to rate your business using this simplistic model; take the average valuation and reflect on your potential. Good luck and as always — Know your value. Know your business.
Businessweek.com put out an article today under its Small Biz section titled “How to sell your business”. We want to draw your attention to the section discussing business appraisal. In summary, the author of this article suggests that the business owner conduct an analysis of their financial statements and an exercise known as “recasting”. Bottom line, this is an adjustment of owner’s salary, discretionary expenses, one-time fees, interest, depreciation and other expenditures. Then, the writer suggests the owner adjust fixed assets to fair market value. Once complete, THEN hire a business appraiser. Huh?
This is a slippery slope for a business owner. The aforementioned recasting of financial statements and fair market value asset adjustments should be conducted through the work of a business appraisal company. Most firms will identify these key factors through extensive data gathering, questionnaires, and owner feedback. It is our professional recommendation that if a business owner plans to sell a business, they conduct a business valuation first and rely on those hired professionals to walk them through the entire business appraisal process. You are paying for professional advice, so let the pros do their jobs.
Otherwise, if an owner begins doing their own recasting, odds are they get overly creative and add-back too many expenses which would then be disputed by a savvy buyer — thus negatively impacting sales price and putting doubts in a buyer’s mind about the seller’s transparency and honesty.
Know your value. Know your business.
An interesting alert came across our desks this morning, from Forbes.com: The Most Valuable College Basketball Teams. I somewhat choked on my coffee and had to read again. The value of a collegiate basketball team? FMV is a proud supporter of the University of North Carolina at Chapel Hill and it was no surprise to see the Tar Heels top the list. The metrics used in this assessment were unique and certainly different from the world of small business valuation, but it was an interesting read. While the methods used by Forbes are based on ticket sales, tournament earnings and a teams impact on its school and athletic deparment, one major factor was completely ignored: team apparel sales! While it could be difficult to extract basketball apparel sales from football, one could quickly assess official basketball jersey, shorts, and other official merchandise sales directly associated with a collegiate basketball team. The valuations would skyrocket, especially for UNC as they are the #1 in licensed collegiate apparel sold world wide! Hmmmm, do you think that is because of basketball or football? In addition, with the limited data collected, Forbes used a conservative multiple of profit ranging from 1.5-1.75 to determine a teams valuation. Forbes “valued” the top 20 NCAA basketball teams and the valuation gap from 1st to 20th (UNC vs Xavier) was not even 2x! How can UNC men’s basketball only be 2x more valuable than Xavier men’s basketball — that is way off.
Now compare the college basketball valuation to the college football valuationconducted by Forbes back in November. Notre Dame ranked first with a value of $100M on generated revenues of $45M receiving a more than 2X multiple on profit. On a global basis, who has more popularity and generates more university income on licensed merchandise: UNC or ND — I think that one is pretty easy!
Over at BNET, they are developing a series on the topic of M&A with goal of empowering business sellers and buyers to “Be a Master M&A Negotiator”. We like BNET because they take complex issues and spell them out in layman’s terms making it easy for most to understand and learn. The portal with various resources is here.
Thus far, they have an assortment of interviews with M&A veterans as well as informative videos with visual & audio demonstrations of common M&A deal challenges. If you plan to sell a business, this is a great resource so you can get into the head of a potential buyer as most recommendations are for buyers.
The Financial Times and Canada.com are at it again and has published a compelling�article�titled “Working out what your firm is worth”��for small business owners and their need to conduct recurring business appraisals.� While some businesses do not need annual appraisals, most privately owned companies do need one at some point in its existence. It is very common for an owner to grossly over value their business based on the blood, sweat & tears they’ve invested over the years to get to where they are today.� While sweat equity is valuable, there are specific indicators a valuator will examine in order to determine “fair market value” of a small business. A key factor for�the business valuation is what is expected to happen in the future when the existing owner is removed from the equation?� If a small business is heavily dependent on that owner’s reputation, expertise & services it could have a negative influence on future financial successes; thus�devaluing such a business.