A Listing Agreement is More than Just a Piece of Paper
In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.
For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.
For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.
So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.
Read MoreWhat a Buyer May Really Be Looking At
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 or several other deficiencies.
- Has the business used all of its bank credit lines? Does the bank or any creditor have the company on any kind of credit watch?
- Does the company have monthly financial statements? Are the annual financials prepared on a timely basis?
Management
- Is the owner constantly interrupted by telephone calls or demands that require immediate attention? This may indicate a business in crisis.
- Has the business experienced a lot of management turnover over the past few years?
- If there are any employees working in the business, do they take pride in what they do and in the business itself?
Manufacturing
- What is the inventory turnover? Does the company have too many suppliers?
- Is the business in a stagnant or dying market, and can it shift gears rapidly to make changes or enter new markets?
Marketing
- Is the business introducing new products or services?
- Is the business experiencing loss of market share, especially compared to the competition? Price increases may increase dollar sales, but the real measure is unit sales.
When business owners consider selling, it will pay big dividends for them to consider the areas listed above and make whatever changes are appropriate to deal with them. It makes good business sense to not only review them, but also to resolve as many of the issues outlined above as possible.
Read MoreA “Pig in a Poke”
Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained 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 or she is not buying the proverbial “pig in a poke.”
The four main areas of concern are: 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 they are not familiar with. 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 out the real reasons for sale.
Business’ Finances: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited? Is the company profitable? How do the expenses compare to industry benchmarks?
Management: For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates? Is there a lot of change or turn-over in key positions? On the other hand, no change in senior management may indicate stagnation. Are the employees upbeat and positive?
Buyer’s Finances: Buyers should make sure that the “money is there.” Too many sellers take for granted that the buyer has the necessary backing. Sellers have a perfect right to ask the buyer to “show me the money.”
Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis.
By doing one’s homework and asking for the right information – and then verifying it, buying a “pig in the poke” can be avoided.
Read MoreCompany 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 $125 million competitor which was unable to sell to Staples, so after absorbing the smaller company, the customer concentration to Staples was only about 10% ($125m + $20m=$145m of which $15 million was sold to Staples or 10+%).
Single Product: Perhaps the most famous example of a single product acquisition is when General Motors overtook Ford’s single product, the Model A, with Alfred Sloan’s brilliant concept of a different model for people with different financial thresholds. Henry Ford’s stubbornness to stay with one product (Model A) almost cost the company its existence.
Regional Sales/Limited Marketing: Companies with parochial focus have limited capabilities to grow other than within their own domain. A widget company with national and international sales has substantially greater prospects to grow than one limited to its own region.
Aging Workforce/Decaying Culture: Skilled workers in certain trades, such as tool and die shops, are not being replaced by the younger generation. This is a sign that the next generation will not provide the companies with a skilled workforce in certain industries.
Declining Industry: Some companies are agile enough to completely change their industry, such as Warren Buffet’s Berkshire Hathaway and Fashion Neckwear Company which completely changed from neckties to polo shirts.
Pricing Constraints/Rising Costs: Companies who sell a commodity product often lack pricing elasticity and are unable to pass on their increased costs to their customers. For a while, the steel industry was in this predicament, but through massive industry consolidation and a booming demand from China, the situation changed.
CEO Dependency/No Succession Plan: Many middle market companies have successfully been built up by the founder/entrepreneur/owner and some critics call these individuals a “one-man-band” for good reason. These superman types tend to dominate most aspects of the company, but this is no way to build a sustainable business long term. Furthermore, these CEOs usually have not created a succession plan.
Maximizing Value
If the owners of a company, many of whom may be outsiders, want to increase the value of their investment, they should, through the Board of Directors, try to overcome the company’s weaknesses. On the other hand, the CEO may not be either capable or motivated to do so. The alternative is to implement a CEO succession plan, preferably with the cooperation of the current CEO. Kenneth Freeman’s thesis in “The CEO’s Real Legacy” (Harvard Business Review, Nov 2004) is that the CEO’s real legacy is implementing a succession plan.
Freeman advises:
“Your true legacy as a CEO is what happens to the company after you leave the corner office.
“Begin early, look first inside your company for exceptional talent, see that candidates gain experience in all aspects of the business, help them develop the skills they’ll need in the top job…
“During good times, most boards simply don’t want to talk about CEO succession…During bad times when the board is ready to fire the CEO, it’s too late to talk about a plan for smoothly passing the baton…Succession planning is one of the best ways for you to ensure the long-term health of your company.”
Both buyers and sellers should assess the company’s weaknesses. While some weaknesses are difficult to overcome, especially in the short term, one potential weakness that is very easy to overcome is to implement a succession plan…especially during the company’s good times before things go bad and it’s too late.
Read MoreQuestions to Consider for the Serious Buyer
A serious buyer should have the answers to the following questions:
- Why are you considering the purchase of a business at this time?
- What is your time frame to find a suitable business?
- Are you open-minded about different opportunities, or are you looking for a specific business?
- Have you set aside an amount of capital that you are willing to invest?
- Do you really want to be in business for yourself?
- Are you currently employed or unemployed?
- Are you the decision maker, or are there others involved?
The real key to being a serious buyer, however, is whether the individual can make that “leap of faith” so necessary to the purchase of a business. No matter how much due diligence a buyer performs, no matter how many advisors there are to advise the buyer, at some point, the buyer has to make a leap of faith to purchase the business. There are no “sure things” and there are no guarantees. If a buyer is not comfortable being in business, he or she should not even contemplate buying one.
Read More
Five Kinds of Buyers
Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.
The Individual Buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.
The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.
The Strategic Buyer
This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.
The Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.
The Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.
The Financial Buyer
Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.
Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.
© Copyright 2013 Business Brokerage Press, Inc.
Read MoreWhy Deals Don’t Close
Sellers
- Don’t have a valid reason for selling.
- Are testing the waters to check the market and the price. (They are similar to the buyer who is “just shopping.”)
- Are completely unrealistic about the price and the market for their business.
- Are not honest about their business or their situation. The reason they want to sell is that the business is not viable, it has environmental problems or some other serious issues that the seller has not revealed, or new competition is entering the market.
- Don’t disclose that there is more than one owner and they are not all in agreement.
- Have not checked with their outside advisors about possible financial, tax or legal implications of selling their business.
- Are unprepared to accept seller financing or now unwilling to accept it.
Buyers
- Don’t have a valid reason to buy a business, or the reason is not strong enough to overcome the fear.
- Have unrealistic expectations regarding price, the business buying process, and/or small business in general.
- Aren’t willing (many of them) to do the work necessary to own and operate a small business.
- Are influenced by a spouse (or someone else) who is opposed to the purchase of a business.
A Private Equity Glossary
“Deep-pocketed investors often set aside money to buy into private equity funds. Such investments tend to be riskier but can generate higher returns than stocks or bonds. Here are some of the key players and terms in the world of private equity investments.
• Private equity firms: A broad category. It includes venture capitalists and buyout specialists who raise money from limited partners and use it to help companies develop products and markets.
• Limited partners: Investors in venture capital or buyout funds. These are typically pension funds, foundations, university endowments, insurance companies, or wealthy individuals.
• Venture capital firms: Firms that use their investment funds to finance start-ups, often in their early stages and typically in the technology, life sciences, or telecommunications fields.
• Buyout firms: They usually raise larger funds and invest them in more mature, later-stage companies of all kinds, often taking controlling interests and sometimes buying the companies outright. (The terms “private equity” and “buyouts” are often used interchangeably.)”
Source: Robert Weisman, in an article from The Boston Globe
Women Business Owners: Coming on Strong
If there were any doubt that women owners are an ever-growing force on the independent business scene, new studies of leading female entrepreneurs around the world supplies incontrovertible proof. The National Foundation for Women Business Owners (NFWBO) has been hard at work, researching the small business climate for women and identifying strong trends.
Fifty Top Women Show Trends
In one study done jointly with IBM, the NFWBO used as its subjects 50 top women business owners (plus 10 more up-and-coming) to compile these findings:
- These women owners cover a wide range of industry categories, for example: 27 percent in manufacturing, 25 percent in retail trade, and 10 percent in real estate.
- Slightly less than half (46 percent) of these women inherited their businesses, and more than half began their own: 34 percent by themselves, and 17 percent with others.
- As a group, the study subjects generate $139 billion in revenue and employ more than 150,000 workers. And, the numbers keep increasing.
The Majority of Women Owners Prefer “Small”
More research from the NFWBO shows another picture: that women owners, taken as a whole, prefer pared-down operations — the very smallest, in fact. Among the approximately eight million women-owned businesses in the U.S., 75 percent of these are one-person operations with no employees. Ownership of such a small business gives women maximum flexibility with work schedules and offers a better chance of keeping their home lives healthy as well.
Ignoring the big-business gurus who claim that small does not equal successful, women owners continue to prefer keeping their businesses small. Although the NFWBO research reveals that fewer than one percent of these businesses have more than $1 million in sales, women owners are showing strength in numbers and gaining respect from many quarters necessary for their support and growth. The Small Business Administration, for example, offers a number of free counseling and assistance programs, as well as its loan guarantee program–all helping the woman-owned business to flourish.
Women Owners Triumph over Bank Loan Inequities
Another NFWBO study shows that women business owners, for the first time ever, are experiencing access to business loans from banks nearly equal to that of male owners. A number of U.S. banks, among them BankAmerica and Wells Fargo, offer special loan programs for women business owners. Partly thanks to the rise of women to high bank positions, the woman-owned business is being seen for its untapped potential.
With easier access to loans, women owners can now be less dependent on high-cost credit card loans for financing, and they have more leeway to reinvest earnings. According to the NFWBO, all this means that women-owned businesses have developed into more sophisticated operations.
Although male and female entrepreneurs may have equal access to loans, a related NFWBO finding shows that the sexes still approach the use of credit differently. Men owners tend to use this money to help out with cash flow or to consolidate debt; women put the dollars towards business growth.
In addition to these specific discoveries, NFWBO studies also showed that, on an international scale, women owners come from similar backgrounds and voice the same concerns about important business issues. They constitute between one-fourth and one-third of the world’s independent business owners. They are also vocal, as was evidenced at an international conference in Paris sponsored by the Organization for Economic Cooperation and Development (OECD). Approximately 350 delegates from 35 countries attended the multilingual sessions and workshops.
Read MoreSaying “Hello” — More Important than You Think
The telephone rings, the caller receives a message welcoming them, then she is asked to dial the extension of the person she wants to talk to. Since she doesn’t know the extension, she has to wait and listen to the office directory; then presses the extension number only to discover that the person being called is not there.
Most Americans have called a credit card company, their bank or any other large company only to get lost in the maze with no way of talking to an actual person. Then there is the “hold music,” the commercial while you wait, with more “amusements” popping up all the time. Who knows what the future holds in telephone communication.
While it used to be that the telephone was a visitor’s first contact with your business, that tradition is changing. Now it is your Web site. Today’s busy buyer now goes to the Internet to look for whatever he or she is considering purchasing. It is even easier for potential clients or customers to find your telephone number from your Web site rather than the telephone book. They can even get directions to your place of business.
In business every call or Web site visitor is a potential customer or client. You can’t afford to lose even one. After all, if someone goes to the trouble of finding your telephone number or locating you on the Web, they must be at least half-serious.
Make sure your telephone system is as user-friendly as you can make it. If it isn’t, change it. One sale or new client will more than pay for this improvement. What is the status of your Web site? Pay a little extra to insure that it is also user-friendly. Your Web site should provide interesting and useful information on your company, your products or services, your personnel (including contact information), and anything else that will make you look like the well-established professional that you are. The more user-friendly and informative the site, the more business you will get.
Understand that the first contact potential customers or clients have with your business is either the telephone or your Web site – and probably both.