Last year, the financials of small businesses for sale reached record highs. This enabled business sellers to ask for – and get – more money for their businesses than ever before. High prices may sound like a deterrent to those hoping to buy a business. However, it’s actually a win-win, according to the article, “Make This the Year You Finally Buy a Business,” published in All Business. In short, buying a thriving business can be a shortcut to getting into entrepreneurship. Read more here: Make This the Year You Finally Buy a Business
The Tax Cuts and Jobs Act in 2017 introduced Opportunity Zones. Simply put, Opportunity Zones open up a pathway for private investors to put money into economically-challenged communities through a variety of tax benefits for the capital invested and gained, conditional on meeting certain requirements. Opportunity Zones have caught the attention of mayors, economic development agencies, private investors, philanthropic foundations, and consultants. An article written by Dane Stangler and published in Forbes Magazine, states, “What will really fulfill the economic development promise of Opportunity Zones is an on-ground mechanism to enable investors to support local entrepreneurs.” Click here to learn about one such on-ground mechanism: Turning Opportunity Zones Into Real Opportunities With Launch Pad
Already in February commercial real estate is off to a great start. Industrial real estate demand soared to new heights in 2018 and continues to grow in 2019 too fueled largely by ecommerce companies and an economy that’s healthier now than it has been in a long time.
Many are on the lookout now for signs of the next recession, as the economy nears its 10th year of expansion — its longest period of expansion ever.
Economists and analysts predict the economy will slow in 2019 due to continued short-term interest rate bumps by the Federal Reserve and waning fiscal stimulus from federal tax cuts.
Read about these and other trends here: 18 Commercial Real Estate Trends To Dominate In 2019
In 2018, BizBuySell.com, an online market for small businesses, reported a 4% increase in businesses sold since 2017, and a 31% increase over businesses sold in 2016. The number of businesses sold has been the highest the last 3 years since BizBuySell.com began tracking sales in 2007. This is attributed to a healthier economy and other factors discussed here: Small Firms Put Out For-Sale Signs
To learn more about National Business-For-Sale Trends and 2018 Transaction Activity read: BizBuySell’s Insight Report
Abraham Lincoln wrote…. “Character is like a tree and reputation like its shadow. The shadow is what we think of it; the tree is the real thing.”
A corporate reputation is the shadow…. The organization is the tree, the real thing.
While an organization can’t actually control its own reputation, it can perform ethically and communicate this in its dealings in the marketplace to actively build its reputation.
You’ve heard the saying, “Actions speak louder than words.” This is true when it comes to corporate reputations which are, truly, shaped more by operational practices than by communication practices.
This is good news for the business owner. He can act to reinforce those areas he considers important to the reputation of his business. He can treat others honestly and with respect, for example. He can implement activities to build awareness of his company’s good operational practices and design programs to enhance the company’s relationships with others.
The professional social network, LinkedIn, offers the following actions a business can take to improve his company’s reputation:
- Contribute to social and economic development in the community
- Support growth and innovation in the industry
- Build healthy professional relationships with others in the marketplace
- Recognize and reward employees who bring value to the company
- Build trust relationships with suppliers and others
- Manage the company’s financial resources responsibly and transparently
A quick Google search defines a reputation as the beliefs or opinions that are generally held about someone or something.
The reputation of a business is the opinion of the organization by its internal and external stakeholders. A company’s reputation is based on its past actions and the probability of its future behavior. Its reputation is an integral part of the goodwill of the business, that part of business value over and above the value of identifiable business assets.
The reputation of a business can be its greatest asset. Companies that have good reputations are thought to provide more value than those with poor reputations; they attract better staff; their customers are more loyal and often willing to pay a premium for their products or services. Companies with good reputations often enjoy higher price-earnings multiples and market values and lower costs of capital.
In an economy where 70% – 80% of market value comes from intangible assets such as brand equity, intellectual capital, and goodwill, businesses are especially vulnerable to anything that damages their reputations.
Benjamin Franklin once said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” If Mr. Franklin were here today, he would suggest business owners proactively build the reputation of their business, monitor it regularly, and promote it seriously.
Most business owners who have grown their business for years are confident it will sell for top dollar and enable them to retire comfortably after all their hard work and sacrifice. They don’t realize that some of the decisions they’ve made in running their company may negatively impact the real value of their business.
Three common mistakes include:
Focusing on the wrong thing. Many owners of small businesses operate their company to minimize income tax. In an effort to reduce the amount of taxes paid, the owner takes as much money as possible out of the business to fund his family’s lifestyle and minimize his tax burden. Instead of siphoning funds from the business, the business should be treated like an investment and strategies implemented to actually increase its value.
Ignoring Margins. When the profit margin is ignored, the value of a business decreases. Profitability and company value is reduced when companies ignore margins to keep gross revenues high. When this happens, the company position in the marketplace weakens. Needless to say, this is not appealing to a buyer.
This tip from Jane Johnson, author of an article published by BTA, may be helpful here: “Recurring revenue is guaranteed revenue, at least for some time, which does not require the same level of sales and owner effort as one-time revenue. This revenue often has much higher margins and is always highly coveted by buyers. Studies show that businesses with recurring revenue sell at much higher multiples than those that don’t.”
Delaying Staffing Decisions. One of the biggest mistakes owners make is procrastinating when staff needs to be cut. When profits are down or the sales pipeline dries up, owners must act quickly to cut expenses; that sometimes means making uncomfortable staffing decisions.
Financing a business acquisition is part of the concern on a buyer’s mind. Funding operations successfully is also a concern. When negotiating the acquisition, we often advise buyers to negotiate additional operational funding at the same time.
Operational funding may come from cash reserve. This would be self-funding, the easiest way to finance operations. The buyer may initially use his own funds for operations. However, the cash flow of the business should eventually finance operations.
Operations may also be funded by a line of credit with a bank, allowing the buyer to use the funds as needed and can be paid down as cash flow improves. Cash flow can be improved by using invoice factoring, i.e, financing slow-paying invoices.
Other sources of operational funding include SBA or bank loans, credit cards, crowd funding, pledging future earnings, securing an angel investor, and raising money from family & friends.
Have you ever wondered how the buyer of your business will finance the deal?
A buyer can purchase either the assets or the stock of a business. Most asset purchases involve the transfer of some assets and liabilities. In buying the stock of a business however, buyers acquire the assets, liabilities and risks too.
There are a number of ways in which buyers finance their acquisition. Sometimes a buyer uses his own funds. Sometimes he applies for a bank or SBA loan. Sometimes the deal includes seller financing or an earn out agreement.
Seller financing is more common now than it was 10 years ago, and banks often look favorably upon deals that involve seller financing in part.
Leveraged buyouts sound appealing and are sometimes a component of the deal. They allow a buyer to maximize returns by minimizing the cash he invests up front. Some of the assets such as equipment, real estate or inventory are leveraged to help finance the acquisition. However, this method can also maximize the buyer’s losses and negatively impact his rate of return.
Usually, in acquisitions of small companies, the deal involves a combination of seller financing and a bank or SBA loan.
These are just a few of the topics I discuss with my clients.
In addition to the question, “How much is my business worth?” I often hear, “Who will buy my business?” from my seller clients. These 2 little but important questions are asked by all savvy business owners at some point in time.
At Creative Business Services, we maintain a healthy database of potential buyers in a wide range of industries/categories, and often find the buyer among them. Buyers of the businesses I’ve sold have come from a number of camps including corporate America, the competitors or vendors of my sellers, and investment groups. Sometimes, the perfect buyer is a partner, an employee or a relative of the seller. Other times, it’s a foreign or public company.
Some buyers are first-time business owners; others bring years of experience to the new operation. It’s hard to tell who the buyer of your business might be.
That’s why, as an M&A advisor, I go over these 2 important questions with each of my clients. I leave no stone unturned when looking for the perfect buyer for their business.