Warning: Beware of Slick “Consultants” charging huge fees to meet your valuation expectation!

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bewareThere are several companies that tour the country setting up Business Value seminars or Grow Your Business seminars, or some variation of those. They are good at pumping up the audience, promising to increase the value of a business, guaranteeing at least one buyer at a high valuation price, and pressuring to sign a contract immediately. If it sounds too good…

The problem is that they just tell the business owner what the owner wants to hear and charge large upfront fees (tens of thousands) for a relatively simple market valuation. These companies have no intention of really helping or advising these business owners properly. The upfront fees that the slick operators charge are based on business size, valuation expectations, and of course how much cash a business has in its bank account.

Legitimate valuation services can be found at reasonable prices by qualified and certified individuals in your area. Depending on the use of the valuation (market price, bank loan, divorce, partnership dispute, buy/sell agreements, tax planning), the cost is normally between $3,000 and $8,000. The higher fees will take into consideration the extra analysis the valuation company must perform to meet IRS guidelines or legal requirements for special situations.
There are so many respected professionals and businesses holding free seminars. Don’t get caught signing a $25,000 commitment to find out you have a business that is worth exactly what you thought it should (big bucks of course). Get some free and honest advice from your Apex Business Advisor. With a clear understanding of what you have, you can make intelligent planning decisions.

Trends Up

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TrendsUPQuite frequently, we are asked by various professional and networking groups to give our impression of the state of the overall business environment. Also, potential buyers and sellers want our viewpoint because of our unique ability to have confidential access to many businesses and their financial histories.

We feel that although there is always a market for buyers and sellers of businesses, there have been some challenges over the last couple of years. Good businesses were hurt by the overall economy, and banks paused in funding acquisitions and working capital. The good news is that these businesses seem to have hit bottom, stabilized, and begun growing again, resulting in an increased value of the business.
Activity in our business is up. More business owners are ready to sell and retire after having recovered from the recession. In light of stable and upward trending revenues, buyers are more comfortable proceeding with a business purchase. They also appreciate and recognize that the business is one that can withstand one of the worst recessions in history. Additionally, banks are making a real effort to compete for loans and are more anxious to fund the acquisitions of these improved businesses.

Some media-reported statistics are now revealing an improved confidence and optimism in our economic future. The press can focus on the negatives too often (understatement), so we need to share the positives! Contact your Apex Business Advisor for assistance when looking at buying or selling a business.

The Huge Gamble

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GambleSave time and money and reduce your risk by investing in an existing business operation. There are plenty of statistics available that reveal the risk of starting a business, buying a new franchise, or buying an existing business. Without getting into the fine detail and analysis – starting a business from scratch is a HUGE gamble. However, buying an existing business (with existing customers, employees, brand, cash flow, history, trends, professional relationships, management, etc) is a SMALL risk.

Look at the differences:

  • If you start a business with passion and a wonderful idea, you have to build it to make it happen. Fulfilling this dream will take some serious commitment, sacrifice, stress, and cash. Do you have the resources to make it work over the first 5 to 7 years? Do you have the experience to hire the right people, handle the accounting and legal issues? Who is going to do the marketing and sales? How long will it take to build revenue to a livable level (be realistic)? Can you handle the lifestyle change of starting a business?
  • Buying an existing business takes away many of the risks and heartache of starting a business. As mentioned above, you enter into an existing business with most of the pieces in place and in working order. There are usually things that a buyer may do differently to improve the business, but a buyer can assess an existing business and its history to better understand its ongoing viability and value. Which would you rather have; a business with $200,000 existing cash flow (bought with $100,000 initial investment) or using $200,000 in savings to start a new business (or new franchise) with no customers, no employees AND no Cash Flow?

See your Apex Business Advisor to review current and past business acquisitions to get familiar with the upside of buying an existing business.

Broken Nest Egg

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brokennesteggMany of our business owner clients who want to sell are doing so because they are ready to retire. They have a plan in place, the business is at least stable, and they want to start interviewing potential buyers. We have another set of potential business owner clients who continue to delay the sale of their business because they don’t feel they are getting the true value for the business, they haven’t saved enough, or they just aren’t ready.

Timing is very important in the sale of a business. Are the revenue trends upward or level, are the net margins strong, is there a stable workforce, etc? If you are at retirement age or just burned out, give strong consideration to sell when things are going well. Don’t wait for the business to turn upside down.

Here’s a current example: We have a client who has waited beyond the good years. He is now in his late eighties, owns a large manufacturing facility in rural Oklahoma, and for the last few years has seen a declining revenue trend as he has not had the same energy and focus to keep the business growing as he did a decade or two ago. His business is now worth about one-third of what it was just a few years ago. He has fought his advisors for the last couple of years with his stubborn opinion of value. Now it will be very difficult to sell at all (other than an asset auction).

There was a good article in the Wall Street Journal recently that gets into this issue a little deeper. It’s also interesting to review the comments posted about the article.
If you have a business, you need to plan ahead. Talk to one of our Kansas City Business Brokers.