Archive for category: Must Knows About Business Sales

Another article about selling a business? Well, we’re business brokers, so we believe in stressing the fundamentals. A business sale is often the most significant transaction an individual participates in during his/her lifetime. And those who master the fundamentals have the most successful transactions.

Step One: Assemble Your Team

There are four key team members you should have assisting you in your transaction:

• Accountant – This should preferably be the accountant that you have always had working on your company’s finances. But in case he/she doesn’t have the bandwidth/desire to assist you with this task, you might bring in someone else with experience in business sales and tax strategies.
• Financial Planner – This person should work hand-in-hand with your accountant to figure out what to do with your free-and-clear proceeds that result from the sale. They can often offer you strategies to maximize value and lessen tax exposure.
• Attorney – Someone to represent your legal interests in the transaction. If you don’t have a trusted resource in this department, we have trusted partners we can refer you to that we work with often.
• Business Broker – We’re going to help make sure this team is pulling in the right direction. Most of all, we’re going to help you stay focused and on track towards the closing date.

This team is what you’ll need for most Main Street (less than $5M annual revenues) transactions, but it can definitely expand as the transaction size increases, to help cover the increased diligence issues.

Step Two: Prepare Your Paperwork

Before selling your business, you can get ahead of the game by asking your broker to get you a diligence checklist for a business that is in your industry or comparable in revenues. The longer you have to work on this list, the less it will seem like term papers of long ago and more like a simple marathon with milestones you keep hitting.

Step Three: Think About Deal Points

There’s no way for you to anticipate what a person buying a business will have as his/her “must haves”. But you can certainly make your own list, as well as your own “red lines” that you won’t cross. Keep in mind that this needs to be a discussion you have with your broker. In your own mind, “must haves” can be very serious, and red lines can be very red indeed. But that might be simply because we’re lacking context or don’t have information about alternative ways to proceed.

There are thousands of ways to get a deal done (we’ve seen most of them!) so if you’re proactive, your mind will be in “deal” mode when you start dealing with a buyer. That means you’re flexible. Flexibility often wins in transactions of all kinds, not just in business sales.

Step Four: Look at Comps

Your business may be worth a certain number in your mind. We always remind our clients that their business is only worth what someone will pay for it during the particular time period your business goes to market. Start with a professional valuation, then talk to your broker about current supply and demand in the market for comparable businesses.

What kind of deals are getting done right now and how does that relate to me and my business?

Step Five: Stay the Course

The deal is not done until the paperwork is completed and the check clears. Period.

Make sure that you have operational support as you’re going through this process. Working on a business sale is a part-time job. You want to make sure that your company doesn’t suffer as a result of doing all the things we’ve discussed above to move towards a successful transaction. If you need help, ask. If you’re struggling, tell your broker. But you don’t have to do this alone, and it’s okay to admit you need help.

Do you feel like it might be time to sell your business? Let’s talk about it!

Here at Apex we’ve sold every type of business you may have heard of, and at least a dozen you could probably have never imagined. But franchise businesses add a few additional wrinkles to the process that it’s important for any buyer to be aware of. In this article, we’ll discuss those wrinkles and how you can smooth them out.

Who’s the Boss?

Unlike other transactions, there’s a third party besides buyer and seller here: the franchisor. Each franchise agreement is different, but many franchisors will include in the original contract that they signed with the franchisee:

• A right of first refusal for buyback: they can (though often do not) exercise the right to buy back the business from you at terms stipulated in the contract.
• The ability to vet a buyer: very often these buyers will have to go through the same financial vetting process that the original franchisee did, and will also have to be interviewed for proper fit for the franchise itself
• The ability to levy additional costs: there will often be a transfer fee that will be paid directly to the franchisor simply for the “right” to transfer the franchise to someone else.  Additionally, the incoming buyer will likely have to go through the same (paid) training that the original franchisee did.

We urge our clients who are considering buying or selling a franchise business to be very familiar with the terms of the original FDD (franchise disclosure document) that everyone is subject to so there is no misunderstanding before starting down the road to a transaction.

What are the Pros?

There are lots of pros of buying into a franchise. With top tier franchises, you’re buying into something that has a well-established system. It’s so well-established that they’ve multiplied the system with strangers. There is an operations manual that you will not only be given, but thoroughly trained on.

You also have bought into something that has a strong brand presence. Customers know exactly what you provide within an established brand halo, and often have loyalty to the brand above and beyond their personal loyalties to ownership. This makes transitions simple.

You will also have the chance to meet other franchisees to see what improvements and changes you can make to take the business you are buying to the next level.

What are the Cons?

In addition to the vetting process listed above, the franchisor itself is, in a way, a direct competitor to the seller. The franchisor is always looking to sell more units and may be able to provide incentives and sweeteners to a deal for a new franchisee that someone who is just looking to sell/transfer his/her franchise to someone else can’t.  However, the overall mission of any franchise is to grow, and if a potential buyer looks like a solid and qualified possible franchisee, a healthy franchisor isn’t going to endanger bringing that buyer into the organization as a new franchisee.

There’s also a smaller buyer pool. We’ve said in previous articles that the bigger the buyer pool, the larger the number of possibilities. Because of the limits of creativity imposed in a franchise model, there are fewer people open to buying into them. But that may also be an opportunity for a buyer, as he/she will be competing with fewer people for the best franchise opportunities.

Looking to buy or sell a franchise business? We’ve been through those transactions hundreds of times. Let us put our expertise to work for you.

Some business owners confine their working knowledge of finances to what’s in the bank today vs. what needs to be paid today. Others will give a quick glance at monthly financial statements their bookkeepers have given them. But the most savvy business owners take those financial statements and examine some simple financial ratios in order to keep tabs on and improve their small businesses. These ratios should be compared to industry standards. (Don’t worry, there won’t be a test at the end!)

Quick Ratio

Also known as the acid test, the quick ratio is a way to understand how much money you have to deal with your current liabilities. It’s calculated by taking your current assets (excluding inventory, which is not quickly convertible to cash) and dividing it by your current liabilities. 

A ratio of 1.0 is acceptable, but it means that you have only $1 of cash on hand to deal with each $1 of liabilities. Anything north of 1.0 means that you have at least a bit of cushion in case of a cash crunch.

Gross Profit Margin

This is often considered a “tell-all” metric and is something that should be monitored month-to-month and year-to-year as you want it to stay consistent. You calculate GPM by taking your gross profit (total revenues minus costs of goods sold – COGS) by your gross revenues.  

What the margin is will depend on what kind of business you have. If you are selling a premium product, you typically see a higher margin, whereas if you are competing on cost, a low margin is more likely. As we said, it’s a number that should stay consistent so if your margin goes down it could indicate:

• Your costs have increased but you have not increased pricing to match
• You have a problem with shrinkage/unauthorized free giveaways

Net Profit Margin

This is a more granular version of the Gross Profit calculation. In the numerator, you will take total revenue and subtract COGS, but this time also take out operating expenses to arrive at net profit. Divide that by total revenue and you get your net profit margin.  

If you’re unhappy with the number, there are a few remedies:

• Raise prices
• Decrease COGS
• Review your operating costs. Can you improve business productivity?
• Analyze your sales mix – is it diversified enough?

Average Customer Sale 

If the previous three ratios examined your business at a macro level, this ratio examines it on a micro level by looking at each transaction with a customer. It is calculated by taking the total amount of sales divided by your number of customers. This number will allow you to identify what each customer is spending with you, on average. If this number is much lower than you expect, then there might be missed opportunities for add-on sales or associated products/services at the point of sale. If it’s much higher than you expect, it’s a great opportunity for you to see what is going right and lean into it!

There are a select group of people who live for numbers, but we know that most business owners don’t. If you need some help with these ratios, give us a call so we can help you better understand your business!

Sometimes businesses come to us that need a bit of creative spark to sell properly. This is often because the business is in a unique situation. These are often fun for us as advisors because it gives us the opportunity to deploy our creativity and find solutions that get us offers. In this article, we will share a few of those solutions with you.

Reframe Your Situation

Some time ago we were asked to represent a veterinarian who was looking to sell his small-town practice and the associated real estate including his house. When the listing broker recognized that it would be difficult to find a veterinarian who was interested in acquiring both the house and the practice, she got creative and re-framed the listing as a pet boarding facility. This allowed the buying audience to be expanded beyond licensed veterinarians, resulting in more inquiries and ultimately a successful transaction.

Not Everyone Wants Your Other Assets

In a previous article, we’ve discussed the importance of being proactive when it comes to the disposition of real estate within your business. As with the previous example, someone might not have wanted a vet business and a house. Sometimes people look at companies that have a lot of vehicles and some of those vehicles were simply bought by owners because of personal tax strategy, not because the vehicles are particularly relevant to the business.

This is why business owners always need to consider two things when looking at asset purchases in relation to current tax liability: how will it help me now AND how does this affect our ability to sell later. Too often, people look at the former and forget the latter even exists, when the reality is that sometimes a considered look at the “later” consequences will convince you that the “now” benefits simply aren’t worth it.

It’s also important to remember that when you encumber a business with real estate and or less usable assets, you’ve narrowed your buyer pool. You always want as large a buyer pool as possible.

Be Creative!

While our advisors work hard to have a curated list of trusted buyers and sellers handy, sometimes a business needs other strategies beyond emailing reliable people. Recently we were dealing with a home health care business in a rural area. Because that industry is consolidating, we thought it would make sense to put together a basic flyer and direct mail other home health care companies in the region. Sure enough, that flyer stirred up some interest, which led to offers and an eventual transaction. Direct mail still has its uses!

Participate in the Transition

A similar approach was utilized when we were representing a very niche energy consulting firm. The sellers recognized due to the nature of their business, a longer transition period would likely be required and that the buyer was probably someone already in their industry. They decided to put the business on the market a few years before they reached retirement age, allowing them a great deal of flexibility for transition. Direct mail was again used to proactively contact potential industry buyers, resulting in a transaction where the buyer’s synergies create greater profits than the sum of the parts and where the sellers’ post-transaction participation will allow them to share in the financial benefits of these synergies.  

Do you have a unique business or know someone who does? We can come up with a unique strategy to sell it!