The Role of the Business Broker in a Sale

When it comes to buying and selling businesses, it’s rare that the buyer and the seller handle the transaction on their own.  Nor is it advisable to do so, given the volume of accounting and legal documentation required, the process of negotiating sale terms agreeable to both parties, and knowing steps to take when a deal in progress encounters unforeseen complications.  There are many potential pitfalls in the process, and generally buyers and sellers on their own do not have the experience, expertise and time required to recognize and then work through the myriad issues that can arise in the sale process.

This is where a business broker comes in.  An experienced business broker is intimately familiar with all of the ins and outs of the business sale process, knows the steps each party will need to take in the sale process, and provides assistance to both parties in the fulfillment of each step.

Business Broker Duties and Requirements

• Pricing the business with a professional valuation.
• Drafting an offering summary, sometimes called a confidential business review. This piece becomes one of the most important marketing tools for the offering, and is provided to prospects only after they have signed a confidentiality agreement and been qualified by the broker.
• Marketing the business to the widest possible audience while maintaining strict confidentiality.  This is one of the important distinguishing differences between business brokers and real estate agents.  Real estate agents put a sign in front of their properties and typically without the need for confidentiality, advertise widely the specific location.  Business brokers are trained to maintain strict confidentiality.
• Introducing prospective buyers to the business after insuring confidentiality agreements have been executed.
• Facilitating meetings between the seller and potential buyers.
• Writing offers to purchase the business.
• Handling negotiations between the parties after an offer has been made.
• Facilitating the due diligence investigation.  Offers to purchase are almost always made contingent upon a further due diligence investigation.
• Assisting the buyer in obtaining business acquisition financing.
• Scheduling and facilitating the closing of the transaction.

Business brokers can represent either the buyer or seller in a sale.  Historically, the broker has traditionally represented the seller, but buyer representation is becoming more common.  The representation of one party in a transaction usually creates a fiduciary duty between the broker and the party represented.  Some states allow dual agency representation of both buyer and seller if all parties agree to the arrangement.

In some states, brokers can choose to act as transaction brokers, representing neither party as an agent but working to facilitate the transaction.  In this situation, there is no fiduciary duty created and the broker deals with both parties on the same level.

At present, 17 states require business brokers to be licensed by their state’s real estate commission.  All states require a real estate license if the business broker is handling real estate along with the sale of the business entity.  However, the majority of small to medium size businesses are in leased locations with no real property as part of the sale.  (Additional information regarding business broker education and requirements are here and here.  California’s requirements are more stringent than others.)

Broker Fees

Just as the seller wants to walk away with a profit, and the buyer expects to profit from the business following the sale, the business broker expects to see a profit from his or her endeavors in the sale process.

While there are no laws or regulations regarding fees and pricing, business brokers typically charge a 10% commission (often referred to as a “success fee”) on the value of the business itself, and 6% on any associated real estate, related to the business up for sale.  Some exceptions are businesses such as gas stations, grocery stores and hotels, which can be less.  Some brokers will charge as much as 12% while others may be willing to drop a few points to land the deal, but most brokers hold firm at 10%.  If another broker is involved in finding a buyer, the fee is split between the listing-side broker and the sell-side broker – provided they are willing and agree to work together (cooperate), which not all business brokers do.  Some states are better than others (Florida is among the best, California among the worst).

The 10% fee may seem high to most sellers, especially if a business owner has invested a good deal of sweat equity into the business.  To give up 10% of all the hard work it took to build the business can hurt.  The reality, however, is that this is what it takes to keep brokers in business, and 10%  is considered the industry standard.  It may not seem evident at the start of a deal, but by the time the deal is completed, most sellers will realize that the 10% broker fee is fair and justified.

M&A Commissions

It is standard practice to provide a discount above a $1 million selling price, and many M&A firms will say they use the Lehman Scale (https://en.wikipedia.org/wiki/Lehman_Formula) although, in reality, it is more likely they will use the Double Lehman Scale.   The Double Lehman Scale pays a commission of 10% on the first million, 8% on the second million, 6% on the third million and 4% on the remainder.

Brokers who don’t normally work on larger deals may charge 10% total commission for a selling price above $1 million.  They generally don’t do this on purpose, rather they just don’t know it is standard to use the Double Lehman.   (Obviously, the seller in such a deal is also not aware of this.)

Smaller deals often have a clearly defined value, making it easy to derive a success fee.  This is not the case with larger or more complex deals – in these cases, it is often up to the seller and the broker to sit down at some point and work out a fair commission.  For example: a deal may have a contingent payment based on the future performance of the company.  In this case, the full purchase price would not be known for a number of years.  This is commonly called an “earnout”. The “expected” purchase price used for commission calculation ended up being above the base price but below the maximum price.

As a general rule, business brokers don’t charge an upfront fee, while M&A advisors do.  It makes sense too.  A business broker is operating essentially alone much like a real estate agent, while an M&A firm applies a team of writers, analysts and deal makers on your project and also must pay for a marketing campaign – there are substantial out of pocket costs for each client for first class mail, telemarketing and advertising, so the M&A firm will charge an upfront fee to help pay for these costs.

The Tail

Engagement agreements vary a lot, from real estate type canned agreements for business brokers to custom agreements for M&A firms, but you’ll find a “Tail” on each one.  The tail on an agreement means that once the agreement has ended, there is still a clause that says if you sell to anyone within 18 to 24 months that the intermediary introduced to you, you still owe a commission.  This should not surprise buyers and sellers, it is a standard provision.  The part that isn’t standard is what is meant by “introduced”.  This is defined as anyone who signed a confidentiality agreement during the time the agreement was in effect.

Legal Assistance and Representation

It should come as no surprise that, given the complexities and contingencies involved in a business sale, both the buyer and seller will have their own legal representation.  The lawyers for both parties play a crucial role in ensuring that the terms of the sale do not break any laws and that their respective clients’ interests are represented in the deal.

With the buyer and seller having separate legal representation, the negotiation process can often become a long and drawn out affair.  The degree of back and forth on the terms of the deal, and the minutiae involved in said terms, is difficult to avoid in this situation.  Good business brokers can try to help mitigate this, but given that lawyers will be lawyers, there’s not much the business broker can really do to change things.

A case can be made that if both the buyer and the seller use the same legal representation, the transaction will run more smoothly and quickly.  While this may seem like a good idea in theory, the reality is not as clear cut: having the same legal representation for both buyer and seller can result in a conflict of interest, especially if the lawyer has a pre-existing relationship and/or agreements in place with either the buyer or the seller.  If the buyer and seller decide to go down this path, they had both be very sure that the lawyer selected to represent both clients in the negotiation process has no prior relationship to the buyer and seller, or any entity having a pre-existing relationship to the buyer and seller.  The difficulty in ensuring this makes having a single legal representative for both the buyer and the seller a rare occurrence.

Challenges Facing Connecticut’s Liquor Establishments

For this article, we turn our attention to a specific sector of small business in Connecticut: the retail liquor market.  This business sector has, for many years, had the luxury of generating profits without the need to put much effort into growing and developing their customer base.  Setting up a liquor store is not a complicated process, and the popularity of the product virtually guarantees a customer base, provided the location is not too far afield and prices are in line with the competition.  Regarding the latter, Connecticut law protects this business sector by allowing wholesalers to set a minimum price for alcohol products and then ensuring that retailers cannot sell the product for less than what it costs them to acquire it.  Shipper, wholesaler, and manufacturer permittees are also prohibited from selling to a wholesaler below cost.  Connecticut’s liquor laws has been on the books for 35 years, are have largely unchanged in that time.

Gary Koval was Connecticut’s liquor commissioner from 1995 to 2008, one of the longest tenures in the state’s history. Now in the private sector, Koval said recently that he never liked the state’s minimum pricing law (the only such law in the country) and fought vigorously to change it.  At the start of his tenure, he reviewed the state’s liquor laws and compared them to the laws of other states, in an effort to undo the Connecticut laws that weren’t working over time.  Not only did he find that lawmakers were unwilling to go along with his initiatives, he was also vigorously opposed by trade groups representing the state’s alcohol wholesalers and distributors as well the package store owners.

This state of affairs has the potential to change in the near future.  In August of 2016, the Maryland-based wine and spirits superstore chain Total Wine & More made a move to break that lock.  The company filed a lawsuit in U.S. District Court in Connecticut, charging that the minimum pricing law for the industry violates federal anti-trust laws. It also engaged in a brief period of defiance, selling multiple items at under the minimum price at its four Connecticut stores in Milford, Manchester, Norwalk and West Hartford, and heavily advertising the chain’s actions.

Opponents of the law, which prohibits wine and liquor retailers from selling alcohol below a level set by the state, say it violates the American ideal of a free market economy and cheats consumers out of getting the lowest possible prices.

Supporters of minimum pricing say eliminating it would result in the loss of thousands of jobs and reduction of consumer choice as large numbers of the state’s more than 1,100 package stores fall victim to the large-volume buying of larger chains. The minimum pricing backers, primarily trade groups for the state’s package stores and Connecticut wine and beer distributors, claim big-box retailers are being predatory, seeking to put the small stores out of business so the larger businesses can dominate the market and charge whatever they want.

We spoke with Jeff Drucker, who has worked in many facets of the liquor business in Connecticut for a number of years.  He pointed out the power and influence of the state's trade groups, such as the Connecticut Package Stores Association (representing retailers) and Wine & Spirits Wholesalers of Connecticut (representing distributors), with this observation: Connecticut’s population is half that of Massachusetts, yet both states have the same number of package stores.  The primary reason many of the stores in Connecticut manage to stay in business is the protections afforded them by the state’s price-fixing laws on the books.  These protections have fostered a degree of laziness on the part of package stores with regard to marketing and developing their businesses with a view to growth.  They are perfectly content to do the minimum amount necessary to keep their doors open and their shelves stocked, yet they continue to thrive and flourish as a result of the price-fixing laws on the books.

All this may change, however, if the efforts of Total Wine & More to change the longstanding price-fixing laws are successful.  According to Mr. Drucker, this is this trend in other states in the union, and as such it is only a matter of time before Connecticut finally strikes down its price-fixing laws.  John Lombardi, President and CEO of CentrePoint Industries, is an advocate of this change.  He sees significant opportunities for businesses in this sector that are willing to take advantage of greater competition this change will inevitably bring about.

The Total Wine & More lawsuit is just one threat to Connecticut’s liquor establishments.  While it winds its way through the legal system, another threat to the complacency of Connecticut’s liquor establishments is starting to make significant inroads into the market.  This threat has the potential to be much larger than the lawsuit, and is affecting other states as well.  The threat: the sale of liquor through the Internet.

Just as Amazon has leveraged the Internet to virtually take over sales of goods and commodities, sites selling alcohol by mail through the Internet are already taking a bite out of retail sales throughout the country.

As of January 2016, the majority of states have statutory provisions that allow for out-of-state manufacturers to ship alcoholic beverages directly to consumers. The majority of states restrict the direct shipments to wine.

Out of the 54 U.S. states, territories and commonwealths, three states – Alabama, Oklahoma and Utah – specifically prohibit the direct shipment of alcoholic beverages to consumers. Mississippi, Guam, Puerto Rico and the U.S. Virgin Islands do not have statutes that specify that direct shipments are allowed. Massachusetts and Pennsylvania have had statutes ruled unconstitutional by state courts in those states.

These trends in the state laws will impact the smaller Connecticut retail outlets in ways that, if they don't get strategies in place for dealing with them, could spell real trouble for their continued operation in the state.

The Other Side Of The Coin

Our previous posts have focused on the small business – approaches to growing the business, seeking out investors, and the issues involved in formulating exit strategies.  In this post we turn things around and focus on the investment side of the equation: the factors involved in evaluating a business investment and the factors involved in taking it over once it has been acquired.

There are 28 million small businesses in the U.S., but research services are few and far between.  What makes one company more worthwhile as an investment target than another?  Certainly there are great opportunities for above-market returns but to take advantage of this opportunity, investors must have an approach for determining which companies are worth focusing on.

Here is an initial list of factors to consider at the start, when evaluating a company as a potential investment opportunity.

• Gross Margin

Gross margin is the percentage difference between what a product sells for in the market (revenue) and what it costs to produce that product (cost of goods sold, or COGS).   This ratio is critical because it is what allows a company to invest in all the other areas needed to get the product to market such as marketing and distribution.

Gross margins can vary by industry, and even by categories within an industry, but razor-thin gross margins leave no room for error.  In private equity, I focused on investing in categories that had higher gross margins and thus could sustain increased costs more easily.  Examples of higher gross margin categories include personal care, premium pet food, and natural and organic products.

It’s very important to keep in mind that gross margin expansion is very difficult. Focusing on creating products with better margins, automating production or getting lower prices for ingredients can help, but the instances where gross margin improvement drives outsized investment returns are rare.

• Brand Strength

This is often the toughest thing to assess in a small company, but an investor needs to ask herself, "Does this brand offer something unique?" A great example of this is Method, the eco-friendly cleaning products. The world did not need another green cleaner, yet Method created a special brand by packaging a quality product with beautiful design and distinctive packaging.

Customer and consumer surveys, "earned" media presence, and third-party data are good ways to start evaluating brand strength. In the consumer packaged goods (CPG) world, there are countless energy drinks and cleaning products. But there's a reason why Red Bull and Method have been huge successes while other products with similar recipes and formulas have failed: formulas can be copied, brands cannot.  A tech entrepreneur will not put her idea for a startup on a crowdfunding site (unless all other investors pass), because any engineer can copy it. But a consumer products company with $3 million in revenue would be comfortable talking about not just the idea, but the actual performance of the business. Why? Because you can back into the recipe for Cherry Garcia from Ben and Jerry’s.  It doesn’t matter. You can’t copy the brand.

• The CEO

In a small business, you are investing as much in the leadership as you are in the product or company. As a result, you need to invest behind a CEO in whom you believe.  As part of your initial diligence, reference checks and third-party background checks are a must.  Beyond that, there isn’t a formula for evaluating leadership talent but you should do what every investor does–spend time asking questions. Get on a conference call and probe on issues you think are important. Does this person understand their business, have a passion for the product, and have what it takes to persevere?

• Exit Prospects

Many people think that if they build a great company there will always be a home for it, but in certain industries that's not the case.  If the company has visions of selling to a strategic acquirer, it should be able to (a) identify who these likely “strategics” are, (b) determine what their acquisition strategies have been, and (c) be able to explain why that business should be attractive to a strategic acquirer.

• Recurring Revenue

Recurring revenue is the portion of the revenue that is going to continue in the future.  It provides a nice base (ideally a growing base) of revenue on which management can rely while focusing on ways to grow the business.  It’s especially valuable because the cost of acquiring a new customer is typically about six times the cost of keeping an existing customer.

In consumer products, recurring revenue comes from repeat purchase. Maybe you bought the product once because you liked the packaging. You buy it again because the product performed.  It’s not enough, of course, to look to recurring revenue; the question is how frequently that revenue will recur.  At a prior firm, we invested in a shampoo company with a beautifully designed bottle (it won multiple awards) that dispensed shampoo in the exact proportions the average woman needed. The problem was that the average person usually uses a lot more shampoo than is needed.  As a result, consumers took 12-18 months longer than normal to use up our shampoo. Sounds great for the consumer, but it was problematic for the company because it delayed the repeat purchase cycle.

Once you have purchased a business, the real work begins.  To ensure a smooth ownership transition, here are seven steps you will need to take which will help lay a strong foundation for your new business to grow and prosper.

• Have the previous owner stay on throughout the transition period.

Make the best out of the pre-determined transition period. Prepare a comprehensive list of things you want the seller to cover like processes, USPs and flaws of the business etc. Work with the owner to learn the business plan and the ins and outs of day to day operations.  In particular, you need to understand the future strategies that current owner has in mind.  Some business owners may have a hard time letting go of control after the sale, so you will need to take extra care in understanding the reasons for this and to take whatever steps are necessary to ensure the owner that the business can carry on and thrive after the transition period has passed.

• Observe, ask questions, and make notes.

Observe the daily activities of the owner, the flow of communication with customers, employees and vendors. Make notes, get to know every bit of the business, continually ask questions and get answers from the owner.

• Do not make any substantial changes out of the gate.

In general, people are resistant to changes (the ‘who moved my cheese’ phenomenon).  As such, it pays to go slow and avoid making changes that disrupt current business operations, or that can result in dissatisfaction on the part of employees and/or customers. You will have the chance to make changes and grow your business after you know it well enough to identify the kind of changes to avoid in this regard.

• Meet your employees.

Take the time to get to know the employees and their roles in the business.  Convey to them that they will be an integral part of your business, and that you have no plans to make staff changes in the short term.  Get their thoughts and perceptions on the current business operations and how things can be improved to make their jobs more efficient and effective.  This kind of feedback from your new staff is crucial to formulating your business plans and strategies going forward.

• Make your customers aware of the new ownership.

Get to know your customers, and review the customer service policies and the procedures. Let your customers know that you are the new owner, that you are committed to providing them the service they have come to expect, and that you intend to improve on this as you move forward. Gestures such as special offers or a giveaway, something that you think your customers will appreciate, can go a long way toward maintaining good will with your customers.

• Don’t forget the vendors!

Just as you will rely on your customers and employees to maintain the business, the suppliers for your business are equally important. Schedule meetings to get to know the major suppliers of your business, and make contacts with the others as well. If possible, avoid making any long term commitments to them which can hinder your new strategies. Later, when you feel comfortable, look out for other suppliers to get better pricing and terms for future deals.

• Give your premises a makeover.

Once you have settled in, make some changes to the office: get the walls painted, re-arrange the settings, and get rid of unproductive assets. This will help to make the business look new and different, and it will help convey your commitment to making a go of your new business. This will also have a psychological effect on yourself, reinforcing for you that the business is now yours, to take in the direction you see fit.

Work out your action plan around these seven steps to get things going in the right direction. Use the transition period wisely and build a thorough understanding of all the relevant facets of the business. Effective implementation of the ownership transition process will go a long way towards making your new business a success.

A Rock and a Hard Place

• A Rock and a Hard Place

There is a segment of the small business community that is often too small to secure needed financing through conventional means, yet not large enough to tap in to the network of investors available to larger companies. These small fish in big ponds are systematically hindered in their efforts to build and grow their businesses.

In the case of businesses too small to secure needed financing through conventional means, the barrier to entry is often the bank loan process. These loans are usually procured through the Small Business Administration, a program designed specifically to provide small businesses with access to capital. There are pros and cons to this program:

Pros:

• For less experienced businesses, SBA loan programs remain one of the best sources of capital.
• Given the support of the SBA loan guarantee, SBA lenders are able to finance projects that lack collateral and are willing to finance soft costs, including franchise fees, leasehold improvements, working capital and goodwill for business acquisitions.
• Borrowers are typically able to provide a lower up-front equity injection and obtain much longer loan terms and amortization schedules with SBA loans in comparison with conventional commercial loans.
• SBA loans are structured with no balloon payments.  They feature longer terms and amortization schedules, which may be as long as ten years for a new lease location, and 25 year terms for real estate-based projects. This enables business operators to improve their cash flows.
• In 2005, the SBA authorized an increase in the maximum loan guarantee from $1 million to $1.5 million, which qualified larger transactions for the SBA loan programs.

Cons:

• Extensive documentation required for SBA loans, because they are directly funded by lenders and backed by the U.S. government.
• All SBA loans require the personal guarantees of owners with an interest of 20 percent or more in the business entity. Unlike non-SBA small business loans (such as Small Balance Loans), conventional lenders offer non-recourse or limited guarantees to businesses that are well capitalized and have a solid performance history. However, non-recourse financing is rarely available to smaller businesses.
• The 504-loan program is limited to financing fixed assets such as real estate and equipment, and soft costs are not eligible.  Unlike the 7(a) program, soft costs such as goodwill, franchise fees and closing costs cannot be financed under the 504 loan. Since most franchise concept investments are below $2 million, the 7(a) program should be sufficient.
• The SBA has established size-standard guidelines to define the maximum size at which specific business types would qualify for SBA loans. The size-standard guidelines vary between industries.  For example, most retail businesses with revenues greater than $6.5 million, most wholesalers with more than 100 employees and most manufactures with more than 500 employees would not be eligible for SBA financing. If one is a multi-unit operator, the SBA will base eligibility on an aggregate of all affiliated businesses and determine it based on a three year average. The SBA estimated that with these size standards, approximately 98 percent of all businesses in the U.S. are eligible for SBA financing.
• The SBA has a $1.5 million maximum guarantee to any individual borrowers or related entity that controls more than 20 percent of a business interest with an outstanding SBA loan. The $1.5 million maximum guarantee is also aggregated on all outstanding SBA loans to that particular borrower or other business investments. For concepts with relatively low initial investments, borrowers may finance multiple units before exceeding the maximum guarantee.  However, for larger real estate-based concepts, the $1.5 million guarantee may limit the borrower to one SBA loan outstanding at any given time.

Although the SBA program is intended to facilitate small business growth, the fact that these loans are tied to a commercial bank severely restricts this financing option for small businesses. (We have the “Great Recession” to thank for this.) These restrictions make it difficult for small businesses to qualify for SBA loans. Apply for an SBA loan with a commercial bank, and it is the bank – not the SBA – that will require the business to provide collateral for every nickel they are borrowing.  Since the business has already plowed most of their profits into growing the business, the business will be hard-pressed to come up with that kind of collateral. The bank will also want extensive documentation regarding income, assets, expenses, income projections etc. to prove there is minimal risk to the bank in approving the loan.  It doesn’t help that the SBA guarantees the loan if the small business can’t meet the bank’s requirements in the first place.

In the case of businesses not large enough to tap in to the network of investors available to larger companies, the barrier to entry is access to investor networks. These networks of investors will often finance business deals with little collateral, other than that the business they are financing can show that their cash flow is sufficient to cover the debt service. Often all that is required for documentation is little more than a prospectus. In many cases, there is a personal relationship between the business owner and the investor network liaison; collateral is less a case of accounting documentation and more a case of “I trust this guy, he’s a friend of mine, we won’t lose money on this investment.”

The investor network primarily consists of “family offices”. These are private wealth management advisory firms serving the “1%” – ultra high net worth investors. Unlike traditional wealth management operations, family offices offer a total outsourced service covering all aspects of managing the financial and investment needs of the affluent. They are serviced by a team of experts from the business, estate, investment, legal, insurance and tax disciplines. Most family offices combine financial planning, risk management, cash management, asset management, and lifestyle management and related services. These services are essential for wealthy families to navigate effectively the wealth management issues it faces.

It comes as no surprise that family offices, and the wealthy families they service, are an insular group whose operations and strategies are kept close to the vest. This lack of transparency prevents access to their network and to the investment strategies they employ. Recent trends in family offices, however, have the potential to work in favor of the small business community.

• Growth in Family Offices

As the number of ultra high net worth individuals increases, so too are the number of single- and multi-family offices. Studies forecast a 34% increase in this number over the next eight years. For both old and new members of the 1%, the family office model is an appealing structure since it provides increased oversight of employed professionals and the money they control.

• Embracing Multi-Asset Strategies

Traditionally, family offices tend to avoid alternative investments which are highly illiquid and can take upwards of 10 years to realize returns.  This trend is changing, since alternative investment assets have the potential to enhance returns and provide an illiquidity premium, and offer the benefit of potentially diversifying risk exposures and cushioning market volatility. As an example, a recent survey conducted by eVestment reported that 60% of family office respondents planned to increase allocations to hedge funds over the next two years. Family offices that are incorporating alternatives in their client portfolios will often outsource investment management to professionals with structured strategies and expertise within these fields.

• Impact Investing

As wealthy baby boomer families pass their assets to millennial heirs, these millennial heirs consider impact a critical investment factor. Many family offices are adopting this value-driven approach in anticipation of inter-generational wealth transfer. According to a recent Financial Times survey, family offices active in impact investing cited succession planning, alignment of family values, and contribution to a sustainable economy as top reasons for impact investing. The same survey reports that family offices allocated on average 17% of their assets under management to impact investments. Over the next decade, impact investing should not be regarded as simply a ‘nice-to-have’ niche.

Unless and until the current economic environment changes, small businesses seeking to grow through capital infusion will continue to be stuck between a rock and a hard place.

Sources:

http://www.investopedia.com/terms/f/family-offices.asp

https://blog.darcmatter.com/top-3-family-office-trends/

The Acquisition Exit Strategy - Making It Work

As a business owner, you know the importance not only of keeping your business going and growing, but also of knowing what to do when you decide you are done.  Of the many exit plans you may be considering (such as transferring ownership to relatives or friends, liquidation, or simply running down the clock), a common exit strategy which can both maintain the success of the business and generate the maximum profit for yourself is finding another business or investment group to acquire and perpetuate your business: the Acquisition Exit Strategy.
 
Here are some things to keep in mind, to help make this strategy a success for you:
 

• Choose the Right Acquirer For Your Business

Finding an acquirer with the right strategic fit and alignment with your business will increase the acquirer’s chances for success in keeping your business thriving after the transfer of the business is completed.
 

• Make Your Business Attractive to an Acquirer

Pinpointing and emphasizing the aspects of your business that offer the greatest potential for profit and growth will go a long way toward attracting potential acquirers.  If a bidding war ensures, the possibility of a higher acquisition price can increase exponentially.
 

• Avoid the Temptation of Targeting a Specific Acquirer

If you have a specific business or group in mind to which you would most like to sell your business, tailoring your attractiveness to the business/group may make your business less attractive to others.  There is also no guarantee that your preferred acquirer is genuinely interested in buying your business in the first place.
 

• Pay Attention to the Business Culture of the Acquirer

Your business brings with an associated cultural operating inclination (fast and loose, straight shooters, cautious, aggressive, conservative or liberal minded etc.).  If the business culture of a potential acquirer is at odds with yours, there is a greater likelihood of the culture clash getting in the way of – and potentially preventing – the success of the business going forward.  An acquirer with a culture more closely aligned with yours will have a greater chance of succeeding after the transfer of the business.
 

• Carefully Evaluate the Terms of the Agreement

If you’ve landed an acquirer and are set to make the deal, go over the terms of the agreement and make sure they won’t cause you grief after the transaction is completed.  For example, a non-compete clause might make things difficult for you if your plan is to start a new business along similar lines as the one you sold.
 
If proper care is taken in the process of executing the steps of a well thought out acquisition exit strategy, the result can be profit and success greatly exceeding alternative strategies.  Of course, we here at CPI are more than happy to help you with this.
 

Sources:

https://www.entrepreneur.com/article/78512
http://articles.bplans.com/types-of-exit-strategies/

Selling A Business When It’s In Trouble

Not all businesses succeed.  For every success story, there are many more stories of failures, and the failure can happen for almost any reason.  There are also stories of businesses that found success, only to encounter difficulties later on.  Businesses like these may find themselves in a position where they would rather sell than stand by while the ship sinks.

Can distressed businesses be sold?  Is there a market for distressed businesses?  Provided the business is viable and can remain a going concern through the sale process, the answer is yes – as long as the business owner is willing to either accept the fact that the value the business based on its current condition may not be as high as they’d like it to be, or alternatively, is willing to take the necessary steps to improve the business and thus increase its sale value.

Accurately pricing a distressed business is the domain of an experienced professional business broker, one that knows how to use the tools and techniques at their disposal to identify both the weak and strong points of the business in order to arrive at a valuation that closely conforms to market conditions and expectations.

If the business owner is open to the idea, a professional business broker will also be in the best position to suggest steps the business can take to minimize its weak points and shore up its good points, which can go a long way towards increasing the value of the business to prospective buyers.

While the manager or owner/managers of a troubled company may be in the position of decision-maker in the sale, this is not always the case.  The business broker will need to become acquainted with all parties involved in the business in order to determine which party is the real decision-maker in the sale process.  The business broker will then ensure they are the primary party involved in the sale process.

If the business is on the cusp of bankruptcy, a sale usually proceeds faster, cheaper and more privately – although there is less protection for the parties concerned.  If the business has already fallen into bankruptcy, the sale will proceed more slowly, be more expensive, and it will also be public – but there are benefits in the form of greater protection for the concerned parties, an automatic stay, and there is a forum for addressing related issues.

Above all else, the main hurdles to overcome in the sale process of a distressed business are twofold.  One is to make clear headed decisions and not let emotions get the best of the parties involved.  The other is dealing with time constraints, which can further exacerbate feelings of panic.  A good business broker will be able to keep these challenges in mind throughout the process, properly dividing up the steps each party needs to take based on their role in the process and effectively managing the activities of each party as needed.

With a steady hand, attention to detail, hard work and a clear-headed approach, a good business broker can meet the challenges of selling a distressed business, and the business can be sold for a value which is satisfactory to all parties involved.

Sources:

http://www.krbrokers.com/site/wp-content/themes/krbrokers/articles/sellingyourbusiness/Selling%20a%20Troubled%20Business.pdf

http://ml-sf.com/publications/docs/TPL0804-Litteneker_McNutt.pdf

Cloud Computing and Small Business

Given that technology plays such an important part in your small business, if you have not migrated at least some of your technology needs to the cloud you are missing out on a major technological wave changing the face of business operations – in terms of convenience, reduced cost, and scalability of your operations.

Traditionally, business owners whose core service was based on computer technology needed to purchase expensive servers and storage, and hire personnel to set all this up and keep it running.  This was, and continues to be, an expensive proposition – made even more so by the need to periodically upgrade your hardware to keep it current and to handle increased demands as your business grows.

More recently, computer service companies began offering an attractive alternative to this scenario by providing access to shared computer processing resources and data to computers and other devices on demand.  This new cloud computing business model enables ubiquitous, on-demand access to a shared pool of configurable computing resources (e.g. computer networks, servers, storage, applications and services) to any business needing them.  These resources can be rapidly provisioned and released with minimal management effort.

The main benefit of Cloud Computing is that your business is no longer responsible for acquiring, housing, setting up and maintaining hardware that is guaranteed to become obsolete in a year or two.  Instead, cloud computing service providers charge a periodic subscription-style fee for the amount and level of service you need.  In most cases, this is an extremely cost-beneficial arrangement.  Free of the expense and hassle of dealing with computer infrastructure, you can focus your time and energy on the core needs of your business and its customers.

Resources are easily managed and administered directly via any internet-enabled device – desktops, laptops, even tablets and phones – via a vendor-supplied dashboard-style control interface.  As your needs grow, you can add more capacity or additional services to your subscription on-demand.  Integrating cloud computing resources with your existing office computer infrastructure is a remarkably simple process with a short learning curve.

Cloud computing makes it easy for your employees to share data and resources.  As cloud computing collaboration tools continue to be developed and proliferate, your employees benefit from streamlined operations and increased efficiency.  Support for these tools on multiple platforms increases the convenience of their use by your staff, and this in turn builds value to your company.

Taken together, the advantages of cloud computing described above make a compelling case for your technology-based business to consider taking advantage of cloud services.

CPI and Cloud Computing

Sources:

https://en.wikipedia.org/wiki/Cloud_computing

https://www.entrepreneur.com/article/245784