There's no sugarcoating it: Raising money for your startup won't get much easier in 2010, since the capital market for early-stage investments is still reeling from the effects of the recession.
But there is still money out there and there are better (and worse) ways to pursue it. Here's how to make the best of the leading trends for 2010:
1.Remember: Angels didn't stop investing--they're just writing smaller checks. There will always be high-net-worth individuals and former entrepreneurs who like to invest in startups, and next year should be no different. But as long as the stock market remains rocky and liquidating stock to make investments remains painful, angels will be investing less. As an entrepreneur, you should plan to get a smaller portion of your money from angel investors, or approach more investors per round.
2.Pay more attention to "sidecar" venture funds. As venture capital firms struggle, deep-pocketed angel groups, clubs and associations will move up the food chain by creating their own managed funds--the so-called "sidecar" venture funds. These funds make sense for both angels and entrepreneurs: Angels get to keep their best deals funded, without having to rely on the ebb and flow of large VC firms. And entrepreneurs see a greater return on their investment of time pitching and building relationships with angel clubs, because clubs can provide access to more funds later on. Angel clubs are spreading nationwide; check out the Angel Capital Association website at angelcapitalassociation.org to find them.
3.Businesses with a social impact will have an edge. Not long ago, entrepreneurs who wanted to solve a social problem formed nonprofits and raised money from foundations, or they formed businesses and raised money from private investment firms. Now, smart social entrepreneurs and a new class of funders in areas such as clean tech, education and economic development are designing collaborations that benefit from tax incentives, facilitate government subsidies for early adopters and leverage the social motivations of angel investors. Examples include angel groups such as Investors Circle, socially driven investors such as Omidyar Network, Calvert and Gray Matters Capital, advocacy-driven innovation funders such as CFSI in Chicago, and double bottom-line investment funds. Expect this trend to continue in 2010, and if your business makes a meaningful social impact, don't hide it.
4.Don't expect to land VC. The venture capital industry endured a shock in 2008 and '09 that will slow the creation of new funds. But top VC funds will continue to invest and small funds within industry-specific niches will benefit from the lack of competition. Entrepreneurs with scalable business plans should look at VC as just one of many funding options.
Wednesday, December 23, 2009
Tuesday, December 22, 2009
Monday, December 21, 2009
Corporate Earnout
It's time to sell your business. You've found a buyer, and you're negotiating the terms of the sale. But there's a problem. While you predict triple-digit growth over the next three years, the buyer doubts your projections and refuses to pay more than a percentage of your asking price. The company's valuation is up in the air.
Enter the "earnout" agreement, a contract where the seller gets paid a percentage of the asking price and agrees to meet specific financial goals over a period of time to earn more money. For example, the buyer might agree to pay 90 percent of the company's purchase price upfront, with another payout contingent on fulfilling a three-year plan. An earnout agreement allows the seller and the buyer to compromise on what they feel the company is worth. Earnouts are also used when the buyer needs the seller to stick around to maximize company performance after the acquisition.
Earnouts are an attractive option in the post-dotcom era, where the focus has shifted from promising projections to post-acquisition performance. "Buyers aren't paying for potential anymore, not upfront. But they will pay for potential realized post-acquisition," says Dave Kauppi, president of Mid Market Capital, a Hinsdale, Illinois, business brokerage that works on mergers and acquisition deals.
Earning Your Keep
Earnout agreements can last up to five years and are calculated at anywhere between 10 percent and 30 percent of the purchase price, with payment made in cash or stock. Earnout goals can be based on a variety of targets, including net income, gross revenue, new clients generated, cash flow and earnings.
You'll have a nice payday if everything goes well, but understand what you're getting into. An earnout arrangement obligates you to keep working for the company after you've ceded most, or all, control to the buyer. "While the seller may have an equity interest, he's not going to make ultimate, big-picture policy decisions," says Mark J. Mihanovic, who's worked on both sides of earnout deals as a mergers and acquisitions partner with the McDermott Will & Emery law firm in Palo Alto, California. There's a risk the buyer could make poor business decisions that run the company into the ground, damaging the earnout. Noncompete clauses in these contracts, meanwhile, might keep you from pursuing similar business ideas. At the very least, chasing an earnout might take up all your time.
Your mojo to hit a series of long-term goals can fade, too, especially if you've made a lot of money from the initial sale. "The same incentive to make [the company] successful is usually not there. It's [a] natural human reaction," says Bruce Crair, a serial entrepreneur in San Marino, California, who sold business-networking company ZeroDegrees to Barry Diller's InteractiveCorp last year. Crair, 49, is bound by nondisclosure agreements regarding earn-out deals he's signed, but he has firsthand advice about surviving the arrangement. Get as much money upfront on the sale as possible, and get used to the idea of being the buyer's employee. Also understand that an earnout isn't a sure thing. "Sign the agreement with the attitude that the only money [you're] going to get is what [you] get upfront," Crair says. "Everything else is gravy."
Keeping earnout agreements simple and measurable is important, says Robert F. Bruner, a professor of business administration at the University of Virginia in Charlottesville and author of Deals From Hell: M&A Lessons That Rise Above the Ashes. "Structuring an earn-out is a real art form," he says. "You need to be very careful about the benchmarks against which the performance of the business unit will be evaluated."
Mihanovic encourages sellers to tie earnout contracts to unit sales or revenue instead of earnings--using earnings allows buyers to factor in high overhead expenses. Crair also stresses the importance of avoiding administrative chargebacks whenever possible. "Often, the parent company will charge the subsidiary companies a percentage of the parent company's costs on a pro rata basis," he says. "You need to make sure your earnouts are totally separate from that because the chargebacks aren't under your control." Finding a good lawyer who understands the fine print is essential.
Keep in mind that you're taking a gamble, and gamblers often lose. Crair notes that of the dozen or so earnout agreements he's observed, only one entrepreneur lasted more than a year. But sometimes gamblers win big. "You can allow [the buyer] to buy you out of the earnout three years into it if you're blowing away the numbers," Kauppi says. Now those are nice terms if you can get them.
Enter the "earnout" agreement, a contract where the seller gets paid a percentage of the asking price and agrees to meet specific financial goals over a period of time to earn more money. For example, the buyer might agree to pay 90 percent of the company's purchase price upfront, with another payout contingent on fulfilling a three-year plan. An earnout agreement allows the seller and the buyer to compromise on what they feel the company is worth. Earnouts are also used when the buyer needs the seller to stick around to maximize company performance after the acquisition.
Earnouts are an attractive option in the post-dotcom era, where the focus has shifted from promising projections to post-acquisition performance. "Buyers aren't paying for potential anymore, not upfront. But they will pay for potential realized post-acquisition," says Dave Kauppi, president of Mid Market Capital, a Hinsdale, Illinois, business brokerage that works on mergers and acquisition deals.
Earning Your Keep
Earnout agreements can last up to five years and are calculated at anywhere between 10 percent and 30 percent of the purchase price, with payment made in cash or stock. Earnout goals can be based on a variety of targets, including net income, gross revenue, new clients generated, cash flow and earnings.
You'll have a nice payday if everything goes well, but understand what you're getting into. An earnout arrangement obligates you to keep working for the company after you've ceded most, or all, control to the buyer. "While the seller may have an equity interest, he's not going to make ultimate, big-picture policy decisions," says Mark J. Mihanovic, who's worked on both sides of earnout deals as a mergers and acquisitions partner with the McDermott Will & Emery law firm in Palo Alto, California. There's a risk the buyer could make poor business decisions that run the company into the ground, damaging the earnout. Noncompete clauses in these contracts, meanwhile, might keep you from pursuing similar business ideas. At the very least, chasing an earnout might take up all your time.
Your mojo to hit a series of long-term goals can fade, too, especially if you've made a lot of money from the initial sale. "The same incentive to make [the company] successful is usually not there. It's [a] natural human reaction," says Bruce Crair, a serial entrepreneur in San Marino, California, who sold business-networking company ZeroDegrees to Barry Diller's InteractiveCorp last year. Crair, 49, is bound by nondisclosure agreements regarding earn-out deals he's signed, but he has firsthand advice about surviving the arrangement. Get as much money upfront on the sale as possible, and get used to the idea of being the buyer's employee. Also understand that an earnout isn't a sure thing. "Sign the agreement with the attitude that the only money [you're] going to get is what [you] get upfront," Crair says. "Everything else is gravy."
Keeping earnout agreements simple and measurable is important, says Robert F. Bruner, a professor of business administration at the University of Virginia in Charlottesville and author of Deals From Hell: M&A Lessons That Rise Above the Ashes. "Structuring an earn-out is a real art form," he says. "You need to be very careful about the benchmarks against which the performance of the business unit will be evaluated."
Mihanovic encourages sellers to tie earnout contracts to unit sales or revenue instead of earnings--using earnings allows buyers to factor in high overhead expenses. Crair also stresses the importance of avoiding administrative chargebacks whenever possible. "Often, the parent company will charge the subsidiary companies a percentage of the parent company's costs on a pro rata basis," he says. "You need to make sure your earnouts are totally separate from that because the chargebacks aren't under your control." Finding a good lawyer who understands the fine print is essential.
Keep in mind that you're taking a gamble, and gamblers often lose. Crair notes that of the dozen or so earnout agreements he's observed, only one entrepreneur lasted more than a year. But sometimes gamblers win big. "You can allow [the buyer] to buy you out of the earnout three years into it if you're blowing away the numbers," Kauppi says. Now those are nice terms if you can get them.
Thursday, December 17, 2009
Determining Your Company's Value
There comes a time in the life of every small business when its owner looks up momentarily from the daily letting of blood, sweat and tears to ask the question: Just what is this thing worth?
Whether you're considering selling the business, recruiting new investors, bringing employees into ownership or gifting the business to heirs, a business valuation can help you put a more precise number on its present and future value. But the valuation of a privately held business--particularly a small company that may not have a lot of comparable statistics in its industry to look at--is an imprecise science based partly on hard numbers and partly on soft figures, such as cash-flow projections and other intangible assets and subjective criteria. How, then, can you be sure you're getting a fair number?
For starters, you need a reputable valuation expert, preferably one recommended by an attorney or accountant you already trust, says Paul Rich, CPA and principal with the business consulting group at Rothstein Kass, a New York City-based accounting and consulting firm. Look for a CPA who is also a certified valuation analyst, or CVA, and who belongs to one or more of the various accounting associations and groups like the American Society of Appraisers, says Rich. Why? "There are rules of ethics in those societies that [members] have to subscribe to." A less scrupulous appraiser might be willing to discount your business heavily to give you the lower number you want for gifting purposes, but you could run afoul of the IRS and find yourself in hot water later on.
If the appraiser specializes in your business or industry, that's a big plus, says Harvard Business School professor Mark Bradshaw. "You have to understand the business to be able to value it--it's not just a spreadsheet exercise," he says. He adds that a specialty in small, private business valuation isn't critical, but it helps. "You could argue that since small companies have simpler operations, they should be easier to get right," he says. With smaller companies, though, doing a comparable analysis, which acknowledges that business prices fluctuate relative to the market, is more challenging than conducting a stand-alone analysis, which looks at the company's value in a vacuum. "It's harder to find that peer group," says Bradshaw. An expert or group that has experience with small, private companies will understand that complexity.
Ask for the valuation expert's method of appraisal, and make sure they're willing to sit down and explain it. David Ellrich Jr., accredited senior appraiser, CVA, and managing shareholder of Moore, Ellrich and Nealin Palm Beach Gardens, Florida, considers it part of his work to educate the business owner on the valuation process and to explain why it needs to be approached from different perspectives. Take, for example, a machine shop owner who has invested a lot in his equipment and makes a decent living. "If you look at that business from a cost approach, it might be worth a million dollars," says Ellrich. "But then you look at it [from] the market approach and you see there are machine shops going out of business all over the country, selling their machinery for pennies on the dollar. That's why you have to look at all the approaches and reconcile the conclusions."
Beware of a valuations expert who tends to rely on one simplistic calculation, such as multiplying the earnings of your business by a price/earnings ratio that's common for companies in your industry, whether big or small--you're likely to end up with a less reliable number that way. "Every simplification has problems," says Bradshaw. "The bottom line is it's an inexact science, so anyone who tries to say they know exactly what a business is worth--they're just wrong."
Rather than present you with a magic number, the valuation expert should give you a range. "I'd want someone who [could] give me sensitivity information... someone who [could] give you different scenarios and tell you what levers drive the business," says Bradshaw. "For example, if we assume your top-line sales are growing at 10 percent, this is your valuation; but if it's 12 percent, it'd be this; and if it was 8 percent, it'd be this."
Armed with that information, even if you decide not to sell the business or end up not needing the valuation, you will learn a lot about your business's current and future performance, and what it will take to keep it on track.
Whether you're considering selling the business, recruiting new investors, bringing employees into ownership or gifting the business to heirs, a business valuation can help you put a more precise number on its present and future value. But the valuation of a privately held business--particularly a small company that may not have a lot of comparable statistics in its industry to look at--is an imprecise science based partly on hard numbers and partly on soft figures, such as cash-flow projections and other intangible assets and subjective criteria. How, then, can you be sure you're getting a fair number?
For starters, you need a reputable valuation expert, preferably one recommended by an attorney or accountant you already trust, says Paul Rich, CPA and principal with the business consulting group at Rothstein Kass, a New York City-based accounting and consulting firm. Look for a CPA who is also a certified valuation analyst, or CVA, and who belongs to one or more of the various accounting associations and groups like the American Society of Appraisers, says Rich. Why? "There are rules of ethics in those societies that [members] have to subscribe to." A less scrupulous appraiser might be willing to discount your business heavily to give you the lower number you want for gifting purposes, but you could run afoul of the IRS and find yourself in hot water later on.
If the appraiser specializes in your business or industry, that's a big plus, says Harvard Business School professor Mark Bradshaw. "You have to understand the business to be able to value it--it's not just a spreadsheet exercise," he says. He adds that a specialty in small, private business valuation isn't critical, but it helps. "You could argue that since small companies have simpler operations, they should be easier to get right," he says. With smaller companies, though, doing a comparable analysis, which acknowledges that business prices fluctuate relative to the market, is more challenging than conducting a stand-alone analysis, which looks at the company's value in a vacuum. "It's harder to find that peer group," says Bradshaw. An expert or group that has experience with small, private companies will understand that complexity.
Ask for the valuation expert's method of appraisal, and make sure they're willing to sit down and explain it. David Ellrich Jr., accredited senior appraiser, CVA, and managing shareholder of Moore, Ellrich and Nealin Palm Beach Gardens, Florida, considers it part of his work to educate the business owner on the valuation process and to explain why it needs to be approached from different perspectives. Take, for example, a machine shop owner who has invested a lot in his equipment and makes a decent living. "If you look at that business from a cost approach, it might be worth a million dollars," says Ellrich. "But then you look at it [from] the market approach and you see there are machine shops going out of business all over the country, selling their machinery for pennies on the dollar. That's why you have to look at all the approaches and reconcile the conclusions."
Beware of a valuations expert who tends to rely on one simplistic calculation, such as multiplying the earnings of your business by a price/earnings ratio that's common for companies in your industry, whether big or small--you're likely to end up with a less reliable number that way. "Every simplification has problems," says Bradshaw. "The bottom line is it's an inexact science, so anyone who tries to say they know exactly what a business is worth--they're just wrong."
Rather than present you with a magic number, the valuation expert should give you a range. "I'd want someone who [could] give me sensitivity information... someone who [could] give you different scenarios and tell you what levers drive the business," says Bradshaw. "For example, if we assume your top-line sales are growing at 10 percent, this is your valuation; but if it's 12 percent, it'd be this; and if it was 8 percent, it'd be this."
Armed with that information, even if you decide not to sell the business or end up not needing the valuation, you will learn a lot about your business's current and future performance, and what it will take to keep it on track.
Monday, December 14, 2009
Selling Your Business with Seller Financing
While it’s true that fewer business-for-sale deals are being made during the recession, it’s not because potential buyers aren’t looking. Across the country, there is plenty of buy interest in businesses, but a shortage of financing is keeping many deals from getting off the ground. As a result, sellers willing to finance at least part of a business sale are finding it much easier to get their businesses sold.
By offering seller financing, a business seller allows a buyer to make a down payment, agreeing to carry a note for the remainder of the purchase price. This way, the buyer only has to come up with a portion of the total price up front and can then pay off the remainder over time.
A seller’s willingness to finance a portion of a business sale has always been a strong selling point for potential buyers, but in recent months it has become essential to many deals. With most business buyers unable to access the full amount of a business price from lending institutions, today’s sellers are faced with the decision to either lower asking prices or work with buyers to overcome sale barriers.
While seller financing could be the key in attracting buyers and taking a sale to completion, sellers should be aware that it comes with risks. Here’s what sellers need to know if they are considering “being the bank.”
Be Aware of the Risk
There’s no doubt that seller financing is an important part of today’s business sales, but the fact remains that it’s not the right approach for every seller. Before making the decision, sellers should evaluate owner-financing as a business investment that undoubtedly comes with risk. When providing financing, a seller stays tied to the business long after the sale has been made, counting on the new owner to turn profit and pay back the principal with interest. Unfortunately, success under the new owner is not guaranteed, and there’s a chance the seller will face the loss of interest income and extra costs associated with collecting debt. For this reason, sellers should make sure they are confident with the promise of the business and the prospective new owner before financing a sale.
Require a Down Payment
Even after they’ve made the decision to offer financing, sellers shouldn’t waive a buyer’s significant down payment on the business. This way, they can minimize their risk by distributing a larger portion of it to buyers. It’s usually in a seller’s best interest to finance no more than one-third to two-thirds of the sale price, letting the rest fall on the buyer. In certain cases where a seller has a vested interest - such as selling to a family member - financing more than this is acceptable, but as the amount increases, so does the risk.
Use Financing to Your Advantage
Many sellers view self-financing as a last-ditch attempt to sell a business, but it can actually offer benefits that cash sales don’t. Sellers can typically sell their businesses for 15 percent more by advertising a willingness to provide financing. Sellers can also use financing to multiply the principal value of a business through buyers’ future interest payments. Most financed sales can bring in an average of 8 to 10 percent interest over a 5 to 7 year note.
Get Outside Help When Necessary
The idea of owner-financing might come with a do-it-yourself mindset, but trying to go it alone can lead to complications during a transaction. A loan between a buyer and seller comes with a great deal of structures and variations that require input from legal and financial professionals to properly secure loan terms, collateral and adequate insurance coverage. Using these professionals when appropriate, can help sellers avoid headaches and sell their businesses much more smoothly.
Don't Be Pressured
No matter how important seller financing has become in today’s business-for-sale marketplace, sellers who have done their homework and still aren’t comfortable with the idea of offering it simply shouldn’t do so. It’s not rare for potential business buyers to try to strong-arm sellers into offering financing, but that’s never a legitimate reason for sellers to go ahead with it. There’s always an underlying reason why a seller doesn’t feel comfortable with owner-financing, and going against this gut feeling could lead to regret. Owners on the fence can benefit greatly from arranging a meeting with someone who sold a business using seller financing and can speak from experience. Acting as the bank can allow owners to sell faster and reap financial benefits, but in the end every seller should step back and assess their individual situation before making the leap into seller financing.
By offering seller financing, a business seller allows a buyer to make a down payment, agreeing to carry a note for the remainder of the purchase price. This way, the buyer only has to come up with a portion of the total price up front and can then pay off the remainder over time.
A seller’s willingness to finance a portion of a business sale has always been a strong selling point for potential buyers, but in recent months it has become essential to many deals. With most business buyers unable to access the full amount of a business price from lending institutions, today’s sellers are faced with the decision to either lower asking prices or work with buyers to overcome sale barriers.
While seller financing could be the key in attracting buyers and taking a sale to completion, sellers should be aware that it comes with risks. Here’s what sellers need to know if they are considering “being the bank.”
Be Aware of the Risk
There’s no doubt that seller financing is an important part of today’s business sales, but the fact remains that it’s not the right approach for every seller. Before making the decision, sellers should evaluate owner-financing as a business investment that undoubtedly comes with risk. When providing financing, a seller stays tied to the business long after the sale has been made, counting on the new owner to turn profit and pay back the principal with interest. Unfortunately, success under the new owner is not guaranteed, and there’s a chance the seller will face the loss of interest income and extra costs associated with collecting debt. For this reason, sellers should make sure they are confident with the promise of the business and the prospective new owner before financing a sale.
Require a Down Payment
Even after they’ve made the decision to offer financing, sellers shouldn’t waive a buyer’s significant down payment on the business. This way, they can minimize their risk by distributing a larger portion of it to buyers. It’s usually in a seller’s best interest to finance no more than one-third to two-thirds of the sale price, letting the rest fall on the buyer. In certain cases where a seller has a vested interest - such as selling to a family member - financing more than this is acceptable, but as the amount increases, so does the risk.
Use Financing to Your Advantage
Many sellers view self-financing as a last-ditch attempt to sell a business, but it can actually offer benefits that cash sales don’t. Sellers can typically sell their businesses for 15 percent more by advertising a willingness to provide financing. Sellers can also use financing to multiply the principal value of a business through buyers’ future interest payments. Most financed sales can bring in an average of 8 to 10 percent interest over a 5 to 7 year note.
Get Outside Help When Necessary
The idea of owner-financing might come with a do-it-yourself mindset, but trying to go it alone can lead to complications during a transaction. A loan between a buyer and seller comes with a great deal of structures and variations that require input from legal and financial professionals to properly secure loan terms, collateral and adequate insurance coverage. Using these professionals when appropriate, can help sellers avoid headaches and sell their businesses much more smoothly.
Don't Be Pressured
No matter how important seller financing has become in today’s business-for-sale marketplace, sellers who have done their homework and still aren’t comfortable with the idea of offering it simply shouldn’t do so. It’s not rare for potential business buyers to try to strong-arm sellers into offering financing, but that’s never a legitimate reason for sellers to go ahead with it. There’s always an underlying reason why a seller doesn’t feel comfortable with owner-financing, and going against this gut feeling could lead to regret. Owners on the fence can benefit greatly from arranging a meeting with someone who sold a business using seller financing and can speak from experience. Acting as the bank can allow owners to sell faster and reap financial benefits, but in the end every seller should step back and assess their individual situation before making the leap into seller financing.
Thursday, December 10, 2009
Is Now the Right Time to Buy a Business?
Over the past year, historically high levels of unemployment have left record numbers of highly skilled individuals looking for work. Many are asking themselves if now could be the right time to pursue their dream of buying a business and becoming their own boss.
With corporate jobs less secure and available now than perhaps at any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and success. Tough economic times have created an abundance of distressed companies in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
Anyone thinking of purchasing a business should keep the following points in mind before going further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many would-be entrepreneurs to want to buy as quickly as possible, it's essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner:
• What are my strengths and skills? Business buyers should also consider their personal strengths before looking for businesses to purchase. Maybe you're a skilled writer and communicator, excel at teaching concepts to others or have a knack for technology. If you buy a business that allows you to put your strengths to work, it will have a much better chance of succeeding.
• Are there any particular times I absolutely can't or don't want to work? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you're considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean more free time; it can mean just the opposite. Be prepared to handle the long hours that often come with running a business.
• Am I comfortable managing people? Just because you want to be a business owner doesn't mean you are--or need to be--a "grade A" manager of people. However, if you buy a business that won't involve a manager on staff to do it for you, you'd better make sure you're comfortable with the situation before committing. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it's not happening?
• What size business do I want? Small businesses can range from zero to 100 employees, which means that there's no cut-and-dried small-business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a 50-person company.
Understand the Market
It's not uncommon for new business buyers to enter into the buying process without a solid understanding of the small-business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it--including the industry as a whole, competition, marketing efforts, suppliers and so on. It's important to do this early so that once you contact the seller, you'll know exactly what to ask.
You should know what a business in your location and industry of interest typically costs. Websites such as BizBuySell.com offer tools to enable you to conduct quick and easy business valuations by benchmarking the business you want to buy against businesses in the same industry. Whether you're interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners--ideally in the industry you'd like to enter--who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others opt for the help of a professional business broker. If you don't feel comfortable taking a do-it-yourself approach, a business broker can help make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it's important to know exactly what you can afford and how much income you'll need every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves you're willing to put toward financing the business, you won't have to worry as much about securing financing for the business through a bank. If don't have reserves, pursuing businesses for sale with a seller-financing option is probably ideal. Since bank loans are so hard to come by, seller-financed opportunities are most likely to pan out.
Seller financing--when a business seller agrees to finance part of the sale, with the buyer agreeing to pay the seller back with interest over time--has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain vested in the success of the business after you take over. Your success is directly related to your ability to pay the seller back.
Narrow Down and Negotiate
If you've done your initial due diligence and have determined that buying a business is the right decision for you, it's time to narrow your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pros and cons of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you'll enter a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal. This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure that you arrive at a number that's fair and that you're comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, it's time for more due diligence. The period of financial due diligence typically lasts from 10 to 30 days and allows you access to all of the company's books and records. Review them carefully, and if you're working with a broker, make sure that broker clearly explain to you the implications of the information.
It's a buyer's market, so if you approach your entrepreneurial dream with the right amount of consideration and research, buying a business could prove a realistic alternative to the job search. You just might find that it's time to leave your traditional job description behind and become your own boss.
With corporate jobs less secure and available now than perhaps at any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and success. Tough economic times have created an abundance of distressed companies in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
Anyone thinking of purchasing a business should keep the following points in mind before going further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many would-be entrepreneurs to want to buy as quickly as possible, it's essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner:
• What are my strengths and skills? Business buyers should also consider their personal strengths before looking for businesses to purchase. Maybe you're a skilled writer and communicator, excel at teaching concepts to others or have a knack for technology. If you buy a business that allows you to put your strengths to work, it will have a much better chance of succeeding.
• Are there any particular times I absolutely can't or don't want to work? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you're considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean more free time; it can mean just the opposite. Be prepared to handle the long hours that often come with running a business.
• Am I comfortable managing people? Just because you want to be a business owner doesn't mean you are--or need to be--a "grade A" manager of people. However, if you buy a business that won't involve a manager on staff to do it for you, you'd better make sure you're comfortable with the situation before committing. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it's not happening?
• What size business do I want? Small businesses can range from zero to 100 employees, which means that there's no cut-and-dried small-business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a 50-person company.
Understand the Market
It's not uncommon for new business buyers to enter into the buying process without a solid understanding of the small-business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it--including the industry as a whole, competition, marketing efforts, suppliers and so on. It's important to do this early so that once you contact the seller, you'll know exactly what to ask.
You should know what a business in your location and industry of interest typically costs. Websites such as BizBuySell.com offer tools to enable you to conduct quick and easy business valuations by benchmarking the business you want to buy against businesses in the same industry. Whether you're interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners--ideally in the industry you'd like to enter--who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others opt for the help of a professional business broker. If you don't feel comfortable taking a do-it-yourself approach, a business broker can help make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it's important to know exactly what you can afford and how much income you'll need every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves you're willing to put toward financing the business, you won't have to worry as much about securing financing for the business through a bank. If don't have reserves, pursuing businesses for sale with a seller-financing option is probably ideal. Since bank loans are so hard to come by, seller-financed opportunities are most likely to pan out.
Seller financing--when a business seller agrees to finance part of the sale, with the buyer agreeing to pay the seller back with interest over time--has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain vested in the success of the business after you take over. Your success is directly related to your ability to pay the seller back.
Narrow Down and Negotiate
If you've done your initial due diligence and have determined that buying a business is the right decision for you, it's time to narrow your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pros and cons of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you'll enter a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal. This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure that you arrive at a number that's fair and that you're comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, it's time for more due diligence. The period of financial due diligence typically lasts from 10 to 30 days and allows you access to all of the company's books and records. Review them carefully, and if you're working with a broker, make sure that broker clearly explain to you the implications of the information.
It's a buyer's market, so if you approach your entrepreneurial dream with the right amount of consideration and research, buying a business could prove a realistic alternative to the job search. You just might find that it's time to leave your traditional job description behind and become your own boss.
Wednesday, December 9, 2009
Monday, December 7, 2009
Liquid Assets Keep the Credit Flowing
When it comes to managing our investments, we entrepreneurs want what everybody else wants: to make as much money as possible with as little risk as possible.
But as business owners, we also need to take other factors into consideration when making our investment choices. Unlike investors with corporate jobs and 401(k) plans, we may ultimately need to use our personal assets--our house, our stocks, our bonds, our mutual funds, even the cash value of our life insurance policies--as collateral for credit lines and business loans as our companies grow.
That's why it's important to stay liquid; that is, to put our money into the kinds of assets banks can sell quickly if we miss our payments and our businesses go under. So while it might be fun to take a flier on an up-and-coming artist or amass a huge collection of comic books or baseball cards, your lender will be happier knowing you've also got money socked away in real estate, blue chip stocks and other liquid assets that can easily be bought and sold. And you can forget about pledging stock in your fledgling startup. The possibility that your company may become the next Google won't hold much weight with the folks at the bank.
Back when I was building my internet marketing company in 1997, we found ourselves in a cash-flow bind, and I called my banker for help. Thankfully, I owned a $1 million Brooklyn brownstone that I was willing to pledge as collateral. I also had several hundred thousand dollars in an S&P 500 index mutual fund. Otherwise, I doubt Citibank would have given us that $100,000 credit line on the strength of our accounts receivable alone--much less the $1 million credit line we were able to get later on.
"The cash value of your insurance policies and stocks that have significant trading volumes are far superior [as collateral] to investments in collectibles, CDs or funds that put limits on redemptions," says William N. Tifft, a managing director at iQ Venture Partners, an advisory firm that helps emerging growth companies raise capital. "You shouldn't worry about marginally better returns on your investments. Your best return is going to be on yourself and your business."
The next time you sit down with your investment advisor, take inventory of your assets and make sure you've got enough liquidity to satisfy your banker if you need to secure a loan or a credit line. If you don't, maybe it's time to lighten your load and free up some additional liquidity in your portfolio. You'll be glad you did.
The information contained herein is provided for informational purposes only and should not be relied upon in making investment decisions. Before investing, you should always consult with a licensed investment professional. Past performance of investments discussed in this column is not an indication or guarantee of future performance.
But as business owners, we also need to take other factors into consideration when making our investment choices. Unlike investors with corporate jobs and 401(k) plans, we may ultimately need to use our personal assets--our house, our stocks, our bonds, our mutual funds, even the cash value of our life insurance policies--as collateral for credit lines and business loans as our companies grow.
That's why it's important to stay liquid; that is, to put our money into the kinds of assets banks can sell quickly if we miss our payments and our businesses go under. So while it might be fun to take a flier on an up-and-coming artist or amass a huge collection of comic books or baseball cards, your lender will be happier knowing you've also got money socked away in real estate, blue chip stocks and other liquid assets that can easily be bought and sold. And you can forget about pledging stock in your fledgling startup. The possibility that your company may become the next Google won't hold much weight with the folks at the bank.
Back when I was building my internet marketing company in 1997, we found ourselves in a cash-flow bind, and I called my banker for help. Thankfully, I owned a $1 million Brooklyn brownstone that I was willing to pledge as collateral. I also had several hundred thousand dollars in an S&P 500 index mutual fund. Otherwise, I doubt Citibank would have given us that $100,000 credit line on the strength of our accounts receivable alone--much less the $1 million credit line we were able to get later on.
"The cash value of your insurance policies and stocks that have significant trading volumes are far superior [as collateral] to investments in collectibles, CDs or funds that put limits on redemptions," says William N. Tifft, a managing director at iQ Venture Partners, an advisory firm that helps emerging growth companies raise capital. "You shouldn't worry about marginally better returns on your investments. Your best return is going to be on yourself and your business."
The next time you sit down with your investment advisor, take inventory of your assets and make sure you've got enough liquidity to satisfy your banker if you need to secure a loan or a credit line. If you don't, maybe it's time to lighten your load and free up some additional liquidity in your portfolio. You'll be glad you did.
The information contained herein is provided for informational purposes only and should not be relied upon in making investment decisions. Before investing, you should always consult with a licensed investment professional. Past performance of investments discussed in this column is not an indication or guarantee of future performance.
Friday, December 4, 2009
How can I grow my business during the recession?
There are quite a few strategies to grow a small business during a recession--both online and offline.
Blogging: Most blogging software is free. It doesn't take long to get up and running. And it's a great way to interact with your customers and potential customers. It does take some time to build an audience. In the beginning, you should anticipate spending up to an hour a day promoting your blog, commenting on other blogs and writing engaging posts.
Just a quick note: Local companies can benefit from blogging too. I once interviewed a personal injury lawyer who replaced advertising in the phone book with blogging. He now ranks on the top page in Google for "personal injury lawyer" in his home town.
LinkedIn: If you have a B2B company, LinkedIn might be a great way to make connections. You can demonstrate your industry expertise in their Question and Answer section. Not only will you be known as an expert, answering a prospective customer's question can lead to a sale.
Niche Networks: If you were to Google the phrase "social network and (your industry)" chances are you will find a group of people already talking about your industry and similar products and services. Join those groups and the conversation and start networking.
Facebook and Twitter: I would be negligent if I didn't include the popular social networking sites Facebook and Twitter. There is a good chance that your customers hang out on at least one of those platforms. First, spend some time listening to what they have to say, and then join the conversation.
Joint Venture: Are there businesses in your area that have complementary products or services to your own? For instance, if you have a landscaping business, you might be able to partner with a fencing contractor. Fencing contractors often require that trees be cut down or bushes be removed in order for them to build a fence.
Networking: For all the talk about social media and social networking, offline networking is still extremely effective. Chances are, there are several free or low cost networking events near you each month.
Blogging: Most blogging software is free. It doesn't take long to get up and running. And it's a great way to interact with your customers and potential customers. It does take some time to build an audience. In the beginning, you should anticipate spending up to an hour a day promoting your blog, commenting on other blogs and writing engaging posts.
Just a quick note: Local companies can benefit from blogging too. I once interviewed a personal injury lawyer who replaced advertising in the phone book with blogging. He now ranks on the top page in Google for "personal injury lawyer" in his home town.
LinkedIn: If you have a B2B company, LinkedIn might be a great way to make connections. You can demonstrate your industry expertise in their Question and Answer section. Not only will you be known as an expert, answering a prospective customer's question can lead to a sale.
Niche Networks: If you were to Google the phrase "social network and (your industry)" chances are you will find a group of people already talking about your industry and similar products and services. Join those groups and the conversation and start networking.
Facebook and Twitter: I would be negligent if I didn't include the popular social networking sites Facebook and Twitter. There is a good chance that your customers hang out on at least one of those platforms. First, spend some time listening to what they have to say, and then join the conversation.
Joint Venture: Are there businesses in your area that have complementary products or services to your own? For instance, if you have a landscaping business, you might be able to partner with a fencing contractor. Fencing contractors often require that trees be cut down or bushes be removed in order for them to build a fence.
Networking: For all the talk about social media and social networking, offline networking is still extremely effective. Chances are, there are several free or low cost networking events near you each month.
Thursday, December 3, 2009
Sell Your Business With Confidence
The worst time to sell a business is when you absolutely have to sell. Most buyers can sense fear and desperation, so if you don't come across as level-headed and under control, they will likely exploit every weakness to gain leverage in a transaction. Unfortunately, this is a rather common scenario in today's market; many business owners are struggling financially and are anxious to sell their businesses, but are having a tough time doing so.
It's equally harmful when an owner assumes a persona of empty bravado; this only masks the desperation--and not very well. This false bravado can send the owner into a state of denial, refusing to acknowledge that her business is on a downward trend and losing value. This is the most critical time for an owner to heed the advice of advisors. There's nothing more frustrating for a professional than to see a client in a downward spiral continue to do everything that led to the state of desperation in the first place.
So if you need to sell your business, what can you do to encourage success and avoid losing leverage by appearing desperate? Here are some important strategies to follow when navigating a business sale under difficult circumstances.
Listen to your advisors
Now is the time to ask lots of questions and to seek professional advice. Your business broker, accountant, attorney and wealth manager have probably all seen your situation before and will know how to handle it for the greatest success.
Establish a plan
Much of the desperation we see from business owners could've been avoided with proper exit planning. Planning, even in urgent situations, can help you gain understanding and clarity about your situation. A properly formulated exit plan should involve all of your key advisors, with primary and contingent plans carefully and comprehensively laid out. The creation of the plan alone can give you the power and freedom to think clearly even when times are tough.
Maintain confidentiality
Unless your situation is dire, you should tell no one outside of your immediate family and trusted advisors that you're seeking a third-party sale. Your instinct may be to take a shotgun approach and tell everyone in the hope that someone will come along and make you an offer. That could happen, but it's far more likely that, once word is out, employees, clients and vendors will start to scramble for a new employer or partner. This will only make matters worse and wreak havoc on your business. Chances are you're already under a lot of stress; there's no need to add more. Consider the benefit of working with an experienced business broker who can help safeguard the confidentiality of your business.
Stay focused
The moment you make the decision to sell your business is exactly when you need to ensure that all your efforts are focused on running the business. It can be hard to avoid pulling back from day-to-day operations or putting all your time and energy into the sale, but it's essential to stay committed to everyday tasks. Buyers like to see that a business has future prospects, even if the situation is dire.
Psychologically, you'll be in a much better position if you keep yourself and your employees fully engaged. You may be surprised at what your renewed efforts might yield in the way of business performance, which will only give you leverage when a buyer does come knocking.
Understand the need for multiple buyers
A surefire way to mitigate a desperate situation when selling your business is to have multiple interested parties. Our brokers constantly remind sellers that having only one buyer is like having no buyers. A good business brokerage firm has the marketing muscle to generate heavy buyer interest even if the business and owner are not in top form. A brokerage firm should have a large, existing database of buyers who may be interested in your business, an internet presence that attracts buyers and a trained, professional staff that knows how to manage a difficult situation. Engaging multiple buyers will enable you to get the best price and terms possible.
Price the business to sell
Now is not the time to overprice your business hoping someone will take the bait. The marketplace knows what a fair price looks like and, given your situation, you should be prepared to peg the price of the business at the low end of reasonable. This may sound counterintuitive, but the right price will actually help you attract more buyers and keep the price and terms at the highest level possible. We normally recommend a third-party valuation coupled with pre-approval from a bank so that we have as accurate a picture as possible.
Know how to meet with buyers
Business owners typically sell a business only once in their lifetime, so they're often unfamiliar with the nuances of meeting with buyers. These meetings typically determine whether a buyer is going to submit an offer, as well as the terms of the offer. There are key questions that can either reveal your desperation to the potential buyer or, if handled properly, communicate that you're motivated but won't be manipulated in a negotiation. A good business brokerage firm is able to anticipate these questions and help you rehearse how to respond in a truthful, level-headed manner.
Have multiple contingency plans
Realize that not all business-for-sale deals close successfully, especially in distressed situations. That is why it's important to have a thoughtful and credible plan B (and ideally, plan C) that can give you the additional confidence to maintain control. Make sure you can answer the question, "What will I do if I can't sell my business when I need to?" An experienced team of advisors can be an invaluable help with this and give you the peace of mind of knowing there are other options.
When you're suddenly faced with a situation that requires you to sell your business, it's difficult to avoid appearing distressed and desperate. It's absolutely essential that you don't, though, both for your ability to attract buyers and close a deal, as well as for your personal well-being. Keep these points in mind and seek the help of an experienced team of professionals.
It's equally harmful when an owner assumes a persona of empty bravado; this only masks the desperation--and not very well. This false bravado can send the owner into a state of denial, refusing to acknowledge that her business is on a downward trend and losing value. This is the most critical time for an owner to heed the advice of advisors. There's nothing more frustrating for a professional than to see a client in a downward spiral continue to do everything that led to the state of desperation in the first place.
So if you need to sell your business, what can you do to encourage success and avoid losing leverage by appearing desperate? Here are some important strategies to follow when navigating a business sale under difficult circumstances.
Listen to your advisors
Now is the time to ask lots of questions and to seek professional advice. Your business broker, accountant, attorney and wealth manager have probably all seen your situation before and will know how to handle it for the greatest success.
Establish a plan
Much of the desperation we see from business owners could've been avoided with proper exit planning. Planning, even in urgent situations, can help you gain understanding and clarity about your situation. A properly formulated exit plan should involve all of your key advisors, with primary and contingent plans carefully and comprehensively laid out. The creation of the plan alone can give you the power and freedom to think clearly even when times are tough.
Maintain confidentiality
Unless your situation is dire, you should tell no one outside of your immediate family and trusted advisors that you're seeking a third-party sale. Your instinct may be to take a shotgun approach and tell everyone in the hope that someone will come along and make you an offer. That could happen, but it's far more likely that, once word is out, employees, clients and vendors will start to scramble for a new employer or partner. This will only make matters worse and wreak havoc on your business. Chances are you're already under a lot of stress; there's no need to add more. Consider the benefit of working with an experienced business broker who can help safeguard the confidentiality of your business.
Stay focused
The moment you make the decision to sell your business is exactly when you need to ensure that all your efforts are focused on running the business. It can be hard to avoid pulling back from day-to-day operations or putting all your time and energy into the sale, but it's essential to stay committed to everyday tasks. Buyers like to see that a business has future prospects, even if the situation is dire.
Psychologically, you'll be in a much better position if you keep yourself and your employees fully engaged. You may be surprised at what your renewed efforts might yield in the way of business performance, which will only give you leverage when a buyer does come knocking.
Understand the need for multiple buyers
A surefire way to mitigate a desperate situation when selling your business is to have multiple interested parties. Our brokers constantly remind sellers that having only one buyer is like having no buyers. A good business brokerage firm has the marketing muscle to generate heavy buyer interest even if the business and owner are not in top form. A brokerage firm should have a large, existing database of buyers who may be interested in your business, an internet presence that attracts buyers and a trained, professional staff that knows how to manage a difficult situation. Engaging multiple buyers will enable you to get the best price and terms possible.
Price the business to sell
Now is not the time to overprice your business hoping someone will take the bait. The marketplace knows what a fair price looks like and, given your situation, you should be prepared to peg the price of the business at the low end of reasonable. This may sound counterintuitive, but the right price will actually help you attract more buyers and keep the price and terms at the highest level possible. We normally recommend a third-party valuation coupled with pre-approval from a bank so that we have as accurate a picture as possible.
Know how to meet with buyers
Business owners typically sell a business only once in their lifetime, so they're often unfamiliar with the nuances of meeting with buyers. These meetings typically determine whether a buyer is going to submit an offer, as well as the terms of the offer. There are key questions that can either reveal your desperation to the potential buyer or, if handled properly, communicate that you're motivated but won't be manipulated in a negotiation. A good business brokerage firm is able to anticipate these questions and help you rehearse how to respond in a truthful, level-headed manner.
Have multiple contingency plans
Realize that not all business-for-sale deals close successfully, especially in distressed situations. That is why it's important to have a thoughtful and credible plan B (and ideally, plan C) that can give you the additional confidence to maintain control. Make sure you can answer the question, "What will I do if I can't sell my business when I need to?" An experienced team of advisors can be an invaluable help with this and give you the peace of mind of knowing there are other options.
When you're suddenly faced with a situation that requires you to sell your business, it's difficult to avoid appearing distressed and desperate. It's absolutely essential that you don't, though, both for your ability to attract buyers and close a deal, as well as for your personal well-being. Keep these points in mind and seek the help of an experienced team of professionals.
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