How Your Employees Can Boost Profits and Values

The simple fact is that without employees, you don’t have a business.  Given the tremendous importance of your employees, it is important to step back and reflect on the value associated with keeping those employees happy.

There is a direct relationship between happy employees and happy customers.  A happy employee takes steps to ensure that your customers are satisfied.  This approach in turn leads to a higher level of customer retention and helps in attracting new customers.  On the flip side, unhappy employees can be quite dangerous to your company’s bottom line.

The hiring process is a key process for the health of your business and should never be overlooked or treated as a secondary process within your business.  Cultivating happy employees begins at this point.  Hiring can and will either make or break your business.

Offering great pay and benefits is only one important factor in keeping employees happy.  A more overlooked important factor is to appreciate the contributions that employees make.  If employees feel as though they are being overlooked or not appreciated, their overall happiness level will falter.  Many owners unnaturally expect their employees to have the same dedication to their business that they do, and this can lead to problems.

Your employees realize that they don’t own the business.  As a result, most are only willing to invest so much of themselves, their talents and their abilities into your business.  Taking steps to keep your employees engaged, such as showcasing that their talents are appreciated, will help keep employees invested and happy.  Research has also revealed feeling happy will make them more productive.  A few years ago, Fortune Magazine wrote an article that cited a UK study connecting employee happiness and productivity.  It’s definitely worth a look.

Being a positive owner is a gigantic step in the right direction where cultivating happy employees is concerned.  Being a good role model is at the heart of having happy employees.  It is vital that you reward people with praise and bonuses for jobs well done and fire employees that are consistently negative or failing to perform their respective duties.  Special touches, such as giving employees their birthdays off, can go a long way towards cultivating the kind of climate that leads to increased satisfactions.  And don’t forget, your team’s satisfaction will increase your bottom line.

When it comes time to sell a business, you can be sure that prospective buyers will be interested in your level of profits.  In this way, the investment you make in the happiness of your employees can be returned many fold.

Copyright: Business Brokerage Press, Inc.

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The Importance of the Term Sheet

The value of the term sheet shouldn’t be overlooked.  From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement.  That stated, it is important that the term sheet is actually explained in detail.  Let’s take a closer look at its importance.

What is a Term Sheet?

Even though term sheets are quite important, they are rarely mentioned in books about the M&A process.  In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”

Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?

Creating the Right Environment

A good term sheet can help keep negotiations on target and everyone focused on what is important.  Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics.  The main goal should be to maintain a “win-win” environment.

At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment.  Using the information can lead to a more formalized letter of intent.  The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.

Make Sure Your Term Sheet Has the Right Components

In the end, a term sheet is basically a preliminary proposal containing a variety of key information.  The term sheet outlines the price, as well as the terms and any major considerations.  Major considerations can include everything from consulting and employment agreements to covenants not to compete.

Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process.  Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.

Copyright: Business Brokerage Press, Inc.

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Don’t Let the Dust Settle on Your Lease: 8 Factors to Consider

Owners often neglect understanding their leases and this can be problematic.  If your business is location-sensitive, then the status of your lease could be of paramount importance.  Restaurants and retail businesses, for example, are usually location-dependent and need to pay special attention to their leases.  But with that stated, every business should understand in detail the terms of its leases.

There are many key factors involving leases that should not be ignored or overlooked.  If you adhere to these guidelines, you’ll be much more likely to control your outcomes.

  1. At the top of the list is the factor of length.  Usually, the longer your lease the better.
  1. Secondly, if the property does become available, then it is often in an owner’s best interest to try and buy the property or he or she may be forced to move.
  1.  When negotiating a lease, it is best to negotiate a way out of the lease if possible; this is particularly important for new businesses where the fate of your business is still an unknown.  Experts recommend opting for a one-year lease with a long option period.
  1.  You may want to sell your business at some point, and this is why it is important to see if your landlord will allow for the transfer of the lease and what his or her requirements are for the transfer.
  1.  Look at the big picture when signing a lease.  For example, what if your business is located in a shopping center?  Then attempt to have it written into your lease that you’re the only tenant that can engage in your type of business.
  1.  If you’re located in a shopping center, then try to outline in your agreement a reduction of your rent if an anchor store closes.
  1.  Your lease should detail what your responsibilities are and what responsibilities your landlords hold.  Keep in mind that if you are a new business, it is quite possible that your landlord will likely require a personal guarantee from you, the owner.
  1. The dollar amount is necessarily the most important factor in determining the quality of your lease.  It is important to carefully assess every aspect of the lease and understand all of its terms.

There are many other issues that should be taken into consideration when considering a lease.

  • For example, what happens in the event of a natural disaster or fire?  Who will pay to rebuild?
  • Is there a percentage clause and, if so, is that percentage clause reasonable?
  • How are real estate taxes, grounds-keeping fees and maintenance fees handled?

Investing the time to understand every aspect of your lease will not only save you headaches in the long run, but it will also help to preserve the integrity of your business.

Copyright: Business Brokerage Press, Inc.

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Don’t Let the Dust Settle on Your Lease: 8 Factors to Consider

Owners often neglect understanding their leases and this can be problematic.  If your business is location-sensitive, then the status of your lease could be of paramount importance.  Restaurants and retail businesses, for example, are usually location-dependent and need to pay special attention to their leases.  But with that stated, every business should understand in detail the terms of its leases.

There are many key factors involving leases that should not be ignored or overlooked.  If you adhere to these guidelines, you’ll be much more likely to control your outcomes.

  1. At the top of the list is the factor of length.  Usually, the longer your lease the better.
  1. Secondly, if the property does become available, then it is often in an owner’s best interest to try and buy the property or he or she may be forced to move.
  1.  When negotiating a lease, it is best to negotiate a way out of the lease if possible; this is particularly important for new businesses where the fate of your business is still an unknown.  Experts recommend opting for a one-year lease with a long option period.
  1.  You may want to sell your business at some point, and this is why it is important to see if your landlord will allow for the transfer of the lease and what his or her requirements are for the transfer.
  1.  Look at the big picture when signing a lease.  For example, what if your business is located in a shopping center?  Then attempt to have it written into your lease that you’re the only tenant that can engage in your type of business.
  1.  If you’re located in a shopping center, then try to outline in your agreement a reduction of your rent if an anchor store closes.
  1.  Your lease should detail what your responsibilities are and what responsibilities your landlords hold.  Keep in mind that if you are a new business, it is quite possible that your landlord will likely require a personal guarantee from you, the owner.
  1. The dollar amount is necessarily the most important factor in determining the quality of your lease.  It is important to carefully assess every aspect of the lease and understand all of its terms.

There are many other issues that should be taken into consideration when considering a lease.

  • For example, what happens in the event of a natural disaster or fire?  Who will pay to rebuild?
  • Is there a percentage clause and, if so, is that percentage clause reasonable?
  • How are real estate taxes, grounds-keeping fees and maintenance fees handled?

Investing the time to understand every aspect of your lease will not only save you headaches in the long run, but it will also help to preserve the integrity of your business.

Copyright: Business Brokerage Press, Inc.

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Your Deal is Almost Done, Then Again, Maybe Not

Having a letter of intent signed by both the buyer and the seller can be a very good feeling.  Everything can seem as though it is moving along just fine, but the due diligence process must still be completed.  It is during due diligence that a seller decides whether he or she is going to finalize the deal. Much depends on what is discovered during this important process, so remember the deal isn’t done until it is truly finalized.

In his book, The Art of M&A, Stanley Forster Reed noted that the purpose of due diligence is to “Assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased.”

Summed up another way, due diligence is quite comprehensive.  It probably comes as no surprise that this is when deals often fall apart.  Before diving in, it is critically important that you meet with such key people as appraisers, accountants, lawyers, a marketing team and other key people.

Let’s take a look at some of the main items that both buyers and sellers should have on their respective checklists.

Industry Structure

You should determine the percentage of sales by product line.  Additionally, take the time to review pricing policies, product warranties and check against industry guidelines.

Human Resources

Review your key people and determine what kind of employee turnover is likely.

Manufacturing

If your business is involved in manufacturing then every aspect of the manufacturing process must be evaluated.  Is the facility efficient? How old is the equipment? What is the equipment worth? Who are the key suppliers? How reliable will those suppliers be in the future?

Trademarks, Patents and Copyrights

Trademarks, patents and copyrights are intangible assets and it is important to know if those assets will be transferred.  Intangible assets can be the key assets of a business.

Operations

Operations is key, so you’ll want to review all current financial statements and compare those statements to the budget. You’ll also want to check all incoming sales and at the same time analyze both the backlog and the prospects for future sales.

Environmental Issues

Environmental issues are often overlooked, but they can be very problematic.  Issues such as lead paint and asbestos as well as ground and water contamination can all lead to time-consuming and costly fixes.

Marketing

Have a list of major customers ready.  You’ll want to have a sales breakdown by region and country as well.  If possible, you’ll want to compare your company’s market share with that of the competition.

The Balance Sheet

Accounts receivable will want to check for who is paying and who isn’t.  If there is bad debt, it is vital to find that debt.  Inventory should also be checked for work-in-progress as well as finished goods.  Non-usable inventory, the policy for returns and the policy for write-offs should all be documented.

Finally, when buying or selling a business, it is vital that you understand what is for sale, what is not for sale and what is included whether it is machinery or intangible assets such as intellectual property.  Understanding the barriers to entry, the company’s competitive advantage and what key agreements with employees and suppliers are already in place, will help ensure a smooth and stable transition.  There are many important questions that must be answered during the due diligence process.  Working closely with a business broker helps to ensure that none of these vital questions are overlooked.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article from Small Business Trends entitled “41% of Entrepreneurs Will Leave Their Small Business Behind in 5 Years” summarizes a report by a global financial services firm that looks at business ownership and entrepreneurialism in modern America.  The report found that almost 60% of wealthy investors would consider starting their own business while more than 40 percent of current business owners are planning to exit their business. Of the 41% of business owners who are planning to leave their business in the next 5 years, half of them plan to sell their business.

The report highlights how heirs in the family are often reluctant to take over the family business and that many business owners underestimate what they need to reach a successful sale. The report notes that 58% of business owners have never had their business appraised and 48% have no formal exit strategy.  One of the main takeaways from this should be that small business owners need to prepare for selling their business and they should create an exit plan well in advance.

Click here to read the full article.

 

A recent article on the Axial Forum entitled “9 Reasons Acquisitions Fail — and How to Beat the Odds” shows us how looking at why others have failed can help you to learn from their mistakes in order to have a successful acquisition. Here are 9 common causes of failed acquisitions:

  1. Strategy – Poor strategic logic was used and it was not a good fit for integration
  2. Synergy – Potential synergy between the companies is overestimated or the complexity is underestimated
  3. Culture – Incompatibility between the companies, ineffective integration, or compromising the positive aspects of one business to create uniformity
  4. Leadership – Poor leadership, not enough participation in the transaction & integration process, clashes between leaders
  5. Transaction Parameters – Paying too much, inappropriate deal structure, negotiations taking too long
  6. Due Diligence – Not enough investigation is done beforehand, failure to act on findings
  7. Communications – Lack of proper communication can result in talent loss, customer loss, and many more problems which eventually lead to failure
  8. Key Talent – Failing to identify or retain key employees
  9. Technology – Failing to identify incompatibilities or underestimating the complexity and time required for integration

Integration involves several steps starting from the initial strategic thinking, to due diligence and then carrying on into the months after the deal is made. Deal makers and business owners need to consider all steps of the process to make an acquisition successful.

Click here to read the full article.

 

A recent article posted by WilmingtonBiz Insights entitled “How Does Exit Planning Protect Business Value?” explains the importance of exit planning in retaining and growing business value.

The article gives an example of two similar businesses, both valued at $5 million, who take different strategies towards increasing their companies’ values before selling. The first company invests in more equipment and hiring more employees, but does not work with any advisors besides their CPA at tax time. The second company works with their CPA, an exit planning advisor and a tax specialist. They build a strong management team, cut the owner’s work week in half, and convert the company to an S corporation. They also work with a business broker to buy two smaller competitors which broadens their market.

When the Great Recession of 2008 hits, both companies are affected but in very different ways. The first company has to lay off all the new employees they hired and their new equipment sits unused. They end up selling their business for less than what it was valued at. The second company has minimal layoffs and has extra money saved from strategic tax planning. Their business is valued at $15 million because of the two businesses they bought, and they are able to exit their business with $10 million profit. No matter what unforeseen circumstances may occur, the right planning can make a huge difference.

Click here to read the full article.

 

A recent article from Divestopedia entitled “Constructing a Buyer List and Finding the Right Buyer for Your Company” explains how buyer lists are created and what makes a good buyer. The first step in constructing the buyer list is to determine the objectives of the seller such as leaving a legacy or retaining the local employment base.

M&A advisors will have many existing resources to start with including an in-house database, established relationships in the industry, business networks, and more. Adding your competitors to the list is another thing to consider, which will depend on the goals of the seller and the reputation of the competitors.

The ability to pay is the main qualifier to look at in finding a good buyer. Consider the following factors when looking for a buyer who can pay a premium:

  • Economies of scale
  • Economies of scope and cross-selling opportunities
  • Unlocking underutilized assets
  • Access to proprietary technology
  • Increased market power
  • Shoring up weaknesses in key business areas
  • Synergy
  • Geographical or other diversification
  • Providing an opportunistic work environment for key talent
  • To reach critical mass for an IPO or achieve post-IPO full value
  • Vertical integration

The best way to find the right buyer is to approach all potential buyers, talk to them and see if it’s a good fit.

Click here to read the full article.

 

A recent article from Business Sale Report entitled “Almost a quarter launch businesses with a sale in mind” summarizes the results of a new study which asked nearly 1,000 entrepreneurs about their start-up history and their motivation for launching businesses. The study found that 23% of those starting their own business have their exit as a primary goal, with 83% of those claiming that selling at a profit is their main incentive.

The top 2 answers for why they started their business were that “It was a passion of mine” and “I knew it would eventually sell well and had exit in mind.” All of the study participants said that they wished they had an exact way to know the value of their business and more than half said they had no real way of knowing the value of their business.

If you are starting a business with a main goal of selling the business for profit, it is essential to know your valuation so that you get a fair price.

Click here to read the full article.

 

Copyright: Business Brokerage Press, Inc.

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Three Easy & Effective Ways to Negotiate

Far too many prospective business buyers and sellers overlook just how important negotiations can be.  But they can also be tricky. In general, there are three approaches to negotiations. Thinking through your negotiation strategies well before the time to buy or sell is a savvy and prudent move.

Negotiation Tactic #1  Take It or Just Leave It

In this negotiating tactic, the buyer makes an offer and the seller makes a counter-offer, then both sides leave it there.  If the deal works fine. If it doesn’t work, that’s fine too.

It is usually smart to step back and ask yourself if you are comfortable with this approach.  Sometimes a small degree of flexibility can go a long way towards turning a proposed deal into a reality.

Negotiation Tactic #2  Maybe Consider Splitting the Difference

Another negotiating tactic is to simply offer to split the difference.  This tactic is pretty straightforward and it demonstrates a good deal of flexibility; however, the financials may not always make sense for both sides.

As always, it is important to think about all the factors involved in allowing a deal to fall apart, such as how much time will it take to find another buyer or another business to buy?  Showing a willingness to split the difference is often seen as a goodwill offer that can facilitate further negotiations within an environment of lower emotional intensity.

Remember, as long as the two sides are talking, a deal may be reached.  But when communication ceases, then the deal is definitely finished and not in a good way.

Negotiation Tactic #3  Negotiation from What is Most Important to Each Party

Understanding what is most important to both parties is usually critical for a successful deal.  Important areas can range from allowing a relative to stay with the business to moving the business to a new location.  Not all key points are directly linked to money, and it is vital to understand this all-important negotiating fact.

Negotiation Tactic #4  Bring in a Pro

In negotiations there is an old adage, “Never negotiate your own deal.”  Emotions can run high when it comes to buying or selling a business and then there is the problem of perspective.  Buyers and sellers are often lack the perspective that an outsider can bring.

Opting for help and guidance from someone who buys and sells businesses for a living, can be a huge step in the right direction.  Through a professional business broker, it is possible to not only establish a fair price but also address the array of intangibles that can go into buying and selling a business.

At the end of the day, deals are put together piece by piece, and skill is involved in the process.  Working with others is at the heart of successful negotiation, and that means taking into consideration what the other side wants and what the other side needs.

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Red Flags are Not a Pretty Sight

When it comes to selling a business, sellers simply must pay attention to red flags.  Problems can always pop up, and that’s why they need to keep their eyes open.

Rarely does a “white knight” ride in and rescue a business with no questions asked.  And if this were to happen, you should be asking, “Why?”  Until a deal is officially inked, sellers need to evaluate every aspect of a transaction to make sure something isn’t happening that could wreck the deal.

Common Red Flags to Watch For

One example would be having a company express interest in your business but you are never able to directly contact key players, such as the President or CEO.  The reason that this is a red flag is that it indicates that the interest level may not be as great as you initially hoped.

A second red flag example would be an individual buyer, with no experience in acquisitions or experience in your industry, looking to buy your business.  The reason that this second example could prove problematic, is that even if the inexperienced buyer is enthusiastic as the deal progresses, he or she may become nervous upon learning what a deal would actually entail.  In other words, the specifics and the reality of owning a business, or owning a business in your industry, could come as a shock to an inexperienced buyer.

Both of these examples above are examples of early-stage red flags.  But what about issues that pop up at later stages?  The simple fact is that red flags can come at any stage of the selling process.

A good example of a middle-stage red flag is when a seller is denied access to the buyer’s financial statements, which is of course essential to verify that the seller is able to actually make the acquisition.  A final-stage red flag example is an apparent loss of momentum, as the buying and selling process can be a long one.

Business Sellers Need to Protect Their Assets  

Sellers are usually very busy and don’t have time to waste; this is doubly true for owner/operators of businesses, as the time they invest with a prospective buyer is time that could be spent doing something else.

All too often, businesses begin to run into trouble when they place their business on the market.  If this trouble negatively impacts the bottom line, then the business can become more difficult to sell and the final sale price will likely be lower.

That’s why it is so essential that sellers protect themselves from buyers that are not truly interested or are simply not a good fit.  Working with a business broker is an easy and highly effective way for sellers to protect themselves from buyers that are simply not the right fit.  A broker helps to “weed out” unfit candidates.

While red flags are never good, that doesn’t mean that a red flag means a deal is a definitely at an end.  Especially with the guidance of an experienced business broker, many of these issues can be overcome.

In the end, if you, either as a buyer or seller, suspect that there is a problem, then you should take action.  The problem will not simply go away.  The single best way to deal with a red flag is to tackle it head on as soon as you recognize it.

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How Does Your Business Compare?

When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?

Value Driver Low Medium High
Business Type Little Demand Some Demand High Demand
Business Growth Low Steady High & Steady
Market Share Small Steady Growth Large & Growing
Profits Unsteady Consistent Good & Steady
Management Under Staffed Okay Above Average
Financials Compiled Reviewed Audited
Customer Base Not Steady Fairly Steady Wide & Growing
Litigation Some Occasionally None in Years
Sales No Growth Some Growth Good Growth
Industry Trend Okay Some Growth Good Growth

The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?

© Copyright 2015 Business Brokerage Press, Inc.

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Valuing the Business: Some Difficult Issues

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.

Here are some issues that must be considered when arriving at a value for the business:

Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.

Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.

Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.

Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.

ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.

Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.

Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.

© Copyright 2015 Business Brokerage Press, Inc.

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