Looking for tips and common questions that sellers should be prepared to answer before talking to a buyer.
Research shows optimism among small and medium business owners in Houston reaching an all-time high. This optimism can translate into results. Year 2018 might be the ideal time to sell your business in Houston.
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Years 2018 and 2019 may be ideal times to sell your Houston business. Values have never been higher, particularly for well-run companies. We’re also beginning an upswing in economic cycles.
There are many factors that determine best timing for selling a small business -- the financial condition of the company, valuation, growth cycle, profit history, and the current market. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward. A solid earnings trend will enable a buyer to pay a higher price and still meet his return of investment criteria. A history of good performance also gives the buyer confidence in projected future earnings.
Circumstances that give a business an advantage over its competitors, strengthen its strategic position, or can be leveraged for future gain boosts business value. Why? Because it increases the probability of the continued future profitability of the business and decreases perceived risk by prospective buyers. As with all value drivers, it’s about risk. Lower risk achieves higher value. Buyers will pay a premium price for a business that has barriers to competitive entry.
One way to describe this Barrier Value Driver is to use Warren Buffet's term, "Business Moat." Buffet compares a castle's moat to the protection that a business needs to ward off encroaching competitors. The wider the moat, the more easily a company can be defended and the longer it can protect its profits. A company with a narrow moat does not offer these protections.
As an avid wine fan and wannabe aficionado, I can’t help but notice the parallels between winemaking and the principals involved in effectively building a successful transferrable business. Frank and I often visit Napa Valley touring our favorite vineyards......and marveling at the amount of care and knowledge required to grow the perfect grape. Each Grapevine Grows Differently In business, there are a few universal truths that are required for long-term stability. For starters, you must have an excellent product or service targeted to a specific market at the right price point. The infrastructure necessary to build and deliver your product must have a solid, well-structured foundation on which to build your business and the right people in the right environment. Finally, sustainable success requires flexibility in meeting constantly changing business needs.
There is little doubt that valuing a business is often complex. In part, this complexity is due to the fact that business evaluation is subjective. The simple fact is that the value of a business is often left to the mercy of the person conducting the evaluation. Adding yet another level of complexity is the fact that the person conducting the valuation has no choice but to assume that all the information provided is, in fact, correct and accurate.
In this article, we will explore the six key issues that must be considered when determining the value of a business. As you will see, determining the value of a business involves taking in several factors.
A number of factors, including record-high 2017 M&A activity and the passage of tax reform legislation, indicate that 2018 will be an excellent year for business owners to move forward with transitioning out of their businesses. If you’re a business owner who is thinking about selling or transferring your business to someone else within the next few years, the time to start preparing is now!
Increased 2017 Q3 M&A Activity
2017 is on track to set a record for the highest number of businesses changing hands since 2007, according to BizBuySell.com's Third Quarter 2017 Insight Report. And, there was an increase in M&A activity by private equity and strategic corporate buyers in Q3 of 2017 compared to Q2, according to the Q3 2017 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Market Project. The report attributes the increased activity largely to the strong demand for add-on acquisitions.
Approximately 55% of business brokers and advisors who were surveyed as part of the Q3 2017 Market Pulse Report expect the shrinking labor market will cause more business owners to expand through acquisition. In Q3, around 90% of deals in the $5MM-$50MM range were acquisition or add-on growth opportunities, compared to 60% in Q2 2017.
It would be nice to live in a world where every business-for-sale was sold at top dollar. While there is no such thing as a perfect business free from all defects, there are a number of problems that can hinder a sale that could be remedied, if given enough time. This article lists ten of the reasons which are often cited as contributing factors in an unsuccessful sale or a completed deal for less than potential value. Business intermediaries need to be up-front with their seller clients, educating them on the challenges faced, and the likely impact that one or more of these issues will have on completing a successful transaction.
1. UNREALISTIC EXPECTATIONS
a. Valuation/Listing Price
Arguably, the price a business is listed at is one of the critical elements to a successful sale. An owner’s emotional attachment to their business, coupled with an inexperienced business intermediary’s desire to obtain the listing and please the seller, can be a recipe for disaster. Overpricing a business will deter knowledgeable buyers from establishing communications. Additionally, it will be extremely difficult to defend the valuation when a business has been priced unrealistically. The typical outcome is that the listing will languish in the marketplace and recovery becomes more difficult. Once on the market for months on end at the wrong price, the process in re-pricing and re-listing creates a whole new set of challenges, the least of which is maintaining credibility.
This checklist outlines the most important variables that impact business value specific to landscaping and lawn care companies. Groom your business to achieve maximum value before putting it up for sale.
Build a management team: A business is more valuable if the owner is not the landscaper, the mower, the weeder, or the sidewalk edger. If you have management and supervisory staff in place overseeing the crews, your business will be more valuable and much easier to sell. Don't be an owner-driven operation. Build your business so anyone can run it. The more important you are to your business, the less your business will be worth. Additionally, building your company so anyone can run it vastly opens up the universe of buyers that can purchase the business.
Performing due diligence on a business being considered for purchase should be conducted much like a surgical procedure. The operation should be an organized examination of the vitals of the company. It should also be approached knowing that this is an invasive phase of the sale process for the owner.
This stage of buying a business begins once you have made your offer and the seller has accepted. A contractual agreement has been entered into between the buyer and seller outlining the price and terms of the sale. The contract is contingent upon the business passing "inspection," which is the due diligence period allotted to the buyer.
Since it is the buyer's responsibility to uncover any potential problem areas of the business, it is important to be prepared. Depending on the size of the business, a buyer will typically have about two to four weeks to complete the process. Having a checklist in hand to present to the seller at the beginning of the process will enable the seller to gather all the information in a timely fashion. This will give you enough time to confirm all material facts of the business and validate what the seller has represented. The buyer, being the leader of the procedure, may call in specialists, such as an attorney to examine the legal aspects of the business and an accountant to scope the numbers.