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Value Driver #9: Barriers to Competitive Entry (Business Moat)

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.

 

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The Wine-Lover's Guide To A Well-Run Business

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.

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The Difficult Issues Often Attached To Valuing A Business

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.

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All Signs Say that 2018 May Be an Ideal Time to Sell Your Business

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.

 

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Why Businesses Do Not Sell

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

 

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Growing a Landscaping or Lawn Care Business That You Can Sell

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.

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Performing Successful Due Diligence In A Business Sale

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.

 

 

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Reasons For A Business Sale

The reasons for selling a business can be divided into two main categories. The first is a sale that is planned almost from the beginning or by an owner who knows that selling is or should be a planned event.  The second is exactly the opposite – unplanned; the sale is motivated by a specific event such as health, divorce, business crises, etc. However, in between the two major reasons, are a host of unpredictable ones.

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The A of Valuation ABCs

It’s no fun telling a songwriter his song is bad. Telling an author her novel won’t sell takes nerves of steel. Telling a business owner his business is overvalued is no way to make a friend, much less gain a client.

Marvin (not his real name) was flat P-O’ed at me. When I told him how a buyer would look at his business, he told me in no uncertain terms he was not going to hire me because I didn’t know the market and didn’t appreciate how hard he’d worked over the years.

After almost 30 years of buying and selling businesses, I understand that it’s common for a business owner to have an unrealistic valuation expectation. This disconnect can be exacerbated by a business broker who is not honest with the business owner. Too many business brokers will tell an owner what the owner wants to hear about his valuation in order to get the listing, hoping the owner will lower his expectation if an offer comes in.

 

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Avoiding The Biggest Deal Killer: Time

When selling a business, time is not your friend. Time is the enemy of all deals. In fact, "time kills all deals" is an expression that can be associated with a number of different industries, but is especially relevant to business acquisitions. So, the key to a successful deal is to prepare well, come out strong and maintain momentum throughout the business sale process. The deal clock is set in motion as soon as your company hits the business-for-sale market, not later in the process when a buyer presents the first offer.

So, to generate deal momentum, a business owner should be ready for the trip to the marketplace before the train leaves the station. This means organize your documentation and vet potential roadblocks that can derail or delay the process. 

Don’t let time work against you. Ready up with these tips to reach a timely closing:

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