Timing the Sale for Maximum Price

Picking the right time to sell a business can mean the difference between a substantial retirement income and nothing.

Every business will go through four stages of a life cycle. Please see the graph below.

 

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

To sell at the appropriate time will require  the owner to take advantage of the growth trajectory and show that the business is a strong money maker.

 

Over here you can do a self assessment and rate your own preparation for exiting.

See here for what prospective buyers want from a business.

 

What Buyers Like and Will Pay More For

 When buying a business, buyers and their representatives (agents,lawyers) create a short list of  a specific set of criteria. Among them are:

  • More Cash and Less Inventory
  • Positive Long-term Contracts
  • Diversified Base of Customers and Suppliers
  • Solid Capture and Retention of Order Data
  • An Audit for the Prior Five Years
  • A Strong Management Team

Not all may apply to your business but probably most do.

More Cash and Less Inventory

Buyers like to see a strong cash position. This comes from smart management of working capital. The seller can increase their cash position by:

  • Collecting  accounts receivables faster
  • Clearing inventory that is not moving
  • Obtaining the most favourable terms for payment from  suppliers

Positive Long-Term Contracts

Long term contracts reduce volatility and uncertainty.Buyers will focus on confirming the sustainability of production. Long-term contracts examples are

  • long-term supply contracts
  • leases on valuable land and buildings
  • leases on production facilities and distribution.

Diversified Base of Customers and Suppliers

The seller should not be dependent on major customers for a large portion of their sales because customers can put pressure and threaten to withdraw their business.

The opportunity to supply a major retailer (i.e. Wal-Mart or Home Depot) or a major manufacturer (Ford or GE) can be a tremendous opportunity for a smaller company, but it can also drain a lot of resources and result in pressure on margins and tremendous customer concentration. While the growth that it drives will increase value, the associated risk of these revenues will reduce value.

Similarly, consider the relationships to suppliers. How dependent is the business on the supplier? How reliable is the supplier?

Capture and Retain Order Data

Without this data, it’s difficult for a buyer to understand how the current sales pipeline compares with previous periods, making it challenging to gauge growth.

How preparation affects the sales price

Get an Audit for the Prior Five Years

Buyers will expect to see several years of audits performed by a public accounting firm. An audit further lends credibility to our company’s financials and decreases the likelihood that a generally accepted accounting principle issue will be uncovered in due diligence proceedings. This type of finding could cause an investor to lower their purchase price.

A Strong Management Team

Companies with strong management teams are generally valued higher than those without them; private equity buyers, in particular, value strong non-owner teams. Since it takes time before new hires begin to contribute to a company’s financial performance, the sooner gaps are filled the better.

It is clear that the preparation for making the business attractive to prospective buyers requires effort. It is an effort well worth while as it will ensure a prompt sale at a high price.

See here : Diagnostic to assess your preparedness for exiting

and here How preparation affects the sales price

If Prepared the Sales Price Will Be Higher

Winners and Losers

There may be a large difference in the price obtained between the Losers (owners who continue to manage their business as before), and Winners,(those that consciously prepare it for sale).

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How To Prepare the Business for Sale

Preparing a business for sale has four components:

  • Timing the sale during high growth or early maturity period
  • Managing for cash
  • Managing for growth
  • Managing so as to earn a higher multiple of earnings

Timing the sale during high growth or early maturity period

Every business will go through four stages of a life cycle. Please see the graph below.

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

Managing for Cash

A seller has some time to prepare the business and its elements prior to the sale.A business that generates more cash flow will bring a higher sales price than one that does not.

A qualified finance or accounting professional may be of assistance here. Among the options one may have:

  • Faster turnover of working capital
  • Divesting low return assets
  • Making the operations more efficient
  • Increased margins

Managing for Growth

Future growth will require strategies and executions that yield the following results: A buyer will be looking for a business that is:

  • Achieving a strong cash position
  • Achieving above-average profitability (in terms of return on capital invested)
  • Obtaining rapid growth in revenues by targeting attractive, market segments
  • Developing a strong brand
  • Competing on non-price issues (e.g. quality, service, functionality)
  • Achieving highly consumer centric behaviour
  • Offering a strong value proposition to its market
  • Developing a strong team with high-grade staff & good people

Each of the above will raise the value of the business and will bring a better price at sale.

Grow the Multiple the Buyer Will Pay

You have probably heard investors talk about the P/E ratio. The ratio also called the multiple is the result of the price that the company is worth (P) divided by annual earnings (E).

The multiple is the kind of return the buyer will want on their investment. For instance, if the multiple is ten, the buyer will pay ten times expected annual earnings. If the buyer can expect the annual income to be $100,000.00 the buying price will be one million dollars.

The lower the multiple, the less the buyer will pay. A multiple of five means the buyer will pay five times the expected annual earnings. The seller want the highest multiple, whereas the buyer will want the lowest multiple.

Again here with proper professional help you can increase the multiple a buyer will pay for the business.

Preparing a business for sale is no trivial matter. We have covered the timing of the sale and the preparations we can make to get the best price.

The vast majority of owners don’t plan for the sale of their business, and as a result they don’t take any steps to maximize their return on their years of investment.

That’s a symptom associated with owners that spend too much time working IN their business and not enough time ON their business. These owners don’t think in terms of selling their business at some point in time. Frequently, they view the business as a vehicle that provides them with an income and there is a rather fuzzy thought or picture involving a sale to fund their retirement.

This article served as an overview of the factors required to obtain a high return on the investments made in creating and managing a business.

Over here you can do a self assessment and rate your own preparation for exiting.

See here for what prospective buyers want from a business.

Is My Idea Going to Create Wealth?

John Mullins in “The New Business Road Test” says

the odds against hitting the jackpot as an entrepreneur can be nearly as daunting as those in Las Vegas or Monte Carlo. One way to mitigate the long odds,…, is to make sure you’ve identified an attractive market segment, one where the customers, according to evidence you’ve gathered, are almost certain to buy what you’ll offer.”

The above statement is ignored by too many.  Time and again I meet startups where the founder is convinced that their idea is  the path to wealth and  that customers will flock to their door. It simply is not true.

The key is doing due diligence in  discovering a market segment that badly needs and wants your product.

Discovering that market is not a trivial undertaking. While you may be convinced that of course  customers are more than willing to buy your product,that’s not enough. What you want is answers to the following:

Market Size and Growth Rate

  • Is your market large enough to allow you to attract a specific segment that will prefer you over the competition?
  • What are the forecasts  for your market’s growth ?

Market size and growth rate are two basic factors when evaluating a market. The larger the market is, the more opportunities exist to sell a product.

In a market of any size, however, it is important to also consider the growth rate. A market with a low growth rate is probably a saturated one, with many competitors in the same space fighting for the same sales. This will lead to lower market share for all participants, as well as lower margins.


Do a self diagnostic of your market attractiveness

Margins

How are the margins in your target market? High margins means that customers are able and willing to pay your price. Low margins imply a fight with your competition over customers and low profits.

Are Prices Increasing or Decreasing?

Are you are able to raise your prices without losing customers ? If so it means that your target market very much needs your product. If not it means that they can do without you.

Where are you in this situation?

Competitive Arena

Are you offering a product that’s unique or differentiated?

Do you have a competitive advantage not easily met by your competition?

If so then a segment of your market will chose you over the competition. If not,they will leave you for a better (cheaper) alternative.

Ask yourself. Can I compete successfully?

Find out  whether your idea is likely to create wealth. Get our diagnostic Is Your Market Attractive?

How to Obtain a High Sales Price for Your Business

A business should do more than provide the owner with a livelihood. In addition to fulfilling the owner’s passion it needs to achieve such value that the owner can sell it at exit time for a price that reflects the time and effort invested. After putting in 20, 30 or 40 years the business should be sold for enough to provide a comfortable retirement for the exiting owner. If not, then all the business did was to provide the owner with a job. Building a business should factor in an exit plan and converting into cash the value built up over the years.

At exit time because of age, lifestyle changes, and financial needs, business owners want to realize the value locked up in their business. Too often the offers they receive do not meet their expectations. This is a situation that could have been avoided.

The investment made in building a business over a generation is frequently several million dollars, and too often it cannot be sold quickly. So, to arrange for a quick sale, and to obtain a fair price much preparation should have been made over the years. The guide to such preparation may be examined here but there are four criteria that need to be met to obtain a quick sale and a high price.

 

  1. Sell when business is good
  2. Show prospective buyers a business that shows recent and steady growth in value
  3. Demonstrate high earnings especially in recent years

 

Sell when the Business Cycle is Favourable

Business conditions for a good sale are favourable when:

  • Consumer demand for the product is high
  • There are more buyers for this type of business than there are sellers

 

Create a business that shows recent and steady growth in value

  • The business must show growing revenues
  • The return on assets invested (ROA) should be attractive.
  • The gross margins must reflect or surpass industry benchmarks.
  • The payments made to the owners over the years should be generous.

Managing for growth is not a trivial undertaking. It requires financial, managerial, marketing, and visionary skills. It means much more than having the ability to make the product or deliver the service.

 

Demonstrate high earnings

Earnings should not be less than the industry benchmarks.

Lower earnings than industry average, imply poor management, inadequate vision and weak execution.

Low earnings will reduce the offered price by a buyer and place financial pressure on the seller.

Achieving the above three criteria for a successful exit is not trivial.

All the above require planning, a solid team, the ability to execute plans well, and not simply “managing by the seat of the pants”.

A successful exit will require financial, managerial, marketing, and visionary skills. It means much more than having the ability to make the product or deliver the service.

Learn how to prepare your business for the inevitable exit

Why There’s a Need for an Exit Strategy

Eventually all business owners will need to exit their business.

Reasons may vary but they revolve around the following factors:

  • Retirement because of age
  • Health problems of the owner or their family
  • A change in circumstances impacting family finances
  • Unexpected family issues
  • Change of interests and no longer passionate about the business
  • An unexpected offer
  • Pursuit of new venture
  • Need to raise money
  • Desire to spend more time with family or take care of a loved ones
  • Death of owner/financial difficulties
  • Desire for liquidity and asset diversification on the part of the primary shareholder
  • Competitive pressures. Unable or unwilling to compete..

 

Having established that exiting is unavoidable, the wise business owner will create an exit strategy while still many years away from departure and will run their business with the view of securing the best possible price when that time comes.

Find out how to obtain the best possible sales price for your business

How We Can Be Your Competitive Advantage?

Maybe this sounds familiar?

In the past the business was fairly successful. Now it’s barely providing a living and the outlook is no better.

You are worried about surviving.

You are worried about your competitors taking away your market share and your customers.

Nothing is helping.

The cause could be any number of things such as:

  • The business has weaknesses that are overwhelming it
  • The business team needs strengthening
  • The environment has changed and the business has not kept pace
  • The competition has grown stronger

We can help with all of these and today we will address the competition.

We claim that if you don’t possess a competitive advantage , that is if customers have no specific reason to chose you then you are seen as a commodity and your prospects look for the cheapest provider.

A competitive advantage starts with thinking about customer needs and and your planned solution to those needs.

Take our firm for instance. What competitive advantage does Aron Brajtman CPA’s possess?

We do several things that other accountants don’t:

  1. We help in creating growth in the value of the business.
    1. We do this by focusing the busines on areas that make profits
    2. We strengthen the areas where the management is weak
    3. We are tuned in to your current situation by using reporting and accounting systems that are on line.
  2. We charge a flat annual fee paid monthly. We never charge by the hour.
  3. We charge  based on the results to be delivered.
  4. We partner with other CPA’s for tax work and other compliance services.

Unless a CPA firm provides features and benefits desired by its customers but not available elsewhere , prospects will look for the cheapest alternative since all CPA firms are the same. That’s what attracts our type of customers to us as opposed to choosing someone else.

Create a competitive advantage for your business. Download our  diagnostics and learn how.

 

Rapport as a Sales Tool

Rapport is the ability of buolding a n immediate relationship by showing your prospect that you share the same values.

For instance when I learned that my business coach was a fan of Stephen Covey and of the Blue Ocean startegy,I realized that we were very much on the same wave length both when it comes to sharng a belief in effevctiveness  and in values.

The benefit of rapport is taht it builds trust very early in a relationship an dsaves much inquiry. It makes the achieving of mutual goals musch easier.

Let’s get real: Inadequate Financial Management

Failure in business is unavoidable when the cash finally runs out. You close the doors and pack it in.

The failure was apparent for some time ,maybe years and is frequently the result of poor management skills.

Let’s get real.

Mahan Khalsa uses that term in his book of the same name. For me let’s get real refers to the capabilities a business must poses to survive. See diagram below and click to enlarge it.

Business model diagram

I repeat. The business to survive must be strong in all these areas.

Today I want to address financial management. Below are problems that indicate inadequate financial management.

 

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Learn how to deal with your challenges by downloading diagnostics of survival and see where the solutions lie.

 

Did you validate your business idea?

What follows is a step by step series of validation steps building or disproving the case for starting a business. This act of validating a business case will significantly increase the odds of success in a world where most new businesses go quickly out of business.

 

Identification of Business Opportunity or Need

No business should be started without identifying an existing concern shared by the stakeholders in the industry and without identifying this as an opportunity to provide a solution. For instance, say that the nearest pizza outlet is 50 kilometers away and they won’t deliver to our location. That’s an existing concern and the opportunity is obvious. If on the other hand the area is well serviced by enough pizza outlets, what’s another outlet going to do? It will not satisfy the market any better, Instead another vendor has been added to an already saturated market.

I used pizza as an example but the same applies to any service provider  such as a dentist, chiropractor, optician, physiotherapist, renovator, painter etc . The same applies to products such as car dealerships, appliance vendors. retailers in general. The market doesn’t need more of the same.

Becoming one more provider of the same product or service reduces them all to a commodity. Being a commodity provider means competing solely on price.

Confirming the Existence of a Need

Identifying a need and possessing the capability to provide a solution is the first required step. The next phase is to operationalise and confirm our viewpoint.

  • It’s important to run our viewpoint past others. We need to establish the case for change and clearly define the need for the investment. These should be individuals capable of confirming or discounting our premises. They should confirm the need for a business such as we are proposing.
  • The next stage is to identify actual prospective users (customers) of our solutions and hear whether they want and are willing to pay for our product/service. This is a reality check because if we can’t find them, they may not exist.
  • It may well be a check of our understanding of how currently the customers solve their problems and what is being left unsolved by the current providers. These same customers will tell us what trade off they will make if our solution cannot do it all.They will also tell us and confirm what problems they are trying to solve with the existing solutions.

Competitive Analysis and Competitive Advantage

The winners in sports have a competitive advantage over the losers. It’s easy in sport to say it’s due to the quarterback, the coach etc.

The same applies in business. Creating a competitive advantage is the source of persistent success.

The start of creating a competitive advantage is to understand where the competition is failing in providing solutions. It requires knowing everything about our competitors. We need to know the number of service/product providers that are out there already. It requires understanding the means by which the competition competes in the marketplace..We need to know how they advertise and market their products. We need to know what sort of reputation they have. We need to know which are most successful and why.

Market Research

So now that we have concluded that we have something to offer that the market is willing to pay for ,it’s time to crunch the numbers and see whether we can make it pay.

We must prepare a forecast showing our best and worst case scenarios. Can we withstand the worst case? For that we need a cash flow projection. We must calculate our break even volume.

We do a concept test. We test our product in a small pilot market and gauge its acceptance in real life. We keep tags on what features delight our customers and  what price they are willing to pay for these features.

We will seek advice – discuss our plans and ideas with an experienced business advisor, our accountant and our bank manager, prior to starting.

Market and Industry Attractiveness

It is better to have a business in an attractive market where the consumers are affluent and have the means to purchase our offerings. It is worse to be faced by a declining and cash poor market. We also want to be in an industry where the participants are successful and the industry outlook should offer good prospects for profitability.

Thus when considering a business venture one must know the industry’s business and economic traits. Among them the nature and strength of competitive forces, what is driving industry change, what strategic moves are rivals likely to make next. It is also best when forces align in our favour..Ideally we want to be in an industry that is not concerned about newcomers because it is too difficult to break in. It is also best if we have power over our vendors and customers and can dictate terms and prices.

We want to know the size and growth rate of the market, so that if the product catches on, we should have a substantial upside.

The Team

No matter how large and fast-growing a market may be, entering it in the face of other competition is likely to be difficult, since customers are probably already satisfying their needs – though perhaps not optimally – in some way.

The competition will not roll over and allow us to take market share from them. We must make an assessment of the competition’s reaction to our entry.

Our team need to be well connected up, down and across the value chain so it is quick to notice any opportunity or need to change its approach if conditions warrant. Specifically the team must be evaluated for the strengths it provides at each position. What does it do well? Is it sales, marketing, operations?

Where is it weak? What activities and processes lack effectiveness and need strengthening?

Our Target Market

We cannot and should not cater to the entire market. We don’t sell to anyone that wants to buy. Instead we should identify a much smaller segment of customers within the overall market. They will be the ones that will be most profitable to our business.

To help identify this segment we answer the following:

  • To whom do we offer a clear and compelling benefit?
  • Are these benefits different from and superior in some way to what’s currently offered by other providers?
  • How large is this segment? How fast is it growing?

Take a self diagnostic and assess the viability of starting your business

Conclusion

The above is more work than most start-ups engage in. However to reduce the risks of failing we need to ask ‘Why will this new business work when most will fail?’ Or, to put it more realistically, ‘What’s wrong with my idea, and how can I fix it?’

Doing this means a lot of upfront work but a lot less later when the business is struggling.