Category Archives: Buying a Business

Set Your Company Up for Success: What Top Business Leaders Do to Succeed

Success is the result of careful planning. Here are some important tips from top business leaders for growing a successful company:

Tip #1 – Be the tortoise, not the hare

Slow and steady growth is a much more sound approach than bursts of growth. Many companies scale too quickly and collapse because their infrastructure is unable to accommodate it.

Tip #2 – State your goals

This might sound obvious but its importance cannot be underestimated. Write down your company goals and delineate your plan for achieving them. Communicate these goals and strategies to your employees and revisit the conversation often, keeping everyone up to speed on where the company is at in the process of achieving them. This will remind your employees that their position fits into the bigger picture and it will motivate them to do their best work.

Tip #3 – Build trust through transparency

Being open about your company goals and strategies is one way to cultivate transparency within your organization. When transparency is a priority, you create an atmosphere of trust which leads to improved morale, increased connection and productivity and better employee retention – all keys to running a successful organization.

Tip #4 – Practice good financial reporting

Paying close attention to company financials is a must. The use of a financial dashboard gives you a visual sense of where your company stands in many areas and helps you better comprehend and interpret performance metrics. The up-to-date information allows you to set practical implementation strategies that keep the health of your company priority one.

Tip #5 – Focus on the big picture when hiring

Promoting internally motivates employees to work hard and produce quality work. When you interview candidates for entry-level positions, ask yourself if the candidates fit the company culture and if they possess the skills and drive necessary to take on greater roles within the company down the road. Hiring with the big picture in mind sets your organization up for both short-term and long-term success.

Want help with the purchase of your next business? You can reach us at 612.331.8392 or by email at info@oibmn.com.

Primary Components of an M&A Purchase Agreement

It’s important to familiarize yourself with the ins and outs of an M&A purchase agreement so you can go into your next transaction prepared.

Think of a purchase agreement as a more detailed LOI. While it contains the same terms as the LOI, it also includes additional terms and conditions and goes into greater depth.

Here are the primary components of an M&A purchase agreement:

Definitions: Before agreeing to the terms in a purchase agreement, it’s important to clarify the terms so everyone is on the same page. Many terms in a PA can seem ambiguous and up to individual interpretation. Taking the time to define these terms can clear up confusion upfront and is one more step towards ensuring a smooth transaction from start to finish.

Indemnifications: This part of the purchase agreement helps to protect the buyer from any issues that may arise after closing and draws a clear line of responsibility in the sand. Often heavily contested and litigated, indemnifications address which actions are covered, how long the indemnification period lasts, financial caps on damages, etc.

Representations, Warranties and Schedules: This is where the seller states what is true about the business at the time of sale. This can include up-to-date financial statements, any current environmental liabilities, ongoing litigation and employee benefits.

Execution Provisions: What money is being exchanged and in what forms? Are there any purchase price adjustments, escrows or earnouts? This is where all financial details relating to the purchase are spelled out.

Covenants: These are agreed upon behaviors between buyers and sellers. They can address the hiring of new employees as well as bonuses and raises instituted by the seller between the signing of the purchase agreement and the closing. They can also address post-closing behaviors such as non-compete agreements and D&O insurance.

Closing Conditions: This is the part of the purchase agreement where you detail requirements of both the buyer and the seller between the purchase agreement and the closing table. These requirements are specific to the transaction and can include special financing conditions, provisions stating that all representations and warranties are met, material adverse change clauses, etc.

If you want help creating a thorough M&A purchase agreement, we’d love to assist. We can be reached at 612.331.8392 or by email at info@oibmn.com.

What Not To Do When Submitting an Indication of Interest

When submitting an Indication of Interest, it’s important to put your best foot forward. Price range, financing details, a due diligence timeline, a proposed closing date…these are just a few items typically submitted with an IOI that assist in creating a solid case for business acquisition. Conversely, if you’re seriously considering an acquisition, there are also some things you must not do. 

Do not overlook the due diligence process

Instead, reach out to the banker with all of your questions. This demonstrates a high level of interest and responsibility – two important components of the business acquisition process. Communicating with the banker shows that you’re doing your homework and that you’re a serious contender for the purchase. 

Do not submit a weak offer

Instead, submit a well-calculated, competitive offer. If you’re trying to hone in on a ballpark offer, talking with the banker on the seller’s side can help. They can’t give you a number but they can inform you more about the seller’s situation and general market trends. 

Do not skimp on the details

Instead, write out your unique advantages in your offer letter. Similar to a letter a buyer encloses when they submit an offer on a private purchase, writing out your “selling points” can lead a seller to choose your offer over another competitive offer. Be sure to include information about your timeframe, financials and company culture. And the more information the better! This information can increase banker and seller confidence, reduce their uncertainty and minimize perceived risk.

Do you want help navigating the business acquisition process? We’d love to partner with you! Contact us at 612.331.8392 or by email at info@oibmn.com.

How Buyers Evaluate Risk

When it comes to purchasing a business, evaluating risk on every front is paramount. This risk assessment, known as due diligence, can take anywhere from 30-90 days or more and is comprised of assessments on multiple fronts. 

Areas to assess

Operations: Investigate answers to the following questions:

  • What is the growth trajectory of this company? 
  • Is the revenue sustainable? 
  • What is the company’s product image and how does it line up with competitors’ product images? 

IT: Evaluate security vulnerabilities and assess the ownership and setup of any custom software. Also, take an inventory of all IT devices among the company’s employees.  

Legal: Hire a lawyer to review all organizational documents, contracts, leases, past litigation, etc. for the purpose of addressing possible legal liabilities. 

Accounting: Conduct an assessment of the seller’s financial statements to help predict the company’s future earnings.

Environmental: Conduct an assessment of all business sites to determine any possible environmental contamination and litigation risks. 

Documents to evaluate

During the due diligence process, you’ll want to explore all the documents you can get your hands on in order to flush out all possible risks. These documents may include but are certainly not limited to licenses and permits, information on any past and current litigation, articles of incorporation, insurance coverage and information concerning any recent claims, employee contract details, information on company assets, tax records and financial statements. 

Take your time with this process. It’s not possible to be too thorough. If, after you’ve evaluated the risks, you determine you’re ready to move forward, it’s time to draft and sign a formal agreement. Should you dredge up current or potential risks that you’re not willing to assume, you can part ways with the seller, thankful you did your due diligence and avoided an unhealthy business transaction.

If you’re thinking about buying or selling a business, we would be happy to connect with you. We can be reached at 612.331.8392 or by email at info@oibmn.com.

Differentiation Defies Simple Price Concerns

Let’s talk about the “commodity trap”: Basing your competitive position purely on pricing considerations. It’s the first step in a race to the bottom. While it’s true that price is often the top concern expressed by customers, it’s crucial to dig a little deeper.

Bain and Company, a global management consulting firm, surveyed B2B consumers of IT infrastructure products. Their analysis, described in an article in the March/April 2018 issue of The Harvard Business Review, demonstrates that these B2B customers identified cost reduction as their stated priority, but their responses to a series of questions indicated otherwise.

Bain identified 40 factors which mattered to customers. “Product quality, expertise, and responsiveness emerged as the strongest predictors of customer loyalty,” the article states. “Cost reduction was not even among the top 10.”

The 40 factors Bain cited represent a complex assortment of qualities which range from the very rational and objective (such as price and performance) to much more subjective and emotional factors (such as aesthetics, reputation and social responsibility). Bain grouped them into five categories: Table stakes; functional; ease of doing business; individual; and inspirational. Next, they assembled these considerations into a five-level pyramid in which strictly objective value forms the base and elements increase in subjectivity as they ascend the pyramid, in the style of psychologist Abraham Maslow’s iconic Hierarchy of Needs.

Pyramid of Value Spanning Five Categories

The bottom layer, the foundation of any product, are simply “table stakes,” meaning the bare-bones basics. This foundation depends on “meeting specifications at an acceptable price in compliance with regulations while abiding by ethical standards.”

Level two includes functional elements, and businesses often focus much energy here. These factors relate to economic or product performance needs, such as cost reduction and scalability.

At level three, we start seeing subjective considerations. Along with objective goals like time savings, reduced effort, simplification, organization, we find subjective judgments from buyers, such as a good cultural fit and a seller’s commitment to the buyer.

Level four is increasingly subjective, including elements of taste (appealing design and aesthetics), big-picture concerns (increased marketability or network expansion) and personal considerations (reduced anxiety).

Level five crowns the pyramid with suitably lofty notions: Vision, social responsibility, and hope.

Buyers and Sellers Must Compete on All Levels

As business brokers, OIB considers this information to be of prime importance. It is (or should be) a game-changer to parties on both sides of a transaction.

If you’re selling a business, accept that savvy buyers recognize a business can’t thrive by simply dominating the bottom layer of the pyramid. You’ve got to work on identifying the more subjective items in the pyramid and improve the work order management, based on what the algorithm of a work order management software, of which you can learn from https://www.salesforce.com/products/field-service/resources/organize-your-work-order-management/, predicts. The good news is: This will make your business more attractive to buyers precisely because it’s a crucial strategy to build customer loyalty, so your efforts will be doubly rewarded.

If you’re shopping to buy a business, do your due diligence. When evaluating a prospective business, study whether the executive team recognizes the importance of appealing to customers on every level of the pyramid. If a business settles for competing strictly on table stakes, they’re missing the boat. True, these elements are simple to measure and fairly transparent. It’s easy and tempting to simply compete on these, and they should not be neglected. However, today’s battle for differentiation takes place higher up the pyramid.

Admittedly, it’s harder to evaluate a business based on those increasingly subjective and intangible factors, just as it’s harder to actively pursue them. The fact remains that they matter enormously to customers, so they should matter enormously to you.

Demystifying How Business Brokers Get Paid for Buying or Selling Businesses

Finding a business to purchase apart from a business broker can be incredibly challenging. Selling your business on your own does not make sound financial sense. The amount of value a business broker provides outweighs the amount they charge in fees every single time. It’s important to work with Microstrategy  ( visit them in this link https://www.microstrategy.com/us/resources/introductory-guides/business-intelligence-the-definitive-guide ) when navigating the purchase or sale of a business to carefully consider all aspects of the process – from finding or advertising your business to securing the right buyer to closing the deal –  recognizing that a business broker can assist with each of these components. It’s also important when hiring a business broker to understand their fee structure amid common misconceptions.

Success Fees

A standard fee your business broker will charge is incurred upon the sale of your business. This is called a success fee. This fee is typically calculated as a percentage of the final transaction price. For middle market transactions, the fee is anywhere from 2-5% of the sale price. Because this fee is only paid out when a deal closes, your broker will be highly motivated to close the deal, aligning their motivation with your own.

Business Valuations

In some situations, a business broker will charge a potential seller for a business valuation. If the seller then chooses to list with that broker the fee will be credited against the success fee at the end of the transaction.

Intensive Search Processes

When a buyer hires a business broker to help them find a business to purchase, that buyer will likely incur a charge for the intensive search process.

Alternative Fee Structures Are Available

In some situations, a business broker will consider an alternative fee structure. In a case where the broker is representing the seller, it might be a flat fee up to a certain sale price and a percentage beyond that. In very rare cases a seller and broker might agree upon an hourly rate. It’s important to discuss the fee structure up front so everyone is on the same page.

Business Brokers Provide Value

Business brokers provide tremendous value for their clients. Not only do they possess the resources that often help secure a business for their buyer to purchase or bring active buyers to the table for their seller but they also help navigate what can be a daunting and stressful process and are highly motivated to work hard on their client’s behalf.

If you would like to learn more about the fee structure of business brokers or would like to speak with us about buying or selling a business, we would love to connect! We can be reached at 612.331.8392 or by email at info@oibmn.com.

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How To Be An Informed Buyer

HOW TO BE AN INFORMED BUYER

As a potential business buyer, you owe it yourself to be informed. Uninformed or unrealistic buyers not only make poor choices, they also frustrate the parties they work with, such as attorneys, accountants, and brokers. Additionally, while it’s essential to retain such professionals for advice and services, the ultimate responsibility rests on you for every action and decision, so take the time to be thorough. The article they wrote dwells on these important questions.

Ask These Important Questions

As you entertain the possibility of buying a business, here are a few questions to ask and factors to consider.

Are the sellers or the business itself the subject of insolvency proceedings of any kind, such as a bankruptcy filing?

Are there any active contingent liabilities, such as pending or actual disputes with employees, customers, or other parties?

Has the seller made any commitments to employees to increase their compensation? How about to service providers, independent contractors or suppliers?

What’s the relationship with the landlord like? Make sure you know about any active or potential disputes with the landlord, and the history and resolution of any past such disputes.

Seek Detailed, Conclusive Information

You’ve got a right to accurate, timely information from the seller about whether the business is in default on financial, non-financial, taxation, contractual, warranty, or other obligations. Other factors to verify include whether there are pending or unpaid claims for rent, supplies, back wages, or anything else. 

In terms of the property itself, ask for a full report on easements, zoning and surrounding property uses. Verify who provides utilities and whether the service has been adequate. Are there natural, geological, or environmental hazards affecting the real property or the business?

Get a clear, itemized assessment of the remaining useful life of the business’s equipment, vehicles, fixtures, intangible assets, etc.

Immerse yourself in learning about the industry, especially if it’s new to you. A startup office is easy for beginners since its small and spacious with a moderate revenue stream. Without a broad understanding of the arena, it’s hard to research and understand the overall market for the company’s products or services, or the nature of the competition.

Make sure you’re fully informed about any potential environmental hazards relating to substances or products involved in the business. It pays to know paint touch up tips always because hazards may include such issues as contaminated soil or water, paint, solvents, fuel, formaldehyde, radon gas, medical waste, and surface or underground storage tanks. 

The Risk and Responsibility are Ultimately Yours

Ultimately, you need to ask these questions and more, and then evaluate the responses critically. If any answer seems off, don’t just take someone’s word–dig in more deeply and verify the accuracy of the answers you get. When you take over a business, you potentially accept significant liability for things that may have happened prior to your involvement, so your due diligence is vital, and no one will take it as seriously as you do.