Category Archives: Selling a Business

How to Prevent Failed Mergers & Acquisitions

Mergers and Acquisitions (M&As) are on the rise as the economy recovers from the 2008 financial crisis.

A strategic, well-executed M&A can be a ticket to success. It’s one of the best ways to grow quickly, and in a perfect world, can increase revenue overnight. A good M&A enables you to potentially expand into a fresh geographic market and/or access new customer segments due to offering new products/services.

However, any M&A is a massive investment: in knowledge, time, money and bandwidth. It’s crucial to entertain the prospect of a M&A with both feet on the ground and eyes wide open. Success is not guaranteed: studies vary, but the failure rate of M&As ranges from 50%-70%-90%.

How can you increase the odds that the M&A you pursue will be one of the winners?

It will take a ton of due diligence in preparation for the deal, and lots of work and thoughtful strategy after the deal is signed.

Here are a few suggestions to start with.

According to a study by Deloitte in 2014, customer retention and expansion is the most important component of a successful integration. You can’t assume all customers are loyal: if they’re just sticking around due to inertia, the changes that result from a M&A may be enough to send them to a competitor. It’s also crucial to know your competition. Employ tools such as Net Promoter Score (NPS) to assess customer satisfaction of the target company, and of their competition, to help gauge how much customer retention you can expect. You also need to assess the competition to ascertain whether the market will bear any price increases.

Evaluate the economic environment in the industry and consider potential disruptions: innovations, up-and-coming competition, regulator pressures, changes to the purchase journey, and local, national and international economic circumstances. It pays to have some strategies in place for worst-case scenarios.

Inadequate involvement from the owners is a frequent cause of poor M&A performance. A mid- to large-sized deal virtually requires professional (and costly) M&A advisors, which tempts some owners to take a hands-off approach. This is a big mistake: the owner should stay in the driver’s seat, while utilizing advisors as assistants, not leaders.

After the deal is done, the integration begins, and it’s crucial. Before completing the deal, carefully appraise and identify crucial products and projects; key employees; sensitive processes; potential bottlenecks. Then explore how to overcome potential integration wrinkles via outsourcing, consulting, automation or other strategies. Cultural integration is also vital.

Consider your capacity and bandwidth, as an executive and as a company. Realize you need to allocate significant resources including money, time, effort and expertise to have a successful M&A, and that unknown issues are bound to arise which will put further pressure on your resources. Costs may soar. Will you be able to devote the necessary resources?

Lastly, with such a high failure rate in the M&A arena, have an exit strategy. Enter the deal with a sense of what success looks like, how much time you’re willing to give the process, and a calculated notion of when you’ll need to cut your losses.

Thinking about selling your business or merging with another company?

Give us a call, we’d be glad to help educate you on the process to help you get the highest value for your business! Learn more about OIB!

How to Value a Business

At Opportunities in Business, we’ve been appraising small, closely-held businesses of all kinds for over 30 years. While the most obvious reason to appraise a business is when it’s changing hands in a buy/sell agreement, business appraisals are also needed for estate planning, stockholder disputes, tax disputes, and divorce settlements.

“Fair market value” of a business won’t be found in your financial statements or tax returns: It’s much more complicated than that, and ultimately depends on buyer perspective.

Business valuation is complex, subjective, and very dependent on somewhat abstract factors such as location and anticipated earnings. Here are three primary strategies we rely on, as a professional business brokerage firm. A thoughtful analysis will evaluate from all three perspectives to triangulate a realistic value for your company,

Assets-based analysis

For the most basic evaluation, calculate the value of a business’s hard assets, minus its debts. For example, a building contractor owns trucks, tools, and equipment: estimate the resale value of these hard assets and subtract business debts to reach an asset-based value. This method tends to establish a low company value because it doesn’t take into account the vital but intangible “goodwill” accrued by the company.

What is “goodwill?” According to Investopedia.com, “Goodwill is an intangible asset… The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment.”

Companies typically have at least some goodwill–for example, a thriving restaurant or spa–so an asset-based valuation will be too low.

Comparables

Another common valuation technique is developing metrics based on the sales price and profits of similar companies. For example, accounting firms may trade at one times gross recurring fees while home/office security businesses may typically sell for two times their earnings. To make an accurate analysis, evaluation begins by selecting a group of companies which share industry, size, and region. Industry conferences and publications are good places to get a starting point on this multiplier.

The usefulness of comparables is limited, however. The resources for comparable data do not provide enough details to ascertain whether the businesses used for comparison are really comparable.

Earnings based methods are the most common methods used for businesses which are profitable. The various methods first define the earnings of the business, and then assess risk factors to determine multiplier and capitalization rates.

Ultimately, a business is like any commodity. It is worth what a buyer will pay for it, and if they have a strategic reason to acquire it, the sky may be the limit. However, having a professional evaluation of the business value is a crucial component to engaging in a successful sale.

Want to learn more? Give us a call today at 612-331-8392!

Selling a Business Via a Business Brokerage Firm: The Five Big Questions

I’m concerned about confidentiality. Will the brokerage protect my privacy?

Experienced business brokers in reputable firms have systems in place to protect the confidentiality of clients and details about their businesses. To further protect seller interests, prospective buyers must complete binding non-disclosure and/or confidentiality agreements and provide financial statements and bank references before they are granted access to essential business information.

Isn’t a business broker just the same as a real estate broker?

It’s true that business brokerage began as simply a subset of real estate brokerage about four decades ago, but the two industries have diverged completely since then. While business brokers in Minnesota (and many other states) are licensed identically to real estate brokers, the business brokerage industry has such singular requirements and challenges that it doesn’t functionally overlap with either commercial or residential real estate brokerage. As with any specialization, expertise is the result of many years of experience focusing exclusively on the niche.

Can’t I can sell my business myself? How does a business broker add value?

Like a good accountant, lawyer or other professional, business brokers contribute value according to their experience, education, and knowledge of the requirements and best practices of their industry. Yes, you can sell your business yourself: likewise, you can also do your own taxes and represent yourself in court, but doing so successfully requires a huge investment in time and education. It also comes with potentially costly risks.

Thanks to our experience and training, we know:

  • how to value a business
  • current market conditions
  • where to find reliable data
  • the challenges and issues likely to arise
  • where to find money for business transactions
  • the crucial details and checklists to complete a transaction smoothly
  • how to comply with legal regulations

Further, we serve as a buffer between the seller and buyer, engaging both parties with effective negotiation skills based on extensive experience and industry knowledge.

But why are the fees so high? Is it worth it?

Fees are based on a percentage of the selling price and have remained constant for many years. Hiring a professional business broker has three concrete financial benefits for the seller:

  • We expose the business to many more potential buyers than an individual seller can, enabling a quicker sale at a higher price
  • We have the expertise to accurately evaluate the business and ensure the listing is priced right and attractively described
  • We handle the details of the transaction with expertise to protect both buyer and seller, preventing costly mistakes, misunderstandings or misrepresentations

My business is special — do you have experience selling businesses in my industry?

At Opportunities In Business, we’ve got over 35 years of experience and we have sold in every SIC code or industry. Browse our listings and you’ll see successful sales of businesses from wholesale manufacturing to laundromats to credit card processing to cafes. With every account, we dive deeply into the business and the industry. Our standard process involves gathering lots of information and asking essential questions to fill in any gaps. Selling the business relies on a different skill set than running the business. We’ve yet to encounter a business so unique and specialized we couldn’t adequately represent it.

Check-out some of the recent businesses we’ve sold! http://oibmn.com/listing_status/sold/