Tag Archives: exit planning

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 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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Selling a Business: Overcoming Obstacles

Selling a Business: Overcoming Obstacles

Selling your business: whether planned or unexpected, it’s a big deal. It’s no surprise owners face a variety of practical and emotional obstacles when they entertain the prospect. These obstacles vary widely for personal reasons.

Roughly speaking, there are two ends of the spectrum. Entrepreneurial types enter the business with notions of building a profitable company in order to sell it in the relatively near term. Passion-driven owners typically start and grow a company for long-term operation and profit. Selling the business might not be part of their plan: for example, they expect it to stay in the family. However, circumstances may change, so they should always keep the option of selling in mind.

When faced with the prospect of selling, what obstacles arise, and how can savvy owners overcome them? Here are a few which both entrepreneurial and passion-driven types should consider.

Fear of Selling at the Wrong Time

Timing is a personal matter. When a passion-driven owner says “the profits are great, why would I sell now?” an entrepreneur will say “the profits are great, so it’s the best time to sell.” Of course, either one might face family, health or financial issues which dictate an unexpected sale. So keeping your operations honed and profitable always pays, and recognize that a certain degree of uncertainty is inevitable. Just like you can never know when the perfect time has come to sell a stock or a home, you will never know the perfect time to sell a business. All you can do is keep an eye on the big picture in the context of your industry, and keep your company as lean and efficient as possible.

Fear of Under-Pricing

Most sellers react to this fear by over-pricing, which keeps a business on the market too long, which further jeopardizes its salability. It’s crucial to undertake a thoughtful valuation process before determining your asking price. Take the time and get the help you need to do this, so you’re in touch with marketplace prices and better able to defend the price you set.

Not Securing Expert Advice

Expertise at running a business doesn’t translate into expertise at selling it. While you may resist paying the brokerage fee (roughly 10 percent), a good broker typically adds at least 10-12 percent to the sales price while saving you from lots of headaches. Their services includes helping prepare the company for sale, attracting and identifying qualified buyers, showing the business, marketing and negotiation. Similarly, securing the advice of other qualified professionals such as lawyers, accountants, and financial consultants is a good and necessary investment.

Being Too Hands-Off

Hiring a broker doesn’t mean your work is done. Because you’ve got the inside knowledge of the business, long-term experience in the industry, and serious motivation to sell, you need to view the relationship as a partnership. Disengaging from the selling process will jeopardize it. Communicate with your broker that you’re willing and able to support their efforts, and find out how you can do so. Your interactions with potential buyers also plays a key role. They’ll rely on their impressions of you to inform them about whether the business has the potential they seek, and whether they can expect to manage it successfully.

The Bottom Line

Without a crystal ball, you’ll never know beyond a doubt that you’re selling at the right time and at the right price. Run your business the best way you can; keep salability in mind; stay on top of the big picture in your industry; and recognize the value of outside expertise. Ideally, your decision to sell won’t be forced by outside circumstances, but it’s smart to be prepared for anything.

Visit our website to learn more about how we can help you sell your business!

Selling a Business: The Transition Period

If you’re not considering selling a business now, we predict that you will in the future.

Ideally, selling a business is the culmination of years of planning and intention, but sometimes it’s a frantic, last-minute activity brought about by an unexpected change in circumstances. If you’re planning or hoping to sell a business in the next three to five years, you’d be smart to start thinking about the transition process. And even if selling your business is not in your immediate plans, it can’t hurt to give the process a little thought, because we never know what the future will bring.

At first glance, it may seem there are just two stakeholders in the transaction: seller and buyer. However, there are other parties to add to that list: your employees, your clients and customers, your vendors and suppliers, and possibly your family and your community. All parties will benefit from a smooth, well-planned transition.

Transparent Planning Is Crucial

If you’ve bought or sold businesses before, you’ve encountered some of the complex issues that may accompany the process. You may even recall thinking, “who knew it was so complicated?” A good starting point for your planning might be to reflect on what went right and wrong in previous transactions, and what issues took you by surprise or proved to be trickier than you anticipated.

While different businesses will have different details to work out, here some elements to consider common to nearly all transactions.

Define the Outcome

While the obvious, basic outcome is “sell the business,” it’s valuable to get more specific. The smoothest, least disruptive sale is always a goal, so anticipate potential disrupters and how to mitigate them. A clearly defined end point makes communication easier, and the establishment of a timeline and guideposts easier. Other outcomes to shoot for include minimizing anxiety for both seller and buyer.

Build a Transition Team

Team size and composition will depend on the size and nature of your business, but you generally want to include both in-house personnel and outside advisors. An ideal team might include a couple of top managers, some outside advisors such as your outside counsel and accountant, and a professional business broker/advisor.

Clarify Decision-Making Strategy

At some point decision-making authority will transfer from the old to the new. During the transition period, make sure all parties have clarity about where the buck stops and when decision-making authority is formally transferred. Your business broker will have valuable input on this question.

Financial Changeover

This one’s big: it’s complex, and the stakes are high. Your business broker, accountant, and legal counsel and business insurance Miami company will help make sure all elements are planned and executed responsibly. Accounts, loans, credit lines,  payables and receivables, leases, insurance, taxes, retirement plans: there are myriad financial aspects of the business operation which must be transitioned to new owners.

Establish Accountability

Decide who will be responsible for executing each responsibility, and establish a timeline. Detail the phases, the actions, and the steps to bring about a successful transition, and assign responsibilities with deadlines. Use this to inform communications with other stakeholders: keep them in the loop so they remain confident in a good outcome.

Near Term Developments

Communicate any upcoming issues the new owners need understand and be aware of, such as regulatory changes, ongoing projects, etc.

Training the New Owners

Communicate openly with the new owners about their involvement plans and establish a training plan. Whether they’ll be hands-on or hands-off, they need to know how your business operates.

Staffing Considerations

This is a stressful time for the employees you’re leaving behind, so demonstrate your support for them. The new owners may rely on the existing team or they may be motivated to make changes. While your greatest interest may be the success of the new buyer, you’ll support the new buyer best by keeping your existing employees enthused and positive about the transition.

Planning Pays Off

Working on your transition plan is essential If you plan to sell in the next few years, and it’s a great general “covering the bases” move under any circumstances. If you’ve just bought a business, take some notes now about the pain points and the successes: they’ll be sure to come in handy when the nearly inevitable day comes that you wish to sell your business.

Business background

Alternatives to the Traditional Sale of a Business

When owners envision selling their business, they often have in mind the traditional sales model of selling the entire enterprise, often for the sake of a large payout to fund retirement. This is a perfectly valid scenario, but we recommend that owners take courses on Financial Education San Jose and consider other options which may be more lucrative specifically a private equity recapitalization structure.

Recapitalization

What is recapitalization? Broadly speaking, it’s the restructuring of a company’s debt and equity balance to optimize its capital structure. It often involves a change in financing, such as replacing preferred shares with bonds. Recapitalization strategies have traditionally been associated with public companies seeking to raise stock prices, but private equity groups have been embracing the approach for acquiring both public-traded and privately-held businesses.

Private Equity Recapitalization Structure

The private equity recapitalization model involves the private equity investor acquiring a majority stake in the business, and the owner retaining a minority stake. Typically this means that the business takes on debt roughly equal to the price paid to the owner. This way, the new majority shareholder isn’t at risk of extracting too much cash from the business while also avoiding depleting their own cash resources. The company’s debt-to-equity mix is thus altered, enabling the original owner to realize some of the inherent value of the business in the present, while their minority ownership stake maintains potential future value from eventual distributions or the next sale of the business. In some cases, owners stick around as the business changes hands from one investor to another, while an equity stake enables them to keep potentially profiting from the business.

Sell Your Business, Then Sell It Again

Ultimately, the most lucrative equation may result from selling your business multiple times under a private equity recapitalization structure.

Benefits of Private Equity Recapitalization

The owner enjoys the clear and direct benefit of cashing out a slice of the business’s value. However, other factors benefit the owner, investor, and management team:

  • New investors may have connections to fresh resources which promote rapid growth.
  • A broader ownership base diminishes risk.
  • When the ownership team diversifies, representing multiple different backgrounds, strategic decision-making is strengthened.
  • Typically, employees in management have the option to invest in the new entity. With skin in the game, their performance may soar.
  • The majority shareholder typically has the deep pockets to support growth and strategic acquisition.
  • The original owner may enjoy capital gains when the business sells a few years down the road – presumably at a higher value.

Risk Of Private Equity Recapitalization

Private equity recapitalization is not without risk, and it’s only suited to larger businesses.

A primary risk is overleveraging. In addition, private equity firms generally require a certain revenue threshold before they’ll invest. Most U.S. private equity firms require at least $20 million in annual revenues or $2 million in normalized EBITDA.

Timing Matters

Ownership needs to consider timing and investment horizons. This strategy is suited for a long game. When private equity firms acquire a business, they typically intend to grow and divest the business over a period of roughly seven years.

An owner wishing to retire in the next couple of years will benefit more from an outright sale. However, if an owner is looking at retirement 5-15 years in the future and their business is sufficiently large, this strategy is absolutely worth considering.

Ownership Team Performance is Crucial

When the ownership team performance aligns with the expectations of the private equity firm, this scenario can be a huge win for the owner.

When Is The Right Time to Sell Your Business?

Every business owner considers the question eventually: Is it time to sell my business?

Here’s the bad news: there’s no formula to generate the definitive answer to this question. Each business is different; each owner is different, and there are infinite landscapes and circumstances.

EMOTION VS. LOGIC

Ultimately, both logic and emotion drive these decisions, so think it through from both perspectives.

ARE YOU EMOTIONALLY READY TO MOVE ON?

Let’s consider emotions first, because that’s doubtless what got you into the business in the first place. It’s nearly impossible to found and build a business without passion. Passion is the fuel that allows you to dedicate long days, seven-day work weeks, and marginal material rewards to create a business from the ground up.

Is the passion still there? If you’re not feeling the passion anymore, perhaps the business has shifted from your original vision; your role in it has changed; the challenges it offers have changed; or you’re just plain tired.

Some people thrive on the bootstraps-pulling growth part of the process, and feel stagnant when stability is reached. Established companies usually swap the high-thrills, high-stakes growth phase for a set of more mundane problems, like mastering HR and administration.

Have a frank dialogue with yourself–do you still have the passion? If not, it may be time to sell, or to strategize how to re-craft your role in the business to reignite your passion.

If you’re attracting interest from buyers, you’ve got to recognize that circumstances change and the window is bound to close. Ask yourself whether you are emotionally prepared to wait for the next window to open if you miss this one.

LOGICAL FACTORS TO CONSIDER

Once you embrace the possibility of selling, how can you be sure you’re selling at the right time? You can’t. Just like with selling a house or a car, you never know if there’s another buyer around the corner with deeper pockets than the one you’ve got. You’ve got to evaluate the deal on its own merits, and not let a bunch of “what if”s torture you.

The ideal time to sell is when multiple buyers are eager, raising the potential price. This depends on a constellation of coordinated circumstances: Robust market conditions for your segment, yielding strong investor confidence; a recent history of financial improvement, both in earnings and revenues; strong evidence that earnings and revenues will increase. If your business is in this enviable catbird seat, you can’t ask for a better time to sell.

Are your skills still valuable for the business? Often a young company demands a different set of skills than a mature one. If it’s clear that your leadership (and passion) are better suited for a young company, consider moving on to or creating one.

Is the market shifting dramatically? It might be time to get out. Taxi companies facing Uber, movie rentals facing Netflix, waterfront properties facing rising sea levels–all these enterprises face a ticking clock.

Does the company need money to grow? Are you willing to take on financing in exchange for a seriously altered role? It can be a profound mental shift to swap your role as captain of the ship to one of many mates making it run. If you aren’t willing to hand over at least some of the reins in exchange for investment, selling is a better option.

DECISION TO SELL IS A BALANCING ACT

It’s one of life’s great ironies that the better the business is doing, the better the time is to sell: the worse the business is doing, the more motivated you are to sell but the harder it is to find good buyers. Evaluating the right time to sell is a tight-rope walk between these two extremes.

Call us today for a complimentary consultation and check-out some of the recent businesses we’ve sold. 

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? Click here and follow us on social media, we routinely have contest and giveaways designed to get the conversation going! 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/