Category Archives: Buying a Business

How Buyers Evaluate Risk

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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

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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, quantifying and competing on the more subjective items in the pyramid. 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

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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.

Meet our team: https://oibmn.com/our-associates/

See our latest listings: https://oibmn.com/listings/

How To Be An Informed Buyer

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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.

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?

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

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. 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.

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.