Thursday, December 20, 2012

Is Now the Time To Sell Your Business?



Have you been thinking about selling your business but just can’t decide if now is the best time?  Do you find yourself repeatedly analyzing the economic situation and wishing you had a crystal ball? There are positive signs and there are negative signs….

If you’re still up in the air and can’t quite decide whether or not to hit the eject button, here are six reasons you might want to consider getting out now.

1. You’re less interested in fighting the good fight
A lot of business owners took the Great Recession in the teeth. If you’ve got your business stabilized and the prospect of possibly having to fight through another recession leaves you panic-stricken, it could be time for you to get out.

2. The worst is behind you
Let’s say you were mentally ready to consider selling a few years ago and then 2008 hit, and in 2009 you made cuts and adjustments, and now you’re seeing some profit and revenue growth.  With your numbers going in the right direction, now might be just the right time to make your move.

3. The tax man is coming
Governments around the world are looking for money to fund the cost of an aging population. At some point this will mean increased taxes.

4. Nobody is lucky forever
If you’re lucky enough to be in a business that actually benefits from a bad economy, congratulations... you’ve probably just had the four best years of your business life. But no cycle lasts forever and right now might be a great time to take some chips off the table.

5. The coming glut
As a business owner, demographics are not on your side.  As the baby boomers start to retire in droves, we’re going to have a glut of small businesses coming on the market. That’s great if you’re buying; but if you’re a seller, you may want to avoid the flood and head for higher ground now.

6. The closing window
Since 2008, it’s been tougher for private equity companies to raise money; so many firms had their last successful round of fundraising a number of years ago. Many of these funds have a five-year window in which to invest or they have to give the money back to the people who gave it to them. Some boutique private equity firms will make investments in companies that have at least one million dollars in pre-tax profits (larger private equity firms will not go below $3 million in EBITDA); so if you’re in the seven-figure club, you could get a bidding war going for your business among private equity buyers keen to invest their money before they have to give it back.

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Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Monday, December 10, 2012

7 things to do before signing a Letter of Intent


You may be years away from selling your business, but it’s never too early to understand what the process involves.


If you have ever promised your child a treat in return for good behaviour, you know all about negotiating leverage. When selling an attractive business, you also have leverage—but only up to the point where you sign a letter of intent (LOI), which almost always includes a “no shop” clause requiring you to terminate discussions with other potential buyers while your newfound “fiancĂ©” does due diligence. 


After you sign the LOI, however, the balance of power in the negotiation swings heavily in favour of the buyer, who can then take their time investigating your company.  At the same time, with each passing day, you will likely become more psychologically committed to selling your business. Savvy buyers know this and can drag out diligence for months, coming up with things that justify lowering their offer price or demanding better terms.


With your leverage diminished and other suitors sidelined, you are then left with the unattractive options of either accepting the inferior terms or walking away.


Here are seven things you can do—before you even put your business up for sale, and before signing an LOI—to minimize the chances of your deal dragging on for months and becoming watered down:


1. Make sure your customer contracts have “successor” clauses.

Have customers sign long-term, standardized contracts, including a clause stating that the obligations of the contract survive any change in company ownership.

2. Nurture and prepare a group of 10 to 15 “reference-able” customers.

Acquirers will want to ask your customers why they do business with you and not your competitors. Before you sign the LOI, cultivate a group of customers to act as references.

3. Ensure your management team is all on the same page.

During due diligence, acquirers will want to interview your managers without you in the room. They want to find out if everyone in your company is pulling in the same direction.

4. Consider getting audited financials.

An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm.

5. Disclose the risks up front.

Every company has some risk factors. Disclose any legal or accounting hiccups before you sign the LOI.

6. Negotiate down the due diligence period.

Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You may be able to negotiate this down to 45 days—perhaps even 30 with some financial buyers.  If nothing else, you'll alert the acquirer to the fact that you're not willing to see the diligence drag out past the agreed-to close date.

7. Make it clear there are others at the table.

Explain that, while you think the acquirer's offer is the strongest and you intend to honour the “no shop” agreement, there are other interested parties at the table.

If you take all seven of these steps, you will protect the value of your business as the balance of power in the negotiations to sell your company swings from you to the buyer.

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Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Thursday, November 8, 2012

Does Your Business Have Curb Appeal?

Let’s say you’re in the market for buying a house and you go to view one that looks appealing in the ad. How does it look on the inside? The outside? What about the location? What is your general impression?

Like your house, your business projects an image to potential buyers. When they come to see your business for the first time, your “curb appeal” can attract a buyer to your business—or cause them to walk away from it.

Do you need to improve your curb appeal? Here's a three-step plan:

1. Fix Your Leaky Faucets
Perhaps, like many other business owners, you started your business from scratch with one or two employees and now you have 20 people working for you. But do you have the appropriate HR infrastructure in place for that size of a company?  Perhaps you even take pride in your informal management style, but it can prove to be a liability when it comes time to sell.

Make sure your human resources policies are at least as stringent as those of the company you hope will buy your business. Some basics to have in place:
  • A written policy making it clear you forbid any form of harassment or discrimination;
  • A written letter of employment for each staff member;
  • A written description of your bonus system; 
  • Written policies for employee expenses, travel and benefits.

2. Assemble Your Binder
When you go to buy a house, it will give you confidence if the owner has the instruction manuals for the appliances, information on where they were purchased, and who to call if one of them breaks down.
Similarly, when a potential buyer looks at your company, he wants to see that you have your business information in order.  Documenting your office procedures, core processes, and other intellectual capital can help you attract more bidders and a higher price for your company, while also lowering the chance of the deal falling apart during diligence. 

If you want to attract a buyer one day, your business needs a binder with instructions for basic functions, such as:
  • Opening up in the morning and closing down at night;
  • Forms and step-by-step instructions for routine tasks;
  •  Templates for key documents;
  • Emergency numbers for service providers;
  • Billing procedures for customers.
  • How your company is positioned in the market and your marketing tools.
 
3. Document Your Intangibles
Intangibles for house buying might include: Is the house near a good school or daycare? What kind of neighbourhood is it?  What kind of commute are you looking at to get to work?

Your business also has intangible, often intellectual, assets that a potential buyer needs to be made aware of, such as:
  • Proprietary research you’ve conducted;
  • A formula for acquiring new customers;
  • Criteria you use to evaluate a potential new location;
  • Your unique approach to satisfying a customer.
As with selling a house, your company's curb appeal can go a long way toward closing a deal.  


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Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Friday, September 14, 2012

Seven Reasons to Sell Now

It seems like we’re at a fork in the road: there are some positive signs that the economy is entering the earliest stages of a long term expansion, but at the same time, if we dare read the headlines, it seems we’re destined to repeat 2008.

It’s precisely because we’re at this inflection point that we see a lot of business owners thumbing the eject button. If you’ve been thinking of selling your business, here are seven reasons to get out now:

1. You’ve lost the stomach for it

A lot of business owners took The Great Recession in the teeth. If you’ve got your business stabilized and the prospect of fighting through another recession leaves you panic-stricken, it’s time to get out.

2. The worst is behind you

Let’s say you were mentally getting ready to sell back in 2007. Then 2008 hit, and 2009 was your worst financial year in recent memory. You cut everything you could in 2010, showed a profit in 2011 and now you’re starting to see some profit and revenue growth.  With your numbers going in the right direction, now might be just the right time to get out.

3. The tax man is coming

Governments around the world are looking for money to fund the cost of an aging population.  In the U.S., the capital gains tax rate is set to go up after 2012.

4. Nobody is lucky forever

If you’re lucky enough to be in a business that actually benefits from a bad economy, congratulations. You’ve probably just had the three best years of your business life. But no cycle lasts forever and right now may be a great time to take some chips off the table.

5. The coming glut

As a business owner, demographics are not on your side. As the baby boomers start to retire, we’re going to have a glut of small businesses come on the market. That’s great if you’re buying, but if you’re a seller, you may want to get out ahead of the flood.

6. The closing window

It’s been tough for private equity companies to raise money since 2008; so many firms had their last successful round of fund raising in 2007. Many of these funds have a five-year window in which to invest; otherwise they are required to give the money back to the people who gave it to them. Some boutique private equity firms will make investments in companies that have at least one million dollars in pre-tax profits (larger private equity firms will not go below $3 million in EBITDA); so if you’re in the seven-figure club, you could get a bidding war going for your business among private equity buyers keen to invest their money before they have to give it back.

7. A good time to be liquid

The stock market has been swinging wildly lately which is why it would be nice to get liquid. With cash in the bank, you will be able to take advantage of a fire sale on the stocks of good quality companies should the market sink.

If you feel like a gambler at a blackjack table with everything riding on the outcome of one hand, it may be the right time to take a few chips off the table.


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Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Friday, September 7, 2012

Planning to Sell? How to answer THE most important question


Many business owners believe the act of selling their business is similar to passing the baton in a 400 metre relay: once you’re finished running, you get to relax.  In reality, buyers will insist that you stay on for a transition period – anywhere from six months to five years – during which time you continue to work in your business to help the buyer capitalise on the investment they’re making.

 THE Question

At some point in the process of selling your business, a prospective buyer will ask you – usually quite casually – “Why do you want to sell your business?” These eight seemingly innocuous words have derailed more deals than any others.

Buyers ask the question to evaluate how likely and willing you are to stay on or if you already have one foot out the door.

Obviously you don’t want to lie, but there is a right and wrong way to answer the question. Answers like “I want to slow down a bit” or “I want to travel” or “we’ve got a baby on the way and I want to spend more time at home” communicate to a potential buyer that you plan on winding down when they take over. However, what they want to hear is your intention to help them realise the potential locked inside your business.

Here are some suggested responses based on your age:

If you’re under 40, you clearly aren’t ready to “retire” so you need to communicate that you see an upside in merging your business with theirs:

“In order for us to get to the next level, we need to find a partner with more <insert sales people, distribution, geographic reach, capital or whatever the partner brings to the table>.”

If you’re between 40-55 years old, most people will understand the need to shore up your personal balance sheet:

“I’ve reached a time in my life where I want to create some liquidity from the value I’ve created so far, and at the same time I want to find a partner who can help us get to the next level.”

If you’re over 55, you can start to talk about retirement, but you want to make sure you communicate that you still have lots of energy and passion for your business.

“I’m at a stage where I need to start thinking about retirement. It’s a long way off yet, but I want to be proactive.”

Rehearse your answer to the question so it becomes a natural response when you are inevitably asked by a potential buyer. 


Wednesday, September 5, 2012

Prevention is better than cure


To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you.

This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise.

To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialised your knowledge, the harder it is to hand over work to juniors.

The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention.

Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be a far easier task to train others to do.

For example, it takes years for a dentist to acquire the education and experience to successfully complete a root canal, but it’s relatively easy to train a hygienist to perform a regularly scheduled cleaning.

It’s almost effortless for an estate agency manager to hire someone to clean the gutters once a month, but repairing the flooded basement caused by the clogged gutters can be quite complex.

For a master car mechanic, overhauling an engine that has seized up takes years of training, but preventing the problem by regularly changing a customer’s oil is something a high school student can be taught to do.

For an IT services company, restoring a customer’s network after a virus has invaded often takes the know-how of the boss, but preventing the virus by installing and monitoring the latest software patches is something a junior can easily be trained to do.

When you’re selling your expertise, it can be tough to hire a team to do the work for you. As ironic as it sounds, sometimes the key to getting out of doing the work is to offer a preventive service, which not only maintains your business income, but also eliminates the need for someone to call you in the first place. 


Friday, May 4, 2012

Do I really want to sell? The four reasons people sell their businesses.

Written by Neil Ackroyd






In my experience there are four reasons why people sell businesses. Every rule has its exception, however, it is very important to consider whether you fit one of these reasons before commencing a process. The cost and disruption to a business of an abortive sale process is immeasurable and can be avoided to a certain extent by considering these four factors up front. I would certainly be exceptionally reluctant to accept a client who does not fit into one or more of these categories for the client’s sake as well as the sake of my team and my bottom line.

I believe that there are only 4 reasons that people complete transactions when selling. 
a) Retirement/completing a plan
b) A fundamental shift in your life priorities
c) The business not being fun anymore/outgrowing your skill set
d) An exceptional cash offer or exit opportunity

Looking at these reasons individually;

Retirement/completing a plan
Many owner managers have a long term retirement plan or exit plan. The commonality of these two areas is that they both give you a clear plan for what you are going to do after the sale of the business. This is the key aspect to whether this is a reason that makes sense for you. If you have a plan that involves sitting on the beach, playing golf or even starting a business in another area then you are onto a winner. Any project to sell a business where you have nothing else to do afterwards should be considered carefully.

A fundamental shift in your life priorities
I have had many clients over the years whose priorities have shifted dramatically. Sadly this often results from a change in life circumstances. Possibly a family or personal illness or tragedy. However, it can also come from good news like the birth of a child or grandchild. This is quite often a stressful situation also because after years of enjoying running a business, and it in fact being a driving force in an individual’s life, it suddenly becomes a place that is stopping them doing what they want, however, they feel a responsibility to be there for staff or to safeguard assets. In this circumstance the sale of the business is an excellent route to consider.

The business not being fun anymore/outgrowing your skill set
The business not being fun anymore or the business outgrowing the skill set of the founder is really quite often the same reason. The first way of saying it is just a way to preserve ego. However, there really is no need for that and absolutely no shame in that reason. The skill set required to start and grow a business to the critical mass of an SME is an excellent one to have. The skill set to grow an SME to the next stage is also an excellent skill set to have. The individuals having these skill sets have very different motivations, traits and behaviours. In my experience it is very rare indeed for an entrepreneur to be able to become a professional CEO and even rarer for a professional CEO to have the creativity and dynamism to be able to be an entrepreneur. These are just facts of life and it is a powerful individual who is able to admit that the next stage of growth is not consistent with their skill set. It is often noticeable that, in this situation, the owner manager is feeling constricted, bored and often confused. This is a very common problem. Although selling is not the only solution to this problem, in my experience more owner managers are capable of becoming professional CEO’s than an effective Chairperson managing a professional CEO (but an entire new website could be dedicated to that as a topic). 

An exceptional cash offer or exit opportunity
This last reason needs little explanation. Reasonably commonly there are short lived and extreme market conditions in niche markets that can offer exceptional exit opportunities. These are areas where you see multiples well into double digits being offered. Biotech was like this prior to the credit crunch and in certain areas still after, telecoms re-sellers in the UK are experiencing such market dynamics at the moment. Clinical trials supply chain companies have had many years of exceptional conditions. If you own a business in a market experiencing such a distortion or if your company very specifically fills a niche desire for one other business then you should consider the deal. There is nothing more soul destroying than saying no to a deal and then working for another 10 years and selling when you want to, and your ultimate exit plus the ten years of profit still being less than the price you said no to (and yes I have seen this happen and heard of it happening many times). However, the other note of caution I would add is similar to the retirement reason. Even if you still sell for a stellar price make sure that you have some sort of plan of what you are going to do next.

The common theme in the first 3 reasons is that the owner manager wants out and is trapped. This is a unsatisfactory position to be in and is unique to the owner manager. A corporate manager or employee will typically have a 3, 6 or 12 month notice period they cannot even be held to this provided they don’t want to move to a competitor. Therefore they can walk up to their boss and hand in their keys and passes. The business will go on without them and no-one will blink. The owner manager is rarely in this situation and often feels a deep responsibility to staff and the business for the years that have gone before. Therefore the decision to sell (in the first 3 reasons) is driven mostly in my experience by a need for freedom and the continuation of the business rather than an overt desire to maximize price or make themselves rich; indeed most of them are already rich.

In conclusion, if you don’t fit into one or more of the top 4 reasons for selling I would think very carefully about what you are doing and why. When considering whether to work with a prospective client our single most important criteria is the likelihood of a successful legal completion. A prospective client doesn’t fit into one of the top four areas is far less likely to complete a deal. I have learnt more than once that such a client can realise mid process that they don’t really want to sell, this a extremely bad for the client and the business and it is very worthwhile considering these points very early on.