Difference between real risk and perceived risk and its effect on the price of a business
In a previous blog, we discussed briefly how risk can be shifted between the buyer and seller during negotiations to achieve the desired price. Visualize with me for a moment; every deal has a big bucket of risk and each deal has a different size bucket. That bucket is filled with perceived risk and real risk. At the closing table, the risk is going to be poured out between the buyer and seller. A deal where no risk is poured in the seller’s cup would be an all cash deal. A good example of a deal where very little risk is taken by the buyer might be one that includes a small down payment and the rest being paid out over 10 years. These examples would indicate prices that reach into the far ends of the spectrum.
An all cash offer is the least risky offer to a seller, but the most risky offer to the buyer. As price gets higher a buyer will typically lengthen the time to pay the seller, or make the price contingent on the performance of the business. Keeping the seller involved is another way to lower the risk. The basic rule of thumb is (more…)Read More
What Key Aspects Should a Buyer Evaluate When Acquiring a Business?
I have worked with well over 1,000 prospective buyers looking to purchase a business over the past 15 years and I would estimate that probably 80% to 90% do not have a particular business category in mind. I can also say that may who have called my office inquiring about a specific business often end up buying something very different from what they had initially called on. A common question I get is what is a good business to buy? While I do have preferences for specific types of businesses, the better question is what are the key aspects I should evaluate in determining which business to buy? Here would be my top 5 factors a buyer should evaluate to narrow down the options and help determine which business is the best fit for them.
Do I have any related experience I can leverage into this business?
When the economy went south in late 2008, many buyers who had used SBA loans to purchase a business had defaulted on their loans. The SBA evaluated this and determined that one of the key factors why new business owners were not able to successfully operate their business during these difficult times was due to (more…)Read More
How to evaluate an offer when selling your business?
Have you heard the term “You set the price, I’ll set the terms”? The crux of this quote is simply reinforcement that when negotiating a deal, the two elements are inseparably connected. For this article, we will be referring to business transactions between $1M and $20M in selling price.
It is a compelling idea for a business owner selling his or her business to ask for the best of both worlds, which would be highest price at best terms. However, in practice, it is common that you will need to flexible on one to achieve the other. What we have discovered in our years of helping small business owners through the complex selling process, is the idea that business owners seem to be more focused on the price while the buyers are typically more concerned with the terms. I would not say that either party necessarily verbalizes this, or even consciously acknowledges it, however by our own empirical observations; it seems to be the case. Albeit an interesting concept, this begs the question; “what do we learn from this?”
Below are five nuggets of value that every business owner should have before going to the table with a buyer.
- There is no typical deal structure:
There are a million ways to skin the cat and structuring business transactions is no different. However, there are some very common starting points; that every seller should understand. A common starting point for most buyers would most likely constitute some portion of cash at closing and some portion of a seller’s note or “carry back”. It is not uncommon to hold a note of 30% to 50%. Seller financing is typically used to widen the number of interested buyers as well as increase the overall selling price of the business. If you are not willing to finance at least some of the price, the result will (more…)Read More
Five Important Steps to Consider When Selling a Business
Selling a business can be a daunting and time-consuming task, particularly when planning has not occurred ahead of time as part of an exit strategy. When deciding to sell your business, some critical steps should be taken that can help to ensure the deal will go smoothly and that a strong value is obtained for the company. Often owners are not prepared until the time they are ready to sell and as a result will rush through some important steps that could end up costing time and money. Planning for the sale early on, even years before the owner is ready is a good practice and will prove valuable when the time comes to sell the business.
To maximize the value of the company it is important to begin as soon as possible, regardless of whether you are ready to sell or not. While there are many facets to the sale of a business below are five important things to consider: (more…)Read More
The Importance of Selecting the Right Buyer When Selling a Business
When a seller decides to list a business, they are hoping to attract a lot of interest. If this occurs, the question will then be how to determine the best buyer from the pack. After going through the valuation process with a reputable source, the owner should have a clear idea of the company’s worth. Buyers may be willing to pay more or less than the valuation depending on what they are seeking. Finding the perfect match could lead to a larger sale price, more agreeable terms, and usually a quicker closing. For this reason, finding the right buyer is critical and should be a defined process from the outset.
Strategic Vs. Financial Buyers
Buyers come from a variety of places and generally consist of two types; financial and strategic. A financial buyer is usually more of an investor than an operator and tends to be focused on using investor capital and debt to fund the purchase. Similar to flipping a home, the goal of the financial buyer would be to get in as low as possible and then sell it after 5 to 10 years hoping to increase the value along the way. It is common that financial buyers will structure part of the consideration as a seller note. This will help to ensure the previous owner will keep an interest in the company’s success and potentially add to future growth.
A strategic buyer is a bit different in that they usually are larger competitors in the same or similar industry looking to improve on their existing business. Strategic buyers are looking specifically for synergies where they believe they can either increase profitability with added volume or add to their offering with a similar or related product or service. Whatever the tactic, the strategic buyer may determine a much higher (more…)Read More