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
Keystone Business Advisors Facilitates Alinea Medical Imaging Acquisitions
FOR IMMEDIATE RELEASE
(Los Angeles, CA) – Keystone Business Advisors recently announced that Alinea Medical Imaging, California-based medical imaging, and mobile mammography services company, retained Dave Richards, a Business Broker, of Keystone Business Advisors to represent them in simultaneous acquisition of Inner Images Services, Inc. and Mobile Mammography Screening, Inc. making the company the clear market leader for mobile digital mammography services in California. Inner Images Services, Inc. provides on-site digital mobile mammography services to over 80 community-based health centers throughout the state. The company is a preferred provider in most health networks including government-funded programs such as Every Women Counts. The acquisition of the collective companies increases Alinea’s mobile breast cancer screening fleet toRead More
Top Reasons Business Sales Transactions Fall Through
Often with a small to midsize company the owner has put a great deal of time and energy into the success of the business. The owners may see the company as an extension of themselves that they worked hard to build and as a result may be looking at it from an emotional or egotistical perspective. Some owners may know the ins and outs of the business like the back of their hand but may not take the time to evaluate how the business may look to a potential buyer. This lack of awareness and preparation can lead to potential reasons for termination of the sale including poor accounting and bookkeeping, inaccurate sales or performance data, unrealistic valuation, or longer than expected transition times to name a few.
According to a sample polling of IBBA business advisors the top reason that half of the deals fell through in Q1/2018 was unrealistic seller expectations at 12% (tied with buyer cold feet). When valuing the business prior to sale it is not surprising that many owners will have a higher than expected price in mind. This is reasonable knowing how much effort has been put into to getting the company where it is today. Owners will also have strong emotional ties with the business that simply are not quantifiable. This perspective can further be explained by what is called the endowment effect. Simply put the endowment effect is the tendency for people who own a good, or business in this case, to value it more than people who do not. The endowment effect causes many sellers to have an inflated idea of the sales price due to their unique perspective. Buyers on the other hand are looking more at the bottom line and are concerned with cash flow and potential risks. A buyer is usually concerned with specific questions such as: (more…)Read More
Determining Owner Commitment to Selling a Business
As an owner, deciding to sell your business can be a difficult and time-consuming experience, and one that requires proper planning and awareness of marketability. When evaluating a potential business for purchase, it is important to understand the owner’s commitment to the sale. Many owners have prepared from the early stages of the life of the business and have developed a detailed exit plan by the time they are ready to retire. In other cases, the owners may find themselves selling before they are entirely prepared, either because of burnout or divorce for example.
According to the International Business Brokers Association (IBBA) when it comes to the buying or selling of a business, 49% of the transactions did not make it to closing in Q1/2018. When evaluating the owner’s commitment and potential to close it often comes down to the owner’s motivation to sell as well as the amount of planning the owner has put into developing a successful exit strategy. Determining an owner’s motivation to sell is an important step in the initial due diligence process as it will sometimes shed some light on the likelihood that the deal will go through.
Below are common reasons owners decide to sell a business:
Retirement: The International Business Brokers Association (IBBA) lists retirement as the number one reason business owners decide to sell their business for listings in the <$500K-$5Mil range. Adding to this already common reason, there is a major uptick in the amount of small businesses being put on the market with the massive influx of baby boomer business owners reaching retirement age. According to the California Association of Business Brokers, retiring Boomer business owners will sell or donate $10 trillion worth of assets over the next (more…)Read More
When is the Right Time to Sell My Business?
A key question many business owners struggle with is…when is the right time to sell my business for its maximum value? This is often a very personal decision with several aspects to consider. There are 5 key questions to ask yourself.
Is my business growing, remaining flat or declining?
For business with sales and profitability that are growing at rates of 10% or greater, they provide an outstanding opportunity to capture a premium. The business trends over the last 3 to 5 years is a key factor prospective buyers look for and greatly influence what they are willing to pay. Businesses which have remained relatively flat do not necessarily generate the same level of interest as high growth businesses. However, they are generally good businesses for a buyer to consider if they provide market potential and represent an opportunity for a new buyer who is willing to explore new avenues to grow the business. Businesses which are trending down are often passed on by most buyers due to the risks involved unless the problems are easily identified and the path for turning things around is clear. If this is the case, you should either spend the time and energy to get things back on track or be prepared to accept less for your business.
Am I still motivated to operate my business?
I have represented many business owners who own a strong business and have developed a reliable business model, but lack the energy or motivation to continue to operate at maximum (more…)Read More