Category Archives: buy a business

Buying a Business … 1+1=3

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Buying a business can be a valuable business strategy. Synergy is an interesting concept but what can it really mean when buying a business. In my prior business I had made many acquisitions to supplement organic growth. The analysis of buying these business followed the below simplified numbers. A brief explanations of the below numbers –

Say you have 2 like businesses that both are in the business of distributing products or services to homeowners. Both companies have overhead cost of rent, advertising, utilities , insurance, phone, office cost etc. When buying a like company many of these cost become readily duplicitous – i.e. you don’t need 2 offices, you don’t need 2 phone systems.

The below example shows that when Company A buys Company B the fixed cost will not increase at all. When a company does buy another like company many of the fixed cost are eliminated but rarely are all of the fixed cost eliminated.

Financial Gain Of Buying A Business

Buying A Business

Photo (c) laboracademy.org

The example below shows the financial gain available in a well thought out acquisition and this format can be used as a starting point to analyze the synergistic benefits of such an acquisition. The fixed cost that will remain can be added to the Combined company and the projected bottom line should be reviewed to see if the bottom line still looks appealing enough to make the acquisition.

For cash flow purposes I would analyze the initial benefits of buying a like company including the cost of acquisition and the benefit that exist after the financing cost has been realized. In the below example after 5 years the bottom line improves after the note of acquisition is paid down. Financing very often can be available through the business owner selling his company. Usually the business owner can analyze the synergy and cash flow of the acquisition better than an outside banker or other financing means.

Also, when one company buys another company customers are lost and that fact should be considered in the acquisition. Will customers lost be 1%, 5%, 10%, 15%? This all depends on the type of business and parties involved.

Buying a like business can be a very effective means of growing ones company. As a business owner I suggest you open your mind to the concept, look around you at potential opportunities and do the analysis. When analyzing look at best case and worst case scenarios for both projected sales and expenses from buying a like business. As with most business transaction the best business deals are the ones that both parties benefit. When buying a business, the seller can benefit from having a means to exit out of an undesirable situation and the buyer can benefit by eliminating some competition and growing sales.

In today’s economy, businesses are struggling and from this adversity, can come opportunity.

Company A                                                                                            Company B                                                                             New       Company C

Sales $200,000                                                                                        Sales $200,000                                                  Sales                               $400,000

Variable Cost $60,000                                                                        Variable Cost $60,000                        Variable Cost                            $120,000

Fixed Overhead Cost $100,000                                                       Fixed Overhead Cost $100,000              Fixed OH                            $100,000

Profit $40,000                                                                                         Profit $40,000                                                        Profit                           $180,000

 

Success is a Journey, Not a Destination

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Success is a Journey – Not a destination.

A well repeated phrase that ones reads, nods in approval and then moves on to other matters. But what does it really mean? Taking a moment to interpret the meaning can provide a strong foundation for business and personal planning of a small business owner or entrepreneur.

 3 Scenarios of “Success”

1. Just consider all the investors in the late 1990’s that made millions in the stock market Dot-Com boom.

Buy low, sell high, make millions- you are a success. Three months later the Dow loses 600 points in one day, the market continues to fall, those millions are lost and investors are left with no gains or worse – are you still a success?

2. Fast forward to the Real Estate Collapse that we are now experiencing.

Buy an entry level house, “flip it” make some good money- Are you a success? Now take those gains, leverage those monies, buy a bigger house, “flip it” make a lot more money.-Are you a success? Things are good, this real Estate thing seems almost automatic, so you take all those monies, buy a $1,000,000,000 property with plans to fix and flip it for $1.5M, but the market turns south and all the real estate gains have gone away and you cant find a buyer for your house at $740,000- are you a success?

3. Now Consider the Entrepreneur/Small Business Owner.

You successfully start your own business. You reach break-even. Are you a success. You reach $1,000,0000 in annual sales, then $2M, then $3M – Are you a success? You sell your business for several million dollars- Are you a success? I say you have reached certain successes, but the journey continues.

Definition Of Business Success

Starting a business and reaching a level of success may make one feel successful. Successfully selling your business and making a lot of money can make you feel successful. Maybe what you do after you sell your business has more to do with your feeling of success. I have associated with several people that have successfully sold businesses, and several of them have not waited until the age of 65 to do so. Those I’ve been around that have sold their business have been more of the “whats next” and treat the successful sale of their business as a “success along the way”.

As an entrepreneur the idea of selling your business for large gains is alluring, and perhaps both inspiring and strongly motivating. The existence of a small business owner/entreprenurs is a series of successes and failures. As an entrepreneur, I say enjoy the successes you attain-heaven know the failures may be more prevalent, but effort yourself to appreciate the successes that come your way.

Business Success

Photo (c) theaposition.com

I have successfully sold my own business, do I consider myself a success – not really. I really think my success, as by my measurement will get determined by what I do next. Planning for your success is very important,. And planning how you will reach your goals and levels of success is important. Very often selling the business that you may have started and nurtured for so many years can be very fulfilling, yet keep in mind it is not always the end-game. “Success is a journey not a destination.”

You are in a great relationship with a great family life, and have good friends – Are you a success? To that I say – So far so good… keep it going.

Failure to Plan is Like Planning to Fail when Selling your Business

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When should one begin the planning for the sale of your business?

It has been said that that thought process should begin when you start your business. So Entrepreneurs, while in the initial throes and excitement of the planning stages of starting a new venture, it is also appropriate to broach the subject of exit strategy. Too often the daily process of running and growing the business disallows the consideration of an exit strategy.

Do You Have An Exit Plan?

A recent study (as printed below) conducted revealed that 75% of small business owners do not have an exit plan.

SACRAMENTO, Calif., Sept. 29 /PRNewswire/ — The California Association of Business Brokers (CABB, a non profit trade organization) says that there is one thing that most small business owners fail to do when preparing to sell their business: have an exit strategy in place. A recently reported study conducted by Harris Interactive found that among those small business owners surveyed, three out of four small business owners did not have an exit plan developed.

An Exit strategy may be transitioning your business to family members, a planned merger, a planned closure, a planned sale of your business, or other possibilities. The below is focused on issues related to the planned sale of your business.

How NOT to Consider an Exit Strategy:

Exit Strategy

Photo (c) newportboardgroup.com

  1. Wake up one morning and say I hate what I am doing, call a business broker and ask to sell your business ASAP. Now if you wake up 60 morning in a row and hate what you are doing it may warrant a call to a business broker to discuss the potential sale of your business.
  2. Wait until an unexpected illness strike you, before you begin the process of exploring the strategy of setting up your business for sale.
  3. Enjoy the good years of business success and allow this success to keep you from developing an exit strategy, and then wait until your business is faltering and can no longer support its own cash flow requirements and then be forced to sell your business in this adverse environment.

Things TO DO when Considering an Exit Strategy

  • Give yourself time, pick a time horizon 2-3+ years out to perform task that would aid in the sale of your business.
  • Try to understand the approximate value of your business. Your business may be one of your most significant assets, and just knowing it for net worth purposes and planning purposes can be invaluable. www.sellabusinessflorida.com
  • Focus on improving the quality of your numbers and your records. Look at your income statements, and balance sheets objectively and see if numbers stand out or jump out as hard to explain, or unusual. Any reports or figures that results in error that are “carried forward”, or allowed to exist – have them reconciled.
  • Work on systems. The more systems in place to more well thought out your business looks. The more systems in place, adds value to a new owner and improves both value and the likelihood of success to the new owner that buys your business.

When is a good time to BEGIN the process of evaluating a good exit strategy for your business? TODAY

Competitors – Rotten SOB’s or Valuable Strategic Alliance?

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Competitors – Friend or Foe ?

Competitors can simply be defined as
“one selling or buying goods or services in the same market as another”
… per Merriam Dictionary

or “those rotten SOB’s that undercut my pricing, run their business without any regards for proper business ethics, and generally derate our entire industry”
… per an upset business owner

Small Business And Competitors

How do you view your competitors? As small business owners we all have competitors. Sometimes they are just down the street or across the globe. I am in the business of helping small business owners buy and sell businesses. Very often when a small business owner desires to sell their business, their competitor may be the first logical party to approach. The relationship that a small business owner has with those competitors is potential buyers of their business will dictate the viability of effective dialogue. When running your business a competitor can be a valuable alliance.

With my previous business, we had fairly open relationships with many of our competitors, and found that at times working together could prove to be mutually beneficial. We had a production company and many of our supplies came from far away. Very often we would coordinate with nearby competitors on shipping arrangements to “share truckloads” to reduce both of our cost. We also would fall short of certain supplies that would potentially shut down our production lines. Maybe we would get a sudden large customer, or just mis-allocate. We would put a call into our local competitors, arrange to buy some supplies from them, and they would do the same with us.

We were competitors, but were business men first and recognized the value of mutually beneficial arrangements. Furthermore, In my previous business we incurred a significant disaster to our production facility which caused our business to shut down to rebuild. The relationships we had built throughout the years with competitors, had the owners of those competitors business on the phone with us offering assistance. And this assistance was invaluable in allowing us to transition through this difficult event. Some of their assistance resulted in additional short term business for them. Other assistance resulted in significant long term relationship building between our 2 companies. I would like to think I would have done the same for them.

Business Competitors

Photo (c) prosper-consulting.com

Very often industry matters, panels, trade groups require the interaction of competitors to benefit the group and or industry. “A rising tide raises all ships”. Is true when you have competitors that can work together, you can benefit the entire industry.

But it would be naive to think that issues will not occur between competitors. You seek the same customers as competitors, and very often it is you or your competitor that gains that new customer, and you want it to be you-your competitor wants it to be him.

Building a relationship with competitors can be beneficial. It doesn’t mean that you need to go out for a beer once a week. But it does mean that you can pick up a phone and make a business request and know that your competitor can do the same with you. It is not always possible to have a mutually beneficial relationship with a competitor. But it should at least be considered and or explored.

How Much? – when buying or selling a business

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You buy products or services and one of the first thoughts you have is – How Much?  You sell products or services to customers and one of the first thing a customer wants to know is- How Much? Somebody looks at buying a business and again needs to know – How Much?  And a business owner is ready to sell his business and either move on to other business interest or retire and he needs to determine – How Much.

How does a business owner determine how much his business is worth? The reality of the matter is that the marketplace ,as with most business transactions, determine how much is the worth of the business.  But in order to attempt to sell your business and market you business a value, or a price range needs to be determined to allow potential buyers the opportunity to see if your price goals match with the price range they are willing to pay.

When discussing the concept of valuing a business or setting a range and or target sell price of business with business owners some times the wrong criteria is initially considered by the business owner.  Sometimes the “What I need to make when I sell my business” is different than “what the business is worth.  Consider the example of a business owner invested $50,000 as an initial investment into his business and owes another $100,000 on some equipment he bought and is still paying off.  I might ask the business owner if he has considered what he would want to sell his business for and he may say “I need to at least get $150,000 for the business because of the above reasons.”  Actually the business owner is telling you what he believes he needs to get out of the business, yet this does not necessarily represent potential value to the buyer.

When business owners or entrepreneurs set prices for products and services certainly cost is a significant contributor to determining price point of that product or service.  What like or similar products or services are selling for is also considered.  But the successful and ongoing sales of that product or service is dependent upon how the customer values your product or service.  Does your customer believe that they are getting fair value for the price of your product or service.  The fact that you now lease a new expensive company car- does that enter into the pricing of your product or service.  It may to you but very possibly/probably it does not to the customer.

This is a similar thought process that should go into the question of how much should I sell my business for.  If a person can buy a similar business to yours and buy it for 40% less than yours why would they buy your business.  The price/value needs to make sense.  And if all else is similar it is reasonable to expect the potential buyer of your business to expect your business to be priced similar to other like businesses.   And the fact that you invest more initially into your business or owe $x on  the business, or lease an expensive new car really does not speak to value or pricing (unless liabilities are following the new buyer and may decrease the value to the new buyer)

The best scenario for selling your business is always a scenario which allows for you the business owner to plan that exit strategy.  Part of that planning process is trying to determine what you believe you need to get out of the business for the sale to make sense to you (also allowing for tax consequences of such a sale.) But it is important that what you need to make when selling your business and what your business is worth when selling your business are 2 separate matters.  While these are 2 separate matters that often get convoluted in the thought process of a business owner – it is very pragmatic to target a potential time to sell your business as a time when “what I need to get out of business when I sell my business” is at least equal or less than “the sell price or value of my business.”  Ultimately the somewhat complex process of setting a price of a business for sale (or a product or service for sale) gets reduced to How Much are your selling your business for? and the answer being How Much are you willing to pay.