Leaving your business on your terms: transition options for small business owners

The shoedown: sell, transfer or keep your business

Are you expecting to die with your boots on? Or do you intend to kick off your shoes and seek other surroundings, near or far?

Some eight per cent of us who own small  businesses in Canada do not plan to retire at all.*

Others would like to keep a guiding hand in their businesses but clear more time for themselves, shedding the day-to-day weight of operational concerns.

Have you thought about your options? Proper “exit” or business succession planning will help you sort out the implications each has for family, funding and taxes. The starting point will be your retirement goals and the provisions you need to get there.

For what it’s worth: gauge the value of your business sooner than later

How many miles have you put in on your business journey?  Are you still enjoying the ride?

Maybe you’ve started thinking about passing the wheel and your business to someone else.

Will you have enough money for what you want to do next? If not, what will it take to get you there?

Putting value in your tank

If you don’t know what your business is worth today, on what basis are you making decisions for tomorrow?

Yet that’s the case for many small- and medium-enterprise owners in Canada who are counting on their business for their retirement nest egg.

Buy an existing business and advance to GO

If you’re anywhere near my age, odds are you’ve played many rounds of Monopoly with your kids or grandkids. Or maybe you grew up with the game.

Everyone loved drawing the card that let you “Advance to GO”, where you would collect $200.

Who doesn’t want the fast track to success!

There are “Advance to GO” cards in the real world. For someone wanting to go into business, buying an existing profitable business is its equivalent. Compared to starting a business, such a purchase provides less risk and more potential for success.

As with a start-up, the purchase of an existing business may require significant effort and long hours over the first few years of ownership, however you do have a head start and very low risk. On the other hand, some 65% of start-ups fail.

The Sunbelt Texas office recently published a very good article about “what you buy when you buy an existing business”, where they showed the difference between buying a business and buying assets, using an actual business sale as an example.

Expect an exciting year for small business ownership in Canada

Exciting ride ahead

This is the first Friday of 2012 and as I work through my e-mails, I’m weighing this brand new year and what it will bring. I expect it to be much better for most business owners than 2011.

The American economy is showing signs of improvement, there is increasing demand for Canadian oil and gas, the potash industry in Saskatchewan is doing well and it would appear that the U.S. housing market has finally bottomed out.

Canadian banks have become more aggressive in the provision of Canada Small Business Loans, employment here is forecast to improve and small business owners are anticipating a better year in Canada.

At the same time, the economy in Europe is shaky and is probably in for a very tumultuous year.

Our current government in Canada has not provided any indication of support or programs that would have a positive effect on small business, but they have maintained low interest rates and a sound banking system. At the same time, we have many business owners past 65 and looking to retire, with many leading edge baby boomers in the same frame of mind.

I expect this to be an interesting and exciting year for small business owners.

With volatility comes opportunity for those who recognize it and are able to act quickly on the changes in the marketplace. For business owners who are considering selling their business this year or the next, now is the time to get focused on the value drivers that will increase the value of your business.

Whether it is increasing sales/profits, eliminating customer or supplier concentration issues, improving the systems that operate your business, or improving hiring and training practices, the time to focus on these factors is now.

Many of us make New Year’s resolutions.  Few keep them.  If your New Year’s resolutions did not include a goal for your business, make this goal now. Ensure that your goal is a SMART goal— Specific, Measurable, Achievable, Realistic and Time-Based.

If you are thinking of selling your business, focus your goals and resolutions on the value drivers for your business. Sunbelt can help you with the process of selling and while we will maximize the amount you receive, it will be related to how well you have addressed your value drivers.

Great time to buy a business

For those thinking of getting into business, there couldn’t be a better time. We are at the beginning of a long uphill climb in small business.

Small business buyers generally fall into three categories:

• those who want to purchase a business in order to secure employment and build wealth and security for their family;
• those who want to purchase a business they can substantially improve and then resell;
• those who are seeking rapid expansion or synergies to increase margins and sales for companies they already own.

For individuals looking to purchase a business to provide their own job security and income, the beginning of an up cycle in the economy is a great time to buy. With many businesses underperforming, the cost to purchase is less than it will be two or three years from now. At the same time, you would be buying at the beginning of economic recovery so your odds of success are great. The success rate for Sunbelt clients who buy a business is greater than 98%, however buying at the beginning of a positive economic cycle results in greater success.

For those wanting to purchase a business that they can substantially improve then resell, there couldn’t be a better time to buy. There are currently many under-performing yet fixable businesses available for purchase. This strategy of buy, build and sell has made many entrepreneurs wealthy. Timing is an issue, though, so I would embark on this now.

Companies seeking rapid expansion or synergies are facing many opportunities. Private equity groups are looking for such investment prospects.  Many business owners who are preparing to retire have businesses that are not performing at peak levels; these same businesses would provide the growth and synergies the purchasing companies are seeking. The result is that there are significant opportunities in the small end of the midmarket and capital is available to take advantage of these.

We are anticipating a raft of small Merger & Acquisition (M&A) transactions with financing coming from private equity investors. The very low interest rates and volatility in the stock markets are making M&A investments look far more attractive and in Canada, real estate is already priced at the high end based upon current ROI and forecast interest rates.

Putting all this together, 2012 should be an exciting year for both business sellers and business buyers.

At Sunbelt Canada, we are looking forward to the busiest year we have had in a decade and it’s about time. The systems and people are in place. The training has been done.  The marketing is at hand. We are ready.  And we are pumped!

There will be wild ups and downs in 2012 that will create outstanding opportunities.

Hold on to your hats and enjoy the ride!

No pain just gain —negotiating tips for buying or selling a business

Find options that meet both parties' needs

My wife, Gayle, and I recently celebrated our 35^th wedding anniversary. We’re both strong-minded but we’re careful not to let our differences turn into a contest of wills, where one “wins” and the other “loses”. Yet that’s often what happens to people with opposing interests—in business as well as in life. The steamroller may “win” in the short term, but at the cost of longer-term damage to a relationship they’ll be counting on down the road.

It’s far better to find options that meet both parties’ needs. And that’s where an experienced third party can help.

In the buying/selling of a business, that experienced third party is a business broker trained in guiding buyers and sellers to common ground.  In Canada, individual business brokers often represent the interests of both the buyer and the seller of a business. This is known as dual agency.

I believe the fact that we operate as dual agents with an intimate understanding of both parties’ needs has a lot to do with our success in closing deals. Our goal is to achieve the objectives of both and to protect both, advising what is and isn’t reasonable.

Let’s say you’re the seller. You want to maximize the value of your business while minimizing risk and taxes. When the sale is closed you and the buyer need to be on good terms. You are probably going to train them. You will probably be lending them part of the purchase price. You may even be staying on with them for a period of time.

The purchaser is buying without audited statements, and even though they have done some diligence, they are buying largely on trust—trust that you have developed with them during the investigation stage.

You and the purchaser have opposing objectives during negotiation, however, and emotions can run high—it is important that you let your business broker do the negotiating. They have training and experience in negotiating that you probably don’t. They will help you reach a deal that achieves your goals and the buyer’s goals—they understand both.  If the deal does not work for either of you it will not work at all.

That does not mean you shouldn’t provide input into the development of a counter offer – you should, however, keep in mind that it has to work for both of you.

Building a pattern of agreement

We start by looking for mutual gains. Your counterpart is working for the best deal they can get. Where do they overlap? Start with what you can get agreement on, and build a pattern so it’s easier to get a concession when one is needed.

Know what concessions you’re willing to make in order to get more of what’s important to you. Prioritize what you must have, what you’d like to have and what you don’t really care about. The latter can be a bargaining chip—what’s disposable to you may be important to the other side.  Your broker will facilitate the trade off, as you give up some things that are a little important for things that are more important.

Generally, the first offer you get from a potential purchaser is not their best – it is their first. Price, terms, closing dates, diligence timelines, inclusions and exclusions are all negotiable.

As you work through the negotiations, keep in mind your Best Alternative to a Negotiated Agreement (BATNA). You need to determine this before you start the negotiating process. It may be that you simply keep the business or that you hope another buyer will be presented. If that’s the case, and it’s clear that an agreement can’t be reached, then you have to be prepared to walk away.

In the end, you make the decision. Not your accountant or your lawyer or your family and friends. You must decide based upon what works for you.

If you’d like to do further reading on effective negotiation, I recommend Getting to Yes: Negotiating Agreement Without Giving In, by Roger Fisher, William L. Ury and Bruce M. Patton.

For tips on buying, building or selling a business, make sure you sign up for our free monthly newsletter.

Negotiating Tips

Give to get. Give and take, and the need to listen to and understand the other party’s position, is needed on both sides.

It’s not personal. Avoid confrontation—learn to separate the person from the issues.

Focus on issues not position. Find common ground of shared interests.

Be prepared. Know what’s essential, optional and dispensable.[via @DonCooper]

Keep an open mind. Be receptive to creative solutions.

More learning opportunities for business owners and prospective business owners

I’ll admit it—I’m a packrat. I hate throwing something out that may be useful to someone else or to me in the future.  It took the discerning eye of my wife, Gayle, for me to clear out all the equipment and material I’d stored in the large vault being converted into a new learning space at Sunbelt’s Ottawa office.  The existing meeting rooms just weren’t big enough to accommodate the number of people wanting to attend our business seminars or broker training courses.  So over the past few months, we’ve been renovating, and we’re now in a position to host more learning opportunities for more business owners and prospective business owners, starting with a series of free evening seminars on “Exit planning for business owners.”   We’ll have more details shortly.

Whether you’re thinking about selling now or several years from now, proper planning and preparation can make a significant difference in the outcome of the sales process.  We encourage all business owners to understand and take control of the factors that affect the value of their businesses and to constantly build for maximum return on investment.

Have you read our three posts on how financial, organizational and operational factors can help you build value in your business?  If not, you might want to do so now:

How’s your fiscal fitness? Get tips on financial factors to build the value of your business.

Can a potential buyer see himself in your business or are you blocking the way? The greater value comes when the business is making money without its owner’s involvement in the day-to-day activities. Read more about the organizational factors that build value.

Some operational factors–the state of your shop, warehouse, office, store–are fairly obvious, but do you know how your systems or lack of them add or take away value from your business?

And if you want to reserve a seat at our Ottawa Exit Planning series, please indicate your interest by registering here. We’ll have more details shortly. Or if you’re outside Ottawa and you’d like to be notified when we have added an event on buying or selling a business in your area, use our contact us form to request this service.

Business owners in Canada getting fair value for their businesses

Small business owners in Canada share many of the same challenges as their counterparts in the United States:  government regulations, access to credit/capital, taxes, finding new customers and retaining existing customers. But selling that same business is a whole other matter—think growth, in contrast to the gloom and doom of the current American market, where it seems that some sellers have reached their breaking point and are now settling for less.

Online marketplace BizBuySell.com has reported that sales of businesses with roughly $350,000 in annual revenue have risen 8% in the U.S. over the second quarter in 2010.

I can tell you that sales have also increased in Canada, but in healthy double digits and at prices that are reflective of anticipated economic success.  Business owners are getting fair value for their businesses and buyers are having success as the new owners.  Most businesses show an increase in revenue of 15% to 30% the year after the transfer of ownership.  The new owners come with energy, enthusiasm, and some new skills and ideas.  This has not changed. Sellers are having to finance a greater portion of the purchase price but they are getting fair value and 99% of the transactions at Sunbelt are working out well for both parties.

Who is selling and when

Some of our sellers are serial entrepreneurs.  They tend to be younger than 55 when they sell a business.  But the vast majority of our sellers aren’t serial and they’re not entrepreneurs.  [While business owners can be entrepreneurs, many are not.]  They hang on to the last moment, when they are turning 71 or 72. For most, freedom 55 is a myth.

In fact, a 2010 survey by Businessesforsale.com, found that 20% of business buyers in Canada were over 55!  You can read more about this and our tips for baby boom buyers here.

The average life expectancy was only 61.7 years when the U.S. set the retirement age for its social security program at 65.  This was in 1935.  By the time our CPP was established some 30 years later, life expectancy had hit 70.  It has now hit 81.  Puts things into a very different light doesn’t it.

Whether you’re thinking of selling and retiring or starting a second or third career, we can help you reach your business goals. Contact any of our offices across Canada for a complimentary consultation.

And for tips on buying, building or selling a business, make sure to sign up for our free monthly newsletter.

No double dipping at our table: how dual agency works in Canada

No double dipping at our table

Business brokers bring buyers and sellers together.  The rules around “who acts for whom” change with the Canada/U.S. border.

In Canada, individual business brokers often represent the interests of both the buyer and the seller of a business. This is known as dual agency.

Dual agency is not the standard in the U.S., although some states do allow a broker and one agent to represent both sides of the transaction as dual agents.

Normally, buyers pay no fees to us.  The broker is paid on a commission basis by the seller when a business transaction is successfully completed.

It seems that some don’t understand this.  Like this individual from an American financial services firm that wrote:  “I hate double-dipping business brokers”.

And he wasn’t referring to our practices with chips or vegetables.

His statements are misleading.

Let me explain.

Selling a business: using marketing to increase value before you sell, part 3

Know the potential return on your advertising investment.

Last post, we talked about a) understanding who you are or want to be, b) identifying your target market and c) ensuring that everything you do is consistent with the image you are trying to create in order to be the very best supplier to your target market.

Today, we’ll address ways of communicating with your prospects.

Most of us are familiar with the standard advertising media such as direct mail, telemarketing, newspapers, magazines, radio, television, coupons, flyers, billboards and signage. These paid media can be effective if you have properly identified the audience you are trying to reach and the message you are trying to get across and you commit to the time it takes to achieve results. You need to determine who you are trying to reach and with what message, in order to choose the media that will be the most effective for your purposes.

You should also be looking at the potential return on your advertising investment. Higher revenue and higher profits (all else being equal) will result in a higher selling price for your business. I highly recommend getting expert advice about your advertising investment. Some simple rules such as including a call to action apply– if your outlay does not result in a prospect taking some action towards becoming a client then what is it accomplishing? Knowledgeable media sales people with personal integrity will help you make appropriate decisions about your advertising mix.  Advertising firms who help with your creative materials are also a good source of such information.

Financing the sale of a business, part 2

Earn-outs can put more money in the seller's pocket

In the last post, we talked about financing the purchase of a business through a bank loan (unlikely), through a Canada Small Business Loan (CSBL), a hybrid structure using a CSBL, and a seller note (preferred choice).  Today we’ll explore other approaches.

Business Development Canada (BDC) provides a lending facility—albeit expensive–for business acquisitions. There is a bureaucracy to work through, but BDC does finance some sales. They generally require the seller to finance some of the transaction behind their loan and the seller doesn’t usually receive principle payments on his/her note until the BDC debt is repaid.  Most sellers aren’t willing to wait that long to get paid out, and being behind the bank adds to their risk.

Selling assets of the business to a leasing company then leasing them back is another approach that can provide additional cash to the seller at closing.

Partnerships where the purchaser has an option to acquire the rest of the business in time are sometimes used, but these can be fraught with problems.

Earn-outs

Earn-outs can be a rewarding way for sellers to get around many issues

A seller and purchaser may disagree over projected earnings or other factors affecting the value of the business. Historical financial information may not be enough to offset the perceived risk to a purchaser determining a purchase price. An earn-out that bases a portion of the valuation on actual future performance can soften the risk of speculative projections to the purchaser and put more money in the seller’s pocket.