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.

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: top organizational factors to build value

Find ways of retaining your key personnel

Can a potential buyer see himself in your business or are you blocking the way?

When preparing to sell or build value in a business, you need to step back. Strive to become dispensable, says Grant Mellow, ActionCoach.

Grant was one of several professionals who sat down with me last fall  to discuss ways owners could add value to their business.  He told us that ActionCoach’s definition of a business is a commercial, profitable, enterprise that works without you!

“Many businesses are dependent on the contribution of the owner for success,” Grant adds. “If you want to add value, then make sure systems run the business and have a great team running those systems. If your business lacks systems and relies on you then it has less value.”

Working ON the business, not IN the business can be hard, especially for those whose business has been their means of self-employment such as a mechanic who started a garage or a baker who opened a bakery.

The greater value comes when the business is making money without its owner’s involvement in the day-to-day activities. This gives the owner the option of “retiring on the job” with income and flexibility in their life.

Confidentiality: why it counts in selling your business

Broadcasting that your business is for sale adds risk

Some people tell too much online.  They announce to the world that they’re going on vacation, letting potential burglars know that they’ll be away from home for two full weeks.  Or they reveal personal details that result in their identity being stolen.

If you’re selling a business, broadcasting the word on a public forum like Craigslist or Kijiji or listing the details under business opportunities in your local newspaper can be just as harmful.  Yet it’s fairly common to see such listings, complete with photos.

Not that anyone is likely to show up to do you or your business personal harm. The potential damage can be just as devastating, though, affecting your chances of selling and in particular, the price you get.

In a real estate listing, you want to get the word out so that everyone knows that a particular house or building is for sale. In most small business listings, you do not want anyone to know that your business is for sale.

Selling a business: understanding what buyers are looking for

So what are buyers looking for?

Whether it’s their first purchase of a business or their 10th, buyers are looking for an ongoing income.

Not surprisingly, then, they’ll be attracted by businesses with a proven track record of consistent financial performance with solid/growing revenue and earnings.

Will the buyer be able to see himself/herself in the business?

Let’s follow a prospective buyer;  we’ll call him Tom.  We’ve met with Tom to assess his skills, interests, financial resources and experience as well as his personal and financial goals.  That lets us pre-screen businesses to find the ideal fit.  If we do not have it now, we may find it in the near future.

Tom is quite taken with one business in particular — an automotive parts store. Let’s say you’re its owner.  Tom’s been tinkering with his own and his friend’s vehicles since his teens so a somewhat-related business is appealing.  He manages a call centre so he has a skill set that’s transferable.

The store’s cash flow looks good.  It might be enough to give him a decent salary and cover financing payments.  But the purchase price is higher than Tom thought it would be.  He knows you’re willing to take back a note for part of the cost, but is concerned you’ll want too much for a down payment.  He can’t overspend as he needs working capital after the purchase.

He really wants to see the business though.  We set that up.  We may send him as a mystery shopper.

Preparing for the walk down the business aisle

So now our potential buyer is about to make his first visit to your business.  He’s signed a confidentiality agreement and he’s serious. Are the premises clean?  Is the equipment well-maintained?  Is the inventory current?  How do you think he’ll be treated?  Remember, first impressions matter.

He’ll want to know more about operations and opportunities:

• Does the business have a wide range of clients/customers or is there a concentration of accounts in any one area?  A concentration is a risk.
• What about suppliers?  Do you depend on a select few?  How long are their contracts for?
• How involved are you, the existing owner?  If you’re involved in most every aspect of daily operations, then how will the business function without you?
• Do you have a good operations manual and staff training program?
• Have you protected your intellectual property?
• Are the staff and clients likely to stay?

Buyers need assurances;  sellers need to find ways to provide them.  Staying on a few months to assist with transition or training is one way to alleviate concerns and help a new owner get acquainted with staff, clients and suppliers.

Back to Tom.  He’s still nervous, but wants to make an offer, understanding he can retract it for any reason up to the last day of due diligence.

A business is only worth what a buyer is willing to pay and what a seller is willing to accept

Both parties need to be comfortable with the other’s ability to deliver what is promised.  The detailed work of verifying financial and legal matters happens at due diligence.  That’s when the lawyers and accountants play key roles. But getting to that point requires give and take on both sides.

In negotiating a business deal there are many things that are important, but none more so than the price and terms.

Tom understands that we’ll need concessions from both sides to arrive at a deal that works for both parties.  He may not get the price down by much, given the value it represents in the market and his own need to secure financing.

In most cases buyers will need the seller to take back a note for a portion of the purchase price to be paid off over time. This “vendor take back” bridges more than financing, reassuring buyers that the seller is confident the business will pay for itself, mitigating potential unknown future liabilities and providing assurance that the seller believes this buyer will be successful.

Another part of the price and terms is the all-important down payment.  Tom can’t let the down payment take him right out of cash.  Even with an immediate cash flow, he’ll need working capital to keep the business going.  He’ll also want to keep something aside for the unexpected.

With our help, you and Tom work out the deal.  Tom is satisfied he’s getting a good business that will meet his current and future needs.  You’re continuing preparations for the next phase of your life, knowing you’re leaving your business in good hands.

Provided nothing takes you and Tom off course at due diligence, we’ll be toasting your success at closing.

If  you have questions about anything I covered above, feel free to ask them  in the comments section below.

You might want to sign up for Sunbelt’s monthly newsletter to get tips and hints on buying, valuing or selling a small business. You can see a sample here.

Our next post in the “selling a business” series will be on  “managing confidentiality”.

So what are buyers looking for?
Whether it’s their first purchase of a business or their 10th, buyers are looking for an ongoing income.  Not surprisingly, then, they’ll be attracted by businesses with a proven track record of consistent financial performance with solid/growing revenue and earnings. 

Will the buyer be able to see himself/herself in the business?
Let’s follow a prospective buyer; we’ll call him Tom. We’ve met with Tom to assess his skills, interests, financial resources and experience as well as his personal and financial goals.  That lets us pre-screen businesses to find the ideal fit. If we do not have it now, we may find it in the near future.
Tom is quite taken with one business in particular — an automotive parts store. Let’s say you’re its owner.  Tom’s been tinkering with his own and his friend’s vehicles since his teens so a somewhat-related business is appealing. He manages a call centre so he has a skill set that’s transferable.
The store’s cash flow looks good. It might be enough to give him a decent salary and cover financing payments. But the purchase price is higher than Tom thought it would be.  He knows you’re willing to take back a note for part of the cost, but is concerned you’ll want too much for a down payment. He can’t overspend as he needs working capital after the purchase.
He really wants to see the business though. We set that up. We may send him as a mystery shopper.

Preparing for the walk down the business aisle
So now our potential buyer is about to make his first visit to your business. He’s signed a confidentiality agreement and he’s serious.  Are the premises clean? Is the equipment well-maintained? Is the inventory current? How do you think he’ll be treated? Remember, first impressions matter.
He’ll want to know more about operations and opportunities:
* Does the business have a wide range of clients/customers or is there a concentration of accounts in any one area? A concentration is a risk.
* What about suppliers? Do you depend on a select few? How long are their contracts for?
* How involved are you, the existing owner? If you’re involved in most every aspect of daily operations, then how will the business function without you?
* Do you have a good operations manual and staff training program?
* Have you protected your intellectual property?
* Are the staff and clients likely to stay?
Buyers need assurances; sellers need to find ways to provide them. Staying on a few months to assist with transition or training is one way to alleviate concerns and help a new owner get acquainted with staff, clients and suppliers.
Back to Tom. He’s still nervous, but wants to make an offer, understanding he can retract it for any reason up to the last day of due diligence.

A business is only worth what a buyer is willing to pay and what a seller is willing to accept
Both parties need to be comfortable with the other’s ability to deliver what is promised. The detailed work of verifying financial and legal matters happens at due diligence. That’s when the lawyers and accountants play key roles. But getting to that point requires give and take on both sides.
In negotiating a business deal there are many things that are important, but none more so than the price and terms.
Tom understands that we’ll need concessions from both sides to arrive at a deal that works for both parties. He may not get the price down by much, given the value it represents in the market and his own need to secure financing.
In most cases buyers will need the seller to take back a note for a portion of the purchase price to be paid off over time. This “vendor take back”  bridges more than financing, reassuring buyers that the seller is confident the business will pay for itself, mitigating potential unknown future liabilities and providing assurance that the seller believes this buyer will be successful.
Another part of the price and terms is the all-important down payment.  Tom can’t let the down payment take him right out of cash.  Even with an immediate cash flow, he’ll need working capital to keep the business going. He’ll also want to keep something aside for the unexpected.
With our help, you and Tom work out the deal. Tom is satisfied he’s getting a good business that will meet his current and future needs. You’re continuing preparations for the next phase of your life, knowing you’re leaving your business in good hands.
Provided nothing takes you and Tom off course at due diligence, we’ll be toasting your success at closing,

Our next post will be “managing confidentiality”.

So what are buyers looking for?

Whether it’s their first purchase of a business or their 10th, buyers are looking for an ongoing income. Not surprisingly, then, they’ll be attracted by businesses with a proven track record of consistent financial performance with solid/growing revenue and earnings.

Will the buyer be able to see himself/herself in the business?

Let’s follow a prospective buyer; we’ll call him Tom. We’ve met with Tom to assess his skills, interests, financial resources and experience as well as his personal and financial goals. That lets us pre-screen businesses to find the ideal fit. If we do not have it now, we may find it in the near future.

Tom is quite taken with one business in particular — an automotive parts store. Let’s say you’re its owner. Tom’s been tinkering with his own and his friend’s vehicles since his teens so a somewhat-related business is appealing. He manages a call centre so he has a skill set that’s transferable.

The store’s cash flow looks good. It might be enough to give him a decent salary and cover financing payments. But the purchase price is higher than Tom thought it would be. He knows you’re willing to take back a note for part of the cost, but is concerned you’ll want too much for a down payment. He can’t overspend as he needs working capital after the purchase.

He really wants to see the business though. We set that up. We may send him as a mystery shopper.

Preparing for the walk down the business aisle

So now our potential buyer is about to make his first visit to your business. He’s signed a confidentiality agreement and he’s serious. Are the premises clean? Is the equipment well-maintained? Is the inventory current? How do you think he’ll be treated? Remember, first impressions matter.

He’ll want to know more about operations and opportunities:

* Does the business have a wide range of clients/customers or is there a concentration of accounts in any one area? A concentration is a risk.

* What about suppliers? Do you depend on a select few? How long are their contracts for?

* How involved are you, the existing owner? If you’re involved in most every aspect of daily operations, then how will the business function without you?

* Do you have a good operations manual and staff training program?

* Have you protected your intellectual property?

* Are the staff and clients likely to stay?

Buyers need assurances; sellers need to find ways to provide them. Staying on a few months to assist with transition or training is one way to alleviate concerns and help a new owner get acquainted with staff, clients and suppliers.

Back to Tom. He’s still nervous, but wants to make an offer, understanding he can retract it for any reason up to the last day of due diligence.

A business is only worth what a buyer is willing to pay and what a seller is willing to accept

Both parties need to be comfortable with the other’s ability to deliver what is promised. The detailed work of verifying financial and legal matters happens at due diligence. That’s when the lawyers and accountants play key roles. But getting to that point requires give and take on both sides.

In negotiating a business deal there are many things that are important, but none more so than the price and terms.

Tom understands that we’ll need concessions from both sides to arrive at a deal that works for both parties. He may not get the price down by much, given the value it represents in the market and his own need to secure financing.

In most cases buyers will need the seller to take back a note for a portion of the purchase price to be paid off over time. This “vendor take back” bridges more than financing, reassuring buyers that the seller is confident the business will pay for itself, mitigating potential unknown future liabilities and providing assurance that the seller believes this buyer will be successful.

Another part of the price and terms is the all-important down payment. Tom can’t let the down payment take him right out of cash. Even with an immediate cash flow, he’ll need working capital to keep the business going. He’ll also want to keep something aside for the unexpected.

With our help, you and Tom work out the deal. Tom is satisfied he’s getting a good business that will meet his current and future needs. You’re continuing preparations for the next phase of your life, knowing you’re leaving your business in good hands.

Provided nothing takes you and Tom off course at due diligence, we’ll be toasting your success at closing,

Our next post will be “managing confidentiality”.

Buying or selling a business: keeping the trust

Doing what is right

Every day or two there’s news about yet another person in sports, business, or government that’s breached personal or public trust.  Or so it seems.

It stands to follow that the public is losing faith in companies doing what is right.

Some turn their ethics on and off like the lights in their offices or buildings.

As an individual, you have integrity or you don’t.  You can’t just pick and choose according to the circumstances.  It’s the same in business.  Ethical conduct has to apply to everyone in your business and extend to everyone you do business with.  In our case, the behaviours relate to the buying or selling of a business.

You’re either ethical 100% of the time or you’re not ethical.

Entrepreneurs know how to create value in a business… do you?

Entrepreneurs are success=oriented

Do you already own a business? Is much of what you need to operate your business “in your head”?

Businesses that rely on their owners for success have less value because replacing the owner is much more difficult and they are not ready for growth. Yet that’s how most small businesses still operate today.

Working ON the business, as well as IN the business can be hard when you are putting in 60 hours a week to keep the business running.

Many business owners are happiest applying the technical skills that got them there in the first place – the mechanic who started a garage or a baker who opened a bakery. They are in their comfort zone. Dealing with their business vision, market segmentation, planning, process development, systems development, documentation, training programs, quality standards, sales processes and collateral, developing customer feedback mechanisms, employee encouragement, tracking systems and the like is not what got them started and it may not be what they enjoy. Yet it’s what makes the difference between a successful very small business and a great business that is poised for growth and highly saleable. The existence of these processes and systems adds great value to a business.

Somewhere along the line, people started calling business owners entrepreneurs. While they can be, many are not.

I explain this at seminars I hold for individuals interested in buying a business. While buying an established business is a statistically successful means (98%) of creating their own job, being able to recognize and appreciate the intangible assets will make them a better buyer. If such assets don’t exist, the opportunity is there to create them and thus improve the business performance, growth potential, and value. That’s where entrepreneurial skills come in.

Examining the entrepreneurial myth

Michael Gerber published his first e-myth book in 1985 and it’s become a management classic. Here’s what Wikipedia has to say about the e-myth.

E-Myth refers to the Entrepreneurial Myth- the idea that most business founders are technicians that were inspired to start a business because they were good at delivering a product or service. They have created a job for themselves, rather than a business.

It is a myth that people who are experts regarding a product or service will also be expert at running a business that provides these. Most make a good living doing it but do not develop entrepreneurial skills.

Entrepreneurs are success-oriented. They know how to supplement the skills they don’t have and eventually work themselves out of day-to-day operational responsibilities.

What are the key traits of an entrepreneur?

The Guardian Life Small Business Research Institute has some excellent studies on small business. They identify six dimensions that characterize success-oriented small business owners, owners who exhibit a strong success orientation based on their desire to enjoy longevity in their businesses, expand revenues and grow the size of their companies.

• Collaboration is one of the key dimensions that lead to success. Those who can effectively delegate and build strong relationships with their management teams, employees, and peripherals, are more likely to connect with customers.
• Being self-fulfilled. Successful small-business owners value the gratification they get from running their own companies and relish the respect that comes with being their own boss.
• Focusing on the future. Planning, both for the short term and the long term, helps entrepreneurs hone their business. A careful eye on cash-flow helps them run their business better both on the day-to-day and year-over-year fronts.
• Curiosity. Success-oriented small business owners are keenly interested in learning how others run their businesses.
• Use of effective technology Being “tech-savvy” helps entrepreneurs increase market, reduce costs and communicate effectively.
• Being action-oriented. Success-oriented small-business owners are decisive and willing to take calculated risks to take their business to the next level. They view adversity as “a kick in the rear to help you move forward”.

The Guardian Life Small Business Research Institute has found sharp differences occur in what matters most to small business owners as their companies evolve from very small entities to sizeable enterprises. (I’ll write more on that in my next post.)

Knowing what matters most is something that individuals buying a business also need to define. It’s important they clarify their skills, interest and experience, as well as their personal and financial goals before they start looking at any businesses.

A business broker can then work on matching them with business opportunities best suited to their profile and objectives. It’s also a help if sellers stay on a few months to assist the new buyers with transition and training. That’s pretty standard with the businesses we sell. We also introduce new buyers to other professionals who can help them grow their business. Lawyers, accountants, bookkeepers, bankers, wealth advisers, marketing specialists, insurance professionals, and business coaches, each have valuable expertise and services they can draw on.

Sellers can also work with these professional advisers to maximize value while minimizing risk and taxes when they sell. As I mentioned at the start of this post, it’s important that owners make their business independent of them. If you want to add value make sure systems run the business and have a great team running those systems. Attaining the level of entrepreneur, the business owner can even choose to “retire on the job” with income and flexibility in their life.

Looking for more information on buying or building a business?

We have many free resources to help first-time buyers and even experienced entrepreneurs to better prepare for success, including a 12-video training package that guides prospective buyers step-by-step through locating, valuing, financing and buying a privately held business. Register with Sunbelt’s Business Buyers University (BBU) for free, unlimited access to these videos and our e-book “Secrets of Buying the Right Business (for you) Right”.

You’ll find many more resources on our web site and Facebook page.

Pay yourself first: think twice if you’re a small business owner

Many small business owners don't even take a salary

Most small business owners are up and out the door early to open the local convenience stores, restaurants, dry cleaners, retail stores, auto repair shops, small manufacturing companies, and other such businesses that come to life each day in your city or town. Most small business owners work long hours. There’s no time-and-a-half pay here. Many small business owners don’t even take a salary.

Only half in the U.S. do. And 44% of those pay themselves less than $50,000 a year. That’s what a poll by American Express Open found.

A recent article in the Boston Herald reported on these findings, making a blanket statement that “it’s not good” for founders/owners to not take a salary.

The full text of the article is no longer available but the comments it drew are. I found the article to be misinformation written by someone who has never built a business.

One commenter pointed out that the decision to take a salary or not is situational and he is right.

Accountants are always preaching to pay yourself first; however, when the greater need is to use the money for something else, that is what business owners do. The idea of setting up a regular payment to the owner is valid, as owners should be building some equity outside their business. But when the business needs the money to pay staff or launch a new product or service or embark on a marketing program, then the owner makes a conscious decision to use the money where it will do the most good.

Most owners pay the staff, the consultants and the bills before they take anything for themselves. The past couple of years, survival has been the goal for most.

Companies that are founded upon other people’s money or are public corporations generally operate on a different basis, yet even in these cases, many CEO Shareholders do not take a salary but focus on building value.

For the owner-operated business, the goal is to pay the bills, invest in the future of the business and have enough for the family to live on. Some families need more than others, so the amount taken varies substantially. Once the business is generating more than what’s required to pay the bills and invest in its future, owners take more and they take it in many different ways depending upon their lifestyle and needs.

It is their money as business owner and operator– not shareholders’ or investors’ money–and they make decisions accordingly.

Minimizing taxes

It is not surprising nor is it any indication of the benefit of owning a business that 50% of owners do not take a salary and that of those who do, 44% take less than $50,000. The money an owner takes as salary is taxable income with the tax being due when the salary is taken. On the other hand, the corporate small business rate is lower and owners can carry losses forward and back, giving them more flexibility.

Owners who pay themselves as self-employed consultants can use expense deductions a salaried employee can’t. Income-splitting between couples is often used to reduce taxes, as are dividend payments.

Five smart steps to selling a business

The 5-step process we've found effective in selling a business

The grocery store has been in John’s family nearly 50 years now, central to the new life they began when they moved to Canada in the early 50s.   He remembers them working long and hard to make enough to support him and his sister. It was only natural that John took over the business when it got too much for his aging father.  The store provided John and his wife with enough income to buy a modest house and put their own son through university.  John never gave much thought to retiring – he enjoyed his customers too much. But his health has begun to fail and his wife is very worried. She wants him to enjoy other things in life before it’s too late. But what about their business? They can’t just close the doors.

A thousand miles away, another business owner is also pondering his future. Jack started his marine and land power sport dealership 20 years ago.  Now 50, he brings in nearly $3 million annually in revenue and owns his showroom and service facility to boot. Determination, hard work and business savvy have all played a part in Jack’s success. He intends to use the same smarts to plan out his retirement.  Jack wants to see more of the world, and sail wherever and whenever his inclination takes him.  He plans to use the next five years to structure his business to fund it all.

The details in these two scenarios are representative of the issues that small business owners face when initiating the selling of a business. Traditionally, small businesses were passed down to the next generation, “passively” sold within the local market or closed down. Today, there are fewer businesses being passed down.

Sooner or later business owners must sell or exit their business. In Canada, some 20% of small businesses are in transition at any given time.

Here’s an overview of the five-step process we’ve found effective in selling a business.

The Sunbelt five-step process to selling a business

1) Produce a detailed valuation of the business to identify the Most Probable Selling Price using appropriate valuation methodologies. This represents a reasonable price, factoring the true earnings and what the market is willing to pay.
2) Prepare key documents:

• a one-page “blind” Business Summary that highlights the key attributes of the business without identifying the business name or location;
• a Confidential Business Overview that includes a history and detailed analysis of the business, products and or services,  markets, industry, staff, strengths, weaknesses, opportunities and threats;
• a Confidential Business Profile that includes financial and operating information, issued only to buyers we feel are serious and have signed a confidentiality agreement.

3) Confidentially market the business. A broker with a well-established firm can expose the opportunity to hundreds of prospective buyers without employees, customers or a competitors knowing the business is for sale. Advertising won’t specifically identify the business.
4) Screen inquiries to confirm resources and potential for assuming your business and manage negotiations, which require give and take on both sides.
5) Accept the best offer and complete the sale, ironing out issues during due diligence.

Protect your wealth

Should you sell your business now or wait a few years?

Start by knowing what your business is worth.  Complete step one, Business Valuation, with your business broker  to determine if selling now will provide sufficient proceeds to support your retirement. Identify the value drivers for your business, the changes and improvements to make over the next few years to add value and the professionals to help you ensure the best structuring from a tax and change-of-ownership perspective.

Contact your local Sunbelt office to speak with a broker in complete confidence and without obligation.