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What Documents Do You Need When You Sell a Business?

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Is it time to retire? Or, are you looking for something new and exciting to try? If you’re ready to sell your business, what documents do you need when you sell a business? There are important steps that need to be taken. One of the first things you should do is start working with a professional business broker. A lot of information about your business will need to be compiled, and the business will need to be marketed properly to find the right buyer, or for that matter, any buyer. Your broker will be with you through every step of this, ensuring you have the best chance of selling the business and getting a good price and terms for it. Some of the documents they can help you gather or create include the following:

Confidentiality Agreement

The first thing that’s done is to create a confidentiality agreement (CA), otherwise known as a non-disclosure agreement (NDA).  The Seller will want to have a confidentiality agreement signed by the Buyer. This is designed to help keep sensitive information about the business from being released, so it’s something that benefits you, as a Seller. If the Buyer goes through due diligence, learns sensitive details about the business, then decides against purchasing it, the Seller won’t want the Buyer taking advantage of the information they’ve learned. The confidentiality agreement should be signed before any information about the business is released, including the name.  This way, the Seller is protected regarding sensitive information being released about the business, or just the fact that the business is being sold, at all.

Letter of Intent

Once a buyer has done some initial due diligence and wants to make an offer, they create a Letter of Intent (LOI).  The LOI details the conditions and terms of the sale, which include the purchase price, if a deposit is needed, terms for due diligence, and more. It is possible for the Buyer to create an LOI and submit it to the Seller, but this won’t always be the case. The business broker, attorneys, Seller, and Buyer can work together to create an LOI with terms they both agree to and are willing to sign. The LOI is a non-binding agreement, which means there isn’t yet a guarantee that the sale will happen. However, once there is an LOI signed by the buyer and the seller, the Seller will usually give the Buyer some exclusivity, and the Buyer may place a deposit in good faith. Smaller deals usually have deposits while larger deals do not, though they may have “break-up” fees.  If problems are found in due diligence or the negotiations don’t go through, the Buyer receives this deposit back, depending on timing and successful completion of due diligence. The LOI can also be used by the buyer to help secure a loan with a bank to purchase the business.

Documents for Due Diligence

The Buyer will need to do due diligence to make sure the information presented about the business is true and complete. The Seller will need to get various materials ready for diligence, but it’s something that is incumbent on the Buyer to complete. Diligence is where the Buyer examines information about the business to understand how that particular the business is run and to make sure it’s a viable going-concern.  During due diligence, the buyer will look through financial records, sales reports, profit and loss statements for the previous few years, leases, contracts, loans, records of orders, and more. It is important for the Seller to have these documents ready and available for the Buyer to view and to make sure they’re properly organized so the Buyer will get the information they need.

Purchase Agreement

If the Buyer does decide to purchase the business, the next step is the purchase agreement and the other documents that make up the “definitive agreements”. The purchase agreement is a binding agreement, and once it is signed, the buyer is obligated to proceed with the purchase, unless there are material changes to the business before closing or a major business disruption/act of God. The purchase agreement will include any details of the sale, such as the purchase price and any specific terms. Both the Buyer and Seller should agree with all information in the purchase agreement.  The attorneys for both sides will include anything needed to help protect their clients’ interests. This document can be very large, and sometimes this can be where things can become contentious.  While most business brokers are not attorneys and will not write legal language, brokers can help mediate “business decisions”.  This happens when attorneys reach a stalemate in negotiations and need both sides to make a “business” decision.

Seller Financing (Not All Sales)

The financing can differ based on the buyer’s financial situation, the risk involved in transferring the business to a new Buyer, or what the bank may be willing to lend on an acquisition. For sellers, the best option is to receive cash from the Buyer. However, many buyers cannot pay all cash, nor are they interested in taking all of the risk. Instead, they’ll need to finance the purchase. This can be done through a bank loan, but it can also be done via seller financing, or both.  If the Seller does agree to finance the business purchase, documents need to be created outlining the terms of the agreement. This is called a promissory note, or a Seller’s Note.  Seller Notes are never a pleasant option for Sellers, who then need to help finance their own business sale, but seller financing documents can help protect the seller if the buyer cannot or does not pay. If the business is purchased with cash or a bank loan, seller financing documents are not needed. However, because all small businesses are risky, some amount of seller financing could be the difference between receiving a premium for the business, or selling the business, at all.

Closing Documents

When everything else is done, the last step involves the closing documents. These usually include the bank paperwork needed to close the sale and transfers the ownership of all parts of the business to the buyer. There are a number of legal contracts included in this paperwork, so it is a good idea to have a professional help with this step. However, this is the last step so, as long as there are no outstanding issues from the previous steps.  Then, these papers can be signed, the money is wired to the Seller, and the deal is officially considered closed. Note that the closing documents can differ based on the details of the sale, such as the financing and any specific terms that may need to be included in the final paperwork.

Getting ready to sell your business takes a lot of work, and you’ll need a lot of documents to get ready to sell. Whether you’re just thinking about it now or you’re ready to talk to someone and get started, a business broker, along with a dedicated M&A attorney can help. They’ll be with you through each step of the sale and will work with you to compile all of the info needed to sell your business. Talk to a business broker today about what documents you need to sell your Austin TX business and learn more about how they’ll help you complete your next sale. What documents do you need when you sell a business? These can be the difference between selling your business or not selling at all!

Exit Strategies for Small Business Owners

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A business owner who is ready to leave their business needs to have an exit strategy. The exit strategy is simply how they’ll remove themselves as the owner of the business, how they’ll monetize their business, and how long the exit strategy will take. By working out the exit strategy in advance, small business owners have more control over their futures and the future of the business. Some of the most common exit strategies used by small business owners today include the following:

Liquidation or Walking Away

One strategy small business owners can use is to close the business and liquidate all of the assets to cover any remaining debts. This can be advantageous because it’s possible to close the business and sell off any remaining assets quickly, but it can have disadvantages as well. There is not going to be a high return on assets for the owner, and the only money they’ll receive is the money from the liquidation sale. Even when the economy is doing well, it may be difficult to get good prices for machinery or equipment the business is selling. Plus, when money is obtained, it must go to repaying debts, while anything remaining goes to the business owner.

Keep it in the Family

Some business owners may want to give or sell the business to a family owner. This could lead to a potentially smooth transaction, especially if the family member has already been a part of the business and knows what is needed to manage the business successfully. It also can allow the small business owner to continue to work in an advisory position. The downside to this is that the family members may not want to take over the business or may not have the appropriate skills to do so.

Selling to an Employee

It is possible to sell the company to current employees or managers who may be interested. The employees or managers are already familiar with the business, so they’re likely to want the business to succeed. If this is done over a long period of time, it can increase employee loyalty, as well. Unfortunately, there may not be an employee or manager who is qualified to own the business, and there may be an issue with financing the sale. Along with this, there’s the potential for clients to be dissatisfied with the new ownership or any changes in how the business is run.

Selling on the Open Market

The most popular way to sell a business is on the open market. This is also often the easiest way to sell a business, as a business broker can handle a lot of the work. If a business owner is ready to retire or wants to try something new, they can engage a business broker and look for the right buyer. This can help maximize the return for the business owner.  However, there is a lot that can influence the price of the sale. With the right business broker to help, a business valuation can be done to determine the best selling price and to potentially sell the business faster. Business owners who want to sell on the open market would be advised to work with a business broker, so they can get the best terms and profit as much as possible during the sale of the business.

Bankruptcy

While no one wants to file for bankruptcy, it does provide the opportunity to get out of a bad situation. If bankruptcy is necessary to sell the business, working with a bankruptcy attorney can allow the business owner to file and start liquidating the business. Once the bankruptcy is complete, the business owner can potentially have business debts settled.  Psychologically, it may be satisfying to not have the same responsibilities, anymore. However, it can impact their ability to obtain credit in the future and can end the relationship with suppliers, clients, and customers. If the business owner wants to open a new business in the future, the end of important relationships can be an issue.

Going Public With an IPO

Depending on the size of the business, it may be possible to go public through an IPO. This can be extremely profitable, but it is not fast. Most businesses typically take many years to build enough scale to sell to the public through an IPO.  Also, depending on the structure of the IPO, the business owner may have to wait to be able to sell their shares during what is called the “lockup” period. It’s also important to be aware, before deciding on this exit strategy, that there are higher compliance and reporting standards for a company that is public. Plus, Dodd-Frank laws state that an owner could be held personally liable for fraudulent accounting of the business, even if they were not directly involved, or any failure to disclose certain issues with the business when it goes public.

Merger or Acquisition

Mergers and acquisitions are other options for small business owners to consider. For a merger, the business owner will likely need to continue being a part of the business, for at least a transition period, so they will not be able to walk away right after the merger is done. With an acquisition, however, the business is purchased by another business. In this case, the owner will sell the business to the other company, and the other company will combine it with their own. While there will likely still be a transition period, the expectation may be that the former Owner may be able to leave, after a short transition period.  One of the downsides to acquisition is that the small business owner may need to sign a non-compete agreement, meaning they can’t open a new business in the same industry for multiple years.

When it’s time to leave a business, whether to retire or start something new, finding the right exit strategy is a must. While some of these are not desirable, like filing for bankruptcy, there are options to account for just about any situation. To get a larger profit or to make sure the business sells quickly, working with a business broker to sell the business on the open market may be the best solution. Talk to a business broker today to find out how much your business could be worth or to find out what is needed to sell your business or what exit strategies are best.

Is Selling the Business to an Employee a Good Idea?

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When it’s time to sell the business and retire or move onto something new, one option business owners may have is to sell the business to an employee. If there is an employee capable of owning the business and ready to do so, selling it to them could be a good decision and could be beneficial to the seller. However, it is important to note that there could be risks to doing this, so sellers will need to think carefully about what they want from the sale and whether selling to an employee will allow them to get what they need from the sale.

Company Retains the Culture and Values

The employee already knows everything about the business, and they likely already care about what happens to the company. They’re more likely to maintain the current culture within the company as well as stick to the company’s values. It’s also more likely they’ll retain the current employees, as they already have a connection with them and know how the employees work.  However, the Seller may want to think about whether selling to a single employee may ruffle the feathers of other employees?

More Control Over the Sale

When the buyer is an employee, the Seller often has more negotiating power and more control over the sale. They’ll be able to dictate more of the price and terms, and the buyer may be more willing to compromise since they’re already involved in the business.  However, when you only have one buyer, this can also lessen the bargaining power of the Seller, as well.

Less Hassle During the Sale

There is a lot that goes into preparing a business for sale, but some of this isn’t needed if the buyer is an employee. The employee is already familiar with the business, so there’s usually no need to produce marketing materials or try to convince them the business is worth purchasing. They already know it is. It’s still important to be transparent during the sales process, but a lot of this is easier with an employee instead of a buyer that’s not connected with the business.  Most sellers want to simply “hand over the keys” and this can be easier with an internal buyer, rather than an external buyer.

Smoother Transition to New Ownership

Since the employee already works for the company, the transfer of ownership is often a lot easier. The employees, customers, suppliers, and distributers most likely know the new owner, and there isn’t as much of a learning curve for handling the day-to-day operations of the business. This means the seller may not need to stay for consulting after the sale is completed.

There Can be Drawbacks

Of course, there are potential drawbacks or risks when selling to an employee. Some of these include the following.

  • Lower Sale Price – Most sales to employees generate a lower sale price compared to sales to other buyers.  While this may seem counterintuitive, most internal buyers would think it would be less expensive to start a new business, than pay a market price for the Seller’s business.
  • Lack of Capital – Most employees will not have the capital to purchase the business all at once or not have enough funds or credit for a bank loan. This could mean the seller must finance the sale, which can have drawbacks of its own.
  • Employees May Quit – If the owner lets employees know they’re thinking about selling, the employees may wonder if they will still have a job. This may lead them to start looking for a new job and quit instead of waiting to see what happens.  This could also happen if there are any internal jealousies that result from a certain employee buying the business versus another.

How to Sell to an Employee

The most common way to sell a business to employees is through an ESOP or Employee Stock Ownership Plan. The employees in the ESOP are able to purchase stock in the business, sharing the ownership. Each employee receives an ownership stake, and the stocks are held in a trust until they leave the company. There are various ways to fund the ESOPs, including bank and seller financing. This can provide tax advantages like a deferral of capital gains taxes, which can be beneficial for the seller. Depending on how this is structure, the owner is still able to protect the company and can take control of the company again if needed to boost sales or profits.  An ESOP can be appropriate for businesses that make $1.5 million in cash flow or higher, as this can be an expensive option.  It’s also more appropriate for businesses with a strong, internal management team.  If you’re an Owner who wears many “hats”, this may not be the correct option for you.  If you are also concerned about getting all of the money up front and not having to worry about the business going forward, this may not be a great option for you.

Determining if Selling to an Employee is the Right Move

Selling the business to an employee or multiple employees may make a lot of sense if there is an employee ready and willing to take over the business. However, it’s not always the right move to make. Business owners will need to consider whether they need the sales proceeds upfront, whether they want to maintain the business as it is and help it continue to thrive in the future, or if they’re worried about what will happen if a new owner takes over the business. If the owner does decide to sell to an employee, they should start preparing for the transfer of ownership as soon as possible.

How to Prepare to Transfer Ownership

Before the business can be sold to an employee, there are some steps the owner should take. These steps help ensure the employee is ready to take over the business and that they’re going to be able to handle the ownership once they are in charge. The steps to take include the following.

  • Training for Ownership – The training part of the transfer can be the most important. The employee learns more about how the business is run and is able to take more control over the business, but they do still report to the owner and will need to have some decisions overseen by the current owner of the company.  However, the longer the lead time, the better, especially if there are contingent payments, such as seller-financing involved.
  • Higher Management Level – The employee can be moved up to a higher level in the company. The owner still has the control, but the employee has a little more free reign to make decisions for the business and learn more about how to run the business.
  • Vesting Phase – During this, the ownership and voting rights start to transfer to the employee, and the Seller receives payments based on the agreement with the employee. The employee is now more in control over the business, and the Seller does less of the day-to-day operations.
  • Final Control Transfer – At this point, the transfer of ownership is complete. The way this looks depends on how the sale is done, so it is possible for the seller to still have some say in the company and still receive profits to cover the purchase of the business. At this point, however, the employee is the owner of the company.

Selling a business to an employee can be a good idea, but it won’t work in all situations. If you’re considering selling your business and you’d like to sell to an employee, talk to your business broker or M&A professional, and legal professionals about what to expect and how it works. Visit businessbrokersaustin.com now to get help or more information on selling the business to an employee.

Getting Help When Selling Businesses in Austin, TX

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Although buyers for Austin businesses are not in short supply, matching a buyer with an existing business isn’t always as simple as it might sound. That’s why area Austin business brokers and mergers and acquisitions experts suggest anyone contemplating selling a business work with an area professional for the best results.  In the last few years, selling businesses in Austin TX has become much more complex due to the number of companies and individual buyers moving from out-of-state to the Austin area.

Industry experts report Austin area and Central Texas are expected to experience significant growth over the next five to ten years. That prediction suggests business owners considering marketing their organization should explore their options soon to determine when to sell.

Getting Started: Evaluate the Value of a Business

Anyone asking how to sell a business in the Austin area wonders how the process actually starts. The first step is to determine the value of the business. Properly evaluating any business requires a certain level of expertise as there are many factors involved in the determination of value.

When selling a business, gross revenue figures, profit margins, equipment, and inventory all have values. Intangibles like reputation and goodwill also play roles in the business valuation, but are a little more difficult to put an exact figure on.  Here at CGK Business Sales, we have a particular expertise in business valuations.  We have been trained at some of the highest levels and passed some of the most difficult tests in the industry.  We will give you a realistic value range for your business.  We are not here to give you an absurdly high price and wait for the buyers to beat that price down.  We don’t think that’s fair.  Often, we hear of other business brokers in Austin who do this.  Then, the business does not sell and just sits on the market.  Meanwhile, these less-trained business brokers have burned some of the best, most-interested buyers.  We give you an idea of how the buyer may look at your business, how the bank may value it, and how the third-party valuation companies (in SBA deals) would look at your business.  All three of these types of stakeholders have different motivations and will look at your business in different ways.  For larger businesses, this process gets even more complex.

Putting the Best Foot Forward: Developing a Confidential Information Memorandum (CIM)

Marketing is somewhat of an art, and Austin business brokers and mergers and acquisitions professionals understand how important it is to present a business in the best light possible. The Confidential Information Memorandum (CIM) must contain all the information prospective buyers need to determine if an acquisition is viable.

Business brokers must become marketing experts, who work closely with the business owner. These mergers and acquisition professionals must give out enough information at this stage to make a buyer interested, while protecting confidential information.  Some information must, by its very nature, remain confidential during early marketing stages. At some point, later, during due diligence, all pertinent information must be disclosed to buyers.  But, at this point, the Confidential Information Memorandum’s objective is to put the business in the best possible light and then determine which buyers are more likely to take that next step in the buying process.  This is a delicate balance.  The Confidential Information Memorandum must be thorough enough to cover all the basics and then some, while protecting the seller from competitors who might use that information for their advantage.  Keep in mind, any buyer that wants to see the CIM must sign a non-disclosure agreement (NDA) ahead of time.  We also find out background information on the buyer to determine who they are, what company they are with, and whether they are financially qualified to buy the business before they see the CIM or find out any information, at all, about the seller’s business.

Moving On: Matching Buyers with Sellers

Not every business buyer matches the needs of specific sellers, which means Austin business brokers and mergers and acquisition specialists must work diligently to match a seller with an ideal buyer for their business. In some cases, that may take a little time, as the pool of buyers is in constant fluctuation. However, when determining how to sell your business, business brokers become marketing professionals and have the experience and connections necessary to pair sellers with prospective purchasers.

Negotiating Skills: Experience Makes a Difference

Austin business owners frequently ask business brokers to “sell my business” because they realize the mergers and acquisitions professionals have the skill sets necessary to negotiate a transaction properly. When the objective is to net the highest profit possible from the sale of a business, owners rarely have all the experience necessary to negotiate prices and terms effectively.  Remember, it’s not just the highest price that should always win.  The terms are very, very important to a business sale.  With sophisticated buyers, this is a common tactic; promise the highest price, but make the terms very stringent to get that highest purchase price.  Also, as deal size grows, deal structure becomes more important.  If the seller is to net the highest after-tax proceeds, careful planning is necessary, not just from your attorney or tax professional, but from the business broker, as well. When it comes to selling businesses in Austin TX, not all business brokers are created equal. We have negotiated with the most sophisticated types of buyers down to first-time buyers.

Getting to the Closing: Facing Those Inevitable Problems

Any business for sale will face problems between the signing of a letter of intent (LOI) to purchase and finalizing the transaction. There is a significant amount of due diligence that any buyer will want to do.  Even if the buyer is inexperienced, they will usually hire service providers that are experienced in this process.  Of course, if the buyer is a private equity professional or larger corporate buyer, they will have multiple types of diligence teams who will help with the due diligence process.  It’s usually best if any problems are disclosed ahead of time.  It’s a fact of life that issues no one anticipated will emerge. Your better business broker and mergers and acquisitions professionals deal with those challenges on every deal.  They will make sure the transaction closes and everyone involved is satisfied with the results.

Taking the First Step: A Simple Phone Call Gets the Ball Rolling

If you’re considering selling a business anywhere in the Austin area, it pays to consult industry experts early in the process. Doing so virtually eliminates the problems many business owners confront when going forward with a sale. If you’ve got questions about how to sell a business, the answers are only a phone call or email away. Contact an Austin business broker for help, today.  CGK Business Sales has the education, experience, and patience necessary to get your business sold.  Call us today at 512-900-3770 and we’ll be happy to speak with you in greater detail about selling businesses in Austin TX.

Maintaining Confidentiality In Your Business Sale

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For business sellers, maintaining confidentiality in your business sale is a crucial part of the sale process. If creditors, competitors, customers, or employees find out about an impending sale, it could adversely affect the business’ momentum and its value. While confidentiality is tricky, it’s less so when the owner works with an experienced, qualified Austin business broker. In this guide, readers can learn which steps to take to keep a business sale confidential.

Use Generic Descriptions

An Austin business broker will advise his or her client against using the business’ name until buyers are qualified and have signed a confidentiality agreement, also known as a Non-Disclosure Agreement (NDA). Businesses should be presented to buyers based on their strength and nature, rather than their names, and responses should be directed to the business broker to main confidentiality. Often, the business broker will also have a targeted list of buyers, which limits the number of people who have any kind of knowledge of the business sale.  If the business is advertised, the business is only advertised in the most generic terms, so that buyers do not know which business underlies the ad.  This step allows the broker to save money and time by following up only with the most qualified prospects.

Execute an NDA

It’s a good idea to have the buyer sign an NDA (non-disclosure agreement) before they begin working with the seller’s business broker. These agreements are rather broad, and they cover how much info can be shared with buyers’ partners, lawyers, accountants, and advisers. Buyers are required to work with the broker rather than going directly to the seller, which offers many benefits as far as confidentiality is concerned.  We also have different NDA’s, depending on whether the buyer is a strategic buyer (this means they are a company), a private equity firm, or high net-worth individual.  Different legal wording in these documents  can protect a seller, in the rare case where the buyer is simply fishing for information.  That being said, the grand, grand majority of our buyers are very serious.  They have no interest in starting a business from scratch.  They want to buy an established business for a reason.  That is, they want to put their skills to use right away.  Usually, these skills mean taking a business from one level to another.  They do not want to spend the two or three years it would take, at minimum, to get a business off the ground with limited to no cash flow during that time.  They would rather take an existing business and scale it to new heights.  Although tire kickers do exist in the marketplace, this rarely happens to our clients.  Our buyers have no simply interest in learning information, just to start a business from scratch.  That is a waste of their time.  They would rather spend that time scaling an existing business.

Pre-Qualify Buyers

An Austin business broker will screen potential buyers as a way of protecting the seller’s confidentiality. The firm has proprietary buyer verification methods, and the team takes the entire process seriously. If a buyer doesn’t have a resume, a LinkedIn profile, an established fund with committed capital, or some verification method, they’re not taken seriously, and they’re not qualified to buy the business.  We do not share any information with these buyers.  We ask the buyer to fill out a buyer profile, which details who the buyer is, where they work, and what kinds of fund they have.  This does a good job of weeding out potential tire kickers.

Learn What to Expect From the Broker

A qualified buyer would prefer for the business’ information to stay private because they like knowing that the broker has taken steps to protect sensitive information. Buyers should be ready to go through our proven process, and if they seem to be in a rush, they’ll likely be eliminated from the buyer pool. While it’s important for the seller to work closely with the broker, it’s vital for buyers as well.  Most of the buyers we work with have been through this process before and will quickly ask us for our NDA.  It’s usually a key sign that they have not been through this process before, if they balk at signing an NDA.  We have a verbal understanding with our sellers: You spend your time running the business while we get the deal done for you.  That’s the understand we have with sellers: You run the business and keep the cash flow going, while we run the deal.  This understanding seems to work well. Business brokers understand that maintaining confidentiality in your business sale is very important and deserves the utmost care.

Meet the Buyer In Person

After the NDA’s been signed and the buyer reviews the Confidential Information Memorandum (CIM), they will often ask for a conference call between Seller, Buyer, and Broker.  Here we get into more detailed questions and answers.  If things progress, the next step in the initial selling process is for the Austin broker to schedule an in-person meeting between the Buyer and Seller. Ideally, such meetings are held via Zoom (during covid) or at the business’s location. In-person meetings at the location, occur after hours, once all employees have left.  Serious buyers will want to see the facilities as part of due diligence, so this meeting checks one of the diligence boxes.  Buyers usually want to get a feeling for the Seller that they can’t get over the phone, so this meeting becomes part of the trust building process that needs to occur between buyer and seller.  Sellers typically take in-person buyers more seriously, and buyers will get the chance to learn whether the seller will help them during the training and transition phase.

The Final Word

As sellers review the steps listed above, they may be nervous about the process, especially if they’ve never gone through it before. An effective Austin business broker will help both parties in a way that keeps confidentiality throughout the entire process. CGK Business Sales has successfully handled many transactions over the years, and the team has an extensive knowledge base on how to successfully market and sell businesses. We know how to run an effective due diligence process to get a deal done.  Plus, we have outstanding legal, banking, and accounting referrals that will help take an opaque M&A process from start to completion.  We will begin by maintaining confidentiality in your business sale. Call today to schedule a consultation or visit the website for more details.

How to Increase the Value of Your Business Without Generating More Profits

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No matter the economic climate, it’s important for business owners to start monitoring their companies’ value up to five years before making an exit. Though most assume that business valuation is focused only on multiples, forecasts, and return rates, it’s more qualitative than it seems.

A valuation is a prediction of a company’s prospects, and to reflect those goals accurately, business owners must identify things that enhance value. Those factors, of course, vary by industry, but we’ll offer some value-adding tips here.

Increase Access to Capital

The smaller a company is, the less access it has to equity and debt capital. To increase your business’ value without a corresponding spike in profits, you’ll need to determine which type of capital will meet your goals. Ask these questions:

  • Is the company leveraged? If so, how?
  • How is the business’ future affected by bank covenant restrictions?
  • Are loans personally guaranteed by shareholders?
  • Is it possible to bring in outside investors to meet future capital needs for growth?

With the answers to these and other questions, you’ll have the information needed to gain greater access to capital.

Building a Bigger Customer Base

A diverse, yet solid customer base is crucial to a company’s ongoing viability. When businesses profit by focusing solely on big clients, they grow to depend on them. It’s not good to concentrate revenue with just a few customers; companies must allocate customer concentration in ways that reduce the risk of revenue loss. Ask how much the company’s top clients contribute to its revenues and find out how much of that revenue recurs. By determining the useful economic life of the customer base and the company’s biggest clients, it’s possible to position yourself in a way that reaches more people.

Use Economies of Scale

As output increases, the cost per unit goes down. Whether it’s done by spreading the capacity cost over a higher volume or offering quantity discounts, large companies possess significant advantages in some markets. Consider the answers to these questions:

  • Is the business leveraging its cost savings effectively?
  • Are there any opportunities to realize larger or additional economies of scale?
  • Can I enter a joint venture or outsource production to reduce expenses and gain more buying power?

With an economy of scale, owners can increase their companies’ value by ramping up output without spending more money.

Engage in External Financial Monitoring

Through financial analysis, trends are measured, assets and liabilities are identified, and a company’s performance is compared to that of similar firms. When financial statements are compiled and prepared in-house, it may keep managers from seeing things with an unbiased eye—and it may make potential buyers question the accuracy of the data.

Before taking this step, ask yourself how the company compares to others in terms of profitability, solvency, activity, and liquidity. Have financial controls been implemented, and are finances reviewed by an outside accountant? If the answer to any of these questions is “no,” it’s time to bring in some help from an external source.

Invest in the Company’s Human Resources

Employees are the engine that keeps a successful company moving. Crucial value-adders include the skills, experience, knowledge, creativity, and training workers bring to a company, as well as the corporate culture.

When considering the value of human capital, focus on quality controls and the effectiveness of the company’s service and production capabilities. The depth of the management team is another thing to think about. Does the company depend on a single person for customer contacts, production skills, or technical support? If so, it’s important to have a succession plan in place.

Work on Branding and Marketing Strategies

Marketing establishes a connection between the customer’s requirements and their responses to the services and products they’ve been offered. With a memorable brand, you’ll boost sales through market recognition and you’ll also improve the company’s operational efficiency.

When forming a sales strategy, assess the company’s marketing shortcomings and capabilities. How well-known is the brand, and does the company have a strong online presence? Companies are more valuable when branding reflects their mission.

Diversify Your Offerings

Niche companies often derive their strength from a narrow focus, but specificity may lead to a lack of diversity and a dependence on a small market. Owners of such businesses often find that their most important clients prefer to deal with wide-range suppliers, which leads them to expand offerings or sell to a larger competitor. With diversification comes lower risk and increased value.

Consider the breadth of the company’s offerings. Are any of them subject to market fluctuations? Can you offer different products and services that use existing customer bases, production capabilities, and human capital? When businesses are horizontally and vertically integrated, they’re more valuable in the eyes of buyers.

Become More Tech-Savvy

Businesses with few resources often find research and development a challenge, as they struggle to keep up with the market’s technological changes. These companies typically spend most of their money and time on the development of just a few products. This strategy usually results in the obsolescence of services and products, slow growth, and market share losses. Meanwhile, bigger companies, with their technological expertise, find it easier to offer products that meet customers’ needs.

Before improving the company’s technology, focus on the allocation of resources to research and development. Do you use updated tech, and will upcoming changes adversely affect your service and product offerings? Answering these questions will help you identify areas for technological improvement and make the company look better to buyers.

In Closing

Continuous assessment of a business’ value drivers will increase the chances of success. Valuation involves a thorough qualitative and quantitative assessment that should be a key part of a company’s operating procedure. With a proper valuation assessment, you’ll be left with meaningful and actionable information that maximizes returns and highlights the company’s intrinsic value. If you’re looking to sell a business in the area, consult the experts at businessbrokersaustin.com for help, service, and advice.

3 Business Valuation Methods You Need to Know About

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Business owners who are ready to sell their business will often wonder, what is my business worth? This is likely the first question they’ll ask themselves since it is the most important; the value of the business determines how much they can obtain if they sell the business. There are a number of different business valuation methods that are in use today, but three that any small business owner will want to know about are the asset approach, the discounted cash flow approach, and the comparable transactions approach.

Asset Approach to Valuation

This business valuation approach is done by determining the values of the assets and liabilities for the business. The liabilities are subtracted from the assets, and the difference is going to be the value of the business. This can be a great way to determine the value of the business if it’s simple to determine the value of all assets and liabilities. However, this doesn’t take into account things that are valuable to the business but that don’t have a price that is easily determined. Also, the owner of a small business keeps some of the assets, while paying off the liabilities. Call us today to find out what these are. For most small businesses, the asset method is only used in case of liquidation. In most cases, though the business is worth more than just the hard assets. The intangibles of the business most also be considered. This is where things get tricky. Read on to find out more.

Discounted Cash Flow Approach

This method takes into account what the business makes in the future. The future amount the business could earn is determined, then a discount rate is applied to determine the present value of those cash flows. This is the way Warren Buffet would value a business. This is the methodology he uses to find what the “intrinsic value” of a business is. This is also what the analysts and portfolio managers use on Wall St. You may find some of this discussed on financial television shows, such as those found on CNBC. Since underlying almost all stocks is a business, we can also apply this to small businesses. Since small businesses by nature are more risky than large businesses, the discount rate for small businesses are generally higher than for middle-market businesses or publicly-traded firms. With the new energy and marketing programs injected by the new owner, this can let potential buyers see how well the business could do in the future by comparing the current price of the business with the amount the business could earn in the next few years. If this value is larger than the current cost of the business, it can help attract more buyers when the business owner is ready to sell. This methodology is complex and fraught with endless possible input errors. This valuation method is best left to professionals who know those inputs, otherwise, a discounted cash flow could give nearly any value for a business. Luckily, I learned this methodology well in business school and as part of receiving my CFA and CAIA charters.

Comparable Transactions Approach

This is a common way to determine the value of a business. The business model is compared with similar ones that have been sold recently to determine the value of the business. This method takes into account the current market for buying and selling businesses. Many people would understand this as the “multiple” method. Meaning, many buyers will use last years’ earnings or an average of multiple years, if the business’s earnings are inconsistent, and use a multiple of those earnings. This multiple can change somewhat, depending on the stage of the business cycle. If the economy is at a low point, multiples tend to contract, while in bull markets they tend to expand. It can be an effective way to market a business and is one that has often been used in the past to determine the value of a business before it is sold. We would remiss if we did not mention that every business is different, so it is best to understand where your business stands, before going to the market. How much is your business worth? To a degree, that is in the eye of the beholder. We can let you know how buyers may view your business.

Choose the Right Valuation Approach

Business owners will want to make sure they take the time to learn more about the various approaches that can be used and work with a professional to ensure they find the right one to help them determine the valuation for their business to help them with a sale. A business broker or mergers and acquisitions advisor is going to be able to work with the business owner to determine which of these approaches is going to be the right one (or ones) to use for their business to prepare for a sale.

So which valuation method is the right one for your business and what are the differences between them for your business? Speak with a mergers and acquisitions advisor today to learn more about selling your business and about how to choose the right business valuation. How much is your business worth? This is an important step you’ll want to do carefully when you’re ready to sell your business. Call CGK Business Sales at 512-900-3770 to learn more.

A Guide to the Mergers and Acquisitions Advisory Firm’s Role in Business Sales

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When an entrepreneur decides to sell their business, it’s usually a bad idea to jump into M&A (mergers and acquisitions) without the help of a knowledgeable, experienced mergers and acquisitions advisory firm. A business owner can prepare for the sale process by retaining an advisor, and as long as that person is qualified for the job, the ROI is often high. The difficulty of selling a business while trying to run it, and the disadvantages of going through the M&A process and leaving empty-handed, are some of the biggest reasons to hire an advisor. Read on to learn more about advisors’ fee structures, the vetting process, and role in business sales.

Fees For M&A Advisors

An advisor typically sees their biggest payout when a deal is closed. Known as a success fee, this payout is often based on the transaction’s final price. Success fees are usually negotiated by the advisor and the business owner when the relationship is formalized. If the contract calls for a percentage of the sale price, the advisor is motivated to maximize the transaction’s value for the business owner. Along with success fees, many established M&A advisors require upfront or monthly retainer fees, which assure the seller’s commitment to the process. CGK Business Sales does not charge retainer fees. We are only paid upon the sale of the business.

Vetting a Mergers and Acquisitions Advisor

Business owners should carefully examine a potential advisor’s competence, experience, and reputation before signing a letter of engagement. Sellers should look for a positive history of past deals, testimonials from past clients, and endorsements from other industry professionals. When advisors have worked in similar industries, they may be more acquainted with potential buyers.

The Advisor’s Role in Preparing a Company for Sale

A considerable amount of work goes into preparing the target market before a sales pitch is made, and adequate financial information is crucial. Many mergers and acquisitions advisory experts will insist that their clients have the company’s financial statements adjusted and reviewed by a CPA if the owner does their own accounting. All advisors want to ensure that potential buyers understand how much Seller’s Discretionary Earnings (SDE) the business produces each year. This type of analysis goes beyond just seeing how balance sheets are connected to their income statements. Beyond financial information, an M&A advisor should ensure that physical locations are properly maintained. Post closing, getting key suppliers and customers on board is another important task, as potential buyers will want some level of assurance that current customers will stay as the company changes hands.

Getting the Company to Market

During the most prominent part of the process, the mergers and acquisitions advisory firm puts the company “on the market” and chooses a method that maximizes the seller’s chances of success. In many cases, this involves contacting potential buyers to gauge their interest. Advisors should manage the process efficiently by qualifying buyers based on seriousness, expertise, and available capital. Depending on the target company’s time requirements and other features, an advisor may decide to market the business to a limited number of potential buyers at one time. No two companies are the same, and an expert advisor will treat every sale differently.

Finalizing the Deal

Finally, selling clients should be confident that an M&A advisor can help them negotiate terms, including structures, escrows, tipping baskets, seller financing, reserves, and other important issues. If contingent payments, non-compete clauses, or consulting contracts are needed, an advisor can help a seller formalize these components with the help of an attorney, as well.

Do not Start a Business, Buy a Business Instead

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Owning a business may be a dream, but the process of taking an idea and turning it into a viable organization is sometimes more of a nightmare. There is a lot of effort involved and most startups will not find enough funding to get off the ground. Many others do not make it past their first year in business. These facts do not mean that anyone should give up their entrepreneurial plans, they just need an alternative path to reach the success they desire.

Purchase a Success

One method that offers more security is taking over the reins of someone else. When an entrepreneur can buy a business, they have something with a proven track record of success and it is easier to prove to lenders that the company can make a profit. There are past experiences and routines to follow to prevent mistakes. A business acquisition provides the new owner with a company that already has brand recognition and a client list.

Avoid Common Missteps

New business owners often make the same mistakes. When buying a business, it is possible to have guidance and training from the previous owner to avoid repeating their missteps. In an established company, there is usually an existing, trained staff that makes it possible to continue the daily operations without interruption.

Expand Business Faster

An existing business owner should also think about how to buy a business that could expand their own company. Mergers help to increase the inventory, the equipment value and the services businesses have available without forcing them to undergo any construction or feel as if they are starting over. A merger with or the purchase of a competing company instantly eliminates the risk they once posed and increases client lists and much more without any undue effort. The value of the company is boosted immediately, and the acquisition sends a signal to potential clients of the success and professionalism of the company.

Eliminate the Worry

Entrepreneurs have a lot to consider when they establish a company. They must determine if there is a market for their product or if there are enough people in the area to support the service they offer. Even seemingly simple decisions can talk a lot of time and money to develop and research. A logo, a company name, and a business motto could take months or longer to choose and there are no guarantees they will appeal to the public. It is possible to avoid all of this when someone chooses to buy a business. An established company has already proven they are viable and they have appeal.

The details of mergers and acquisitions are easier to understand when working with a company that specializes in this type of buying and selling service. It is a business transaction that enables everyone to get what they want. The existing business owner can see the continuation of the business they created while being able to move on to other projects or retire. The buyer has an instant company to make their own and adapt over time into their own unique organization. Find out more about the potential this opportunity offers before making any other investment.

Tips to Make Selling a Business Much Easier to Handle

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Business owners who are ready to move onto something different or just ready to retire and enjoy the money they’ve earned will want to make sure they can sell their business as easily as possible. However, selling a business does take some time and proper planning to ensure everything is done properly and that there are no issues with the sale.

Start Planning for the Sale as Early as Possible

When a business owner decides to retire or to start a new business, the first thought they often have is, will it be possible to sell my business? While most businesses that have positive cash flow will allow the owner to sell their business, this isn’t going to happen overnight. In fact, it could take up to two years from the thought of selling to the actual sale. If they’ve decided to sell the business, they will want to make sure they start planning right away, and this could mean finding the right help.

Get Help to Sell the Business

Many business owners who are interested in selling a business will want to make sure they have help from the very beginning. A mergers and acquisitions advisor is going to be able to help them whether they’re merging their business with an existing one as part of the sale or if they’re just selling it to an interested business owner. They can receive help determining the value of the business, organizing paperwork for the business, finding a buyer for the business, and more.

Determine the Selling Price of the Business and Any Conditions

When the business owner is ready to sell, the first step in how to sell a business is for them to determine how much they want to get for the business. They’ll need to determine the value of the business and how much they would like to get when they sell it. They might want to think about any conditions they might have for who can purchase it or what can be done with the business after the sale (i.e. are there any synergies?). This will help them make sure they’re ready to start looking for the right buyer. This is something the business broker or the mergers and acquisitions advisor can help them with to ensure the business is ready to be sold before a buyer is found.

Start Looking for a Buyer for the Business

The next thing they’ll do is look for a buyer for the business. This can be the most difficult part of trying to sell a business because they’ll want to make sure they find a buyer who is serious about taking over the business and who is going to be willing to pay the offered price or negotiate to a reasonable price for the business. If they have a mergers and acquisitions advisor helping them, the business owner can get the help they need to find the right buyer and complete the sale quickly.

For many business owners, the idea of selling a business can be daunting because it’s a long process and there’s a lot they need to do to ensure they’re prepared. If you’re ready to sell your business, make sure you talk to a mergers and acquisitions advisor today so you can start getting the help you need. They’ll help with every step to ensure your business is sold as quickly as possible and help you get the right terms and as much money as possible for it.

Contact Us

CGK Business Sales

401 Congress Ave

Austin, TX 78701

phone: (512) 900-3770

website: https://businessbrokersaustin.com