The Sign Businesses For Sale Blog
Red Flags are Not a Pretty Sight
When it comes to selling a business, sellers simply must pay attention to red flags. Problems can always pop up, and that’s why they need to keep their eyes open.
Rarely does a “white knight” ride in and rescue a business with no questions asked. And if this were to happen, you should be asking, “Why?” Until a deal is officially inked, sellers need to evaluate every aspect of a transaction to make sure something isn’t happening that could wreck the deal.
Common Red Flags to Watch For
One example would be having a company express interest in your business but you are never able to directly contact key players, such as the President or CEO. The reason that this is a red flag is that it indicates that the interest level may not be as great as you initially hoped.
A second red flag example would be an individual buyer, with no experience in acquisitions or experience in your industry, looking to buy your business. The reason that this second example could prove problematic, is that even if the inexperienced buyer is enthusiastic as the deal progresses, he or she may become nervous upon learning what a deal would actually entail. In other words, the specifics and the reality of owning a business, or owning a business in your industry, could come as a shock to an inexperienced buyer.
Both of these examples above are examples of early-stage red flags. But what about issues that pop up at later stages? The simple fact is that red flags can come at any stage of the selling process.
A good example of a middle-stage red flag is when a seller is denied access to the buyer’s financial statements, which is of course essential to verify that the seller is able to actually make the acquisition. A final-stage red flag example is an apparent loss of momentum, as the buying and selling process can be a long one.
Business Sellers Need to Protect Their Assets
Sellers are usually very busy and don’t have time to waste; this is doubly true for owner/operators of businesses, as the time they invest with a prospective buyer is time that could be spent doing something else.
All too often, businesses begin to run into trouble when they place their business on the market. If this trouble negatively impacts the bottom line, then the business can become more difficult to sell and the final sale price will likely be lower.
That’s why it is so essential that sellers protect themselves from buyers that are not truly interested or are simply not a good fit. Working with a business broker is an easy and highly effective way for sellers to protect themselves from buyers that are simply not the right fit. A broker helps to “weed out” unfit candidates.
While red flags are never good, that doesn’t mean that a red flag means a deal is a definitely at an end. Especially with the guidance of an experienced business broker, many of these issues can be overcome.
In the end, if you, either as a buyer or seller, suspect that there is a problem, then you should take action. The problem will not simply go away. The single best way to deal with a red flag is to tackle it head on as soon as you recognize it.
Buying? Selling? Seven Key Points to Consider
Buying or selling a business is one of the most important decisions that most people ever make. Before jumping in, there are several points that should be taken into consideration. Let’s take a moment to examine some of the key points involved in buying or selling a business.
Factor #1 – What are You Selling?
Whether buying or selling a business it is important to ask a few simple questions. What is for sale? What is not included with the buyer’s investment? Does the sale price include any real estate? Are vital assets, such as machinery, included in the sale price?
Factor # 2 – What are the Range of Assets?
It is very important to understand the range of assets that are included with a business. What is proprietary? Are there formulations, patents and software involved? These types of assets are often the core of the business and will be essential for its long-term success.
Factor # 3 – Evaluating Assets for Profitability
Not all assets are created equally. If assets are not earning money or are too expensive to maintain, then they should probably be sold. Determining which assets are a “drag” on a business’s bottom line takes due diligence and a degree of focus, but it is an important step and one that shouldn’t be overlooked.
Factor # 4 – Determining Competitive Advantage
What gives a business a competitive advantage? And for those looking to sell a business, if your business doesn’t have a competitive advantage, what can you do to give it an advantage? Buyers should understand where a business’s competitive advantage lies and how they can best exploit that advantage moving forward.
Factor # 5 – How Can the Business Be Grown?
Both buyers and sellers alike should strive to determine how a business can be grown. Sellers don’t necessarily need to have implemented business growth strategies upon placing a business up for sale, but they should be prepared to provide prospective buyers with ideas and potential strategies. If a business can’t be grown this is, of course, a factor that should be weighed very carefully.
Factor # 6 – Working Capital
Some businesses are far more capital intensive than others. Understand how much working capital you’ll need to run any prospective business.
Factor # 7 – Management Depth
Businesses are only as good as their people. It is important to ask just how deep your management team is, how experienced that team is and what you can expect from that team. How dependent is the business on the owner or manager? If the business may fall apart upon the leaving of the owner or a manager, then this is a fact you need to know.
Buying or selling a business is often more complex than people initially believe. There are many variables that must be taken into consideration, including a range of other factors not discussed in this article ranging from how financial reporting is undertaken to barriers of entry, labor relationships and more. Due diligence, asking the right questions and patience are all key in making your business a more attractive asset to buyers or for finding the right business for you.
Who Exactly Owns Personal Goodwill and Why Does it Matter?
Personal goodwill can have a profound impact on both small and medium-sized businesses. In fact, it can even impact the sales of larger companies. Ultimately, understanding how personal goodwill is cultivated is of great value for any company.
During the process of building a business, a founder builds one or more of the following: a positive personal reputation, a personal relationship with key players such as large customers and suppliers and the founder’s reputation associated with the creation of products, inventions, designs and more.
What Creates Personal Goodwill?
Personal goodwill can be established in many ways, for example, professionals such as doctors, dentists and lawyers can all build personal goodwill with their clients, especially over extended periods of time. One of the most interesting aspects of building personal goodwill is that it is essentially non-transferable, as it is invariably attached to and associated with, a particular key figure, such as the founder of a company. Simply stated, personal goodwill can be a powerful force, but it does have one substantial drawback. This is as the saying goes, “the goodwill goes home at night.”
How Does It Impact Buying or Selling a Business?
Buying a business where personal goodwill has been a cornerstone of a business’s success and growth presents some obvious risks. Likewise, it can be difficult to sell a business where personal goodwill plays a key role in the business, as a buyer must take this important factor into consideration. Certain businesses such as medical, accounting or legal practices, for example, depend heavily on existing clients. If those clients don’t like the new owner, they simply may go elsewhere.
Now, with all of this stated, it is, of course, possible to sell a business built partially or mostly around personal goodwill. Oftentimes, buyers will want some protection in the event that the business faces serious problems if the seller departs.
Solutions that Work for Both Parties
One approach is to require the seller to stay with the business and remain a key public face for a period of time. An effective transition period can be pivotal for businesses built around personal goodwill. A second approach is to have some form of “earn-out.” In this model, at the end of the year lost business is factored in, and a percentage is then subtracted from monies owed to the seller. Another option is that the funds from the down payment are placed in escrow and adjustments are made to those funds. It is important to note that the courts have decided that a business does not own the goodwill, the owner of the business does.
No doubt, businesses in which personal goodwill plays a major role, present their own unique challenge. Working with an experienced professional, such as a business broker, is an exceptional way to proceed in buying or selling this type of business.