Join Rahsaan Freeman and Scott Lundt as they dive into some risky scenarios that seriously affected their clients’ business’s value when it came time to sell. Rahsaan and Scott share real case studies where over-reliance on a single major customer tanked a manufacturer’s revenue when that customer went under and it took them years to recover.
Understanding the Complexities of Buyer Motivation
Negotiations can often be both perplexing and delicate. A simple misstep can jeopardize what could have been a great deal. One key but often overlooked tool in any negotiation is to pause and consider the wants, needs, and desires of the other party. Contemplating the ideal outcome for them can work wonders.
Understanding what motivates a buyer is crucial for a successful outcome. At the beginning of the sales process, it’s unlikely that you’ll know what your buyer really wants. This lack of knowledge about their desires, values, and standards presents a challenge, especially in the initial stages. Essentially, you’re operating with limited key information at the negotiation’s onset, necessitating caution.
One effective approach is to emphasize the strong financials of the business. Emphasizing a business’s sound financial footing is generally well-received. Whether a buyer is a former corporate executive or from another background, highlighting a strong return on investment (ROI) is prudent. Additionally, most buyers prefer a business that won’t disrupt their current lifestyle.
Understanding what a buyer expects from you post-sale is crucial. Some may want the previous owner available to assist during the transition period, while others, particularly those familiar with your industry, may require less post-sale involvement. Knowing their expectations can help you adapt your approach accordingly. Some buyers may seek your expertise, while others have their own ideas for running the business. Understanding their direction can aid negotiations.
Emotions play a significant role in business transactions. Buyers are often excited about the prospect of purchasing a business, especially in the initial stages. However, it’s essential to maintain a realistic and grounded presentation and approach. Overselling the business can backfire, as it can lead to later disillusionment from the buyer.
Sellers should consistently consider what buyers want. While all buyers seek a successful business, their motivations and perspectives can vary widely. Tailoring your approach to each buyer and understanding their motivations can lead to positive outcomes. With their extensive experience, business brokers and M&A advisors can provide valuable insights into buyer motivation.
Copyright: Business Brokerage Press, Inc.
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Considering Seller Financing
Many sellers are surprised to learn that seller financing is very common. In fact, sellers should realize that there is a good chance that in order to sell their business, they will have to consider offering seller financing.
What is Seller Financing?
Seller financing essentially occurs when the seller provides a loan to cover some part of the purchase price. It is common for the rest of the purchase price to be covered by a combination of a down payment and additional financing sources.
Benefits of This Approach
At the end of the day, seller financing means that the seller serves as sort of a bank for the buyer. While many sellers may not like this prospect, seller financing can offer many benefits. Two key benefits are that potential difficulties of working with a real bank are bypassed, and sellers often enjoy a higher final sale price.
Most business brokers strongly encourage sellers to consider seller financing. One reason brokerage professionals favor the seller financing option is that it helps stimulate buyer interest. A seller who believes in their business enough to offer seller financing can expect buyers to take notice and respond. Sellers with confidence in their business can expect buyers to be eager to learn more.
Due Diligence is Essential
Sellers who choose to offer seller financing will still have to perform all necessary due diligence. Working with a bank does have its benefits; for example, a bank will check a potential buyer’s financial statements as well as their credit reports and more.
Without the involvement of a bank, the seller is responsible for performing due diligence and checking that the buyer has a low risk of default. While seller financing opens up many possibilities for sellers, it is important that sellers also realize that this route comes with additional responsibilities.
Safeguards to Utilize
There are a variety of safeguards that sellers can use to help protect themselves when offering seller financing, and once again, brokerage professionals can be invaluable guides in this regard. Contracts often allow for the seller to take back the business within a 30-to-60-day window if financing fails. Another helpful clause for businesses centered on inventory is that the new owners are required to maintain a predetermined level of inventory during the payment period.
Thanks to seller financing, both buyers and sellers can benefit in a range of ways. Sellers who opt for seller financing usually discover that they receive a good deal of attention from buyers. Buyers enjoy greater financing flexibility and have a very clear indicator that the seller has confidence in the business. While seller financing does come with a good deal of paperwork, it is an option that buyers and sellers alike should consider.
Copyright: Business Brokerage Press, Inc.
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Protecting Your Business Assets: Lessons To Increase Your Business’s Value
They discuss the common temptation of using your business like a personal piggy bank and why that will slash your business’s valuation. Also, failing to protect intellectual property and document key processes – both easily avoidable mistakes that ended up costing business owners 7-figures on their exit! These stories are to help you make proactive decisions now that set you up for maximum value later.
If concentration risk, personal expenses, or lack of IP protection feel familiar, this episode will inspire some valuable changes! Even if you’re not looking to sell in the near future, these case studies demonstrate why having a trusted expert NOW will set you up for success when retirement is on the horizon.
Napkin Numbers Talking Points
[0:37] Importance of Diversifying Client Base
- Scott discusses the importance of not depending on a single customer (or single type of customer) and the negative impact it can have on a business’s value.
- He shares a case study of a company that suffered a huge revenue dip due to customer concentration and the positive outcome after diversifying its client base.
[3:04] Using Business as a Personal Piggy Bank
- Rahsaan highlights the risks of using the business for personal expenses and how it can negatively impact the business’s value.
- He emphasizes the importance of running the business as a business and not using it for personal funding.
[6:31] Impact of Unprotected Intellectual Property
- Scott shares a case study where a company’s unprotected intellectual property led to a significant decrease in their business’s value.
- He emphasizes the importance of protecting the assets of the business to maintain its value during a sale.
[9:09] Importance of Process Documentation
- Scott discusses the risks of neglecting process documentation and improvements in a company.
- He shares a case study in which a buyer acquired a company at a reduced price due to the lack of documented processes, emphasizing the value of having clear onboarding and manufacturing manuals for successful business transfers and future sale preparations.
To prepare to exit your business, consider the missteps others have made and set yourself up for long-term success and a better business valuation by following these tips: diversify your client or customer base, protect your intellectual property, document your processes and run your business like a business – not a personal piggy bank.
If you want to sell a business, please use our complimentary business evaluation calculator to determine its value.
Unlocking Business Potential with Strong Recurring Revenue
Everyone loves recurring revenue and for good reason. When buyers see recurring revenue, they instantly know that a business is stable, has positive cash flow, and, importantly, has room for potential future growth.
There is no way around the fact that buyers want a business to be predictable. In short, buyers want to see consistency and stability at every level. Recurring revenue means that a prospective buyer can be confident that they will see income from the first day they take over the business. There is a powerful psychological aspect to recurring revenue that sellers should keep in mind, as they put themselves in the buyer’s shoes.
When a buyer sees that there is recurring revenue, they know that even if they are unable to develop the business as soon as they take over, there will be positive cash flow. Buying a business is a big decision, and recurring revenue can take some of the fear out of the equation.
Recurring revenue also serves to strongly indicate to buyers that your business offers goods and services that are consistently in demand. Any seller that wants to convince a buyer that their business is worth the asking price should focus on cultivating recurring revenue opportunities. There is nothing quite like recurring revenue to calm nerves and convince buyers that a business is worth a serious look.
Sellers should strive to have a business that has strong annual recurring revenue (ARR). ARR is a metric that measures the money coming in annually. Once your business has a strong ARR, don’t be shy about emphasizing that fact to buyers. A healthy number serves as a truly powerful indicator of your company’s current and future health and potential.
When your business displays strong recurring revenue, it points to the fact that your business is doing many things correctly. It shows that your business is able to consistently serve its customers well enough that they return again and again. This fact indicates that both your goods and services and your management and team members are performing optimally.
Summed up another way, recurring revenue is a quick and easy way for potential buyers to gain insight into the value of your company. Any seller looking to optimally showcase their ARR, or looking for ways to boost their recurring revenue, should consider working with a business broker or M&A advisor. Brokerage professionals understand all the different variables involved in helping prepare a business to be sold.
Copyright: Business Brokerage Press, Inc.
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Cultivating Success: The Impact of Business Brokers on Closing Rates
Business brokers and M&A advisors consistently improve closing rates. There are many reasons why this is the case and, in this article, we’ll explore some of the top reasons why brokerage professionals get results.
When it comes to selling a business, few variables are as important as how your business is presented. A key area of expertise for business brokers is in presenting businesses. There are many factors to consider when presenting your business in the best possible light. An experienced business broker can help you prepare your business for even the most discerning buyer.
Another key reason that business brokers are a great option for any seller is that they reach not only more buyers, but more qualified buyers. Brokerage professionals have years of experience in buying and selling businesses, and with that experience comes a long list of vetted buyers. When you start working together, they likely already have many qualified buyers in mind that they feel would be a good fit for your business.
A third reason sellers should consider working with a business broker or M&A advisor is that they are invested in your success. When your business is sold, these professionals stand to profit. In this way, the process of selling your business becomes a team effort, one that you can expect them to take seriously. After all, they only get paid if you get paid.
Selling a business is a very complex process, even for those with the most experience. There are rules, regulations, negotiation hurdles, and more that must be navigated. Everything from government regulations to spouses who may have a different opinion can, and do, play a role. An experienced business broker or M&A advisor has the experience to find solutions to almost any negotiation obstacle.
One of the most important reasons sellers should work with a business broker or M&A advisor is to gain focus. As the owner of your business, you have no choice but to stay focused on the day-to-day operation of your business. Far too often, owners place their business for sale and then become preoccupied with the sales process. Sadly, this can lead to a loss of revenue and overall business disruption, which in turn, decreases the value of the business.
Opting to work with a business broker or M&A advisor is an easy, and proven, way to dramatically boost your odds of achieving a successful sale. When all the variables are combined, it is easy to see why sellers who choose to work with a brokerage professional consistently enjoy high closing rates.
Copyright: Business Brokerage Press, Inc.
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Building a Valuable Business: Lessons from An Expert Business Coach
Have you heard these myths about small business exit strategies? Myth 1: The value of your business is solely based on net profits. Myth 2: Customer service is the ultimate differentiator. Myth 3: Emotion and identity play no role in business value. Want to know the truth behind these myths?
In this episode of Napkin Numbers, Scott Lundt and Rahsaan Freeman speak with Denver Business Coach Steve Kohnke to dispel these myths.
Throughout the episode, key factors impacting a business’s value are uncovered, shedding light on the risks associated with owner dependency, emotional attachment, and lack of differentiation. By addressing these factors through intentional strategies, small business owners can mitigate risks, increase operational efficiency, and ultimately boost their companies’ attractiveness to potential buyers.
Understanding the key factors impacting the business value is crucial for owners looking to optimize their exit strategies and achieve maximum value upon selling their businesses.
Napkin Numbers Talking Points
[0:37] Exiting on Your Terms
- Steve emphasizes the importance of business owners exiting on their own terms and schedule.
- He highlights the risks of dependency on the owner, key employees, customers, and suppliers and the need to separate the owner from the business.
[1:20] Business Risks and Emotions
- The conversation delves into the emotional attachment of business owners to their businesses and the impact on value growth.
- The discussion also touches on the significance of brand value and its influence on the selling process.
[8:15] Valuing the Business
- Steve discusses the misconception of using a simple multiple to determine a business’s value and highlights the need for a more comprehensive analysis that considers industry benchmarks, intangibles, and risks.
[11:50] Differentiating the Business
- The conversation explores the importance of identifying real differentiators for a business beyond competing on price or customer service.
- Steve shares how training employees to think like entrepreneurs can create value and set a business apart.
[14:25] The Power of a Strong Team Culture
- Steve discusses the importance of having a fully committed team and bought into the company’s vision and values. A strong team culture results in better service and increased business value.
[14:38] The Intangible Factor of Culture
- Scott and Steve emphasize the significance of a solid company culture when looking to sell a business.
- They highlight that a strong culture can make a business more attractive to potential buyers and increase its valuation.
[15:08] Attractiveness to Financial Buyers
- Emphasis is given to the importance of building a business that is attractive to financial buyers.
- They stress that having the right people and culture can raise a business’s valuation and make it more appealing to potential buyers.
The importance of business owners exiting on their own terms and schedule is paramount. Emotional attachment, accurate assessments of brand value, misconceptions about valuation, real differentiators, and the power of a strong team culture are all factors one must consider when attempting to attract financial buyers and ultimately increase their business’s value.
If you want to sell a business, please use our complimentary business evaluation calculator to determine its value.
Discover more about Steve Kohnke:
