The Entrepreneurs Advocate

Archive for April, 2008

I received this email today from www.TomReillyTraining.com and in this market it is easy to fall into the “sell by price” trap (which is not selling, your just an order taker). It also got me to thinking of one of my favorite sales books, The Dollarization Discipline. Enjoy:

Never discount your differentiator.Your differentiator is what makes you, your product, or your company stand out in the market. Why would you discount this? It is the very reason someone should pay more to do business with you. Throwing it in or bundling it as part of your package is really discounting it. This lowers its perceived value. When you excel in some area, improve your ability to communicate this difference versus giving it away to get the business.

Saying “No” is a lot like saying “Yes.” It gets easier every time you do it. This applies to price objections, too. Saying “No” to the buyer’s request for a cheaper price can become habitual with a little work. You don’t have to take their deal if you don’t want it. You don’t have to cave on price unless you decide to. You don’t have to say “Yes” to an objection unless you have trouble saying “No.”

You never lose ground with a price objection until you stop selling and telling. You don’t lose until you quit. Practice your value story. Get really good at it. Have more than one argument justifying your price. Don’t curse the objection, work on your response. If you can’t give me three good reasons why I should pay more to do business with you, you’re not working hard enough on your story!

Here are seven more reasons that your business did not sell or sold at a steep discount:

6. Bad Location or Lease: A great franchise in lousy location makes for a failing business. Also, too high a rent as a percentage of sales can make it tough to survive. Thirdly, if your landlord won’t play ball with the buyer or the buyer’s bank, it can queer a deal.

7. Poor Growth Outlook: The old adage goes “Buyers pay based on your history in anticipation of the future”. If the future prospective sales don’t look that rosy, why would a buyer take the plunge?

8. Out of Favor Industry: Florida construction companies for sale in 2008 are taking longer to draw interest, even the good ones. They are getting tarred with the same brush as failing companies. The key is to stand out versus your peers.

9. “One Man Band” Syndrome: Entering parties are looking to buy a company with good systems and procedures in place. If they see an Exiting owner who is frazzled, over-worked and whose company’s existence depends on him; that is not very appealing. Next…

10. Unrealistic Price: See Point #5 from the prior post, It will not Support Financing. You think your business is worth $5 million and an unsophisticated buyer will pay $5 million (it rarely happens) but the bank, backed by an appraisal will only loan $2 million.

11. Sales/Cash Flow trending down: This is part and parcel of point #7. Unless your business is distressed and a turnaround professional is called in, an Entering Party wants to see plenty of business in the pipe line and margins improving.

12. Not willing to give out enough data: I see this from time to time. Exiting Clients are (rightfully) worried about sharing too much data. But sometimes it goes beyond that. What are they hiding? Has trust become an issues? Screening Entering Parties up front to make sure they meeting the buying criteria will prevent this. A well-written Non Disclosure is a must.

If you have tried to sell your business on your own or it was listed with a broker for over a year and the contract lapsed and you have given up in frustration, let us talk about what might be the problem. We will break this down into two posts:

1. Poorly presented to the world: There is an old saying that a website is akin to a billboard in the middle of the desert without proper marketing. How was your business confidentially marketed? Was enough monies budgeted to get your business out to the world and was it marketed to the correct potential buyers? If you are a niche business (like a medical practice or manufacture a unique product) there are certain media venues and industry sources where you do and don’t place your business.

2. Inferior books and records: The number one reason a business does not sell. Please see our detailed post on this subject, What Prospective Buyers Look For.

3. Critical deal breakers: If your are set in stone about a certain point (short training period, all cash, obsolete equipment or inventory included, certain staff or family must be retained, etc.) and the market is giving you negative feedback, take a hard look about whether your desire in a certain area is the problem. Time is not your friend and roadblocks are a serious deterrent to a successful exit.

4. Curb appeal: When we are feeling out a potential client, one question I always asked is “if we decide to work together and I see something in your business that would give a buyer or lender pause, do you want me to be politically correct or brutally honest?” Everyone always answers brutally honest (whether they mean it or not). Broken signs, weeds, obsolete inventory or a messy shop floor do not set the right tone. People take about 6 seconds to generate a first impression. Don’t blow it.

5. It will not support financing: You are asking two million dollars for your business, but the free cash flow is $150,000/year. Debt coverage on 80% of the offered price for 10 years is approximately $230,000/year.  Add another $100,000 salary for the new owner and you business would be a negative $180,000/year loser. Your asking price has to “back tested” against reality. This is another reason a third party appraisal with pre-financing in place is so critical.

In my next post, I will describe seven other reasons businesses don’t sell or sell at a deeply discounted price.

The majority of the time Bankers Advocate employs a certified business appraisal, it is for use when our Client is Entering or Exiting Business Ownership.

However, recently we were asked for a certified business appraisal, where the shareholders were not happy with the results their long time president provided. The owners had called in a top turnaround consultant to review the company’s performance. The turnaround consultant reported to the ownership group the good news is the business is being run for the benefit of the family, the bad news is that it is not your family!

Ownership replaced the existing president with the consultant and profitability and cash flow were improved tremendously. The one problem left over from the old regime is that the company had loaned the ex-president the money to buy a small equity stake in the business. Now that he was gone, they needed to negotiate with him to buy those shares back. We were called in to value the business for a stock sale factoring in the minority discount and the fact the appraisal had to be to litigation standards (i.e. The appraiser would be ready to testify in defense of the appraisal, if necessary).

We gathered the data and our appraiser completed his work. The client was happy to see that the appraiser’s work valued the minority shares at a 75% discount to what they had planned to offer the ex-president.

Six months later, an update of the original appraisal was requested. The update confirmed that the consultant had created over $1.2 million in enterprise value under his stewardship. The ownership group is much happier and is looking for more investment opportunities in their industry.

This above real-life example encompases the first three listed usages of possible Business Appraisal applications:

Ownership Disputes
Buy/Sell Agreements
Investment Yardstick
Fund Life Insurance
Marriage Dissolution
ESOP Valuation
IRS & Tax Planning
Estate Planning
Joint Venture
Equity Infusion
Borrowing Justification

These are just a few of the examples where a certified business appraisal can be a valuable tool.

I get asked by potential Exiting Clients how the tighter lending environment is affecting the market for their company. I see a couple of things happening in the market place:

Deals are still getting done- Fairly priced companies under $10 million are moving nicely. It seems the smaller the deal, the less radical the lender requirement changes. However, getting deals financed is still tougher than it was a year ago and Buyers must “line up” correctly for the bank.

Private Equity has moved “Down Stream”- PEG’s (Private Equity Groups) have funds that must be employed and they are looking at smaller deals than they have historically done in the past. These smaller deals are typically easier to get funded.

Due Diligence: Slower and Pricier- Because of stricter lending requirements and Potential Buyer’s being more gun shy, due diligence can be drawn out and more expensive for both sides. This alone is a good reason to get a reputable third party appraisal and pre-financing in place. Cleaner books and records will help your business stand out and reduce transaction costs.

More Corporate Buyers- With the big company layoffs and turmoil, more middle management types are looking to leave the corporate world and build there own economic engine. While always strong, I have seen an uptick in these type buyers.

The International Buyers are Coming- There have always been foreign buyers looking for businesses in the US. However, with the strength of their home currency versus the USD, this has accelerated. I have been asked to give seminars in Canada and Great Britain to potential buyers who can also use buying a US business as a vehicle to get a visa.

You can see this is still a fine time to Exit Business Ownership. Whether the Prime Rate is 20% or 5%, the proper steps still need to be taken before your business is brought to market.

Everyone wants to help their children succeed. Many believe the best path for them is the same path they chose-Entrepreneurship. Before you help your children buy or start a business let’s look at some caveats:

Can you afford it? The $100,000 that you are loaning to your kids (make it a formal loan, with loan docs, interest rate, amortization schedule, UCC filing, etc.), can you afford the loss if none of it ever comes back? The odds are pretty high that their and anybody else’s start-up will fail. If the loss of the money will jeopardize your retirement or lifestyle-Don’t do it. Also, there are tax ramifications that need addressed before making the loan.

Do they have what it takes? As an Entrepreneur, you probably started out on a shoe string, clawed your way up, lived frugally and deferred a great deal of personal gratification. How about your kid’s? Have they only know an easier life and take your sacrifices for granted? Not everyone is cut out to be a business owner and make payroll with a Visa advance.

What is their skill set? What do they know about the restaurant, car wash or cleaning business? What is their educational and working background? Can they read a Balance Sheet or Income Statement? Can they close the sale with a critical, must have prospect? You love your kids, but a greater love is not setting them up to fail.

Is it the right business or the right business for them? Why will banks lend to almost anyone to buy a reputable franchise, even if the buyer/borrower has no industry experience? A franchise gives them a proven system and business model as a security blanket. On the other hand, for someone to get an SBA insured loan to purchase an independent, non-franchise business, the lender will weigh experience in the industry heavier than the borrower’s personal credit.

In addition, a wonderful franchise in a lousy location makes for a failing business. Many name retail franchisee locations are struggling mightily in this tough economic environment. Prepare yourself  and your child to spend considerable time and monies on due diligence above and beyond the initial investment.

Your children may do wonderful things with the money you lend them, but forewarned is forearmed and much family grief can be eliminated with some good planning and review.

Fraud is rampant in business today. According to the Association of Certified Fraud Examiners, U.S. organizations lose 5 percent of their annual revenues to fraud — about $652 billion a year. The median loss is $159,000, but one-fourth of the cases result in losses of at least $1 million. Fraud can be difficult to detect. The median length of schemes in an association study was 18 months from when they began until they were detected. Small businesses suffer disproportionately from fraud. The median loss suffered by an organization with fewer than 100 people was $190,000.

My friend John Capizzi, who is a Certified Fraud Examiner offers these Red Flags to look for:

• An employee under financial pressure.
• An employee with personality changes.
• An employee demonstrating poor money management.
• An employee living beyond their means.
• An employee with outside business interests.
• Poor company internal controls.
• Too much control in a single employee.
• Lax management.
• Failure to pre-screen employees.
• Records altered, missing or destroyed.
• Chronic shortages.
• Signatures on records appear to be forgeries.
• Employee drug or alcohol abuse.
• Employee gambling problems.
• Employee gives inadequate answers when questioned about missing supplies, property or funds.
• Customer or supplier complaints about shortages or discrepancies.