Phone: (208) 749-3116 - Email: [email protected]
Confidentiality is a Price Multiplier
What is the first thought in almost anybody's mind, when they see a sign on a business stating that it is for sale?
Most people think of giant furniture store banners proclaiming a "Going out of Business Sale!"
It doesn't matter if it's true or not, once the public sees that a privately held Company is on the market, the perception is that the business must be doing poorly and it is only a matter of time before it closes its doors and any unfulfilled orders or unclaimed product will vanish into thin air. Customers stop ordering future purchases, Contractors start shopping around to the competition, those new contracts the owner had been chasing for years decide to go with someone else who is not telling the world they are going out of business. Soon, the business with the sign on the wall, does begin to lose custom, revenues decline, employees leave, vendors tighten credit controls, and the business does in fact, "go out of business."
This is ironic, because the best time to sell a business is in fact when it is doing very well. When a business shows record profits, new customers are flocking to the store, and the owners are spending all of their time negotiating new contracts for future orders, leaving the operations of the business to a trusted management team; this is the moment when the business, if offered for sale discreetly, will bring the most cash to the owner.
If done correctly, it is possible to sell a business without letting anyone in the general public know. Consider how many businesses you have seen over the years, with no indication that they were for sale, all of a sudden posting "Under New Management" signs on reader boards, in windows, or on their regular advertising? Few people ever assume these businesses are in danger of going bankrupt. Instead, they are often seen as being rejuvenated, with new owners investing their efforts into growing the business. "After all, they just purchased it, of course they are going to focus on growing it, and they will be operating for the long haul."
Have you ever wondered how these businesses were able to be sold, without ever leaking the information that they are trying to sell?
The process goes like this:
First, the business owners have to decide that planning an exit strategy makes sense. Many businesses fail to plan for succession from one set of owners to the next. This leads to problems, such as waiting too long to sell, allowing revenues to begin to decline, the owners no longer as interested in expending the effort required to grow the business, issues like these generally end up in a business simply closing its doors or selling for a drastically reduced price. A planned exit strategy allows Companies to remain in business for many years after the originator has retired. Providing jobs for its employees, making sure its customers continue to receive the service they expect, and most importantly, a planned exit strategy allows the owners to control the timing and condition of the transfer.
Second, the owners get in contact with a knowledgeable business broker. It takes a specific skill set to understand how to place an accurate price tag on an ongoing operation, market the business for sale without impacting its operations, and negotiating with potential buyers, weeding out the tire kickers and those who are on the lookout for competitors who are trying to sell their business. (There are many reasons why one should NOT offer to sell to a competitor. Give me a call if you would like to discuss those reasons.)
Third, an appropriate asking price is set for the business. Value = Income divided by Risk. This is such a simple formula, but the key factors that are incorporated are actually very difficult for the untrained to determine. For example, a small business is a riskier investment than a piece of commercial real estate. Goodwill and other intangible assets are easy to destroy, whereas land is much more difficult to render unsaleable. This means that capitalization rates used to appraise real property are much too low to use to value a business. Also, the income stream most often used by the untrained is the net income reported by the latest tax return or financial statement. Unfortunately, businesses are operated with the main strategy of minimizing reported net income in order to minimize income taxes. This means that the reported net income is most likely an incorrect and often lower income stream. As a Certified Business Appraiser, I am very well trained in determining what the value of a business is.
Fourth, potential buyers are approached, discreetly. Confidentiality is important for trade secrets, intangible property, proprietary processes, and selling businesses. What happens to one's employees, vendors, and suppliers when they find out the business is for sale? Or even worse, one's landlord? Maintaining a full staff of well trained employees, a strong relationship with vendors and suppliers and making sure the building does not get leased to someone else while marketing your business for sale, are all key assets that add value to the business. A buyer wants the staff to stay and to be able to rely on an uninterrupted supply chain, and to be able to continue to use the same location customers have been coming to for years.
Fifth, patience is exercised. Statistically speaking, it takes about a year to successfully sell a business. Some businesses sell faster, some sell after a much longer period of time. There are many factors that contribute to this time period. Marketing discreetly takes time, but it can mean the difference between receiving only the value of the desirable inventory on hand, or a price several times the value of the operating assets owned. If you are interested, I would be happy to pull a list of privately held businesses that have sold across the country and show you how long each was on the market with trained business brokers, before achieving a successful sale.
I am located in southern Idaho and would be happy to meet with you at your business, after hours, for a confidential, no obligation intended, session to discuss the possibilities surrounding a sale of your Company. I will be able to provide you with a good idea of what your business would actually sell for and answer any of your other questions you have about the process.
Thank you!
Shawn Hyde, CBA, CVA, CMEA and business broker with Laska Company.
What is the first thought in almost anybody's mind, when they see a sign on a business stating that it is for sale?
Most people think of giant furniture store banners proclaiming a "Going out of Business Sale!"
It doesn't matter if it's true or not, once the public sees that a privately held Company is on the market, the perception is that the business must be doing poorly and it is only a matter of time before it closes its doors and any unfulfilled orders or unclaimed product will vanish into thin air. Customers stop ordering future purchases, Contractors start shopping around to the competition, those new contracts the owner had been chasing for years decide to go with someone else who is not telling the world they are going out of business. Soon, the business with the sign on the wall, does begin to lose custom, revenues decline, employees leave, vendors tighten credit controls, and the business does in fact, "go out of business."
This is ironic, because the best time to sell a business is in fact when it is doing very well. When a business shows record profits, new customers are flocking to the store, and the owners are spending all of their time negotiating new contracts for future orders, leaving the operations of the business to a trusted management team; this is the moment when the business, if offered for sale discreetly, will bring the most cash to the owner.
If done correctly, it is possible to sell a business without letting anyone in the general public know. Consider how many businesses you have seen over the years, with no indication that they were for sale, all of a sudden posting "Under New Management" signs on reader boards, in windows, or on their regular advertising? Few people ever assume these businesses are in danger of going bankrupt. Instead, they are often seen as being rejuvenated, with new owners investing their efforts into growing the business. "After all, they just purchased it, of course they are going to focus on growing it, and they will be operating for the long haul."
Have you ever wondered how these businesses were able to be sold, without ever leaking the information that they are trying to sell?
The process goes like this:
First, the business owners have to decide that planning an exit strategy makes sense. Many businesses fail to plan for succession from one set of owners to the next. This leads to problems, such as waiting too long to sell, allowing revenues to begin to decline, the owners no longer as interested in expending the effort required to grow the business, issues like these generally end up in a business simply closing its doors or selling for a drastically reduced price. A planned exit strategy allows Companies to remain in business for many years after the originator has retired. Providing jobs for its employees, making sure its customers continue to receive the service they expect, and most importantly, a planned exit strategy allows the owners to control the timing and condition of the transfer.
Second, the owners get in contact with a knowledgeable business broker. It takes a specific skill set to understand how to place an accurate price tag on an ongoing operation, market the business for sale without impacting its operations, and negotiating with potential buyers, weeding out the tire kickers and those who are on the lookout for competitors who are trying to sell their business. (There are many reasons why one should NOT offer to sell to a competitor. Give me a call if you would like to discuss those reasons.)
Third, an appropriate asking price is set for the business. Value = Income divided by Risk. This is such a simple formula, but the key factors that are incorporated are actually very difficult for the untrained to determine. For example, a small business is a riskier investment than a piece of commercial real estate. Goodwill and other intangible assets are easy to destroy, whereas land is much more difficult to render unsaleable. This means that capitalization rates used to appraise real property are much too low to use to value a business. Also, the income stream most often used by the untrained is the net income reported by the latest tax return or financial statement. Unfortunately, businesses are operated with the main strategy of minimizing reported net income in order to minimize income taxes. This means that the reported net income is most likely an incorrect and often lower income stream. As a Certified Business Appraiser, I am very well trained in determining what the value of a business is.
Fourth, potential buyers are approached, discreetly. Confidentiality is important for trade secrets, intangible property, proprietary processes, and selling businesses. What happens to one's employees, vendors, and suppliers when they find out the business is for sale? Or even worse, one's landlord? Maintaining a full staff of well trained employees, a strong relationship with vendors and suppliers and making sure the building does not get leased to someone else while marketing your business for sale, are all key assets that add value to the business. A buyer wants the staff to stay and to be able to rely on an uninterrupted supply chain, and to be able to continue to use the same location customers have been coming to for years.
Fifth, patience is exercised. Statistically speaking, it takes about a year to successfully sell a business. Some businesses sell faster, some sell after a much longer period of time. There are many factors that contribute to this time period. Marketing discreetly takes time, but it can mean the difference between receiving only the value of the desirable inventory on hand, or a price several times the value of the operating assets owned. If you are interested, I would be happy to pull a list of privately held businesses that have sold across the country and show you how long each was on the market with trained business brokers, before achieving a successful sale.
I am located in southern Idaho and would be happy to meet with you at your business, after hours, for a confidential, no obligation intended, session to discuss the possibilities surrounding a sale of your Company. I will be able to provide you with a good idea of what your business would actually sell for and answer any of your other questions you have about the process.
Thank you!
Shawn Hyde, CBA, CVA, CMEA and business broker with Laska Company.
Phone: (208) 749-3116 - Email: [email protected]
Mailing Address: P.O. Box 5197 - Twin Falls, Idaho 83303