Unlocking Business Success: The Power of Staged Buyouts for Long-Term Seller Involvement

 Today, I'm diving into an intriguing question from a viewer years ago– what if you don't have enough capital to buy a business, and you want the seller to stay involved for the long haul? The solution lies in the art of staged buyouts. Check the YouTube video here:

Imagine a scenario where the business in question isn't a small entity but has a significant workforce, say around 10 to 12 employees – perhaps a small car dealership. In this staged buyout strategy, the buyer initiates the process by using the available funds to acquire a small percentage of the company, let's say a 5% stake. Over the years, as the business turns a profit, dividends are issued. However, rather than reaching the minority shareholder, these dividends are redirected to purchase additional shares from the seller.

This gradual approach offers several benefits. Firstly, it facilitates a mentor-mentee relationship between the buyer and the seller, allowing for a seamless transfer of knowledge about the business operations. Secondly, it ensures that the seller receives excellent value for their business. A pre-established buy-sell agreement outlines the valuation formula for shares, and as the company thrives, the value increases, resulting in a higher price for the seller.

More importantly, this staged buyout provides the seller with a secure exit strategy, mitigating the risks associated with unforeseen circumstances. Whether it's a personal crisis or a planned retirement, the exit plan is locked in, offering flexibility and control over the transition.

Traditionally, buyers would acquire up to 49% of the shares through this staged process, with the remaining shares purchased in one transaction. While this might involve securing a loan from a bank, the buyer's track record within the business, coupled with a profitable operation and issued dividends, makes securing financing much easier with most lenders.

For this strategy to succeed, a well-structured business with defined roles, responsibilities, and profitability is essential. This ensures a smooth collaboration between the buyer and seller without constant interference.

If you're looking to enhance your business setup and learn effective exit planning strategies, consider exploring my Small Business Systems Course and Exit Planning Program. 

As we delve into the exciting prospects of staged buyouts, keep in mind the importance of business discipline and profitability for a seamless transition. 

Cheers to your success, and see you next week!

David C. Barnett

Unseen Liabilities- SmallBiz worth less than $1!

***New Video Alert!

This business owner learned that his business was worth less than $1.

How?

Because of the unseen liabilities.

Let’s learn about how companies owe money that doesn’t get shown to you when you look at the financial statements.

Watch this week’s video here: https://youtu.be/a7RY-1LVTiM 

Cheers

See you over on YouTube

David C Barnett

LIVE Pat Ennis Exit Planner More to Exit Planning than just a Sale.

 

More to Exit Planning than just a Sale.

New Livestream guest- Pat Ennis, CExP, CAP®

I’m happy to have Pat join me on a live broadcast.

Pat has been in the wealth planning business since the 90’s and helping SMB owners plan their exit for over a decade.

Tune in and as we’ll be discussing getting a business ready for your exit and just what, exactly, that might mean.

This is a ‘must see event’ for anyone who owns a business or want to one day.

Be sure to join live so that you can ask questions, replay will be available.

Set yourself a reminder on YouTube here: https://youtube.com/live/ai-Hhe9PE98 

We’ll be going live March 25, 2024 at 1PM Atlantic Time and 12 Noon Eastern Time

See you there!

David C Barnett

Navigating Due Diligence: How Long Should You Investigate Before Buying a Business

Today, let's tackle a crucial question from Bob, who experienced the challenges of insufficient due diligence time when buying a business. https://youtu.be/qJSlRfg62Ik

Bob rightly points out that during the initial stages of negotiations, everyone seems amicable and forthcoming with information. However, it's when you delve deeper into discussions with key staff and suppliers that the real insights emerge. So, the burning question is: How long should due diligence last when you're looking to acquire a business?

In a previous video, I shared the story of Jay, who found himself in a bind due to an impractical 10-day due diligence period. Buying a business involves numerous intricate components – employees, suppliers, receivables, vendors, customers, and more. Rushing through this process can lead to oversight and potential pitfalls. Watch the video here: https://youtu.be/-CF-b7QdctQ

During my time as a business broker, I adopted a unique approach to due diligence. Instead of limiting it to a set timeframe, I structured deals where due diligence began upon acceptance and continued until closing. 

This way, the buyer could scrutinize every aspect of the business without feeling rushed.

Now, from a seller's perspective, the idea of an extended due diligence period might seem daunting. To address this concern, we often implemented a milestone or benchmark within the process. 

For example, when the buyer wanted to engage with key employees or suppliers, breaking confidentiality, we made the deposit non-refundable.

This strategic move protected the seller's interests and ensured that buyers were committed before delving into sensitive discussions. By making the deposit non-refundable at a crucial stage, we encouraged serious offers and filtered out less committed buyers.

The key takeaway here is that due diligence should be thorough and comprehensive. Every business is unique, and setting arbitrary deadlines can jeopardize the quality of the investigation. Unlike real estate, businesses are complex entities with multifaceted operations that require time for a meticulous examination.

If you're buying a business, avoid getting locked into an unrealistically short due diligence period. From a seller's standpoint, it's essential to strike a balance between buyer confidence and protecting your business's confidentiality until the right stage in the process.

Remember, due diligence is your safeguard against a bad deal. If you're serious about buying a business, check out my comprehensive online program, "Business Buyer Advantage,". It's your roadmap to navigating the complexities of business acquisition and ensuring a successful deal.

Click here to download my Checklist to Unlock the Secrets How Long Should Due Diligence Last A Comprehensive.

Explore my blog in a nutshell with these awesome infographics! 

And make sure you’ve signed up for my email list while you’re here.

Cheers!

David C Barnett

Compete to buy the best business

 

***New Video Alert!

For every person who sells a business there are 10 buyers.

How does a buyer compete to get the best business?

Let’s discuss

Watch this week’s video here: https://youtu.be/5ip8bIUwU08 

Cheers

See you over on YouTube

David C Barnett

Live - Quickest way to find a business in the UK with Alfie Lambert- Bizcrunch.co

Quickest way to find a business in the UK.

New Livestream guest-> Alfie Lambert.

I’m happy to have Alfie join me on a live broadcast.

He’s the co-founder of BizCrunch.co, an online tool that makes it easy to find exactly the business you’re looking to buy in the UK.

Tune in and as we’ll be discussing the hows and whys of his new BizCrunch tool.

This is a ‘must see event’ for searchers in the UK.

Be sure to join live so that you can ask questions, replay will be available.

Also, Alfie has set up a special offer for any of you who want to try out the service.

Tune in and get the link/discount code.

Set yourself a reminder on YouTube here: https://youtube.com/live/b5VMMhT_Szo 

We’ll be going live Monday March 18, 2024 1PM Atlantic, 12 Noon Eastern Time

See you there!

David C Barnett

 

The ABCs of Factoring in Business

Today, let's dive into the world of factoring – a financial tool that can be a game-changer for businesses dealing with accounts receivable. Watch the full video here:

So, what exactly is factoring? In simple terms, it's a financial process that allows companies to transform their accounts receivable into immediate cash. If you're in a business-to-business environment, offering trade credit is common – you provide goods or services, issue an invoice, and then patiently await payment, typically within 30 days.

Now, trade credit is industry-dependent. While fast-food businesses may receive instant payments at the counter, others, like those selling hard goods to retailers, might extend credit to clients. This credit allows retailers to sell goods, generate revenue, and pay the supplier within an agreed timeframe.

However, this seemingly normal practice can lead to a cash flow crunch for growing businesses. Imagine having to wait for 30 days or more to receive payment for each sale while still covering operational costs. This scenario can be detrimental, especially for businesses experiencing rapid growth.

This is where factoring companies step in. They address the liquidity crisis by purchasing accounts receivable. Let's break it down:

1. The Asset: When you make a sale and issue an invoice, the resulting accounts receivable is essentially your asset. It represents the money your customer owes you.

2. Factoring Agreement: A factoring company enters into an agreement with you to purchase these receivables. In exchange, they provide you with an advance amount – let's say $80 for a $100 debt.

3. Payment Shift: Once the agreement is in place, your customer now owes the money to the factoring company, not you. You instruct your customer to pay the factoring company directly.

4. Final Settlement: When the customer pays the factoring company, they deduct their fee (let's say 3%) and remit the remaining amount to you. In our example, you'd receive the remaining $17.

On the surface, it might seem like a fee, but the benefits are substantial. Factoring accelerates your cash flow, providing immediate working capital to cover costs and fuel growth. The fee incurred is comparable to credit card processing charges but can offer a significantly higher return on investment.

If you haven’t already, be sure to sign up for my email list at www.DavidCBarnettList.com 

Cheers

David C Barnett

The changing Value of your time

 

***New Video Alert!

What’s more important to you?

Money or time for personal pursuits and relationships?

This week, I take a stab at how to value your time and some very important considerations you need to make before you get into business.

Watch this week’s video here: https://youtu.be/KwNwBaZA1WA 

Cheers

See you over on YouTube

David C Barnett

Great Interview with the host of Vital Strategies Podcast Patrick Lonergan

How to Maximize Value When You Sell Your Businesses with David Barnett

Join host Patrick Lonergan in a dynamic episode featuring business exit plan expert David Barnett. With over 25 years of experience, David shares unique insights on selling and buying businesses, free from the conflicts of traditional approaches.

A seasoned expert in business exit planning, David brings unparalleled expertise to help entrepreneurs navigate the complexities of selling their businesses.

Explore the details of typical exit strategies with real-world examples and practical tips. Discover the art of structuring a deal that benefits both sellers and buyers, along with insights on post-closing payments for a seamless transition.

Unveiling the Franchise Reality: A Freshii Perspective on Business Ownership

Today, I've got an eye-opening video to share about franchises, sparked by a recent news article.

Now, let's shift our focus to the pressing issue of franchises. As you may know, back in 2015, I penned a book called Franchise Warnings, shedding light on the pitfalls and risks associated with the franchise business model. Fast forward to today, and we're confronted with a recent news article about a Canadian franchise giant, Freshii, whose ambitious growth plans took a hit, leading to a 50% drop in stock value.

Freshii's CEO, Matthew Corrin, aimed to almost double their store count in 2019, but the reality was a far cry from expectations. The blame game began, with Corrin pointing fingers at underperforming franchisees and slower-than-anticipated growth in the UK and US markets. This situation raised eyebrows, prompting me to explore the deeper issues within the franchise model.

The franchise business model often relies on rapid expansion to attract investors and drive stock prices up. However, the consequences can be dire for individual franchisees who find themselves caught in the crossfire. Corrin's insistence on closing the bottom 10% of stores demonstrates a stark truth: franchisees don't truly own their businesses; they are merely extensions of the franchisor's larger enterprise.

This brings me to a cautionary tale from the past. The Great Canadian Bagel, once hailed as a success story with over 200 stores globally, now stands with only 20 locations, highlighting the transient nature of franchise success.

When considering a franchise, it's crucial to align your goals with the franchisor's and understand the potential risks. Franchise ownership may not grant you the autonomy and control you envision, as the franchisor's priorities may clash with your individual business aspirations.

In conclusion, as you navigate the world of business ownership, stay informed and consider all aspects before jumping into a franchise opportunity. And if you're hungry for more insights, head to davidcbarnett.com and sign up for my email list to gain access to exclusive content, including my holiday chat videos.

Thanks for tuning in, and remember, true success comes from informed decisions and strategic planning.

Until next time.

Dave Barnett.

 

***New Video Alert!

Trace wants to know the difference between online businesses and real-world ones.

Finance, operations and will there be a buyer for his business when he’s ready to sell?

Which one has the greater potential for trouble?

Watch this week’s video here: https://youtu.be/S4Ts-jyQxh4 

Cheers

See you over on YouTube

David C Barnett

Online vs real world businesses

 

***New Video Alert!

Trace wants to know the difference between online businesses and real-world ones.

Finance, operations and will there be a buyer for his business when he’s ready to sell?

Which one has the greater potential for trouble?

Watch this week’s video here: https://youtu.be/S4Ts-jyQxh4 

Cheers

See you over on YouTube

David C Barnett

The Hidden Pitfalls of Business Growth:

 

This individual runs a thriving therapy business in the southern US, and her rapid growth presented a financial challenge that many businesses face without even realizing it.

The Story Unfolds:

This therapist, talented in her field but lacking extensive business experience, sought a business loan to address what she perceived as a need for additional operating capital. Intrigued, I had a conversation with her to delve into the intricacies of her financial situation.

The Quandary:

On the surface, her business seemed healthy. Charging $139 per therapy session and paying her assistants $50, she appeared to have a robust gross margin. 

However, she consistently found herself without enough money to pay herself, despite what seemed like a successful practice.

The Issue: Growing Pains and Cash Flow Timing:

Upon closer examination, it became evident that her growing business was facing a common challenge—cash flow timing. 

She was adding multiple new clients each week, but the insurance companies she worked with took 30 to 45 days to process payments. 

Meanwhile, she paid her assistants every two weeks. The result? A significant gap between the money going out and the money coming in.

The Danger of Financing the Value Chain:

This situation highlighted a crucial point: when your receivables (what you're owed) grow faster than your payables (what you owe), you find yourself in a perpetual need for higher operating capital to finance your customers.

 Essentially, you're inadvertently financing the value chain of your business.

The Illusion of a Loan Solution:

The initial inclination was to seek a business loan to alleviate the short-term pressure. 

However, I cautioned against this approach. 

While a loan might provide temporary relief, it wouldn't address the underlying issue. 

If the business continued growing at the same pace, the borrowed capital would ultimately be consumed by the need to finance the insurance companies' delayed payments.

The True Solution: Matching Receivables with Payables:

The key to resolving her financial challenge was to extend her payables. 

By changing the payment terms for her assistants to align with the typical payment cycle from insurance companies, she could match the money she's owed with the money she owes to others.

 This would prevent her from unintentionally financing the activities of the insurance companies.

A Valuable Lesson: Financing Wisely:

This scenario highlights the importance of keeping a close eye on your payables and receivables. 

Businesses should be cautious about taking on debt unless it's to acquire assets that will generate profit over time. 

Borrowing to meet short-term financing needs, especially when it involves financing customers' activities, can lead to a cycle of interest payments without significant benefit.

Closing Thoughts:

It's a reminder that businesses should strive to match receivables and payables, ensuring a healthy cash flow.

Whether it's through credit terms with customers or strategic payment schedules, businesses can navigate growth more effectively by managing their cash flow wisely.

Never miss any of my content by signing up for my email list at https://www.DavidCBarnettList.com

Cheers

David C Barnett

A great Interview with Jay Schwedelson Host of Small Business Quick WINS Presented By Thryv

 

In this episode of Small Business Quick Wins, host Jay interviews David Barnett, an expert on buying and selling small businesses. They discuss how to determine the value of a business, what makes a business attractive to potential buyers, common mistakes sellers make, and tips for successfully exiting a business.