Listen in as I join Jayson and Richard on their podcast to talk about the top 5 reasons why a business goes for sale, mistakes that sellers often make, understanding the terms of the sale and much more.
Listen as I join Jack Spirko to discuss why buying a business is less risky than starting one from scratch. We also talk about top
mistakes people make when buying or selling a business and how you can finance
the purchase and much more.
You
bought/sold the business.Now how to
tell the employees…
What makes Terry such a great guest is
that in his past he’s also led a family business which did multiple acquisitions
before selling the entire enterprise on to a bigger company.
Then he had a career in commercial
banking.
Terry’s rich experience was welcome in
today’s discussion about how to talk to employees about the sale of a business.
Learn how to buy an already-successful and
profitable business even in the covid-recession of 2020: https://www.BusinessBuyerAdvantage.com**Now with a new section on buying distressed
businesses.
P.S. if you
want to dip your toe into educational investment AND you live near Toronto,
Kitchener or Las Vegas, then maybe you should come out and meet me LIVE this spring.
Yes, I know
how to spell ‘stupid,’ please don’t e-mail me.
I’m cranky
and sore and upset. I’ve got a cold and
an ear infection.
What makes
me more cranky and upset is when I hear the same poor advice about rules of
thumb for pricing small businesses being passed around again and again and
again.
This week I
tell the story of the old accountant who told me once in a workshop,
‘Businesses sell for 5 times their cash flow.
Those with real estate sell, those without don’t.’
Simplistic
rules of thumb like this one guarantee only one thing… mistakes are being made
and it’s costing someone dearly.
I explain
why those with real estate sell, those
without don’t in this video and the answer will make you sick to your
stomach if you happen to be a business owner who could have fallen victim to
this kind of advice. Watch it here: https://youtu.be/ck_AmnOIzDE
If you own a
business and will want to sell one day, you need to educate yourself about how
this process works and give yourself time to get ready.
Learn what’s
involved in selling your small business.
Take my 3 hour online course at www.HowToGetOutOfMyBusiness.com or buy my Amazon best-selling book; How To Sell My Own Business. Available from Amazon.com or Amazon.ca
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
I’m coming to Charlottetown, Prince Edward Island in January
2017. My live events always fill up
fast. Find all my live events here: http://davidbarnett.eventbrite.ca
I had an online exchange the other day with a guy on the
west coast who believed that paying off his business debt was a key ingredient
in preparing it for sale.
WRONG.
There are all kinds of problems with this thinking but this
week I simply want to discuss it from the buyer’s point of view.
(There will be another video in two weeks about how this
thinking affects the seller’s wealth.)
Does small business debt have an impact on the value of the
company?
Nope, just like your mortgage doesn’t have an impact on the
value of your house. The value of a business is derived from its cash flow.
Do you think they care if your business owes money?
Well, this is a little more complicated. A buyer may actually care quite a lot and it
may not be for the reasons that a seller thinks. I made this video to explain why some kinds
of debt within a business may be very interesting for a potential buyer. Watch it here: https://youtu.be/pOJ3B1_K9L8
This business owner would certainly benefit from working
with me to get his business ready for sale.
I’ve got another mastermind group starting up for 2017. E-mail me if you’re interested in learning
more. It’s for those who plan to buy,
sell, or improve their business in 2017; dbarnett@alpatlantic.com
HALIFAX, NS: I’m
coming on November 30, 2016. Find out
more and register at https://ceed.ca/calendar/
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
I had the
pleasure of speaking to a business owner in Toronto while I was away on
vacation. It was just a brief consult done from a park bench in Brussels.
He and the
other owners had become aware of a competing firm that had been acquired by a
larger company and wanted to try to do the same thing.
The
conversation centered around the best strategy… hiring an intermediary, hiring
someone in-house to try to find a suitor, etc.
During this
time, my client made a little comment about how he and the other founders of
the company were working almost 16 hours a day and how they found it impossible
to hire people to help them out.
I made this
recording telling the story and how you can go about fixing it. Listen here (audio only on YouTube): https://youtu.be/9n68EuvNXfw
Needless to
say, it is quite difficult to convince someone to pay money to buy a business
that needs this kind of management engagement.
Proper
businesses have structure, organization and everyone knows what they’re
responsible for and what duties they need to get done. Without this, it’s impossible to grow and it
sure does look scary for anyone looking at buying.
The topic
was very apropos as I’m in the middle of creating my latest workshop; Building
a Business that Someone Will Want to Buy.
It’s going to be presented on October 18 in Moncton, NB and will likely
become an online course.
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up just to the left of this post. If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
Why does the seller make me WAIT so long for information?
I got a call from a client the other day. He’s been trying to decide if he wants to
pursue a business that is rumoured to be for sale.
I say ‘rumoured’ because it certainly doesn’t seem like it’s
for sale. The owner says he wants to
sell, he speaks highly of the business and its potential, but he just won’t
hand over the information the buyer is asking for; the latest financial
statements.
The first thing that is obvious is that this seller hasn’t
read my best-selling book; How to Sell MyOwn Business.If he had, he would know that you never go out looking for
buyers and talk with them before you’re completely prepared to answer all their
questions and you’ve got your ‘package’ together.
Putting together Confidential
Business Profiles is part of what I do for my clients.
From the seller’s perspective here’s what may be going on:
There may have been a pressing emotional or
personal need which pushed the owner to decide to sell and this need may no
longer be so aggravating.
If the business is profitable, then the longer
the seller delays the sale, the more money they make in the interim.
There may be some pressing business needs that
require their attention in the present, selling the business may actually be a
‘side project’ and doesn’t get the proper attention.
Outside advisors or service providers like accountants
may not be available because of workloads or vacations.
Let’s be clear, any delays caused by the seller are not good
for the deal. They upset the buyer and buyers can be hard to find.
One of the hazards of this scenario is that the more a buyer
follows up and ‘chases’ the seller, the more the seller may begin to think that
the buyer is in love with the business.
This can cause them to believe they can get more money for
the business. As a buyer, this is bad.
So stop it. Stop
following up, emailing and calling the seller continuously. Slow down. Look at other businesses.
One of the problems from a buyer’s point of view is that
they may be imagining themselves as the owner.
They start to get excited and REALLY want to buy the business NOW.
This is called Buyer Fever and it’s a very dangerous
illness. It can cost people hundreds of
thousands of dollars in over-payments when it leads them to make bad deals and
not do proper due-diligence.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up just to the left of this post.
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
If you’d like to learn how to create high returns by making
local private lending deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September.
How much can you sell a business for that makes no profit? Here's what I used to do and the rationale. Also, be prepared for a deal that works for the buyer.
Transcript:
Hey
there, it's David Barnett again. This time I have a question from a
business owner who wants to ask about selling a business and a few weeks ago I
did a video about the three different ways that you could evaluate a business
and if you recall, I talked about market valuation methods, I talked about
income or capitalization market of evaluation methods and I talked about asset
evaluation methods.
So the question is, how do you put a price on a business that has no
profit? Interesting question. Let's take a look at those three
methods in a little more detail.
So if you recall from that earlier video, I had said that there were three
different camps or methodologies for evaluating business. There are
market comparison methods where we look at the subject business and compare it
to other similar businesses of a similar size in the same industry. There
is the capitalization method where we actually look at what rate of return are
we looking for from an investment in this particular company. Then there
is the asset accumulation method which are simply looking at what material
things are part of this company.
If we are looking at setting a price on a business that has no profit, then
obviously we can't use these methods at all (capitalization) because we have no
profit for which to apply our mathematical formula, we can't capitalize
zero. Within market comparison there are two different methodologies of
how we compare one company to others we've already sold. One method is a
multiple of the cash flow or sellers discretionary earnings. The other method
is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we
can't multiply the sellers discretionary earnings or if we can, maybe it's a
figure that's actually below the firm market wage of what a manager would
earn? So, it wouldn't give any kind of accurate result. So this
method then is off limits to us as well. What we are left with is
comparing the subject company that doesn't make any money to other companies
that have sold and looking at what those other companies sold for as a percentage
of sale. That's one method we can do. We can also do the asset
method.
So, a business that doesn't earn any money or has no profit. What exactly
do you have to sell? Well, you got stuff, your tangibles; inventory,
machinery, equipment etc. But you also do have sales. There are
customers that come and they buy things from you. The problem is, either
there aren't enough of those customers or your business is not being managed in
a proper fashion so that it produces a profit. That could be because of
some structural problem, maybe you have twice as much space as you should have
for this type of business and so you got an overly burdensome overhead for
example. It could simply be that employees are stealing or there is some
other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a
business that didn't have a profit, what I would do is I would use the market
comparison method and use the percentage of sales, let's say for example
that give me a figure of $100,000 and then we would do an estimate of the asset
accumulation; add up the value of all the things in the business, and let's say
that gives me 80,000. What I would do, is suggest a asking price that
kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't
demonstrate to a banker that it's going to be able to service any debt,
right. So whenever I have a seller that has a business like this, I
always have to give them an explanation as to what kind of offer they were
going to be receiving. In all likelihood, they were going to be getting
an offer that
didn't involve any institutional or bank financing. So for example
this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I
will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the
terms would always have to be flexible for the buyer because the buyers would
all know that the only alternative the seller would have would be to close the
business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your
cash down payment from the buyer is likely going to exceed what you could hope
to get in an auction scenario. If an auctioneer might get you $20,000 for
the asset and you can find a buyer willing to give you $25,000 down and then you
hold a note overtime for the balance; then that's a great deal for you.
The employees get to keep their job, the customers get to keep doing business
with the business. It's better for everyone all around, but it's going to
require a lot of flexibility on the part of the seller and if there are debts
in the business that aren't be serviced or can't be serviced and the debts
exceed the likely amount that we are able to get out of it, then that's a
really bad situation.
Unfortunately, I have had people who have run businesses down to the point
where they weren't making any money, they weren't able to service debt.
They sold them for what they could and then they had to go to their banker and
say, look, this situation is bad, I am not going to be able to pay you anyway,
this is an opportunity I have to get out of this situation, and this is the
kind of money I am able to bring to you. Can we work out a deal?
They have been able to do something with their bankers to try to work
themselves out of that debt, or in a really bad situation, they end up having
to declHey
there, it's David Barnett again. This time I have a question from a
business owner who wants to ask about selling a business and a few weeks ago I
did a video about the three different ways that you could evaluate a business
and if you recall, I talked about market valuation methods, I talked about
income or capitalization market of evaluation methods and I talked about asset
evaluation methods.
So the question is, how do you put a price on a business that has no
profit? Interesting question. Let's take a look at those three
methods in a little more detail.
So if you recall from that earlier video, I had said that there were three
different camps or methodologies for evaluating business. There are
market comparison methods where we look at the subject business and compare it
to other similar businesses of a similar size in the same industry. There
is the capitalization method where we actually look at what rate of return are
we looking for from an investment in this particular company. Then there
is the asset accumulation method which are simply looking at what material
things are part of this company.
If we are looking at setting a price on a business that has no profit, then
obviously we can't use these methods at all (capitalization) because we have no
profit for which to apply our mathematical formula, we can't capitalize
zero. Within market comparison there are two different methodologies of
how we compare one company to others we've already sold. One method is a
multiple of the cash flow or sellers discretionary earnings. The other method
is what these businesses sell for as a percentage of sales.
If we have a business that doesn't earn a profit, then that also means that we
can't multiply the sellers discretionary earnings or if we can, maybe it's a
figure that's actually below the firm market wage of what a manager would
earn? So, it wouldn't give any kind of accurate result. So this
method then is off limits to us as well. What we are left with is
comparing the subject company that doesn't make any money to other companies
that have sold and looking at what those other companies sold for as a percentage
of sale. That's one method we can do. We can also do the asset
method.
So, a business that doesn't earn any money or has no profit. What exactly
do you have to sell? Well, you got stuff, your tangibles; inventory,
machinery, equipment etc. But you also do have sales. There are
customers that come and they buy things from you. The problem is, either
there aren't enough of those customers or your business is not being managed in
a proper fashion so that it produces a profit. That could be because of
some structural problem, maybe you have twice as much space as you should have
for this type of business and so you got an overly burdensome overhead for
example. It could simply be that employees are stealing or there is some
other problem in the way that the business is being run.
When I was a business broker, putting businesses up for sale, if I had a
business that didn't have a profit, what I would do is I would use the market
comparison method and use the percentage of sales, let's say for example
that give me a figure of $100,000 and then we would do an estimate of the asset
accumulation; add up the value of all the things in the business, and let's say
that gives me 80,000. What I would do, is suggest a asking price that
kind of averages the two. So let's say we are going to ask 90,000.
here is the other problem though. A business that has no profit can't
demonstrate to a banker that it's going to be able to service any debt,
right. So whenever I have a seller that has a business like this, I
always have to give them an explanation as to what kind of offer they were
going to be receiving. In all likelihood, they were going to be getting
an offer that
didn't involve any institutional or bank financing. So for example
this $90,000, maybe a buyer will come and say, I'll give you $40,000 down and I
will give you payment over five years adding up to another $50,000 for example.
This price would certainly be negotiated downward from the asking price and the
terms would always have to be flexible for the buyer because the buyers would
all know that the only alternative the seller would have would be to close the
business and liquidate the assets, send them to an auction for example.
What I often say to many of my seller was, get any offer you can where your
cash down payment from the buyer is likely going to exceed what you could hope
to get in an auction scenario. If an auctioneer might get you $20,000 for
the asset and you can find a buyer willing to give you $25,000 down and then you
hold a note overtime for the balance; then that's a great deal for you.
The employees get to keep their job, the customers get to keep doing business
with the business. It's better for everyone all around, but it's going to
require a lot of flexibility on the part of the seller and if there are debts
in the business that aren't be serviced or can't be serviced and the debts
exceed the likely amount that we are able to get out of it, then that's a
really bad situation.
Unfortunately, I have had people who have run businesses down to the point
where they weren't making any money, they weren't able to service debt.
They sold them for what they could and then they had to go to their banker and
say, look, this situation is bad, I am not going to be able to pay you anyway,
this is an opportunity I have to get out of this situation, and this is the
kind of money I am able to bring to you. Can we work out a deal?
They have been able to do something with their bankers to try to work
themselves out of that debt, or in a really bad situation, they end up having
to declare bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a
business that doesn't have any profit? Basically what we look at is what
is the worth of the sales and the tangible assets and we figure out how can we
make it possible for someone to buy this business when in all likelihood, no
bank or any other institution is going to finance a business who doesn't have
any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out
every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't
forget to visit www.investlocalbook.com. Sign up for my e-mail
list. It's right down here under the welcome video.
Thanks and we will see you next time.
are bankruptcy and stuff like that.
Anyway I hope that answers your question, how do we put an asking price on a
business that doesn't have any profit? Basically what we look at is what
is the worth of the sales and the tangible assets and we figure out how can we
make it possible for someone to buy this business when in all likelihood, no
bank or any other institution is going to finance a business who doesn't have
any cash flow.
Thanks and don't forget to sign up for my e-mail, newsletter that comes out
every week. We'll talk with you later. Bye.
Hey, you made it to the end of the video. That's great. Don't
forget to visit www.investlocalbook.com. Sign up for my e-mail
list. It's right down here under the welcome video.
This week I'm asked what amount of vendor financing is ideal when doing a business transaction. Listen to me talk about the largest and smallest amounts I've seen done on deals.
Transcript:
It is David Barnett
once again and this week the question I received was is it normal when you buy
a business for the vendor to finance to 20% of the purchase price? Now I have
done other videos about vendor financing or vendor take back notes. And this is
the first time I have had a question about the normal level of financing that
we might expect for a seller to do. The reality is that the amount of financing
that a seller has to do relates to two things; number one
how quickly does the seller want to move the business? The biggest impediment
to selling a business is the access to financing. So, when I was a business
broker and I had sellers that wanted to sell a business very quickly. I would
advise them that if they were more willing to hold more paper on the deal or do
a bigger vendor take back. Then we would likely be able to sell the business
faster.
The second
consideration involved is how many and
what kind of tangible goods are included in this business sale? The amount of
tangible goods included in this business is going to determine what kind of
traditional or institutional bank financing that we are going to be
able to obtain. So, if there are hard assets in the business such as equipment,
machinery, vehicles etcetera. Then we are going to be able to bring a
traditional bank lender in; that means we are going to be able to get more
traditional financing. We don't have to ask the vendor for as much vendor
financing; now in the question it mentions 20% but in my experience I have seen
across the spectrum. Equipment intensive businesses where the buyer had lots of
money, the buyer was able to get bank financing. And basically asked for
10%-15% vendor financing just to give them a little bit more security and to
give them all the positive advantages that I talked about in other videos about
why you need to do a vendor take back when you are buying a business.
In other cases I have
had service oriented businesses without a lot of equipment and material and
they have sold with, I have had one that sold with 75% vendor financing. So,
quite literally the buyer put in 25% and the seller finance the balance. There
was even a period of time back after the financial crisis of 2009 were we did
several deals in my business broker shop, without any banks involved at all.
They were entirely deals with buyers and sellers where the buyer would put down
money, either from saving or perhaps from a personal debt tool like a line of
credit for example. They would put down their money and the vendor would
finance the balance; and most of those deals it was between 40%-60% vendor
financing, so there is no hard and fast rule when it comes to the amount of
vendor financing that you might expect in a deal. Basically,
it's completely up to negotiation and it is important that when you
are buying a business that you ask, ask for the world. They are just going to
say no, that is fine, that is part of negotiating.
And from the seller's
point of view offering a greater amount of vendor financing can help sell the
business more quickly. But more importantly, it can help you actually sell it
for a value closer to its true value. Because, the difficulty of course is
always getting financing for that goodwill component and no bank is
going to finance a 100% of the equipment for example. So the buyer needs to
have some equity to offset what the bank is going to give him and in order for
a seller to enjoy that last little bit of value to bring the price of the
transaction up to where it should be if it is a profitable business. The seller
has to be there to finance it, there is just no other place to get the cash and
I have often had sellers tell me that they didn't want to finance a buyer when
they sold their business.
And I advise them that,
quite frankly what would happen is because they weren't willing to finance
buyers wouldn't be able to put a deal together. The business would sit on the
market for years and years and eventually the seller would start to lower the
price to the point where they would end up with the same cash on closing as
they would have if they had sold years earlier and would have been willing to
accept some amount of vendor financing. So, it is really a win win tool for
both; it can help secure the buyers position, it can help offset some of the
risk by transferring it from the buyer to the seller. I have
explained that in other videos and really buyers should be asking for as much
vendor financing as they can get. And sellers should be using vendor financing
as a way to get the price that they are after.
Anyway, I hope that answers the
question and don't forget if you enjoy my videos and you like what I have to
say please share and like the videos that is how I grow my viewership and to
make sure that you always get the latest stuff that I put out. Be sure to put
yourself on my email list. I send out an email every week.
In this video I tell the story of the difficulty in finding a buyer for a highly specialized niche retail store; one that sells bird-watching items.
I relate how small business buyers are looking for both an investment and a job and help shed some light on how you should imagine an exit plan before you start a business.
