Small Business Owners’ Largest Fear

Inc Magazine reports:

Small business owners’ biggest fear? Not having the money to retire, says a new study.

Nearly two-thirds of small business owners fear outliving the money they need to retire, according to a poll from the Guardian Life Small Business Research Institute.

Click here to read the full article.

We find many business owners who do not sell their company because they fear not having enough money to live without their primary income source.

Exit planning alleviates fears by establishing the business value, a planned exit path, and a comprehensive retirement plan.

Fear is often based on a lack of knowledge. Exit planning brings in multiple advisors to give an owner the knowledge and confidence they need.

July Newsletter

We have already received great feedback about the How to Hire a Great Salesperson article in our July newsletter.

Click here to read the newsletter.

For direct links to the two newsletter articles, you can click below.

• How to Hire a Great Salesperson
• Planning Business Ownership Succession (outside link to Bank of America)

 

Must Read for Every Entrepreneur

I recently finished reading John Warrillow’s book, Built to Sell. John was kind enough to send me a first edition copy.

The first edition was published in 2010 and was named by INC Magazine as a 2010 “Best Books for Business Owners”. The second edition with expanded resources will be released tomorrow, April 28, 2011.

I recommend the book for every business owner. He takes readers through a process of building sell-able value into an advertising agency as seen through the eyes of the fictional owner. This engaging narrative is punctuated with “Ted’s Tips”, a series of take-away points from Ted who is the fictional business advisor in the book. Although the book focuses on a business in the service industry, it offers valuable insights for all industries.

Even if you do not plan to sell, building a business to sell is the exercise as adding intrinsic value to the company. Click here to visit the book website and to place an order.  If you order by April 30 John is offering a valuable promotion. Click here to get the promotion.

Happy business building!

Bryce DeGroot

First Quarter Completed Transactions

Compass Advisors advised in the sale of two Montana businesses in Q1 2011.  We initiated these transactions, assisted in the negotiations leading to their conclusion, and acted as advisor to the sellers.

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The entrepreneur’s juggernaut…

…that many never get past.

In a recent dialogue with the founder of a manufacturing company I wrote the following note:

We recommend starting to plan for a sale at least 2-3 years prior to the time you want to exit. Two of the most critical value drivers to develop are (1) stable and growing earnings, and (2) a qualified management team and operating systems that allow the company to operate without the owner to the greatest extent possible…

In response to my note the owner said the following:

The management team is the first hurdle which has been the hardest for me to apply. We had a consulting group come in and after a few days it became apparent to me how miserable I was trying to do everything myself, the entrepreneur’s juggernaut that many never get past. So, I stepped aside and put a very capable man in charge as President. That was the best thing I ever did because I truly hate running the business. I like the sales/marketing and in particular, technology development.

This astute business owner realizes that growing to a multi-million dollar revenue level means that he needs to delegate and form a second layer of senior management. His experience stands in contrast to some business owners who get burnt out while trying to do it all. Lets read again what he said above:

…it became apparent to me how miserable I was trying to do everything myself, the entrepreneur’s juggernaut that many never get past.

Let that be a lesson to each of us. It could change your company’s direction and your life.

Not only does a qualified management team release the owner who is trying to juggle everything. It also drives a significant value premium when the owner eventually sells or transfers ownership.

Bryce DeGroot, President

BizBuySell Reports Slightly Improving Business Sale Conditions

In a report released on January 5, BizBuySell.com announced that 2010 business sale volumes of small businesses increased slightly.

According to today’s BizBuySell.com Insight Report, the number of closed business-for-sale transactions in the United States, as reported by business brokers, rose by 3 percent in 2010.

The report continues to project the 2011 business sale climate.

BizBuySell.com projects that 2011 will witness an accelerating recovery in the business-for-sale marketplace, citing the following industry drivers:

• Latent Supply. While many business owners have hesitated to sell their businesses in the midst of a recession and flat/declining business performance, the recovering economy should reverse this trend and drive an increase in the number of businesses listed for sale. A compounding factor is that the earliest members of the U.S. baby boomer population, many of whom are business owners, have reached retirement age. As an increasing number of small business owners near retirement, this trend will continue to bring an above average number of small businesses to the sale market.
• Latent Demand. Business brokers nationwide report a growing number of buyers looking to purchase a company. This is driven in part by declining business valuations, which makes buying a business more affordable, and in part by the nation’s high unemployment numbers, which have convinced many laid-off employees to give entrepreneurship a try. According to Handelsman, the principal obstacle to making the transition from unemployment to business ownership remains a lack of available financing for business acquisitions.
• Easing Credit. The Federal Government and the SBA have recently focused on helping banks ease their lending restrictions to provide necessary capital to the small business market. As capital becomes more readily available, it will be easier for brokers and business owners to close sales.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/01/05/prweb8046060.DTL#ixzz1AHMsHFkF

November Newsletter

Read the latest issue of the Private Company Report, which is our firm’s bi-monthly newsletter. The newsletter explores issues that are critical to owners considering a sale of their business and to buyers looking to acquire a company.

Topics include seller financing & succession options.

Click here to read the full newsletter.

To subscribe to the newsletter, please click here.

Seller Financing 101

I just posted an article on our website that takes a high-level look at seller financing. If you are a business owner planning to sell your company, then offering seller financing on some portion of the sale price is an important consideration.  Click here for the full article.

Excerpt:

This type of financing differs from a traditional commercial loan because the seller essentially extends credit to the buyer against the purchase price of the business. However, seller financing is misunderstood by many, even though it may be the best way to sell a business in a challenging financing environment.

Then I mention some benefits of seller financing:

• Faster sale and higher price– Seller financing provide an attractive option for buyers which means that sellers can sell their business more quickly and at a higher price.
• Flexibility – Seller financing enables the seller to create a payment schedule, interest rates and loan period that fit their personal goals.
• Tax breaks – Taking a note for part of the business purchase price may provide a tax break for the seller. The seller can defer some of the tax due on the sale of the business until full payment is received, which could be several years down the road.
• Protections – Requiring the new owner to keep the seller up to date with information like monthly profit and loss statements, cash flow, order backlog, inventory levels or other items can be a loan covenant or stated in the sale contract. The additional information allows the seller to keep track of the business and to step in and offer advice or help if any problems are detected.

Continue reading the full article.

EBITDA and Company Value

This Inc. Magazine article explores EBITDA as a gauge of company value. Click here for the full story.

One place to start measuring your company’s potential value in a sale is determining your EBITDA, or earnings before interest, taxes, depreciation, and amortization.

“It’s a quick and dirty way to assess the firm’s ability to pay back interest or debts,” says Gil Sadka, assistant professor of accounting at Columbia Business School in New York.

Best Industries?

What are the best industries for starting [or buying] a business right now? We just tweeted this article from Inc. Magazine.

RT @emyth: The Best Industries For Starting a Business Right Now from Inc.com http://ow.ly/34Adj—
Compass Advisors (@CompassAdvisors) November 04, 2010

What is Blue Sky?

“Blue sky” is a colloquial term that means, according to Merriam-Webster, “having little or no value” and “not grounded in the realities of the present.” The term is often used in reference to the intangible value of a business, but that doesn’t sound like the definition! Business usage of “blue sky” terminology is probably best replaced with the term “goodwill” which does specifically refer to the intangible value of a business.

Goodwill is defined as the difference between the purchase price of a business and the tangible assets being acquired. It represents the total intangible assets of a business, as expressed in the following formula.

Purchase price (or fair value) – tangible assets = goodwill

Goodwill may consist of customer and vendor relationships, branding, trade name, intellectual property, or any other asset not capitalized on the balance sheet.

The concept of goodwill does not entail nebulous speculation about what a customer list or business name might be worth. Arriving at a goodwill figure first requires the total fair market value or actual sale price of the business. Then tangible assets are subtracted, leaving the difference as goodwill value.

Although business appraisers estimate goodwill as part of fair market valuations, actual goodwill is not known or recorded on the balance sheet until a private company is sold. Post-sale the company now has the two variables necessary to calculate goodwill, which is then recorded as an asset item on the balance sheet. As an intangible asset, goodwill is amortized as an expense over a period of years.

We recommend the term goodwill over blue sky because it has a precise business definition that leads to a better understanding of valuation.

Blog Debut

Compass Advisors has navigated the world of technology and ended up with a new WordPress blog. We look forward to sharing content that interests you. We plan to bring you resources on buying and selling companies, merger & acquisition news, and general business intelligence.

Please comment, and let us know that you are reading.