SelfInformed

Selling Your Business — A NASE Guide

The minute you decide to sell your business, you face two choices:

1.     Will you proceed immediately and offer your business in its current condition? (Realizing that you may need to make price concessions to account for unaddressed weaknesses that the buyer can indicate.)

2.     Will you delay your sale or extend the process to involve investing efforts and funds necessary to overcome its weaknesses and improve its attractiveness to prospective buyers?

Your answers depend entirely on your personal motivations, and your own goals and objectives. These will aid you in creating an in-depth profile of your prospective buyer; understand how they will gauge your business; valuing your business; and pricing it right before listing it for sale.

This short NASE guide will aid micro business owners (aka small business owners) and entrepreneurs properly prepare their business for sale. Let’s start with a brief on personal motivation and goal setting for your sale.

Your Personal Motivations for Selling Your Business —

A Checklist

Why do you want to exit?

Answer the following questions and state the urgency of your exit timing. (Are you willing to transit out of the business over time or immediately?)

While answering questions keep in mind that an immediate exit can dramatically affect the sale price of your business. The following are the prime reasons:

1.     You eliminate the opportunity to strengthen the attractiveness of your offering by overcoming weaknesses identified by the prospects

2.     A prompt departure eliminates the possibility
of a transition period during which you can strengthen the business and overcome various weaknesses as identified by the buyers and agreed upon during negotiations. Hence, you reduce possibility of receiving higher offers in line with
a negotiated agreement.

3.     An immediate sale/payoff makes it impossible to offer any seller financing that are known to allow buyers to offer higher selling prices.

Next, select and resolve conflicts in your priorities, which can include one or several from the following:

• An immediate departure
• The highest price possible
• All-cash payoff at closing
• Post-sale involvement with your business
• Post sale priorities such as little or no disruption to clients or staff
• Pre-sale preparation followed by future sale

Your Goals and Objectives for Selling Your Business —
A Checklist

Set Your Sale Goal

What do you hope to achieve from the sale?

• Sell your business in full while remaining involved in its operation
• Sell your business in part while remaining involved with its operation
• Sell your business in full and end involvement with its operation
• Other

Set the Timeline

Decide the time during which you hope to complete the sale process e.g. (0–6 months, a year, etc)

Set the Financial Goal/Expected Outcome

What are your preliminary financial expectations from the sale of your business? This includes setting the price for your business. We will discuss how to properly value your business in the next section, but here’s a preliminary on pricing:

For now, consider the following questions to arrive at a preliminary pricing multiple for your business sale:

• My business is in strong condition and likely to command a high sale multiple
• I’m prepared to accept a lower pricing multiple due to the current condition of my business
• I’m willing to commit time and effort to strengthen my business condition and therefore to improve its likely pricing multiple

Next decide on the form of payout you are looking for:

• Will you provide a seller-financed loan for a portion of the sale price?
• Do you require an all-cash payoff at closing

The answer can affect the net sale price the buyer is willing to pay, and in case of presence/absence of seller financing capable of paying.

Whose You’re Prospective Buyer?

When you began your business, you must have created a customer profile for your target audience. Now you have to create one for your buyer. Here are a few primers to create your prospective buyer’s profile:

• I prefer or am obligated to sell to a partner, key employee, employee group or family member. (If so, you won’t need to list or market your business for sale. Instead, you’ll work with legal and financial advisors as you pursue next steps.)
• I intend to pursue a sale to a targeted business such as a supplier, competitor or strategic business buyer? (If so, you won’t need to list your business for sale. Instead, you’ll work with legal and financial advisors as you strategically market your business to select targets.)
• I seek to sell to any buyer who has the financial and managerial capability to buy my business. (If so, proceed with the following parts of this guide as you prepare to prepare, list, market, and sell your business.)

After-sale Objectives —

Your Personal Departure Objective

• I want to stay involved with my business in a managerial capacity after its sale.
• I’m willing to remain involved over a post-sale transition period of 3-12 months.

Your Post-Sale Objective for your Business

• I prefer to sell to a buyer who plans to retain employees and therefore cause little disruption in their lives.
•  I’m willing to sell to a buyer with plans to merge, move or significantly alter the business.
• Once you answer these questions, which may take some soul searching and careful consideration, you’ll be clear about what you want from your business sale. You may end up adjusting some of your objectives along the way, but the outcome of this step puts your sale goal into words and sets your sale effort in the right direction.

Hence, we believe that you must consider the need for an immediate exit as a perceived need.

Valuing Your Business, or What Matters to Your Buyers

The fact of the matter is that simply “being profitable” can never make you scalable.

The Pricing for Your Business

How much should you ask for, making sure that it is neither too high nor too low?

The answer to this primarily depends on the pre-sale condition of your business. A rule of thumb, applicable for most small businesses, is to sell at a multiple of 2–4 times annual multiple based on business condition and attractiveness to buyers.

Here are the primary motivations for buyers to pay more than what you had actually valued your business for:

Money — It is true that cash opportunity drives purchase decisions but buyers are looking for more. It’s called a recurring revenue, or the revenue that they can expect with high predictability. These include things like subscriptions or long-term contracts.

A quick way to value your what your recurring cash stream are worth and then to divide them by the rate of an investment of comparable risk.

Example: if a business is able to put away $40,000 every year in the bank knowing that if they had invested it in the business they would have a predictable and total going rate of return of about 4%, then the cash stream of that business is worth (estimated) $40,000/ 4 percent (i.e. 0.04) is $1,000,000.

Market — The next thing the buyer wants to know is the market share of customers your brand has. Call it your brand position, your customer base, or simply the market share, it is the one thing that lets the buyers estimate how long it will take for them to gain back on their investment. Take the example of Yahoo buying Facebook in 2006 when it had around 20 million users.  Yahoo bid it at $1 billion. Divide that with Facebook’s customer base and it comes to $50 worth of ads to each user to make good on that investment. For Yahoo, at that time, it would have taken 2 years to earn the whole investment.

Competitive Advantage— the buyer will take into account the competitive edge your business has over others in the same niche. Things such as trade secrets, talent pool, technology etc. This can be hard to quantify, but a good estimate can be gained from how much it would take to hire the same talent pool or to make the same thing on their own, or how much your competitor is willing to pay for the patented knowledge you have.

Established Methods of Valuing a Business —

A Checklist

Important considerations, and established methods of valuing your business include:

• The asset valuation method to value a business.
• Minority discounts, and how they affect the money you get.
• How your deal structure can affect the ‘real’ value you get for your business.
• Reasons why people sell a business
• Tax advantages of selling your business.
• Planning your exit strategy: how it can help you get a better value for your business.
•      How much it costs to sell your business.

Preparing Your Business for sale —

Your Pre-Sale Checklist

• Bring your financial statements in order
• Estimate the value of all tangible assets of your business
• Prepare your statement of Seller’s discretionary earnings
• Estimate multiples, based on:
• Do the math on your own — arrive at an estimate of purchase price
• Compare prices with recent listing your business category and other comparable businesses

Final Words — When Should You Sell

“Now might and might not be a good time to sell your business” is the adage that has plagued self employed individuals and entrepreneurs for decades. The recent report by the BizBuySell Insight Report found that the number of deals that closed n 2013 had increased by 41.7 percent in the third quarter relative to the same quarter the year back.

This healthy selling climate is expected to continue. That’s good news for those eager to retire or cash out and start another venture.

A survey conducted by Dykema, a law firm headquartered in Ann Arbor, Mich showed that the market for acquisitions and mergers are expected to pick up by 68 percent. Furthermore, the experts claim that the low interest rates also allow affordable financing to be had and hence increase the closing sale price. 

But the market for small business has always been unpredictable and so owners shouldn’t simply sell because there’s momentum in the market. It is crucial that you spend time and effort in understanding your motivations, and properly valuing and preparing your business for sale.

Sources:
www.bizbuysell.com/news/media_insight.html
www.dykema.com/assets/htmldocuments/MASurvey.v2.10.2013.pdf

5 Media Tips For Small Businesses

Designing Self-Employment

Susan Sharman, Owner of Sharman Studios, based in Martinez, California has been a NASE member since 2012. Like many members, Susan joined for the access to health insurance but has come to appreciate many of the other benefits the NASE provides. Sharman Studios specializes in crafting visually pleasing and vibrant graphic design and marketing solutions for small to mid-sized businesses.

What inspired you to enter the field you are in?

I fell into the graphic design field after graduating from art school with a BFA in printmaking. I had school loans and needed a job! My first job was paste-up artist (a job that no longer exists in the design industry) for a wine importer. I also had knowledge of print processes which was helpful in understanding how to prepare artwork files for commercial offset printing. The skills I had were a good match for entry level work in the design field but once I got into it I loved the work. I love the smell of ink on paper! One of my favorite project tasks is conducting a press check for a client project.

 When and why did you start your business?

After working as an in-house designer and art director for about nine years in the wine industry I was ready to be my own boss. I was tired of “working for the man” and I launched myself into the freelance world in 1993 with one client, a Mac, and a fax machine! I will admit that I made a lot of mistakes in the early days but I was very committed to being self-employed so I stuck with it. Along the way I discovered I had skill sets that were uniquely suited to running my own business such as good organizational and project management skills.

That must have been a big leap of faith, how are your clients now and what equipment do you have?

My client base has grown exponentially and now extends nationally with current clients here in California, on the East Coast and in the South East. I got rid of the fax machine about four years ago and transitioned to a web-based fax service. I now have state of the art equipment in my office including a scanner, several printers including an Epson color printer and additional computers. A number of years ago I invested in custom designed and built cabinets and work area for my design office which includes flat files and a central “work island” with room to spread out my projects.

What challenges have you faced in your business? How have you overcome them?

The past two decades have seen radical changes in the graphic design industry, especially with technological advances and changes to the process of implementation of digital files. Additionally, the marketing avenues and choices now available to the small business owner have changed and morphed and we now work in a global economy with potential to reach beyond our local neighborhoods. This was not available a mere ten years ago.

I view the challenges as opportunities to learn something new to both advance my own business as well as for my clients! I keep abreast of new trends through my involvement with professional organizations; participating in seminars or workshops and through a great deal of reading.

I also have established partnerships with fellow entrepreneurs who may serve the same industries I do but offer a companion resource. These are my trusted referral partners and I bring them to the table for projects as needed for my clients. For instance, I may create a design for a direct mail campaign that will include traditional print and snail mail methods but to be truly effective the campaign should populate across multiple marketing channels including social media. I’ll bring on a social media expert to the project to advise and implement. I am proud that I can provide work for other small business owners such as myself.

I’m sure the other small business owners appreciate it too, how do you market your business?

The majority of my work comes via word of mouth. My website is the base for all my marketing efforts and outreach. The strategies I use to drive people to the website include networking, content creation for my blog and articles, and social media. Via the website potential prospects can see my work, learn about my process and capabilities and read my e-newsletter and blog posts. I also send the e-newsletter out to my database on a regular basis. I network within various organizations both to meet potential prospects but also to develop referral partnerships.

You mentioned you were determined to be self-employed, what’s the best thing about it?

I am master of my own time and direction of my life. I get to choose how I will spend my days and what type of creative work I will take on. I have the opportunity to meet and work with some amazing people! I can leave my studio and take a walk in the middle of the day if I need to recharge my creativity.

And conversely, what is the most challenging thing about being a self-employed designer?

What is most challenging about being a freelance designer is keeping current with the software and hardware necessary to conduct my job. It requires a substantial financial investment on an ongoing basis.

What’s the best compliment you’ve ever received from a client?

That I am a trusted member of their team! I am a firm believer that the best design solutions come from an open and collaborative process between designer and client.

What’s the most important piece of advice you would give to someone starting their own business?

2014 Mid-Term Elections

On November 4, 2014, voters will head to the polls electing a potential majority busting group of new  U.S. Senators and all of the U.S. House of Representatives, impacting the legislative landscape for the self-employed in state and federal governments. 

U.S. Senate

The 100-person deliberative body of the United States Senate is unique for several reason, members seek re-election every six years and unless one party holds a “super-majority” (60 of the seats), it is by nature the chamber of bi-partisan efforts and legislative compromise.  This cycle, there are 36 Senate races, eight open seats due to retirement or primary loss and 28 incumbents seeking re-election.  Off the 10 Senate races categorized as “toss-up” races by Real Clear Politics, seven are currently held by Democrats and three by Republicans.  With the Senate evenly divided at 45-45, those 10 seats will either maintain the majority for the Democrats or swing the majority to the Republicans.  The ten must watch Senate race:  Alaska, Arkansas, Colorado, Georgia, Iowa, Kansas, Kentucky, Louisiana, New Hampshire, and North Carolina.

House of Representatives

Much like 2012, it would be almost statistically impossible for the Republicans to lose their majority in the U.S. House of Representatives.  Of the 435 House seats, the Republicans hold 230 non- competitive seats (218 seats needed for majority) and the Democrats hold 188; even if the Democrats won all of the 17 toss-up seats, they will still fall short of re-capturing the majority.  12 of the toss-up seats are currently held by Democrats, leaving the Republicans with ample opportunity to expand their majority in the House, while certainly maintaining it.

Congress will have a short time table to address key issues including, tax reform, immigration, and government spending, before the 2016 presidential campaign swings into full gear.