September 2004 Newsletter - Valuing Your Business.
When business owners asks that familiar question “What is my business worth?”—they might find the best answer in the mirror. Of course, there are also the financials to be considered, but numbers will not tell the whole story. Nor will goodwill. The true value of a business can be best determined by looking at the person at the helm—themselves.
As the owner of a business, ask some hard questions of yourself. How do you measure up when it comes to attitude, management strategy, customer-service smarts, and community relations? Take the following litmus test and see if you make the grade.
1. Do You “Think Positive”?
Are you so focused on the bottom line that you forget to look at the clouds from time to time? Owning a business is the acknowledged American dream, yet many business owners allow themselves to get bogged down by the harshest sort of reality. They neglect to keep the dream alive, to think positively about the business today and tomorrow. In our technological world, it’s easy to forget the importance of having the right attitude. If business owners aren’t positive, how can they expect customers and employees—and at some point, prospective buyers—to be? The owner who sees only the downside of the business will probably not see it turn upward again. Of course, there are always the real-life factors: banks that won’t lend, customers who stop buying, services that become obsolete. However, if these problems didn’t exist, the negative-thinkers would find a whole new set.
If you feel you could do with some positive polish—begin with just that. Spiffing up the place of business with fresh paint, newly cleaned carpeting, well-stocked shelves, a cheerful potted palm or ficus—just to name a few improvements—will speak volumes about the state of the business. Less visible, but equally key, is a positive plan for the future of the business. Business owners should be prepared to spend what it takes to generate new business, and should take the time to explore new possibilities for long-range success. If the company currently has no mission statement or business plan, creating one will be evidence of the owner’s enthusiasm for the future and for the ongoing success of the operation.
2. Are You a Macro or a Micro Manager?
In today’s workplace, with a manager hovering at every corner, it is difficult to keep an eye on the big picture of the business. When an owner is managing every manager, and shuffling paperwork at his desk all day, he is estranged from the big outside world of the business. Owners should occasionally take time off to work the floor, drive the delivery truck, and sell the product. Owners who put themselves in the trenches are in touch with the business, and this first-hand understanding will be evident to anyone who assesses its value. Part of being a macro, big-picture manager is preparing for contingencies. The value of a business increases dramatically when the owner demonstrates appropriate delegation of duties and provides a backup managerial plan. If the owner is the business, and personal disaster should strike -- the answer to “What is the business worth?” is not a felicitous one.
3. Do You Smile When You Say “Customer Service”?
Do you avoid treating a customer like a number? If not, follow the lead of successful mail-order operations, such as L.L. Bean, who ask for the proper pronunciation of a customer’s name and who do not automatically address him or her by their first name. Basic up-front courtesies are important, but they do not supplant other customer service virtues such as patience and willingness to problem-solve. Whether products and services are sold by phone or on the floor, employees should be up to speed on what they’re selling. Nothing sparks a sale better than a salesperson with hands-on knowledge and expertise. This works for companies as large as L.L. Bean (whose employees seem to have Ph.D.s in every item in their catalog) or as small as a neighborhood bistro, where the waitperson can explain every nuance of sauce or vintage of wine. Every hour spent training employees in the product pays huge dividends for the business’s long-term success.
4. Are You “Out There” with Community Relations?
Business owners need to keep their company’s image “out there” and visible to the public. Advertising can build image at the same time it attracts business. A display ad within the yellow pages listings, a monthly newsletter (hard copy or on-line), the offering of free seminars, for example, are ways to position the business as more than just the sum of its products. An example of a business owner with multi-faceted image-making skills is a caterer in Asheville, N.C. She dishes up the city’s best lunches and dinners-to-go—or to eat with obvious relish at the small tables she sets out on the sidewalk. She sends out a monthly newsletter with recipes and manages to snag appearances on radio programs to talk about her commitment to buying local food. When Garrison Keillor’s “Prairie Home Companion” (a production of Public Radio International) came to town, she volunteered to cater for the cast and crew, and they ended the program by having her stand for huge ovation. Her small store-front operation had a line the next day that wound around the block.
For the less adventurous, or conspicuous, there are plenty of conservative ways to promote the business and its owner. Taking an active role in the Chamber of Commerce or in trade or service associations, and sponsorship of worthy local events is great public relations. In addition to the more traditional public donations—providing kids’ sports team uniforms, taking out ads in yearbooks—employees can join hands for walkathons, or volunteer to work the phones for public TV or radio fundraisers. Being a good community partner is good for the business and for the workers. It’s also great for that reflection in the mirror that takes us back to where this discussion began.
When it comes time to sell, and you are discussing the process with your business broker, the term “Listing Agreement” will surface. Very simply, a Listing Agreement is a written agreement in which a seller authorizes an individual or company to sell their business. It is basically an employment agreement. The agreement may employ a broker to represent the seller in the sale of the business, which means the broker is the agent of the seller. Some states provide for a Transaction Agreement, which means that the broker doesn’t represent anyone, nor is he or she an agent of either the seller or the buyer. Regardless of the terminology, the purpose is the same. The seller wants to sell the business, and the business broker is supposed to sell it. The agreement essentially should cover the following areas:
All agreements should be read carefully. However, a seller must sell the business and pay a brokerage fee only if a buyer is procured who is ready, willing, and able to buy the business at exactly the price and terms stated in the listing agreement.
Professional business brokers almost always expect a seller to agree to an exclusive listing. This means that the business broker you chose to work with will be the only one handling the sale of the business. If the business sells during the listing term, the business broker is entitled to the fee outlined in the agreement. Most agreements also provide that if any prospective buyer who was introduced to the business by the broker during the term, buys the business for a period of time (usually a year) after the listing period, the broker is still entitled to the fee.
The reason for exclusivity is that business broker professionals spend a lot of time, effort, and money in attempting to sell a business. The bulk of the business brokerage firm’s income is earned only when – and if – the business sells. Professionals avoid working with a seller who is not serious about selling or who doesn’t have confidence in the business intermediary they have chosen to sell it. Sellers should expect the brokerage firm they have selected to do everything necessary to sell their business at the highest possible price.
The first, and most important, question sellers must ask themselves is: “Do I really want to sell my business?” Sellers must also be prepared to answer the following questions, since buyers will want to know the answers.
Sellers also need to decide on specific comfort levels concerning price and ask themselves the following:
Sellers should also give some thought to who might be the best buyer. Who might be willing to pay the highest price? Is it someone who is looking to go into business for the first time? Is it the competitor in the next town?
By answering these questions and arriving at satisfactory answers, sellers are off to a great start in selling their business successfully!
One other important thing: There are some sellers who think they can run a cash business without reporting all of the income, and yet expect the buyer to recognize this unreported income. Buyers are not going to! There are also some sellers who run their business in such a way as to just show minimal profits, but do show a maximum number of “perks” (with many carefully hidden), and expect the buyer to pay for “recasted” or “phantom” earnings. That’s not going to happen either.
Some sellers also bend the tax laws to avoid paying taxes. If the seller cheats the government by avoiding taxes, then the buyer may also assume that the seller will somehow cheat him or her in the transaction.
Nothing impresses a buyer more than a clean set of financials. The seller may actually receive a better price and terms by allowing a buyer to see exactly what the books show and not trying to sell “the off-book” income. If the business does better than the seller’s financials showed, a happy buyer will be the result. A happy buyer will make the payments on time or maybe even a bit early, if the seller is financing the sale.
Remember, buyers are only willing to pay for what the seller can prove, not for what a seller says the business does, or can do.
©2004 BBP - This newsletter is not intended to render accounting, legal or other professional service; the publisher and sponsors assume no liability for a reader’s use of the information herein.
©Copyright 2004 Business Brokerage Press
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