Value Drivers or Life Drivers?

Value Drivers or Life Drivers?

I recently caught up on some reading about the value drivers to consider when selling a business. The consistent message was, just focus on 5 or 10 value drivers and you’ll maximize the value of your business when you sell it. My reaction: there’s a lot more to “maximizing the value” than this.

When I meet with a business owner, I get to know the business history, the business strengths and weaknesses (i.e. the value drivers), and other key pieces of information. I’ll deliver an estimate of the business value and review it with the owner. And sometimes, the response is … “I understand it, but I’m not going to sell my company for that”. Translation, the owner just isn’t ready to go to market … regardless of the “value drivers”.

Here’s what I’ve learned over the past 20-years. When a business owner is considering “exiting” their business, something has happened in their world, something has changed…let’s call them the life drivers.

For instance:

  • A personal matter – health issue, financial change, moving somewhere
  • A family matter that needs attention
  • Concern about surviving the next “market correction”
  • Worry how the next surge/variant of COVID will impact business
  • Just not as attentive or as “connected” to the business
  • “I don’t know what it is, but something is keeping me up at night”

Here’s my point.

    • Value drivers matter but generally, life drivers are the real motivation
    • Life drivers are private and personal; sometimes hard to see them
    • Understand how the life drivers might impact the negotiation
    • In the end, the maximum value of the business is the result of good-faith negotiations by both parties. And there’s no list of value driver for that.

Like you, we’re small business owners. We get it, and we’d love to discuss it with you. Give us a call for a free consultation.  We appreciate the opportunity to help out.


This post was written by Eddie Davis, C.P.A., C.V.A. , Harvest Business Advisors partner.

 

Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.

 

Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services.

 

We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.
3 Tips for Business Owners and Business Sellers – July 2020

3 Tips for Business Owners and Business Sellers – July 2020

Since the outbreak of Covid-19,  the business brokerage / investment banking world seems to change dramatically every 30 days.

As we enter the middle of summer, here are three tips we are giving business owners and business sellers:

 

1. After the 30 to 45 Day Shut-Down Starting in Mid-March, There is a Market Again  

But, banks and institutional lenders have gotten much more cautious, taking marginal buyers out of the market.

We are qualifying prospects more carefully so we do not risk wasting a lot of time on transactions that cannot be financed.

We do recommend that if you receive a good offer, take it seriously as it will be harder to obtain as many offers as before this started.

 

2. Run Your Business Like You are Going to Own It Forever Particularly During a Sale Process

Your best negotiation strategy is that you are making money and will keep running it if you must.  Be profitable every day.

Clearly, due to current circumstances, some businesses cannot do that.  They should not sell at this time unless they do not have a choice.   Unfortunately, there are going to be a lot of unavoidable bad outcomes due to Covid.

If your business is in the middle ground, make the tough choices and get pricing up if necessary. Always work toward having your costs in line with your likely revenues.

 

3. Good Companies will Attract Buyers

The discount you will need to give from your February 2020 price is going to depend on the uncertainty in your industry, your supply chain, your customer concentrations etc.

The sense of risk has been elevated.  How high that perceived risk is will vary from no perceived increase in risk with liquor stores to incredible going concern risk with high end sit down restaurants.

Most businesses are somewhere in the middle and it appears they can sell with price reductions that make sense compared to the increase in risk.  Buyers and sellers may consider forms of risk sharing through earn outs and the like.

If you would like to learn the value of your business as you make important decisions, please connect with us. We would be happy  to discuss your business’ market appeal.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our proven ability to deliver the highest price in the smoothest sale transaction possible. Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

 

After the Covid-19 Shock, What’s Next for Your Business?

After the Covid-19 Shock, What’s Next for Your Business?

You have made the initial quick adjustments to your business to deal with coronavirus shutdowns and covid-19 shelter in place directives.  Hopefully your business is stabilized for now and everyone is safe.   But for most businesses the future is unlikely to look like the past.  For most business owners determining and preparing for changes as the ramp-up back from the coronavirus shut down begins is unclear.

How do you prepare your business, including your employees, customers, suppliers, and others for the future with all this uncertainty?

  • Business planning, strategy, and role playing after covid-19.  Develop a simple easy-to-adjust cash flow projection, key indicators, and bullet point improvement plan for the next 12 months. Overly complex projections will actually impede what needs to be understood.  A simple model that captures the big risks and rewards is perfect.  In the end you want to develop a few pages you actually use.   Run “Best”, “Likely” and “25% below the worst you can imagine” scenarios. Look at how to increase revenues and cut costs.  Work it through to staffing, possible renegotiations on fixed costs, etc.  Bounce this off trusted family members, key employees and advisors.  Talk about it with anyone with business sense you respect and trust that will work through it with you.  This will open up possibilities and solutions so as things happen (good and bad) you will have already given thought to many situations and can make decisions from a place of reason, not just emotion.
  • On a daily basis monitor sales, variable expenses, and cash (as necessary).  Revenues and cash flow are the equivalent of blood.  You must keep some in the business and stay focused on small day to day matters that improve business sales, reduce expenses, and protect business cash flow.
  • If possible, particularly for businesses with substantial contracts, keep your fingers on future sales. Stay in touch with key customers, key suppliers, and politely ask difficult questions essential to your survival.  Is the contract funded?  How will future payments be made?  How is timing of awards in the pipeline expected to change? Are suppliers able to perform?  etc.   For many contractors and others, status WILL change over time as your clients better understand how the response to coronavirus is affecting them and adjust.  Check at least monthly.  Check more if that makes sense.  Make tough decisions early.  Don’t delay.
  • Grow key people. Now is a time where they can shine.  How can you help them take the next steps in responsibility and decision making?  Adjust systems for virtual workers and actual volumes to keep control but not over-control.
  • Communicate and Lead. Leadership counts in times like these.  Covid-19 is scary particularly where many people are infected and ill.  What specific measures are your business instituting to keep people safe?  A communication vacuum allows fear to grow.  People want to know how they are going to come out of this crisis.  What is the plan today, tomorrow, and the next day.  They also realize plans are going to change as necessary.  Treat your employees like the adults they are.  Deliver bad news with empathy and include what is being done to overcome obstacles.

Planning sometimes seems like a silly thing in a crisis but it is your chance to work through options and generate ideas early.  Like the Boy Scouts always said, “Be Prepared”.   That is still very good advice.

We have communication, projection and cash flow tools and experience to assist you in your business planning and preparation. Should you be looking for guidance or support, please reach out.

Greg Caruso, JD, CPA, CVA  Partner, Harvest Business, LLC    |     609-664-7955  GCaruso@HarvestBusiness.com


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia.
Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

What Now? Stay Focused… Keep Going

What Now? Stay Focused… Keep Going

Over the past several weeks I’ve been talking to business owners who are either current, prospective or past clients of mine about how COVID-19 is affecting their business.

I’ve been telling them while the number of buyers seeking information about businesses that are currently for sale has declined over the last several weeks, for the first 12 weeks of 2020, economic indicators consistently signaled a strong and growing economy. Rate of inflation has been: LOW. Unemployment rate has been: LOW. Housing demand is: UP. Consumer Spending is: UP.

Depending on the industry, some businesses, like commercial construction, accounting service firms, B2B and B2C services, certain IT sectors, and government contractors are still doing well continuing work on current jobs and submitting bids on future work. Other business owners, however, are now feeling the effects of COVID-19 on their business.

So, what should a seller or a potential seller of a business do until the COVID-19 curve flattens out and this problem virus is history?

    1. Continue running the business hard, fast and lean.
    2. Call and talk to all your customers. Ask how the virus is affecting them.
    3. Prepare a short-term cash flow forecast.
    4. Review your short-term business plan.
    5. See if your company can provide services and/or products to support the fight against COVID-19.
    6. Review your bank covenants.
    7. Contact your bank and other financial providers and obtain their continued support. In addition, financing and other assistance is being offered at the Federal and State levels.
    8. If you were planning on selling your business this year, prepare and place the business on the market now since it may take up to a year to locate the right buyer as the economy improves. Also, many people who have lost their jobs due to the virus will be considering buying a business as an option to finding another job. Banks are still lending and the U.S. Government, through agencies like the Small Business Administration and the Veterans Administration, as well as state governments will have programs to help buyers purchase small businesses. This helps both sellers and buyers.
    9. Connect with me at Harvest Business and let me help you if I can. Even if you just want to talk, I’m happy to have a conversation.

If you have a good business with consistently solid financials and strong business attributes now is a good time to think about your exit plan and perhaps even begin preparing to put your business on the market. Whether you want to sell your business now or at some later time, my best advice is to stay focused, keep going and use this time to plan for the future.

(If you find yourself with a little time, we wrote an ebook – “Ten Ways To Increase the Value of Your Business Before You Sell” – that might be the perfect thing to read!)

This post was written by Richard Stopa, Harvest Business Advisors Partner

Richard Stopa
Partner
Rstopa@HarvestBusiness.com
703-307-1187

Seller Expectations and Repricing Issues

Seller Expectations and Repricing Issues

With a lot of activity in the market, 2020 is off to a fast start, promising to be another strong year for the sale or acquisition of privately owned companies. As always, serious sellers and buyers with the right motivation and reasonable expectations will succeed.

This month, we want to revisit the topic of buyers “repricing” an offer and how that can impact the seller’s expected transaction prices. We’ll illustrate what repricing is, how it happens and how it might impact the seller’s expected sale price.

It’s extremely important that sellers know upfront that the repricing of a deal is a possibility and what situations might require repricing. Being blindsided by an unanticipated repricing issues in the midst of the transaction process can be a potential “deal killer”.

Let’s go through a simple example to illustrate.

Disclosure: the following is a hypothetical illustration to show how repricing issues can impact the final deal price; results will vary depending on facts and circumstances

What Is Repricing

Repricing is a common occurrence and part of the normal transaction process. Repricing issues are real issues that need to be resolved (negotiated) in order to complete the deal, otherwise the deal could fail.  Repricing issues generally occur when the buyer completes their due diligence and finds issues that, in their opinion, should reduce the transaction price, a.k.a. repricing.

Seller Expectations  

Sellers need to have realistic expectations regarding the potential business value and that includes an understanding of possible repricing issues. Consider this typical scenario:

  • Bob decides to sell his business because he has realized it’s time to do what he wants to do or for some other ‘the time is now'” reason – but he has not really prepared to sell
  • Someone (a friend or associate) tells Bob that your price businesses “3 times the cash flow”
  • The past results are:

blank

  • So Bob determines his sale price is  $1,500,000    (3 times $500,000)

 

Repricing Issues

After some time, Bob finds a potential buyer who has offered $1,500,000.

But, while completing their due diligence, they discover 2 significant issues that, in their opinion, result in a repricing of their offer (a reduction from Bob’s $1,500,000 price).

They meet with Bob to review the repricing issues with the intent to renegotiate (reprice) the original price. The two issues they discover are:

    1. A need for working capital required to run the company
    2. The need to update company assets (equipment, vehicles, technology etc)

The buyer has determined (in their opinion) the additional cost (investment) for these issues are:

    1. Working capital needed:  $100,000
    2. Investment needed in capital assets:  $300,000

You can see where this is headed… the buyers are going to revise their offer (reprice) and expect Bob to accept the revised purchase price.

Sellers Expected Deal Price – Repriced

How does this impact the sellers expected sale price?

Seller’s expected sale price (above)                      $1,500,000

Buyer repricing adjustments:

blank  

 

Bottom Line:

  • Bob wasn’t aware of the issues that a buyer may object to and based his decision to go to market with a transaction price of $1,500,000 based on a formula that didn’t really consider the many factors that determine a solid price

Where do Bob go from here? Can the parties renegotiate the deal price or is the repricing significant enough to kill-the-deal and the deal fails (worst case)?

 The Takeaways

  • It is very important to work with an advisor who has experience with the business sale process and can properly value your business.
  • Buyers will search for repricing opportunities during their due diligence; it’s one of the reasons they do their diligence – it’s just part of the transaction process.
  • Keep cool: if the business price needs to be negotiated, it’s usually just a hurdle not the end of the process. But the issues can be resolved if both parties want to get the deal done and are negotiating in good faith

NOTE TO SELLERS: Owners who reinvest in capital assets, stay current with maintenance schedules and properly manage cash flow will be rewarded in the ultimate deal price. Those who don’t, won’t … it will cost you.

With experienced advisors by your side, we assure you that  a proper price will be set based on  facts and figures and,working together, most issues can be resolved to everyone’s satisfaction and the deal can go forward.

We’re here to help you with your transaction planning and our consultation is free with no obligation.

This article was written by Eddie Davis C.P.A, C.V.A., Partner at Harvest  Business Advisors.

Contact:  EDavis@HarvestBusiness.com or 301-325-7687


Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@HarvestBusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

Benchmarking in 2020 – Key Business Metrics to Monitor

Benchmarking in 2020 – Key Business Metrics to Monitor

As you start the new year, it’s advisable to pay attention to areas of your business to identify problems, resolve issues and measure growth.

Business owners at all stages should follow benchmarking practices – but owners considering selling their business soon or in the future should be especially vigilant.

Likely, you already track some performance metrics in your business, such as profit and EBITDA. While profitability and EBITDA are very important, there are others that many business owners overlook.

Let’s look at some metrics that are equally valuable.

Gross Profit Margin Per Revenue Source and Service

Business owners should review each revenue component whether it be products or services and analyze both the revenue and expenses associated with each. They should also really look at the 80/20 rule in terms of the gross margin per revenue or product.

When is the last time you really studied or analyzed each one of your product or service areas based up on gross margin contribution to the company – including all costs associated with each revenue source? Does a revenue source have disproportionate expenses?

Are these expenses worth the revenue that it brings into your company?

Are there expense components that can be bettered utilized in other parts of your business?

Studying your profit margins across your spectrum of products and services is crucial in bettering your company’s profitability.

Monthly Recurring Revenue Metrics

It is very important to the profitability and value of your business to provide services with monthly recurring revenue. If you do have recurring revenue, you should analyze the cost associated with that revenue (client acquisition, service expansion upgrades, client churn) and understand what percentage of your customers you are keeping, what percentage you are losing and why.

If you do not currently have services that provide monthly recurring revenue, now is the time to put creativity, thought and effort to develop that side of your business

Labor Loaded Gross Margin

If you are running a service business and you have a lot of clients, you need to examine the cost associated with generating gross margin.

Pay attention to which clients demand a disproportionate amount of attention and resources. By looking at profit margins you’ll be able to identify which clients are receiving too much time.

Effective Hourly Rates Spent Servicing Clients

It’s necessary to understand exactly how much it costs to service a client. Once you determine that figure, you’ll know whether you need to charge more. It’s certainly not a good business practice to lose money on a client.

If you can’t make money on the client, then you may need to fire that client or have a frank discussion with the client. So, calculate this metric for each client, analyze the results and increase your monthly fees when necessary.

Customer Contribution/ Client Concentration

While large and loyal customers are an asset to your business, customer concentration of too many large clients (in relation to your total customers) can be a red flag when you are raising capital to expand your business or selling your business. Keep track of customer concentration so that your customer portfolio is in balance and that your customers are evenly distributed across your customer base.

Client Churn Rate

How many clients do you lose each month? And why?

You should be tracking this statistic in your business. Some churn is inevitable but a sudden decrease in customers means you need to take a look at your business. Is it an employee issue? A product or services issue? Are you losing business to a competitor?

The sooner you identify the issue and act to correct course, the quicker your business will recover and rebound.

Employee Churn Rate

Your employees are your biggest asset.

Are you retaining employees? If you are not, why aren’t you?

Is it because of ineffective managers?

Lack of training? What can you do to better train your employees?

What can you do to cut down on this rate?

Are your compensation plans competitive? Are you rewarding and recognizing your employees?

How do your employees stack up against your competition?

Conversion Rate

How many client leads do you actually convert into new clients? Generating leads is great but a good conversion rate is critical to the success of your business. It’s also important to understand lead source and testing new lead generation strategies when necessary.

Return on Investment

Any time you spend money in your business should be done with the intention of calculating the return on both the soft (employees, etc.) and hard (actual cost of goods – equipment, software, web development, social media, online branding, supplies, etc.) to generate that income. Understanding this information – and making adjustments based on it – is critically important..

Conclusion

There are many metrics to choose from in running your business. The most important thing is to choose the ones that will benefit you the most in growing and maximizing profits for your business. And, in the end, using good metrics will pay off for you when its time to exit and sell your business. Buyers do pay more for well-run businesses with strong processes in place.

 

This article was written by Harvest Business Advisor Partner, Richard Stopa.


Clients choose Harvest Business Advisors for our accurate business valuations and our proven ability to deliver the highest price in the smoothest sale transaction possible. Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.