• About Monalea Hutchins

    Buying a Business

    by  • February 25, 2013 • Buyers, Tips On Buying & Selling • 0 Comments

    Buying a Business                               If you want to own your own business, it is easier to buy an existing business than it is to start you own business from scratch. An established business allows you to skip past the startup phase entirely, which is where 50 percent of all new businesses fail. If you buy a business then you can concentrate your efforts on making the business larger and more profitable.

    Buying a business does not have to be a challenge. You want to avoid overpaying for the business or buying a lemon. The easiest way to avoid this is to follow these three steps in buying your own business.

    STEP 1: Due Diligence
    The first step is due diligence where you determine whether or not this company is one you want to buy and at what price you are willing to pay for it. Find out why the seller is selling the business. This may involve talking to the employees, suppliers, and customers. Once you are satisfied that the reason is not to flee from something negative that you will be inheriting, you can do further due diligence.

    Your examination of the company will start with analyzing the last three years of financial data. You should uncover any pending lawsuits, relationship with supplier and customers, intellectual property rights such as copyrights or patents, and any potential liabilities.

    STEP 2: Make an Offer
    There are formulas that are commonly used to value a business and this should be the starting point to determine how much to offer. The value needs to be adjusted to account for any information uncovered during the due diligence period. Having an accurate picture of the value of the business will help you to decide whether or not to proceed and the maximum price you are willing to pay. Once you have arrived at a price you present the seller with a letter of intent. This letter of intent will detail the price and terms in which you will purchase the business. Once both parties agree, a purchase and sale agreement is drawn up for both parties to sign. The purchase and sale agreement can be several hundred pages long because it itemizes every aspect of the sale. This step usually involves hiring an accountant and a lawyer to assist you in the process.

    STEP 3: Arrange Financing
    The last step in buying a business is financing. There are many sources available that you can tap to put together the financing. These sources include family, friends or banks. Whatever the source of funds, lenders will have requirements that you will need to meet in order to be approved for the funds. They will require you to have enough money available for the down payment as well as have enough adequate working capital to maintain the business. You can either pay for the closing costs out of pocket or arrange to have them included in the amount that you are financing.

    Owning your own business is something that many people dream of accomplishing. Buying a business is one way to make this dream come true. If you follow these three steps you will be on your way to owning your own business.

     

    Position Your Business to be Bought by a Big Company

    by  • February 15, 2013 • Sellers, Tips On Buying & Selling • 0 Comments

    When a Giant Comes Calling

    by John Warrilow

    Yesterday was a big day in the world of Mergers & Acquisitions: Warren Buffett’s Berkshire Hathaway bought Heinz, and American Airlines and US Airways announced plans to merge. Bankers are hoping 2013 will be the year the M&A market finally comes back to life.

    Arguably, there has never been a better time to position your business to be bought by a big company. Why would a big sloppy giant buy a little company like yours? Because your company does something they can’t easily replicate and, thanks to a little something called the “accretive acquisition”, they usually make money the day the deal closes.

    The Accretive Acquisition

    These days, the average S&P 500 company is trading at around 7.5 x EBITDA. Let’s imagine Giant Industries has one billion in revenue and a 15% EBITDA margin. At 7.5 times $150 million, the company is worth north of $1.1. billion.

    Now let’s imagine Giant Industries sees your company churning out $2 million-a-year in EBITDA. If Giant Industries were to buy you for five times EBITDA, you get a check for $10 million and they add your $2 million dollars in EBITDA onto their P&L. With Giant Industries trading at 7.5 times, your $2 million of EBITDA is now worth $15 million on their balance sheet. Giant Industries just made $5 million without building anything, sending an invoice, running an ad or collecting a receivable.

    Instead of envying big companies for how easy it is for them to make money, I want you to take advantage. As the stock market continues to tick up, and the dumb money keeps pouring in, the average EBITDA multiple being paid for these giant companies will edge above eight. At the same time, analysis of business owners getting their Sellability Score shows they are getting offers in the 3-4 times EBITDA range. You can do better. After all, assuming the deal is accretive, they win the moment you hand over the keys.

    This of course requires you to attract the attention of some billion-dollar conglomerate. So here are three ways to flirt with a giant:

    1. Do something better than them

    You don’t have to do everything better than a big rival but have one product line or one service offering that no matter how hard they try, they just can’t seem to match.

    2. Tidy Yourself Up

    Big companies are allergic to risk. If you have been sloppy about counting the money or have been treating your company as a personal piggy bank, expect them to walk. Have an accountant make sure your books are clean.

    3. Paint Them A Picture

    People who work in big companies are not as creative as you (if they were, they’d be running their own business instead of toiling for a boss). Leverage your creativity by helping them see how buying you will allow them to minimize a threat or capitalize on an opportunity. Explain how your company is going to help them sell more of their cash cow product or how bolting you onto their offering is going to help them stem the bleeding from a competitor who is stealing market share.

    Big companies have money and an increasing stock price which means buying you will likely be accretive. The time is now to get snapped up by a giant. This window won’t last forever. Carpe diem.

    Four Traps to Avoid When an Acquirer Comes Calling

    by  • February 4, 2013 • Sellers, Tips On Buying & Selling • 0 Comments

    Four Traps to Avoid When an Acquirer Comes Calling

    You may be eager to sell your business, and happy to have an acquirer at your doorstep, but what’s it like when an acquirer starts looking inside every inch of your business?

    Most professional acquirers will have a checklist of questions – both objective and subjective – that they need answered before getting serious about buying your company.

    Examples of objective questions include:

    • When does your lease expire and what are the terms?

    • Do you have consistent, signed, up-to-date contracts with your customers and      employees?

    • Are your ideas, products and processes protected by patent or trademark?

    • What kind of technology do you use, and are your software licenses up to date?

    • What are the loan covenants on your credit agreements?

    • How are your receivables? Do you have any late payers or deadbeat customers?

    • Does your business require a license to operate, and if so, is your paperwork in order?

    • Do you have any litigation pending?

    Then they’ll try to get a subjective sense of your business, including figuring out just how integral you are personally to the success of your business. And that requires some investigative work as well as some tricks of the trade. For example:

    Trick #1: Making last-minute changes

    By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers. If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.

    Trick #2: Checking to see if your business is vision impaired

    An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.

    Trick #3: Asking your customers why they do business with you

    A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and will therefore expect to hear good things. The customers may be asked a question like ‘Why do you do business with these guys?’ The acquirer is trying to figure out where your customers’ loyalties lie. If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.

    Trick #4: Mystery shopping

    Acquirers often conduct their first bit of research before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.

    Make sure the experience your company offers a stranger is tight and consistent, and try to avoid being personally involved in finding or serving brand new customers. If a potential acquirer sees you personally as the key to wooing new customers, they’ll be concerned that business will dry up when you leave.

    You may not be expecting an acquirer any time soon, but it’s never too early to ask yourself the questions an acquirer would be asking you – and your employees and your customers – if he or she was thinking of buying your business.

    Buying a Small Business

    by  • February 2, 2013 • Buyers, Tips On Buying & Selling • 0 Comments

    Buying a Small Business for Sale Businesses for sale are all around us. This could include the dry cleaner’s shop where the owner wants to retire, the corner restaurant whose owners are interested in buying a bigger place downtown, or the mobile dog-cleaning service with a proprietor who’s tired of driving all over the...

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    Acquisition vs. Expansion

    by  • January 10, 2013 • Featured Articles, News • 0 Comments

    In the business world of buying and selling companies we hear the phrase mergers and acquisitions quite frequently. Mergers are less common than acquisitions and an acquisition can actually boost your existing business. Investopedia.com defines the term acquisition as, corporate action in which a company buys most, if not all, of the target company’s...

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    The Danger of Market Timing the Sale of your Business

    by  • January 7, 2013 • Sellers • 0 Comments

    The Danger of Market Timing the Sale of your Business

    The other day I was speaking with a successful CEO in his fifties who runs a heating and air conditioning company generating eight million dollars in revenue and over one million dollars in profit before tax.
    Even though he was tired and nearing burnout, he was planning to wait another five to seven years before selling his business because he “wanted to sell at the peak of the next economic cycle.”
    On the surface, his rationale seems to make sense. If you speak with mergers and acquisitions professionals, they’ll tell you that an economic cycle can impact valuations by up to “two turns,” which means that a business selling for five times earnings at the peak of an economic cycle may go for as low as three times earnings at a low point in the economy.
    The problem is, when you sell your business, you have to do something with the money you receive, which usually means buying into another asset class that is being affected by the same economy.
    Let’s say, for example, you had a business generating $100,000 in pre-tax profit in an industry that trades between three times earnings and five times earnings, depending on the point in the economic cycle.
    Furthermore, let’s imagine you sat stealthy on the sideline until the economy reached the absolute peak and sold your business for $500,000 (five times your pre-tax profit) in October 2007. You took your $500,000 and bought into a Dow Jones index fund when it was trading above 14,000. Eighteen months later – after the Dow Jones had dropped to 6,547.05– you’d be left with less than half of your money.
    Even though you cleverly waited till the economic peak, by March 9, 2009, you would have effectively sold your business for less than 2.5 times earnings.
    The inverse is also true. Let’s say you waited “too long” and sold the same business in March 2009. And because you were at the lowest possible point in the economic cycle, you only got three times earnings: $300,000. Notice that’s 20% more than if you’d sold at the peak and bought an index fund at the top of the market.
    Just like when you sell your house in a good real estate market, unless you’re downsizing, you usually buy into an equally frothy market. Which is why timing the sale of your business on external economic cycles is usually a waste of energy.
    External vs. internal economic cycles
    Instead, I’d recommend timing the sale of your business when internal economic factors are all pointing in the right direction: employees are happy, revenue and profits are on an upward trend, and there is still lots of market share for an acquirer to capture.
    When internal economic factors are pointing up, you’ll fetch a price at the top end of what the market is paying for businesses like yours right now, which means that – for good or bad – you get to use your newfound cash and buy into the same economic market you’re selling out of.