In India, entrepreneurs with surplus funds often like to start a franchise business. It may not be their primary source of income but it can lend them a great deal of profitability because the business model is already proven successful and is led by a strong existing and recognised brand.
Let us first take a brief glimpse at what is a franchise business:
In layman terms, a franchise is a license which grants the permission for the usage of products, name and trademark of an existing operational business. The party that lends the franchise is called the franchisor (popular examples include Mcdonalds, KFC, Pizza Hut etc.) and the party which will take the franchise is called the franchisee.
What can be the benefits of taking a franchise?
When a franchise is given to a franchisee by the franchisor, they can derive multiple benefits from it including selling franchisor’s products, using their trademark, access to technical know-how, access to their logistical services, professional advice etc. It is the most convenient way to start a business as the franchisee will be supplied with almost everything by the franchisor.
The brand and the business model are laid out for the entrepreneur taking the franchise but still there are a lot of challenges to be faced while running it. And, in this blog post we are going to help you tackle those challenges as well as provide you with the required guidance on starting a franchise business.
What is your budget for starting a franchise?
First thing you should know before looking for a franchise opportunity is that every franchise comes with a required upfront brand fee and also an estimate of required investment. So, we recommend you to go over your personal finances and assets to get an idea of franchise price range you should look for. For example a subway franchise in India will cost you around INR 6 lakhs in upfront brand fee and approximately INR 65 lakhs in investment required in opening the outlet. Take some time considering this variable as you don’t want to waste time in dreaming up opening a particular franchise only to later realise that it doesn’t fits your bill.
Then how do I proceed with the process of opening a franchise?
We at SMERGERS have a huge number of franchises listed on our platform here across several preferred locations and industries. Also, you can easily shortlist franchises of your choice according to required investment, run rate sales, EBITDA, year of establishment etc. Once you approach a franchisor through our platform or any way else the following process takes place:
1. Franchisor will conduct the due diligence of you the franchisee as well as you can also do a due diligence of the franchise to see if it will be suitable for you or not.
2. Approval will be granted by the franchisor often based on certain conditions being met by you the franchisee.
3. Then, the franchisee can sign the franchisor’s agreement and both parties can start the franchise.
What is included in the franchise agreement?
A franchise agreement is a legal document that governs the rights and obligations of both the franchisor and the franchisee. You should definitely consult a lawyer for going through this complex document which will list various obligations for you as a franchisee.
Following are some of the key terms in a franchise agreement:
1. Payment: Payments have to be made by the franchisee to the franchisor such as the brand fee, royalty and management fee.
2. Term: This states how long the franchise has been granted for to the franchisee.
3. Intellectual Property: This includes how the franchisee can make use of franchisor’s patents, trademarks and copyrights.
4. Supplies: This states the items that the franchisee has to purchase from the franchisor only.
5. Confidential Information: The includes any information passed on from the franchisor to the franchisee has to remain confidential.
6. Accounting: The franchisor will require regular maintenance of accounts and invoices by the franchisee and the same must be audited by an independent firm of accountants.
7. Non compete clause: Often there will be a clause in the agreement that bars the franchisee to start a similar business once the franchise agreement has ended in a geographical territory or for a period of time.
8. Employees: The franchisor may require the franchisee to hire employees of a certain qualification only or require them to pass a certain training program developed by the franchisor.
Signing up for a franchise business is as easy as this but make sure you have the required surplus resources to pull it off and you can work under instructions from the franchisor as this may not be suitable for those entrepreneurs who are fiercely independent.
If you are looking to start a franchise business then you can login to www.smergers.com and start connecting with attractive franchise options available in your location.
If you’re a small business owner, a franchise can be one of the best ways to build your business. Many entrepreneurs dream about exponentially growing their business and making their brand a household name, but typically lack the growth capital required to get to such a stage. Franchising your business ensures a low cost scaling model, though it requires diligence and a laser focussed execution strategy.
Before franchising your business, you need to do the following hygiene checks –
1) Is the business meant for franchising? - Although franchising is a great way to expand, it might not really be best suited for your business. Have you built a brand for your business potential buyers see value in? Do you have patents/trademarks/technology that buyers can leverage to grow the franchise? Is there proven track record to show that the franchises can be built profitably?
You need to make sure that there’s a strong value proposition for buyers of your franchise, and that this is the best way for you to grow your business.
2) Is your business ready to be franchised? - If you start setting up franchises of your business too early, it’ll lead to a bad experience for buyers of your franchise as well as end customers. Experts opine that it’s best to have atleast 2-3 outlets of your brand built by yourself before franchising more. Also, it’s best if all your existing outlets have a proven track record of revenue growth and profit.
3) Are you personally ready to be a franchise owner? - When you make the shift from small business owner to a franchise owner, your role within your company changes completely! Earlier, your focus would have been on your customers and team but now you’ll spend all your time in selling franchises and supporting franchise partners. The time spent on your core product will decrease over time, and you need to be ready for this shift.
McDonald’s is the world most successful franchising business with $26Billion in annual sales
Getting the legal and financial aspects in place for setting up your franchise
There’re no separate laws in India for franchising businesses unlike many other countries, so you won’t have to spend too much time in setting up the same. The rules around franchising are primarily governed by other laws like The Contract Act, Restraint of Trade, Consumer protection and product liability, etc. It’s highly advisable to sit with a lawyer and work with them to structure the deal for the franchise partners.
It’s also important to update your company financials till the latest quarter and have it audited by a reputable firm. Franchise buyers will ask for data about the financials behind the same and you need to be ready with the same.
Finalize your offering to potential franchise buyers
Financial - It’s important to work out an optimal price structure for franchise partners. Typically, there’s an upfront fee which is paid for buying the franchise rights, plus a cut in the sales made by the franchise outlet (generally between 5-10%). Franchise deals are struck for anywhere between 7-15 years depending on the domain.
Training - Franchise partners, and their team, have to be trained extensively before you let them serve end customers, and the training module is always included in the offering to buyers. Most successful franchise businesses have invested heavily into training programs for their partners. It’s also important to ensure that regular training sessions are held and that it’s not just a 1-time activity. Ensure that you set aside time and resources for the same.
Rules of engagement - Do franchises buy products from you or can they buy independently? How will you monitor customer service levels? How will your help your franchise partner in marketing the product in their area? Which geographies are they allowed to operate (to ensure that no 2 franchise partners compete for the same business)?
These are a few of many key questions that need to be decided prior to commencement
Setting up franchises is a complicated business that requires a great execution strategy
Finding potential franchisee partners, and making the sale
You first need to understand that there 2 main types of franchises –
1) Master franchise - This is when you have 1 person or entity that buys your franchise for a given geography, and can sub-license to other franchisors within that area. Ex. Your business is in Bangalore and you sell a master franchise to someone in Mumbai. This means that the Mumbai master franchiser can sub-license to any number of people who want to operate in Mumbai.
2) Direct franchise - This is a normal franchise model where you sell a franchise directly to a buyer and he/she cannot sub-license to anyone else.
Once you’re all set up, you now have to go out and find people willing to pay you good money to buy your franchise. There’re 3 primary ways to do this –
1) Franchise brokers - These are professionals who specialize in helping you find franchise buyers and hand hold you through the transaction. There’re franchise brokers who specialize in certain specific categories, like restaurants, etc. that you can reach out to as well
2) Online marketing - Platforms like SMERGERS and Franchise India help in connecting business owners to people willing to buy franchises. You can upload details about your business on these websites and get responses from potential buyers
3) Your own network - Another great way to find potential buyers is to look for someone within your network, who’s seen your business grow, and is willing to buy a franchise. Though this isn’t a scalable solution, it’s a great way to sell your first few franchises.
Providing support to franchises
Most franchise business owners will tell you that the secret to success is in providing great support to your franchise partners. You need to understand that these are people who don’t know or understand the business as well as you and they need constant support with every aspect of running the business, including staff recruiting and training, maintaining accounts, customer service, general upkeep of the premises etc. It’s important to set up a Franchise Support team that helps partners in running their business successfully.
A happy franchise partner will refer more of their friends to your business (or take more franchises for other areas), so it’s important to ensure their well-being as well.
As an entrepreneur, the eventual exit from the business, however successful, can be made sour unless the tax structure of the sale is optimized. Many business owners have paid over 40% of the sale amount to the Government as taxes, merely due to bad financial planning. In this article, we’ll attempt to decipher some of the less understood points about the taxes incurred while selling your business.
There’re 2 primary strategies which decide how much taxes are paid –
1) Type of Sale (Asset sale vs Share sale)
2) Payment Terms (Immediate vs Deferred)
Tax planning is an important part of business than most entrepreneurs ignore
Let’s break these 2 down
1) Asset Sale vs Stock Sale
One of the primary difficulties is deciding which type of sale to carry out, as buyer and seller benefit from opposing structures. An asset sale is the purchase of the individual assets and liabilities, whereas a stock sale is the purchase of the owner’s shares of a company.
What is an Asset Sale?
The seller retains the hold over the company while the buyer purchases the assets of the business (like fixtures, furniture, licenses, goodwill, inventory, etc.). The buyer can choose not to buy the liabilities that come with the assets, and can decide whether they want to buy the cash balance, debt, etc.
Tax implications of Asset Sale
Buyers can allot a higher value to assets that depreciate quickly (like furniture, which depreciate in 5-7 year) and lower value to assets that depreciate slowly (like goodwill, which can take up to 15 years) and avail tax benefit. In the near term, through reduced taxes (due to depreciation of assets), it increases the cash flow in the buying company and helps in running the business. This is the primary reason why buyers prefer an asset sale.
This isn’t advantageous to sellers as assets generate a higher tax rate. Though intangible assets (like goodwill) are taxed at capital gains rate, tangible assets (like furniture) are taxed at normal income tax levels for higher tax slabs. As a consequence of this, the effective tax rate often crosses 25%.
What is a Stock Sale?
This is applicable only for private limited companies that are registered with shares of the company issued to promoters, investors and other entities (like employees, advisors, etc.), and is not applicable for proprietorship/partnership companies.
In a stock sale, the buyer purchases the shares of the company (the legal entity). The buyer would legally own the company after the transaction, including all assets and liabilities underlying. Assets which are not desirable for the buyer are typically sold off and the liabilities have to be paid by the buyer.
Tax implications of Stock Sale
Sellers prefer a stock sale as all the proceeds from the same is taxed under capital gains, which would be lower than the income tax rate (in most cases). The seller also becomes immune from future cases of product liabilities, environmental concerns, lawsuits, etc. which would be on the responsibility of the buyer.
On the other side, buyers don’t get to value the assets as per their requirements as the asset values would’ve been mentioned in the book value of the company during their previous annual filing. This would mean that the depreciation of assets would happen at a lower value, and hence they can’t avail the tax benefits they get during an asset sale. Coupled with the possibilities of future liabilities, buyers don’t choose stock sale
The 2 types of selling a company come with their own advantages and disadvantages
2) Payment Terms
Tax implications upon selling a business are impacted deeply by when the payment is made for the acquisition. Buyers can demand the payment immediately, or opt for a phased payment through a few years. Both methods have their own merits and demerits.
Immediate Payment on Sale
In this method, the seller pays all the money for the acquisition at completion of the transaction. Given that the payment comes in one shot, it attracts a higher rate of tax in that financial year. If the sale is made for a good amount, it’ll fall in the highest tax bracket and the seller would end up paying 30%+ in effective tax rate at sale.
The main reason why many sellers prefer this mode is that there is no risk of the buyer defaulting on the payment.
Deferred Payment or Instalment Strategy
Buyers and sellers can also choose payment terms such that the pay-out is made over a few years and not upfront. Through this strategy, only the amount received during any given year is taxable, and hence, a deal can be structured that payment made every year shall be lesser than what falls in the higher tax slabs. Thus, the seller shall pay lesser in net taxes through the course of time.
Though this results in net tax savings, this is a risky strategy as the seller has to deal with the chance that the buyer might not have the ability to pay at a later stage. There’re insurance companies that sellers can work with that cover the risk of such defaults in payments.
Depending on the urgency of the sale and the effective tax rates, buyers and sellers need to work together to come up with an amicable solution to carry out the transaction in an effective manner that benefits both parties.
Disclaimer: Every business unique – so is every sale transaction. Tax liabilities upon sale are subject to national and local laws depending on the geography. We’d strongly advice any business owner to work with a tax consultant during the sale of their business.
Every business owner has to exit their business at some point – be it for personal or professional reasons. Though selling the business can be a challenge, attempting to sell it quickly poses a unique set of problems. The aim of this article is to educate small business owners on how to sell your business fast.
Though every sale transaction is unique, a well-run business generally takes around 90-180 days to be sold. Most business owners prefer a quick sale, but it makes the acquirers nervous as they like to have enough time to do their due diligence.
What state is your business in?
Before you start, you need to understand which state your company is in. We can classify businesses into 3 categories -
1. Booming business– Every month, your revenue is increasing and you have healthy margins. Loyal customers and a pumped-up team keep the energy levels high in your business.
2. Stable business – Revenue is constant and you have good margins that earn you a good profit. You’ve been in business for many years and have a track record of stability.
3. Failing business – You hardly have customers, and revenue is falling. You may not be breaking even on an operational level.
Obviously, it’s easier to sell the first 2 types of businesses compared to the third. There are buyers who are interested in buying a failing business but few. Your strategy for sale of the each of the categories would also vary, which has been discussed further in this article.
Selling a business quickly comes with its own set of challenges
Tips to make a quick sale
The following tips are time tested and proven to help business owners in selling their business fast
1. Get organized – Get rid of unprofitable customers – You might have signed an agreement with an early customer who’s always caused you trouble but you never let go of them. Your acquirer doesn’t need to see deals that will be a liability for them in the future. Get your team ready and tell them clearly what your intentions are with the company. During the months when you’re trying to sell, the team has to function efficiently and ensure the business is running well in your absence. Update your inventory numbers, clean up your deal with vendors and make basic fixes in your business (it could be fixing a leak in your roof or updating your taxes for the previous year).
When selling a business, it’s very important these hygiene factors are taken care off – else you’ll lose a lot of time when potential buyers do their due diligence and find problems in all these areas
2. Update your finances - Sit with your accountant and bring all your books up to date till the latest month. When quoting revenue and important metrics to potential buyers, you need to be equipped with the latest and truest numbers at all times, and lack of data is often seen as a sign of weakness by potential buyers.
Ensure all filings and submissions that need to be done with the Government are taken care of, and all registrations and permits are up to date.
3. Get a valuation report by an independent audit firm - Work with an independent auditor to get a valuation report for your business which can be the price you quote to your buyers. During early talks with potential acquires, quoting an exorbitant amount for your company may drive them out of the negotiation room and lead to delays in sale. It’s best that you have a valuation report that backs why you want the price you’re quoting.
4. Remove yourself from the operation aspect of your business - Of course you’ve always been the heart and soul of your business – Most of your customers have a direct relationship with you, and not with your company. You can make a sale better than your best salesman, and you care more about your customers than all your customer support executives combined! You’re the first one into the office and generally the last one out. It might seem impossible that the business can function without you.
That’s exactly what acquirers are scared off when they buy small businesses – that the strength of the business lies only in its owner. Prior to commencement of the sale proceedings, withdraw yourself from day-to-day activities and let your team take care of operations. Prove to potential buyers that your business can thrive, let alone survive, without your presence.
5. Talk to multiple parties till you close - A rookie mistake many business owners do during sale is work with potential buyers serially, than in parallel. When talks with one potential buyer start looking promising, most sellers stop looking for other buyers. In many cases, the deals fall off at the last stage after 2-3 months, and the seller is back to square 1 and goes through the process all over again. It sets you back in time, and delays the entire sale. The deal is never done till the contracts are signed and the money is received in your bank account – never stop looking for buyers till the deal is done.
How to find a buyer?
Once you’ve done all the ground work, it’s imperative to reach out to as many potential buyers as possible. Here’re a few ways to do this -
1. Business brokers - There’re many professional brokers for businesses who specialize in helping customers sell their business. It’s good to work with business brokers as they can help you find buyers as well as help you with the paperwork and structuring the sale
2. Sell your business online - Digital platforms like SMERGERS and BizBuySell help small business owners find buyers through their website
3. Employee sale - Management buyout or employee buyout is a great way for you to ensure your company continues whilst rewarding your employees with ownership of the company they’ve worked hard for. There’re many financing options facilitate management and employee buyouts.
4. Look within your network - An easy way to sell your business fast is by finding a trusted friend, acquaintance or relative purchase it from you. Given that they’ve seen you build the business for many years, it will expedite the process of sale and make it quick.
For those who’re ready to take the entrepreneurial leap, starting a business from scratch might not be the only option. When you build a business from ground up, there’re many challenges in the same including initial set up, finding early customers, hiring key employees, managing cash flow, etc. These issues are negated when you choose to buy a business which has a proven track record of customers, internal processes, revenue and profit. If you’re asking yourself ‘How can I buy a business?’ this article is for you.
Factors to consider when buying a business
Buying a business can be an arduous task, especially if you’re a first time business buyer. The following factors need to be kept in mind before you start the process -
What domain are you comfortable in?
It’s always best if you buy a business in a domain you know and understand. Ex. If you’ve worked with customers in retail analytics, buying a retail shop would work well for you, as you understand the business.
Which geography can you operate in?
Are you willing to travel a long distance (within your city or another city altogether) to run the business? Or are you looking for something within the vicinity of your home? It plays a crucial part in selecting the business you want to buy
What’s the size of the company you can buy?
You might want to buy a big and flourishing business, but these businesses can be expensive to purchase. Plus, you might not have the experience to handle a business of such scale. But if you buy a very small business, it might not give you the required financial benefit you’re looking for. Be clear on the size of the business you want to buy, in terms of number of employees, revenue, floor size, etc.
Meeting of minds between buyers and sellers is a difficult task
How can I buy a business? (Process)
While buying a business, it’s best to stick to the flow explained below -
1) Pick domain and size of business you want to purchase
This has been highlighted in the above section
2) Find potential businesses you can buy There’re a few ways to find businesses for sale. They include:
a. Online – Platforms like SMERGERS (www.smergers.com) provide information for businesses that are for sale. You can use these services to reach out to seller.
b. Business Brokers – Business brokers help entrepreneurs in buying and selling businesses. If you’re looking to buy a business, they’ll you help in finding potential businesses to purchase, apart from hand holding you through the entire process.
c. Local newspaper ads – You can look for ‘Businesses for sale’ ads on local classifieds. You could also post your own ad and wait for responses from the business community.
3. Meeting potential owners and picking your best fit
It’s important that you spend time with as many business owners as possible and understand how they run their business. Building a rapport with the seller pays off in the long run, especially if you move ahead with the purchase. Also, this helps in getting perspective on how different entrepreneurs run their business.
Once you’ve done your research, pick the business/business that you feel most comfortable with and carry on to the next stage.
4. Due diligence
Performing the due diligence on an existing business requires time, skill and expertise – Put together a small team consisting of an accountant, an auditor and a lawyer to help you with the same. The list of things you need to check prior to the purchase include -
b. Registration of company and regulatory compliances
c. Audit of financial statements including accounts payable/receivables
d. Customer feedback
e. Employee feedback including assessing everyone’s strengths, weakness, work contracts and salaries
f. Existing marketing strategy, execution and ROI
g. Gauging the reputation of the business in the market
Agreeing on the price
The sale price can depend on a variety of factors - How badly does the seller want to exit the business? What’re the reasons for the same? What’re the macro economic conditions at the moment? What’s the price a similar business was recently sold for? Having an understanding of all these factors will help you get a better understanding of the price you can pay for the business.
There’re many methods for putting a price on the business
a. Multiplier method
In this method, you take assign a multiple of the revenue/profit after tax, etc. and give a value for the business. Ex. With a 10X multiplier, a business giving a profit after tax of $100,000 can be valued at $1,000,000. The multiple value depends on the market and recent acquisitions in that market.
b. Discounted Future Cash Flow
In this method, you can make revenue and profit projections for the next 5-10 years, and discount the same to arrive at a present market value for the business. This is a difficult method to calculate value of small businesses.
A simple way to value a business is to see the return on investment provided by the business and arrive at a valuation. Small business typically provide returns of 15-30% on the capital invested, so if you’re buying a business with a post-tax profit of $100,000, you can value it at $500,000 if you’re looking at a 20% ROI per year.
You need to consider the sale type you want to pursue i.e. Asset sale vs Stock sale.
Financing the deal
It’s best if you put 50% of the cash from your pocket and finance the rest through a lender / investor / seller financing. Many sellers are fine to take a deferred payment through the next 2-3 years as it assures them of future income, and there’re insurance companies that insurance against the possible default by buyer. Plus, tax for the seller are reduced through a deferred payment strategy (the same has been explained in another blog (link)).
Other ways to finance the deal include -
a. Take loan against assets owned by seller
b. Partner with someone for buying (Ask seller if there was anyone else interested in buying, but didn’t have enough cash)
c. Lease, with an option to buy – Many sellers will be willing to lease the business to you for a period of 3-5 years, while giving you an option to buy the company at any point during the lease
d. Set up ESOP and raise cash from existing employees – Through this method, you get the cash you want, and the employees will be more motivated to work as they all own a part of the business
Closing the deal and transition
Once you’re through with your due diligence, and you’ve figured out your financing options, it’s time to pull the trigger. Your lawyer will help you with the paperwork and auditor/account with the finances. Working on the transition phase post-closing of the transaction is very important as customers, suppliers and employees need to adjust to new management. Your seller will help you learn the business and operations in a transition phase which can last anywhere between 3-12 months. You should spend this time making everyone in the eco-system comfortable with your working style and learning how to operate the business as well.
Selling a business is never an easy task so you can always enlist the services of a broker to sell your business.
Who is a business broker? It’s easy. Think of a real estate broker, who sells houses. Business brokers are just like that, except, they sell businesses.
They are intermediaries between a business owner who’s selling their business and an acquirer who want to purchase it. They play an important role in sale of businesses in providing expertise needed to get the sale done, a trait most small business owners lack. Also, selling a business takes time, so working with a broker allows the business owner to focus on operating the business while the broker does the leg work required to complete the sale.
In simple terms, a business broker help a seller and buyer complete a sale transaction
Duties of a business broker
The business broker has to ensure that the sale transaction is carried out within the stipulated time frame without any compromise on the market value of the business, whilst maintaining confidentiality about the business. Some of the duties required of a broker are –
1) Advising seller on the process for sale
2) Structuring the method/type of sale (Asset vs Stock sale, Upfront payment vs Deferred payment, etc.)
3) Pricing of business and valuation
4) Drafting the offering summary which is document floated to potential buyers about the business on sale, its assets, liabilities, financials statements, etc.
5) Marketing the offer and finding potential buyers
6) Buyer-Seller meeting
8) Offer writing for purchase – This is when an interested buyer offers his terms for purchase of the business to the seller
9) Managing the Due diligence process – Which includes review of all licenses, registrations, financial statements, Govt. approvals, inventory check, etc.
10) Arranging for financing for buyer (if required) – Many buyers who’re ready to make the purchase need some financial support to complete the transaction. The broker works with banks and other financial institutions to arrange for finances through loans and other financial instruments.
11) Closing of transaction – Completing the paperwork and ensuring disbursement of the money as agreed
Compensation for brokers
Brokers typically make between 8% and 12% in the US with 10% being the median. In developing countries like India, the number hovers between 3-7%. Irrespective of the country, smaller the business, more the commission paid to the broker (which is understandable given that the time put in by the broker is almost the same, irrespective of the size of the business). The fees are generally paid by seller at closing of the transaction, though it’s common that the seller pays a portion of the fee upfront as a retainer to help the broker manage his expenses.
Like in most brokerage industries, business brokers fall into 3 categories –
1) Sell side broker These are brokers who’re engaged by the business owner to help them sell their business
2) Buy side broker These are brokers who work with the medium and large enterprises to help them find and buy small businesses which are available for sale
3) Transaction broker These are brokers who don’t favour either party but provide advisory services which are required to complete the transaction
Training and Licensing
Many countries have small, but a tightly knit business broker community which has a members association. These associations arrange for trainings for new entrants into the industry. The American Business Brokers Associations organizes bi-annual training sessions where existing members mentor and train new ones. In India, digital platforms like SMERGERS and Tworld are leading the way in helping individuals become business brokers by providing them with tools and resources to enter the industry. Most countries do not require a license for business brokers to practice their profession.
Business brokerage is a great industry with strong professionals
There’re a few challenges that most business brokers confess to.
1) Maintaining confidentiality Businesses for sale can’t be marketed too openly. Amongst other reasons, customers and employees lose trust in the business if they know it’s up for sale. The broker has to ensure that the sale advertisement reaches as many potential buyers as possible without being too loud about it. Even during and after the sale process, clients of business brokers don’t like them sharing information about their business to many people. It takes great skill to get to potential buyers whilst maintaining confidentiality about the sale
2) Networking with other brokers The business broker community is very small in most countries – Ranging from 3000 in the US to about 7000 in India. There’s a strong need for organization in the industry for professionals to meet and engage with each other. Real estate brokers have a strong network of other brokers they constantly work with to get deals done, and there’s a requirement for business brokers to do the same as well. Again, digital communities like SMERGERS are working towards bridging this gap.
3) Pricing the business Arriving at the optimal pricing and valuation for a small business can be tricky. There’s a lack of access to data on sale prices of businesses in the same domain, and arriving at valuations through traditional methods like DCF don’t work efficiently for small businesses. SMERGERS has a wealth of data of small business multiples which could act as a guideline for SME business valuations.
4) Financing Many buyers are looking for financing options to purchase businesses, but it’s getting increasingly difficult to arrange for that funding. Deals fall off at the last moment due to lack of financing options for the buyer. There’s an acute need for the broker community to work with banking and financial institutions to arrange for the loans required to ensure deals happen. Broker should also explore the possibility of seller to providing some form of seller financing.
How to find a broker to sell your business?
If you’re looking for a broker to sell your business, here are a few ways to go about it
1) Looking online A simple Google search will retrieve contact details of brokers in your city who help in sale of businesses.
2) Digital platforms Websites like SMERGERS and Transword help business owners in finding curated and trustable business brokers.
3) Broker organizations Many countries have broker organizations for businesses and getting in touch with them makes it easy to find a broker in your city/area
"Price is what you pay. Value is what you get" - Warren Buffett
Calculating how much a business is worth is a complex financial subject which is difficult to cover in one article. In this article, let us look at the basics of valuation and what are the typical methods and drivers for valuation of a business. To begin with, it is first important to understand the reason behind why one would like to value a business. There are several reasons why one would like to know a business’ worth, including –
1) to raising capital from investors
2) to sell the business
3) regulatory and tax related requirements
4) applying for a business loan
What does the valuation of a business depend on?
Valuations are very subjective and different people (or entities) would assign different values to the same business and they perceive different future cash flows and synergies. Here are the primary drivers of valuation of a business –
Revenue, profits and cash flow - Businesses need to make cash profits and that’s what drives most of the valuation of the business. Having strong revenues with profits is essential to having a good valuation for your business. Sustainable profit (The average of the profits of the previous 3 years, adjusted with non-business expenditures and accounting for a market salary for the business owner) is a key indicator of how well a business is performing.
Company assets - All companies have both tangible and intangible assets which are important to know how much a business is worth. While valuing tangible assets is easy, intangible assets (like goodwill) are slightly more complex to put a price on. Any goodwill and brand value a business commands should reflect in its revenue and profits.
Moat (or competitive advantage) - An important benchmark for a business is it’s ‘moat’ or competitive differentiator. What’s unique about this business that would make it survive and thrive against the competition? If you own a nice Italian restaurant, why can’t someone else open a new one opposite to yours to steal all your business? Some great differentiators could be having a trademark or a patent on your product, having a team that has been well trained to handle customers, customer loyalty, etc.
Market conditions and Macro Economic sentiment - Though it’s not something a business owner can control, the overall conditions of the market and prospects of the economy in the country affect the valuation of the business as well.
Methods to find how much a business is worth
There’re a few tried and tested methods that can help ascertain the true worth of a business. These are explained briefly below:
Revenue multiplier - In this method, you need to find out the annual revenue of business and multiply it with a “Sales Multiple” and arrive at a valuation for the business. For example, if the sales multiple is 1.5x, a business with $100,000 revenue would be valued at $150,000. The multiplier value depends on the market segment and recent acquisitions in that market. Though it’s an easy method, it may not be accurate as revenue alone doesn’t indicate capacity to make future profits.
EBITDA multiplier - This method is more commonly used among investment bankers as EBITDA indicates the operational profits of the company. To calculate EBITDA of the business add back Interest, Tax, Depreciation & Amortization and any other non-operational expenses to the profits of the company. Multiply EBITDA with the “EBITDA multiple” to arrive at the valuation of the business. Apart from the above two multiples there are several other multiples which can be used to arrive at valuations for a business, the key is to identify the key drivers of value for a business.
Asset based valuation - All assets held by the business are valued independently, and summed up to arrive at the valuation of the business. Tangible assets could include inventory, real estate, machine/tools, etc. and intangible assets include customer loyalty, brand awareness, patents, etc. Intangible assets should be valued based on the potential to generate immediate future cash flows.
Discounted cash flow - DCF is one of the most fundamental methods of valuation which most valuation experts swear by. Cash flow projections over the next few years are chalked out and this future cash flow is discounted against borrowing and interest rates, to arrive at the net present value of the business. In simple terms, how much money would you have to pay now to earn the projected cash flows in the years to come? This is a complex method to carry out as you’d need to have an acute sense of understanding of how the business is expected to perform over the next few years, as every small change in the market (like supplier increasing price) will affect the cash flow projections. Having said that, this is one of the most widely used methods of valuing a company.
Expected ROI - A simple way to value a business is to see the return on investment provided by the business and arrive at a valuation. Small businesses typically provide returns of 15-30% on the capital invested, so if you’re buying a business with a post-tax profit of $100,000, you can value it at $500,000 if you’re looking at a 20% ROI per year. Though this method is simple to use, this might not entirely be accurate and is used only upon a sale event when a potential buyer wants to make an offer.
It is a good practice for entrepreneurs to know how much their business is worth. When they’ve worked so hard to build something valuable, it makes sense to assign a dollar value to the same. It’s highly recommended that entrepreneurs work with the valuation experts and auditors to figure out what’s the best method to value their business, and keep it updated at all times. You can use our online valuation tool to quickly assess your company’s valuation here
Buying an existing business from an owner who’s retiring, relocating or cashing out is a great way to become an entrepreneur. Buying is particularly interesting as most of the legwork is already done by the existing business owner. Plus, you don’t have to go through the long process of figuring out a business model that works, monetization techniques, etc. and go straight to expansion and growing profits.
Before you start searching for companies for sale, it’s important to be clear on what kind of a company you want to buy, as the strategies for finding them would be different. Depending on your strengths, experience and requirements, you should think about the following –
Industry and domain - What industry are you looking at? Depending on your skillset and experience, you have to zero-in on which domain you want to get into.
Size of the business - While you might be tempted to buy companies which are growing rapidly and profitably, they often come at a cost. Many entrepreneurs end up buying business that have a big scale (in terms of revenue, team size, etc.) without actually having the ability to run it. You have to understand the size of the business you can successfully buy
Stage of the business - Are you looking for a business which has shown stable profits over the past few years, or one that’s growing its’ revenue rapidly but is yet to break even? Do you want something pre or post product-market fit? Having clarity on the same will help streamline the search
How to find companies for sale
Most business owners do not openly discuss about selling their business. Some of them may not even think of selling, unless someone makes an offer the entrepreneur is willing to accept. Typically they use confidential mediums such a trusted broker or online platforms such as SMERGERS to reach out and connect with relevant parties who may acquire their business. It is important to keep this information private so that employees, customers and suppliers do not become nervous about a change in ownership. So while finding companies for sale, it’s important to keep in mind that the best ones are hidden beneath the surface.
Having said that, here are a few ways buyers try to find businesses for sale
Identifying businesses and directly calling business owners - While this seems like a reasonable approach, it’s typically not the preferred approach as business owners shy away from openly discussing their business for sale. If you want to follow this approach you can avail the services of a middle man who can connect with the business to understand their strategic interests and accordingly introduce you both. At SMERGERS we help our clients to assess the interest level before making introductions between parties.
Industry networking events and conferences - All industries have a local body which meets frequently to discuss challenges and the way forward for the industry. Attending such events and networking with business owners help a great deal in understanding the market conditions and reasons why anyone would look to exit.
Through auditors/lawyers whose clients might look to sell - This approach was the most common approach before internet became popular. Reaching out to lawyers and auditors has also proven to be a good way to find companies for sale as they may have clients who’re looking to exit from their business.
Online Mergers & Acquisitions Websites - While there are several business listing websites, very few of them like SMERGERS provide you a confidential and secure mechanism to help business buyers find and connect with business owners who are seeking to sell their company.
Hiring a Business Broker - Business brokers specialize in buying and selling of businesses. You can reach out to business brokers who operate in your domain and avail their services. Most business brokers use online platforms to find companies for sale, but will eliminate the hassle of going through all the data by yourself and also hand hold you through the entire process till completion of transaction.
Finding companies for sale and completing the transaction is not an easy task, so we’ve compiled a couple of tips that can help you with the same.
Don’t be over enthusiastic - The process of buying a company takes time. Finding SMBs for sale is tricky as most business owners are secretive about their interest in selling their company. Also, business owners are always courted by enthusiastic buyers who lose interest quickly, so use a calm approach when talking to business owners
Talking directly to business owners - Over time, it’s been proven that talking directly to business owners increases the chances of sale, over working with middlemen and intermediaries. Once introduction is made, keep the conversations directly between you and the business owner, unless it is really required to go through the middleman.
You’ll lose the deal unless you know how to put together a worthwhile bid - Many times, buyers find sellers in domains they’re interested in, but lose the deal as they couldn’t put together a winning offer. Even before you find the company you’d like to buy, work with your team (of bankers, lawyers and auditors) to learn and understand exactly how to make a bid, including valuation of companies, due diligence required, financing arrangements for the buyout, etc.
Online mediums are fast emerging as a default medium to find companies for sale from across the world. You can browse the list of companies for sale on SMERGERS here.
For business owners, a great way to retain their business but still get some liquid cash is through selling a part of the business. That’s right – selling a business doesn’t mean you have to sell it completely. You can always sell a portion of it while holding onto the rest. The cash can be used for further growth of operations or get some liquidity. Selling a part of your business might be a better option for you and the business, if you plan and execute the strategy well. Let’s start by exploring the use cases for selling a part of the business.
Why sell a part of your business?
Below are a few reasons why you might consider selling a part of your business
Enable expansion Certain divisions / business units which you want to grow might require capital to grow and a good way to raise this capital would be to sell a part of your business which is not your core operations.
Liquidity Business owners generally put in a lot of their resources (cash and time) into their venture. Though the business might be running well, the entrepreneur has little (or no) cash liquidity. Selling a part of the business ensures that the entrepreneur retains control and runs the venture, while also getting cash for their personal use
Strategic partnerships An important reason to sell a part of the business is due to strategic opportunities that may arise. In general, it can be classified into 3 categories -
Synergies that allow revenue growth If you’re a restaurant owner, and you get an offer of partnering with a real estate developer who has space in a prime part of the city, you could work together to increase the revenue of your venture
Synergies that help in cost reduction If a large company purchases raw material, they’ll get a good discount on the price due to high volumes. By partnering with such a company, you can work out an arrangement where you source the same raw material through them and reduce your overall cost
Access to intellectual capital If an eminent personality with deep domain knowledge in your industry agrees to partner with you, you can grow your venture significantly by leveraging their network and knowledge
Inability to operate the full business by yourself Some businesses, especially when there are multiple business lines, are difficult to run by one person itself and require committed focus by multiple individuals (Ex. A retail company with multiple outlets in different geographies). Such cases would require bringing on more partners to handle operations
Reduce risk in running a business Property management companies do great when the real estate market is slow as people prefer to rent homes. When the market picks up, real estate agencies and brokerages do well as people buy homes over renting them. A partnership between such companies helps them offset the risk during market slowdowns
Offload underperforming assets and focus on core business units A web based e-commerce platform which also operates offline stores might figure out that their website is much more profitable than their retail stores. Now, it’d make sense for them to sell their retail stores to another entity and focus on their web platform alone.
Apart from the above, there are other cases as well, such as retiring high cost debt, conflicting lines of business, etc which warrant a partial sale of a company.
Types of sale
It’s important to understand the types of partial sale possible and its implications
Selling shares in the company As a solo founder, you will probably own a large portion (or even 100%) of your business. You can sell a portion of the shares in your company to an oncoming investor (strategic or otherwise) in exchange for a capital infusion into the venture. The shares allocated to the investors would give them rights to the business (like access to company’s financial and product data, customer data, etc.) and a certain amount of decision making power.
The end result would be that you’d own a smaller percentage of the business than you did before, but will have more people to help you grow the business along with capital which can be deployed in appropriate areas. You can choose to remain a dominant shareholder or can become a minority shareholder as per your requirement.
Selling a division or a business unit (Stores, products, geography) When a company sells a division of a business unit, it is called divestiture. This could be in the form of selling stores, products or even operations in certain geographies. Post the sale, the entity which has acquired the unit would have complete control to running the division in terms that have been decided by the sale agreement. This exercise would result in the original organization getting cash rich (due to the sale) but with lesser assets (as it has sold a unit to another entity).
Ex: A business owner who runs 4 tea stores is not able to operate all of them successfully. She sells of 1 of the units to a buyer, and uses the cash for funding the purchase of new machines in her remaining 3 stores.
How to go about selling a part of your business?
The process for sale of a piece of a company is similar to the sale of the entire company, but with some minor changes
Figure out what you’re selling What does the buyer get as part of the purchase? Will it be equity shares in the company? Or will they be purchasing a store in a geography you’re not interested in anymore? In the case of the latter, do they have to pay any licensing fee to use your brand name or technology?
Being clear about these aspects are very important prior to starting the proceedings.
Valuation What’s the amount of money the oncoming buyer would have to pay? It’s best to work with an auditor to figure out a fair price for the assets you’re selling
Find buyer Once you’ve sorted out the price you want for the sale, you have to find potential buyers for the entity. This can be done through –
Online website – Companies like SMERGERS specialize in helping small businesses find potential buyers for their sale
Business brokers – Offline players in the market exist who can help you find potential buyers, as well as hand hold you through the process
Network – It might also be easier for you to look within your network to find a potential buyer. A close friend or a business associate who has seen you build your business might be more inclined towards making an offer, as they already trust you
Financing Do you want to take the full sale value as cash upfront or would you prefer to take a deferred payment over a few years? Depending on your tax planning, the strategy might change.
Carry out transaction Once all other details are in place, it’s best to work with a lawyer to chalk out the paperwork and take care of any necessary regulatory filings that maybe required.
When exiting your business completely is not an option, selling a part of your business can be the right move. You get some liquidity, and at the same time continue running your business. Several business owners sell non-core units of their business and invest further in their core areas for future growth. Platforms such as SMERGERS let you advertise and sell part of your business.
Different entrepreneurs have different motivations for starting and running a business. Some do it to escape the monotony of working for a corporate outfit, while others do it to pursue a passion. Whatever the reason an entrepreneur has for pursuing a business, eventually he/she would think of selling the business to realize its full potential. There are several reasons why one would want to sell the business. It could be retirement, absence of succession planning, no legal heir, mental fatigue for the entrepreneur or simply, to cash out for the right offer. In this article, we’ll explore different steps one has to take before putting up a running business for sale.
It’s important for us to first understand what buyers of business look for while purchasing, to better understand what strategies need to be followed while building a business.
What potential acquirers of a business look for -
USP A unique selling proposition is very important to have for any business to find a buyer. What’s something special about your company that a buyer can’t find in other business? What’s your secret sauce?
Strong, positive cash flows Selling a profitable venture in itself is a challenge, but selling a business which is running on a loss is possibly 10X as difficult. Buyers are sceptical when purchasing businesses which are bleeding money at a constant basis as they can’t be too sure how/when the business will become profitable.
Moats A moat is essentially a reason why competitors can’t eat up your business i.e. a competitive advantage over other companies in the same industry. Buyers always want to reduce their risk when acquiring a company, and having strong moats around your businesses is critical to ensure a good sale.
Less dependence on founder(s) While all businesses will have a lot of dependence on the founder, buyers are always concerned on the survival of a business post an acquisition, when the entrepreneur is not part of the company anymore. It’s important to ensure that the business can carry on, even in the absence of the founder(s)
Regulatory compliance There’re too many instances of buyers of companies being hit with retrospective taxes and penalties due to non-compliance of regulatory processes in the past. These instances have made buyers vary and are particular that the business has to be completely compliant to all rules in the industry
Company Culture Post a take-over, most companies struggle with conflicts of culture between new management/team with the employees in the business. Buyers look for businesses which have a ‘cultural fit’ with themselves
Now that we’ve understood a few important aspects that buyers want, we can move onto strategies that could be followed before putting up your running business for sale
Building moats and USPs A moat, as discussed earlier, is nothing but a competitive advantage over others in the same market. Possible moats could be a great recipe that has customers coming back for more (in the restaurant business), or well struck deals with suppliers to keep the price low for customers in retail businesses, or a great team which understands and executes in your market, or filing patents for processes/technology. It’s important for founders and management to really understand what possible moats could exist for the business before putting it up for sale.
Cash positive businesses Drive the company towards profitability at all levels – By store, by business division/function, etc. While calculating profits, it’s also important to keep interest payments for capital, depreciation of assets and other factors in mind. Businesses with a high gross and operating margin are of particular interest to buyers (even if the net margins are currently low, as margins will increase once debts are paid back).
Automation of processes and decisions When you are selling your running business, it’s important to ensure that it can grow (and flourish) without the hands-on involvement of the founder. Work towards automating all processes in your organization to an extent they don’t involve the founder at all.
Another important automation that has to happen is that of decision making – Small businesses are structured such that the business owner is involved in all decisions (big or small). It’s important to put a structure in place which removes this dependency to make the business lucrative for buyers. Having a management layer between the operational elements and the business owner is critical. In general, it’s best to reduce the role of the business owner to 3 main functions –
a) Raise the capital b) Hire people and take care of building a great culture c) Set the strategic direction and vision
Anything outside of these functions should be offloaded to management.
Adherence to regulatory formalities Work with a strong accounting and auditing teams to ensure that all regulatory procedures are updated periodically. Every formality from tax deductions to filing of board meetings have to be done regularly, which helps during the eventual sale of a company.
Having a sound understanding of factors affecting the sale of your business will not only help you run your business successfully, but also make it a very attractive target for buyers looking for running businesses for sale. You can leverage platforms like SMERGERS to sell your running business.
If you’re a business owner with a great firm and are wondering why you aren’t able to attract buyers/investors, perhaps you’re committing some of these classic mistakes (with easy fixes) we’ve seen hundreds of businesses commit.
Mistake #1: Revealing very little information about your business
Fix: Answer the Five Fundamental Questions (at least!)
Investors will take less than a minute to look at your teaser/online profile and decide whether to proceed or not. It is therefore important to present an attractive, comprehensive view of your business to enable the investor to make an informed decision. At the same time, be careful about conveying too much of information. Unless specifically asked, you should stick to explaining your business and not the entire industry as most investors/buyers would have already researched this. While investors have varying individual criteria, make yourself investment-friendly by answering the Five Fundamental Questions in your profile/teaser:
1. What exactly is your business?
2. How much money are you looking for?
3. How much money are you making already?
4. Why do you need the money?
5. What does the buyer/investor get in return?
Hint: There is no need to reveal any confidential information. You should request the buyer/investor to sign a non-disclosure agreement before sharing confidential details.
Mistake #2: Projecting unrealistic future growth
Fix: Present pragmatic assessments and plans
Unrealistic goals and projections repel investors and make the business owners look inexperienced. We have seen businesses that project very high revenues compared to their previous revenues over dozens of years of operation.
While it is good to have ambitious targets, you need to provide realistic, well-researched, and acceptable projections and plans to investors.
Mistake #3: Expecting sky-high valuations
Fix: Use online valuation tools and also talk to Valuation Experts
Potential for $100mn in revenue does not equal a valuation of $100mn. You may be intrigued by the valuations which young technology companies are commanding these days but the ground reality for established and stable businesses is different. Buyers/investors look to break-even their investment in 3-4 years, which means around 3-6 times EBITDA is generally an acceptable range. Too-high valuations are most common reason investors pass on opportunities.
For a detailed overview of valuation, please read our primer. We also provide a free valuation tool to help you get a rough estimate of your valuation. Finally, be realistic about valuations and talk to a valuation expert for detailed analysis.
Mistake #4: Low responsiveness
Fix: Be available, prompt and serious about the deal
In a merger/acquisition, we have busy people on both sides of the table. When one of them is available, the other may not be and vice versa. This leads to delay. In such cases, it is important to have a good part of initial conversation over email and then have key conversations over phone, video call or face to face meetings.
We started SMERGERS to help you reduce the time needed to find interested buyers/investors, but when they are knocking on your door, you should take them seriously.
Mistake #5: Not ready with key documents/information
Fix: If you want a deal, keep all documents ready for it
To begin meaningful conversations, buyers/investors will need a few key documents such as a Teaser and an Information Memorandum to shortlist the opportunity. During due diligence process, buyers/investors will require additional documents such as Registration Certificates, Trade licenses, Financial statements, Projections/Targets, Valuation reports, Client contracts, etc.
Making the investor wait for you to process these documents leads to decline in investor interest, concerns over your planning skills, and might result in a no-deal.
Mistake #6: Appearing to be unprofessional
Fix: Communicate effectively, validate trust, and respect your investor/buyer
While interacting with investors/buyers, keep in mind that your behavior reflects greatly on your business. Displaying good communication skills with investors reflects positively on you and your ability to interact with your business’ stakeholders effectively. Make sure you perform a basic spelling and grammar check before hitting the send button.
Being late for meetings, committing to some work and not keeping your word will make investors lose interest in you (and your business!). It is extremely important to be accountable while interacting with investors/buyers.
We understand that you are an entrepreneur and have built a business all on your own, but you need to respect the buyer/investor. Instead of a generic ‘if you’re interested, call me’, being genuinely involved while interacting with buyers/investors will help you close the deal successfully. Even if you are the next Facebook, keep the ego aside and focus on building cordial relationships. It will payoff some way or the other.
Fix: Do a background check- and then stay positive!
Business owners become over-protective of their business and start seeing every buyer as a potential competitor. While it’s important to conduct a background check of the buyer/investor and know who they are, having a positive attitude while speaking to them makes a difference. Business owners who believe that the buyer/investor they are speaking with is the one who will close the deal, are the ones who actually close the deal!
We have seen many deals fail at the brink of being closed due to business owners committing these common mistakes, and we’d like you to be aware that getting these small things right leads to faster deal closures.A successful closure can be attributed to being practical and being proactive. Business owners should follow this religiously or appoint an expert advisor who will take care of the intricacies of the process from end to end.
In a future post, we will explore common mistakes investors/buyers commit while interacting with business owners. If you have any thoughts or comments, we’d love to hear from you at email@example.com.
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