The SMERGERS Blog
  • How can I buy a business?

    Sat 16 Jun 2018

    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 -

     

    a. Inventory

     

    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.

     

    c. 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 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.

     

    Sale type

    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.

     

     

     

     

     

     

     

     

     

  • Business Brokers

    Wed 13 Jun 2018

    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

     

    7) Negotiations

     

    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.

     

    Representation methods


    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

     

    Challenges


    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

  • How Much is a Business Worth?

    Mon 19 Feb 2018

    "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

  • How to Find Companies For Sale

    Sun 11 Feb 2018

    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.

    Pro Tips

    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.

  • How to Sell Part of Your Business

    Tue 17 Oct 2017

    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

    1. 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.

    2. 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

    3. 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
    4. 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

    5. 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

    6. 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


    1. 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.

    2. 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


    1. 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.

    2. 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

    3. 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
    4. 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.

    5. 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.


  • How to Sell a Running Business?

    Thu 17 Aug 2017

    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 -

     

    1. 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?

    2. 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.

    3. 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.



    4. 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)

    5. 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

    6. 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

    1. 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.

    2. 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).

    3. 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.

    4. 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.

  • 7 Common Mistakes by Business Owners seeking Sale/Investment

    Tue 20 Jan 2015

     

    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.

     

    Mistake #7: Suspecting buyers/investors excessively

    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 vishal@smergers.com.