Rose Stabler

Build a Business Plan When You Buy A Business

An essential part of any business is its plan for success. Your business plan lays the foundation and groundwork for your new venture.

Business Plans are a standard requirement when pursuing third-party financing from any lending institution, including SBA lenders. While it's true that business plans are certainly essential when trying to land funding, they should be looked at as a long-term map to guide your business and take it where you want it to go.

The discipline of developing a business plan gives you the opportunity to examine and understand the challenges ahead and generate realistic expectations for your new business. This involves organizing your business ideas and financial needs as well as detailing your marketing and management plans.

How far ahead should business plans look? A three year prospectus is standard since circumstances can change over long periods of time. Business plans should also include contingency plans, especially in the case of a sole owner. Investors or lenders will want to know how the company will continue operations should something happen to the founder.

The first part of your business plan should have a cover sheet, a statement of purpose, and a table of contents. The cover sheet includes the name, address, and telephone number of the business along with the names of all principals. The statement of purpose gives the reason for the business plan. The table of contents lists the headings and subheadings in your plan.

Sample Table of Contents

I. The Business

• Business Description / Executive Summary
• The companies products and services
• Legal entity of the firm (ie, LLC, Corp)
• Marketing Strategy & Implementation
• Target Market & Competition
• Operating procedures
• Management Team & Personnel
• Business insurance

II. Financial Data

• Loan applications
• Capital equipment and supply list
• Balance sheet
• Breakeven analysis
• Pro-forma income projections
• Pro-forma cash flow

III. Supporting Documents

• Tax returns of principals for last three years
• Personal financial statements (all banks have these forms available)
• Copy of contracts
• All supporting documents
• Proposed lease or purchase agreement for building space
• Licenses and other legal documents
• Resumes of all principals
• Copies of letters of intent from suppliers, etc.

A business plan has four areas:

1) Description of the Business / An executive summary

This section summarizes what is contained in the plan, such as the company's mission, objectives and key elements. The summary allows investors or lenders to learn about the company without having to wade through the entire business plan. Also included is the location of your business in terms of desirability and accessibility.

2) Marketing Plan

Marketing usually involves determining who your customers are, identifying their needs, and fulfilling those needs. Questions you need to answer include: Who is likely to buy your goods and services? What is your potential market share? How can you hold and expand your customer base? What is your pricing strategy? Who are your competitors in the market and how can you differentiate yourself from them?

3) Financial Management Plan

Financial management is one of the keys to keeping your business profitable. Plan a realistic budget that covers initial working capital and operating costs. Consider how much cash you have for a down payment. How much money will you need to purchase the business? How much will you need for initial working capital? How much will you need to pay debt service, earn a livable wage, and make a reasonable return on your investment?

Your operating budget should show the expenses you will incur and how they will be paid. You should cover the first three to six months of operation. This section should also address your accounting system and inventory control. You will also need to include any pertinent financial forms previously listed in the sample table of contents.

4) Management Plan

The existing business owner may already have operating procedures, manuals, and materials. You can describe any training and assistance that you will be receiving from the previous owner. Who will be your prospective management team? What are your plans for hiring and training personnel?

Remember to keep the business plan an active participant in your company, use it as a spot check to make sure you stay on track.

For more info on this subject refer to these helpful websites:
www.SBA.org
www.SCORE.org

Houston, Buckle Up As Our Economy Takes Off

Despite a sluggish economy in the U.S., Houston is still displaying its buccaneering spirit. While the oil boom is a large part of the Bayou City's good fortune, it is not the only gusher pouring out prosperity. A diversified business base is the fuel that powers Houston's shining-star status.

Newsweek article, Houston, We Have No Problems, published June 30th is one that every advocate of Houston would want to read. It addresses the varying aspects of what makes our city so hot, and it wasn't talking about our summer heat.

Houston's cash registers are ringing with big ticket items, construction crews are fully employed, and upscale restaurants are cooking. We are experiencing an unsinkable residential real estate market, Class A office space is virtually full, and a variety of construction projects are underway to keep up with demand. The article also purports that pessimists here are as rare as Birkenstock sandals and Obama '08 stickers in ExxonMobil's parking garage.

The article informs its readers that The Texas Medical Center is Houston's biggest employer, not the oil industry, clarifying that Houston isn't just about oil. However, not mentioned in the article were other powerful facts about the Medical Center that predicts its future impact. It is the largest medical center in the world and will be the seventh largest downtown district in the country when current construction projects are completed. There are more buildings going up in the medical center than in the rest of Houston combined. Considering that Houston is leading the rest of the country in construction, one could assume that the pulse of the city's medical industry won't be slowing anytime soon and will largely contribute to the city's future global positioning.

Referring to the 1981 oil bust, the editorial reminds us that back then the oil and gas industry was domestic and blue-collar, but today it is international and white-collar.

Remember John Travolta's "Urban Cowboy" in 1980 during the last oil boom? The movie was a classic portrayal of Houston at that time as being a redneck, oilwell-ravaged town. Well, "We're not that kind of city anymore," Travolta might have said in a quasi "Michael" movie production referring to our modern Houston rather than to his atypical angel stereotype.

Instead of cowboy, think suburban geek, the Newsweek column asserts. Houston has 70,000 engineers and architects, a concentration 60 percent higher than is typical for the United States. Houston's role in energy is not as the roughneck city this time around. It's role is "as the technical, trading and administrative center of the worldwide industry," says Joel Kotkin, an internationally-recognized authority on global, economic, political and social trends, in his book, The City: A Global History.

There's more, oil isn't the only energy game in town. We've drilled down even further within one industry. Houston also leads the future of alternative energy. So, referring to 1981? That was then, this is now. What a difference 27 years makes!

The article also touts Houston's port as one of its strengths, the second busiest port in America with rising exports. Houston's Gulf Coast has long powered the growth in southeast Texas and has seen its trade activity more than double since 2003. Houston's upward movement as a major player in international commerce, continued influx of business relocations, increasing worldwide trade, the benefits and advantages associated with Houston's Foreign Trade Zone, and the city's ongoing investment in the expansion of port terminal facilities paved the path for continued acceleration as a global leader in international commerce. As with manufacturing, Houston's international commerce and transportation sectors are trucking along in the speed zone and won't be braking anytime soon.

"More important than gold and diamonds are people. This critical resource, more than anything, accounts for Houston’s headlong drive toward becoming not only the leading city of Texas and the South, but also a player on the global scene: it is emerging as one of the world’s great cities." says Joel Kotkin, in another publication, Lone Star Rising.

Since it will take people to make this prediction happen, no problem, Houston is ready to forge forward. We have all the right stuff. Kiplinger's July 2008 issue puts Houston as the #1 place to live, work, and play in America. Kevin Stolarick, research director at the Martin Prosperity Institute, a think tank that studies economic prosperity, highlighted cities for Kiplinger that didn't just have strong past performance, but also had all the ingredients for future success. And, one key to a bright future, the Kiplinger article emphasizes, is a healthy shot of people in the creative class. People in creative fields -- scientists, engineers, architects, educators, writers, artists and entertainers -- are catalysts of vitality and livability in a city.

To further bolster the city's launch into its promising, anticipated future that lies ahead, the younger generation is coming to help pilot the passage. Houston is the #1 city in the U.S. for recent college grads, according to Forbes. Not only do we already have the right people, we are filling the roster with more of the right stuff to take over the reigns.

To tie up the message, Newsweek's article bespeaks Houston's characteristics as uniquely situated to capitalize on the longstanding megatrends that are transforming the global economy. Its Medical, Energy, and Trade Sectors are shining stars and herald the city's importance in the global arena.

This makes acquiring a business in Houston a good investment for the future.

What is the First Step Towards Selling Your Business?

"I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business. However, my children aren't involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process."

Since most business owners only sell a company once in their lifetime, it is quite understandable when an owner makes such an inquiry. While the thought of selling their company may seem overwhelming to many business owners, if thought in terms of baby steps, it is really quite simple.

What is the initial question that comes to mind when you think about selling your business? One might guess that you wonder how much someone would pay for it.

Well, your first thought is the very first baby step you should take towards the ultimate goal of selling your business. Get a valuation to get an objective price range that you could expect to receive in the marketplace. It's that simple.

Typically, the documents needed to determine the probable price range of a company in the current market are tax returns for the most recent three to five years, a current year profit loss statement, current balance sheet, and an equipment list. Again, as you can readily see, the required items for a valuation is not complicated. Several years of financials helps paint a historical picture and current trend of the company. Upward trends are the desired scenario.

Since profits on financial statements and tax returns of privately-held businesses are usually minimized in order to reduce income taxes, the financial statements are restated in a valuation to show the true cash flow of the business.

As part of that process, a professional business broker / intermediary will ask easily-answered questions that will help determine which expenses are discretionary in nature or are not strictly necessary. There will be other expenses that may be non-business related benefits going to the owner and family members, or one-time, non-recurring or unusual expenses that would not be borne by a new owner of the business. These expenses will be part of the true discretionary cash flow that would be enjoyed by a new owner.

This valuation, or Broker's Opinion of Value, is normally provided at no cost. It should clearly outline the details that buyer prospects and their advisors would need and can understand. It should be assessed on the same premises lending institutions use for the purpose of determining if the price makes sense. If a formalized business valuation or appraisal is required, a Restricted Appraisal is one alternative, which is less complicated than a Full Appraisal, and much less costly.

Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company's fitness for the marketplace. A valuation is an unbiased examination of your company's marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.

Other considerations in determining the business value will include competition, regional demand factors, proprietary products or processes, what type of buyer the company would attract, favorable lease terms, advantageous supplier relationships, management's desire to exit or stay with the business, concentration of customers, and many other relevant factors.

Your company's history of earnings represents its financial health and can establish the baseline for the monetary worth of the enterprise. The single most important factor for valuation is how much money the business makes. This figure should be maximized and be shown to be maintainable under new ownership in order to get the best price possible when the time is right. Buyers pay for the past, but buy for the future.

Most owners never take the necessary steps to plan their exit and end up selling because of unexpected events or crisis-driven reasons rather than on their own terms. According to members of the International Business Broker Association, 75% of business owners do not know the market value of their company. This is too large a number considering how painless a task it is to achieve.

The sooner you take the first baby step in understanding the value of your business, the more informed and comfortable you will be in planning your next step.....whether it be deciding the time is right to sell now, or making improvements for a future sale.

Ahh, that's the next stride in the baby-step approach.

What Is The Purpose Of Small Business?

According to a professor from Florida State University the purpose of business is to serve others who have a vested interest in its success, such as its employees and investors, because they are the ones who suffer the most if the business fails.

To fully understand my response, one must first read the Professor's Full Article as follows:

When I was in classes getting my Ph.D. in finance, my professors told me over and over, “The purpose of a business is to make money for its owners.” Unfortunately, I cannot tell you how many times I repeated this mantra to my students over the years. Now, however, I have a very different opinion on the subject.

A firm cannot stay in business just to make money for its owners at the exclusion of everything or everyone else. If an entrepreneur takes the attitude that he or she deserves to make all of the money, the business will suffer and will most likely crash and burn. Just consider who stands to lose the most when a business fails.

Some folks — my former professors included — would argue that the owners lose the most since they have the most at risk. There is no question in my mind that entrepreneurs lose a bunch as they generally have the most invested in terms of dollar amount. They are not; however, the ones hurt the most by a business failure. A business closing is devastating to the employees.

Employees are one of the many entities that have a vested interest in a business’ success. In addition to owners, stakeholders such as employees, vendors, banks and customers have so much tied up in a business. They are vitally concerned with the firm’s wellbeing and will put forth much effort to ensure its success. However, success is impossible unless all of the stakeholders are taken care of.

When a business fails all of the stakeholders suffer. Take for example a financial institution. A financial institution risks much of its depositors’ funds to support a business, and if the company fails, its own financial performance suffers.

If employees are not treated reasonably, the whole business will suffer as both the quality and quantity of work declines. So many entrepreneurs forget how important each and every employee is to the success of the business, and they often fail to treat employees well. If the business should fail, these employees are the ones that are going to pay a very high cost.

My colleague and I recently assisted an entrepreneur who had been operating a business with over 50 employees for a very long time. The business was losing hundreds of thousands of dollars each month, and we tried to give the entrepreneur the resources he needed to turn things around. When the situation failed to improve, we realized that there was only one alternative left: he had to close the business and file for bankruptcy.

Telling this entrepreneur that closing the business’ doors was the best course of action was, by far, one of the hardest things I ever had to do in this job. What made it so hard was not that we had to give the entrepreneur this bad news, but because we knew what a loss it would be for all of the stakeholders, particularly the employees. Through no fault of their own, the staff would lose their jobs.

In my opinion, the purpose of a business is to serve the stakeholders. Businesses must earn money to acquire additional funds and assets, but its staff and other stakeholders are vital contributors to this endeavor. The key is to balance and deliver on the needs of all the stakeholders.

My Response

I disagree with the premise that the purpose of business is to serve others. Yes, a business owner must be practical in her/his operational approach because others do hold "stakes" in the success or failure of the company. Everyone loses when an enterprises closes its doors.

Small businesses are the engines that power our economy. According to SBA statistics, they generated 60 to 80 percent of net new jobs annually over the last decade, employ 50.6 percent of the country’s private sector workforce, represent 97 percent of all the exporters of goods, account for almost 40 percent of our gross national product, represent 99.7 percent of all employer firms, and generate a majority of the innovations that come from the U.S.

When a firm closes its doors, business taxes and payroll taxes are lost, suppliers lose revenues from a lost customer, landlords lose rent, employees are out of a job, the taxes those employees pay are lost, those employees lose buying power and, consequently, sales taxes are lost as well. Everyone in the community loses. No one wins.

The two statements, first, that the purpose of business is to serve others, and second, that business owners are not the ones that lose the most from a business failure, are wrong. Both these attitudes fall into the liberal mantra that it takes a village to raise a child. No, it does not take a village, it takes the people who care the most to raise that child, the parents. Comparatively, the owner is the caretaker of his/her business.

No one cares the most for a business then its owner. No one will work harder for the business, sacrifice the most for that business, forgo vacations, time with family, reinvest every penny into that business, forgo sleep even.

Lenders, investors, and employees take calculated risks when they choose to invest or work for a firm. They have choices and their loyalties are calculated based on self-interest, not out of the goodness of their heart or for the best interest of the company. Nor will these stakeholders lose everything if the business fails. Lenders will invest in other ventures and employees will work for other companies.

On the other hand, the business owner will lose everything. They will suffer the most from the loss of their "child." The business owner is the most loyal to the company and is its biggest risk taker.

Successful business owners understand they must take care of those who have vested an interest, a self interest, in the firm. The market is competitive for employees and financing. Business owners know that. It is in their own best interest to provide for those who work for them and who invest in them. If they do not, those workers and investors would leave in a heart beat, a New York minute even.

Furthermore, these stakeholders would not wait around for the business to go to bankruptcy if they knew it was happening. The business owner, the captain, however, will go down with the ship.

So, to say that everyone has the same stakes, or the business owner loses less, is a falsehood, and undervalues business owners. An owner should enjoy the most benefit from the company should it be a success, just as they would suffer the greatest from its failure. The stakes are not equal nor is the interest.

If not for the ingenuity of business owners and entrepreneurs, there would be no investments to make by lending institutions, there would be no jobs for those employees, there would be no new technology and innovation for our future.

As Ayn Rand might have said, no one owns the "engine" but its inventor, no one slaves over it like its inventor, and no one has rights over it but its inventor.

The purpose of a business is to serve the ingenuity of its owner. The rest is opportunity for others.

Structural Changes in our Economy and our Businesses

Keynote speaker at the recent International Business Broker Association last week in Denver, Jerry Osteryoung, Executive Director of Global Entrepreneurship at FSU, was kind enough to allow this reprint of his report concerning the future economic changes that will be necessary in our society and the way we do business in order to cope with rising fuel prices and the diminishing oil supply.

"The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency." ~Bill Gates

With gasoline hitting $4 a gallon and no end to the increase in sight, it is time to start thinking about the structural changes that we are going to experience in our economy and in our businesses. With the exception of the internet revolution, this is one of the most dramatic changes that has come along in the last 50 years.

A recent report showed that if the current rate of oil consumption in China continues, they will need all of the world's fuel in the next ten years. Additionally, production and refinery capacity is going to further limit the availability of fuel, meaning higher prices as well.

Do I think that fuel prices will ever go down to two or even three dollars a gallon? No, because the demand for this commodity is increasing exponentially. I would not even be surprised to see fuel at five dollars a gallon by year end, especially if the dollar continues to do poorly against other currencies.

Not only is this a very big challenge for our country, but it is also an immense challenge for each and every business. One major change that I think we are going to see as a result of these conditions is more and more shopping on the internet. People are going to opt for this alternative as a way to avoid using gas. Of course, people will still have to shop for items like food; but they will use the internet much more in order to combat higher fuel prices and maintain their standard of living.

What this means is that your business is going to have to step up your web site. An okay web site is not going to cut it. To prosper in tomorrow's economy you must have a great web site that clearly demonstrates your products and services. It must also be easy to navigate and transact business. Users will simply fly by your site if it is not dynamic and relevant to their needs. In light of this, I think it would be very prudent to shift as many advertising dollars as possible to the internet.

A second trend we can expect to see is telecommuting becoming the norm rather than the exception. With high fuel prices and congested roads, businesses will simply not be able to recruit or afford workers that have to commute. Businesses will have to design the workplace so that more of their workers will not have to come into the office everyday. Of course, mass transportation will eventually fill this void, but this is going to take a long time to develop.

Another major change I see is development growing up instead of spreading out. In the past, new development moved away from the city core, but now it will have to come back to the center to provide housing for people that can no longer afford to live in the suburbs.

This will be especially troubling for the many workers who moved further out to get inexpensive land for their houses. The commute was acceptable when fuel costs were low; however, now that paradigm has changed, and these workers are getting caught in an economic squeeze. They are going to be stuck, both unable to live out of town due to fuel costs, and unable to take on the expense of moving.

Another business cost that will warrant examination is transportation for your materials or products. Now is the time to take a look at ways that you can reduce your shipping costs. Start by looking for vendors or resources that are closer to home, thereby reducing your cost of doing business.

Finally, each and every business will have to change the way it thinks about fuel. Businesses will have to limit travel, opting to conduct more meetings using video conferencing technology. Smaller vehicles will have to become the rule rather than the exception. Bottom line: each business will have to redesign itself assuming that fuel hits $7 a gallon. As Jim Moran, the philanthropist who funded JMI, said, "The future belongs to those that plan for it."

Now, there is a solution to this fuel price issue, and the answer is technology. Will this be a quick fix? No, but I believe it will come within the next seven to ten years.

Now is the time to start thinking about how you can offset the increasing fuel costs that will have a direct impact on your business. Do not be satisfied with minor tweaking here and there. The scope of this issue demands a major structural change - a reengineering of each and every business.

About the author:  Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jerry.osteryoung@gmail.com or by phone at 850-644-3372. All of Dr. Osteryoung's articles can be found in a searchable form at www.cob.fsu.edu/jmi.

International Business Brokers Association - 47th Semi-Annual Conference This Month

The International Business Brokers Association (IBBA®) is having its 47th Semi-Annual Conference this month, June 1 -7, in Denver.

The IBBA®, established in 1983, is the largest international non-profit association operating exclusively for the benefit of professionals and firms engaged in the various aspects of business brokerage and mergers and acquisitions. The association represents professional, ethical and practice standards by which its members operate. This semi-annual event is seven days of professional development and top-notch education and networking. Educational and Workshop courses number close to 100 and include such topics as:

• Up-to-date legal and tax issues that impact business transfer transactions
• Analyzing and recasting financial statements
• Techniques for pricing and maximizing value of privately-held companies
• Succession planning and exit strategies
• Negotiating the M&A Process
• M&A Tax Strategies and Deal Structures
• Solutions to closing challenging transactions
• Getting deals financed

At each conference the newest products, techniques, and services are introduced at the IBBA® Trade Fair. In addition, merger and acquisition professionals and Private Equity Groups (PEGs) from around the globe gather to make deals happen during the M&A Source Middle Market Expo. Sponsors and nationally recognized keynote speakers include global economists, banking and lending professionals, private equity and other investment groups, and tax and legal experts involved in business transfers transactions.

When choosing a business brokerage firm to represent the sale of your business, it is important to ascertain the firm's participation in the IBBA®. For more information, visit the IBBA website & M&A Source website.

Why is Buying An Existing Operating Business Better Than Starting A New One?

Don't start it, buy it! Why should you buy an established business versus start a new one? The most important reason is your chances for success are better!

Here is a list of ten solid reasons:

(1) The success rate for existing businesses purchased is significantly higher than the success rate for a new business startup. Statistics indicate a 90% failure rate for new business ventures within five years, while business brokers report that 70% of businesses they sold are still in business five years later. (Economist, Brian Headd, with SBA Office of Advocacy, report -- Redefining Business Success: Distinguishing Between Closure and Failure.)

(2) An established customer base means immediate cash flow!

(3) Bank finance options: It is much easier to find capital to buy an existing business than to start a new one. Why? Banks know the statistics. Bankers are much more willing to lend money when there is an identified source of repayment already in place (i.e. cash flow).

(4) Seller financing: Many sellers of existing businesses are willing to provide financing at very reasonable terms. Why? For income tax reasons, to increase the probability of a sale, and to increase the overall net they receive from the sale from interest on the loan. And, if a seller is willing to carry back any part of the purchase price, it tells you the seller has confidence that the business will continue to succeed under your management.

(5) Projections for a startup are nothing more than an educated guess. Projections for existing businesses for sale are based on historical results. Which is more reliable?

(6) Startups always cost more than expected and may use up initial financial resources budgeted for the venture. This is one of the reasons start ups fail within the first couple of years. Just like a baker making bread from scratch, when launching a new business, you'd be rolling out the "dough" without knowing if there will the anticipated market for your new product or service. Mistakes will be made along the way and new approaches, that require additional expenditures, will need to be formulated. You will need to stay "fluid and flexible" so you can bend and twist along with the business as it takes shape.

(7) You may actually need to come up with less cash for your down payment plus working capital when you buy an existing business than you would need if you started your own new business venture. Why? With owner financing and a performing track record, your existing business purchase is very bankable...a new startup is not. The cash required to get the new business to a cash flow positive is unknown. Unless you are rolling in "dough," this is problematic and threatens ultimate success.

(8) An established web site presence. Although each business will vary, most businesses rely to some extent on a business web site. The longer a web site has been established, and the more traffic that web site receives, the more value search engines place on that site. This is important as your web site ranking determines your placement in search engine results. In other words, building a new web site is not enough. Customers still need to find it. A quality, established web site can be a real asset, something that a new startup will not have.

(9) Many businesses listed for sale are fairly priced. One can often find a business acquisition whereby after the sale the new owner will be able to make an immediate livable salary with enough left over to pay debt service on the new loan and get a reasonable annual return on their investment.

(10) Less stress and strain: An existing business acquisition does not mean stress free. But it will be significantly less than if you were always wondering and worrying if customers would really come and, if and when, the monetary investment would pay off on a start-from-scratch business venture.

Buying an established business is a more efficient way to business ownership. Here's a list of additional advantages of buying an existing business not discussed above:

• Established suppliers / vendors
• Furniture, Office Machines & Communication Equipment are in place
• Experienced Employees
• Relationships with professional advisers, insurance companies, advertisers
• Location demographics has already been market tested & proven
• Established Market presence
• Policies and procedures are in place
• Pricing and competition are already known quantities
• Immediate Growth Potential

In the long run, buying an existing business is less costly than launching a start-up. Even if you pay a premium price for an existing business, at least you know what you are getting for your investment and can anticipate, to a certain degree, what the future will bring.

Finding an existing business with all the ingredients for success already in place is a safe investment and a great platform from which to grow and launch your entrepreneurial new ideas. By far, a much less risky avenue to achieving business ownership. No matter which road you take, however, there are no guarantees. You still need to be a sharp businessperson to make it work.

When Is The Right Time To Sell A Privately-Held Company?

There are many factors that determine best timing for selling a small business: the financial condition of the company, valuation, growth cycle, profit history, and the current market.

There is one aspect about timing that comes into play that seems to dominate all other factors....it is the business owner's emotional readiness to sell. However, if the primary determining criteria in the decision to sell your business is emotional readiness, you may put yourself in a weaker bargaining position when you do decide to sell.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, the mergers-and-acquisitions marketplace, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value. Internal conditions within a company, of course, also change -- often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value -- sometimes eroding value and sometimes increasing value.

Yes, it's easy to understand that you should hold on to a growing business....sell it after it grows bigger. But how should you start thinking objectively about the best time to sell? Well, imagine the life of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can't see the top, when it looks like it's all up from here. When others can see the top, they may not buy, or they may pay prices based on the downside trend and higher risk factor. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. Buyers are not too interested in declining businesses. To get the best deal you have to sell on the way up -- not at the top or the downside -- and when the market and prices are good.

Markets change and fortunes change from year to year. The current status of the small business market place in Houston is hot. Buyers in every category are plentiful, our economic position is one of the top in the U.S., business policies are in place for continued prosperity and growth, interest rates are at historic lows, and capital is available for business acquisitions.

Fueling the market are the different categories of buyers. For example, a variety of people in the Individual Buyer Category are:

• early baby-boomer corporate retirees
• corporate refugees who have suffered a downsize
• foreign buyers seeing U.S. businesses as investment opportunities while the dollar is still valued lower against their own currency
• 30-something-up-and-comers aggressively buying and building

Increasingly, corporate America, both public and privately-held companies, are acquiring smaller firms as part of their strategy for growth and innovation. Private equity groups, too, are actively seeking add-on acquisitions in Houston for their investment portfolios. Each of these buyer categories, the strategic buyer and the investment buyer, vary in their acquisition criteria regarding the sectors they are targeting and the revenue ranges they require. However, we have seen one major common trend occurring. More and more private equity firms and corporations are looking for smaller businesses. These strategic and investment buyers in increasing numbers are considering businesses with lower minimum cash flow and total revenue generation as acquisition candidates than they were just one year ago.

We expect this trend to accelerate, especially in Houston, for several reasons. But here are a few specific reasons:

1. While the national credit crunch may have impacted the larger transactions, the smaller transactions are still very active because all buyer categories for privately-held, small enterprises are looking to put their money to work.
2. Houston has been minimally affected by the credit crises and has been deemed recession proof. As a result, the city is a major target in the business acquisition marketplace.
3. The new 2008 Fortune 500 list of annual rankings of America's largest corporations is out. Houston is called home by the second largest number of the companies on the list, second only to New York City. Houston has been steadily adding to its collection of Fortune 500's for the past several years, while New York's number has declined.
4. Houston's pro-growth, no nonsense politics are major factors driving developers and other capitalistic-minded investors to Houston. Business experts and economists say it's a matter of simple economics — low taxes, affordable land and an expanding labor force.
5. Houston is one of America's top ten recession proof cities, according to Forbes' article, America's Recession-Proof Cities, released April 29, 2008.

Most importantly, buyers exceed sellers and we have a robust exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers, and acquisition appetites and prices will fall. It will shift to a buyer's market rather than the seller's market that exits today. As a seller, you do not want to be participating in that buyer's market.

The time is right when the external and internal conditions are right...when the market, the buyers, and values are good and financing terms are favorable. When those factors are right, it's time to get your emotional readiness in line, or you are likely to miss the boat. It's that simple. If you turn down a great market, when buyers are willing to pay a great price, and if you wait too long for your emotional readiness to catch up, the market cycle or your business' internal conditions will likely have changed. The Market is ready and it is never wrong -- and like time, unfortunately, it waits for no one.

The Buyers For Privately-Held Companies And Why They Buy

Most owners of small and medium-sized businesses don't think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them don't even realize that their business may be an attractive acquisition target.

With about 8,000 Americans turning 60 every day, about 20% of businesses owned by boomers will be looking for buyers within the next three years. We are now in the initial stages of what is expected to be the greatest wave of business transfer activity in U.S. history. This future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner's readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: The Individual Buyer, The Investment Buyer, and The Strategic Buyer. Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

THE INDIVIDUAL BUYER CATEGORY

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 to $3 million. Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. These qualifiers give Individuals confidence in the business' continuity and stability. Employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

THE INVESTMENT BUYER CATEGORY

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, they number in the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

The relative sizes of acquisitions by category of buyer (compressed into their broader categories) is shown in the accompanying Table.

THE STRATEGIC BUYER CATEGORY

The Strategic Buyer is usually a public company or a larger privately-held company. Their targets are businesses that would compliment their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that joining the two companies will produce more, or be worth more, than just the sum of their parts. Here's a simplified example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2-3 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.

Selling Your Company? What Is It Worth?

When it comes time to sell your business, knowing how to enhance its value and PLANNING AHEAD are key to doing it ON YOUR TERMS.

Selling a business can be complicated and very time consuming. Since the average business sale transaction takes anywhere from FOUR TO TWELVE MONTHS, business owners need to be in the right frame of mind when they embark on the process. A big mistake that is often made is not planning well enough in advance to optimize its value and not having a strategy for exit.

THE CONCEPT OF VALUE was set forth as early as the first century, B.C., when Publilius Syrns wrote his Maxim 847: "Everything is worth what its purchaser will pay for it," or as an early British economist, Samuel Bailey wrote in 1825, "Value, in its ultimate sense, appears to mean the esteem in which an object is held." So, a closely held business may have a high value to its owner resulting from the efforts expended to build it, but it may have a lower value to a potential buyer who may be more interested in return on investment than past efforts of the Seller.

Thus, a proper valuation of a business will result from a dispassionate analysis of the firm's objective and subjective factors such as: the firm's financial condition, future income and expense risk factors, market and industry considerations, management and marketing functions, and the perceived esteem with which the business is held by its industry.

VALUATION METHODS

Two methods commonly used by BUSINESS BROKERS / INTERMEDIARIES to determine fair market value of privately-held businesses are the Multiple Method and the Discounted Future Benefits Method.

Multiple Method

The most viable valuation method for small businesses is the multiple method. This formula applies a multiple factor to the previous year or current year projected Discretionary Earnings figure to arrive at a purchase price. The Discretionary Earnings figure is a combination of several factors: Seller Discretionary Earnings (SDE) = Pre Tax Profit + Owner's Salary + Additional Owner Perks + Interest + Depreciation + Adjustments for One-Time Events. Note: Net working capital and real estate would be additive values. Typically, small businesses will sell in a range of one to four times multiple of this figure. This is a wide range, so how do you determine what to apply? In general, a one to two times multiple is for those businesses where the seller is "the business" or is "a one-man show." In other words, if the seller leaves, so too can the customers. Businesses with declining revenues, and high-risk businesses, such as restaurants, are in the one to two-and-a-half times multiple range. Three to four times multiple is for businesses that have been around for several years, have shown sustainable growth, have a solid base of clients, assets that will not have to be replaced in the immediate future, are involved in growth industries, and have expansion possibilities. Of course, there is a lot more to factor into the equation such as current economic and market conditions and the CATEGORY OF BUYER that the business will bring.

Examples of Positive factors that raise multipliers include: aProprietary products, with strong brand and/or patent or trademarkaDiversified customer base - no one customer more than 10% of sales aStrong management teamaWeak competitors and a healthy market share for your companyaProducts that are early in the Product Life CycleaAbility of the company to meet some growth with current plant and equipmentaNo pending legal or government actionaFinancial ratios that are near or above industry averages aand these OTHER POSITIVE ASPECTS.

Examples of Negative factors that lower multipliers include: aProducts that are just like competitors aOne or a few customers make up more than 25-30% of sales aStrong competitors and a weak or declining market share for your company aProducts that are near the end of the Product Life Cycle aMajor investment needed soon in plant and equipment aPending legal or government action aFinancial ratios that are below industry averages aand these OTHER NEGATIVE ASPECTS.

About the factors listed above ---if your company has one, or even a few, of the negative factors --- you are typical! There is no perfect business, but buyers will use these factors to negotiate the price down. You should address POSSIBLE PROBLEM AREAS and outline how the negatives can be overcome by a new owner. Buyers will look at the price of the business and determine if they can make sufficient profits to earn a livable salary, pay the new debt service, and provide a reasonable return of their investment. Ultimately, this is the test to see if the price and terms of any deal are reasonable.

Discounted Future Benefits Method

When forecasted future earnings can be reasonably developed, then the Discounted Future Benefits Method is often preferred by some buyers. This method utilizes one of several forms of forecasted after tax earnings over a period of five to 10 years. These earnings are then converted into a value using a present value concept. This method is more applicable to larger businesses that have stable or predictable earnings. Buyers often expect a 25% to 35% rate of return from an acquisition.