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Popular Business Sales Myths

10/12/2015

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Myth 1:  Foreign Buyers Will Overpay Just to Immigrate to Canada
Some owners seem to think that rich foreign buyers looking to reside in Alberta, or immigrate to Canada, will overpay to buy their business because they have tons of foreign cash. The facts are probably a bit different. It's pretty hard for foreign buyers planning to immigrate to Canada to purchase a business before they come here first. Most foreign buyers will move to Alberta first and find a job and then once they know the environment they live in and the business practices, will consider buying a business. At VR Business Brokers in Edmonton we notice that most immigrants have lived in Alberta for at least 2 years before buying a business. 
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Myth 2:  Same Industry Buyers Pay More
Why should they?  The trust is just the opposite. We found that buyers from the same industry in the same city usually pay the least for the business. This is even more correct in industries where there are fewer competitions. Why would your competition pay you more for your business when they know that naturally your customers, your employees will naturally go there if your business does not exists anymore. However, there are situations where your local competition might be willing to over pay when they fear losing the purchase to another buyer, perhaps a new competition from another area that wants to expand their market share. If a competitor is sufficiently smart and successful to build a business big enough to swallow yours, then they are not likely to suddenly get dumb enough to over pay. Yes, I know all about earn-outs over time to get a premium price, but if I could buy your business using your money, I would probably over pay too.

Myth 3:  Excess Assets Make a Business More Valuable
No, the opposite is true. Too many non-performing assets can make a business difficult to sell. An example would be an underperforming manufacturer. Why would someone pay $1m asset value for a business earning $100k? How would a bank finance this transaction? How can the cash flow support the loan repayments? Businesses with underperforming or excess assets should sell off those assets and get their balance sheets in order before selling.

Myth 4: Inventory Should Be Added To The Price But Not Multiple 
Majority of times, businesses are valued and sold on multiple of earnings. For example if you have earnings of $100,000 and the multiple used based on your industry, size, risk of your business is 3.5 times, then the value of your business is $350,000. However most sellers then want to add another $50,000 to that price for the inventory they have in stock.  Unfortunately the inventory in a business is part of a going concern of the business. If you were to add the $50,000 to the purchase price now the total sale is $400,000 and the buyer just paid 4.0 times for your business which will impact the length of time it would take the Buyer to recover that his investment. At VR we recommend that normal level of inventory should be included in the asking price of the business. What is normal depends on the business and its purchasing cycle. Any excess inventory than can be either sold by the seller or sold or consigned to the buyer. 
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The Key to Selling a Business

5/3/2015

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As you probably know or heard, getting an offer to sell your business is not the toughest part of business sale transactions – addressing all the concerns and finding solutions to bring this offer to a close are! I was not born a salesperson, but the one thing I quickly understood when I first got into business sales a decade ago was that focusing on quickly identifying and fully understanding any concerns from both the buyer and the seller was in fact the key to my success and the #1 reason why I had a higher than average sale closing ratio!

I cannot recall how many times I was told: "Nathalie, it’s impossible to close this deal!" but closed the deal anyway! The secret? After having identified and understood the buyer’s and the seller’s concerns, using my imagination, negotiating power and knowledge to address these concerns by ALWAYS coming up with win-win solutions. I do admit it’s most often easier said then done but the word "IMPOSSIBLE" in just NOT in my dictionary! There is no such thing as a problem that cannot be solved; there are only solutions to be found!

For example, one day I ended up working on the resale of a franchise where time and options were clearly running out - actually just a few weeks away - and so was the seller’s chance of retiring with a large portion of her well-earned money, sitting in the value of her business.

The FACTS/ISSUES:

1) the deadline to renew the franchise agreement was fast approaching;

2) the franchisee was NOT AT ALL willing to commit to a renewal of the franchise agreement other than with an "unconditional offer to purchase" in hand before the franchise renewal deadline, because this meant committing to providing the franchisor with a personal guarantee to operate the business for 5 more years if the business did not sell quickly;

3) the buyer’s lawyer would not allow him to remove his conditions on the offer before getting confirmation of the rental rates of the lease renewal and confirmation of an amendment to the lease to have at least 1 x 5-year option to renew;

4) the franchisor was on the head lease and the franchisee had therefore no control on the negotiations of the terms of lease renewal and it had become clear that the franchise renewal deadline would expire before the rent renewal rates would be known;

5) not finding solutions to these problems meant the seller losing most of the hard-earned retirement money that took years of work to earn, which for me meant failing was just not an option! I was going to succeed - or die trying!

The SOLUTIONS:

Problem #1: Future rent increase:

After considering that an increase in rent meant:

a)    a decrease of the Seller Discretionary Earnings (SDE); and

b)   since a business usually sells based on a multiple of the SDE, also a decrease in the value of the business… 


Using the same multiple of the SDE that the initial offer price was based on (the "Selling Multiple"), I proposed that we resolve this issue by adjusting the sale price with a formula: the average amount of the 2 first years of the "annual basic rent increase" multiplied by the Selling Multiple. I knew from experience that the buyer’s lawyer would not like the use of the formula unless his client was further protected hence also proposed that the seller’s lawyer hold back a certain amount of the sale proceeds to cover the possible sale price adjustment (if any) until the terms of the lease renewal were finalized and the amount of annual basic rent increase known. SOLUTION #1 - ACCEPTED!

Problem #2: Uncertainty in obtaining an option to renew the lease:

Considering that removing conditions prior to having a lease renewed meant the following possible risks for the buyer:

a)    paying higher rent as part of  the lease renewal to obtain an additional 5-year option to renew the lease; or

b)   not obtaining an additional 5-year option to renew the lease and entering a new lease in 5 years with higher rent higher than the rental market rate; or

c)    having to move the business to a new location in 5 years if the landlord and him could not agree on a new lease.

To address this problem, I asked the buyer if there was an amount of money by which the offer to purchase price could be reduced for the aforementioned risks to be acceptable to him. The buyer came back with an amount and when presented to the seller, the latter felt that this option was much safer than committing to a new 5-year franchise agreement while not knowing if the buyer would actually buy the business or risk losing her ability to sell the business at all. SOLUTION #2 – ACCEPTED!

And this is how ADDRESSING CONCERNS WITH WIN-WIN SOLUTIONS turned this "IMPOSSIBLE" DEAL into a "CLOSED
" DEAL! 

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Nathalie Lacroix is a Vice President at VR Business Brokers in Edmonton. Nathalie specializes in helping entrepreneurs in buying and selling their business. You can reach her confidentially at nathalie@vralta.com. Alternatively, visit our website to learn more.

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BABY BOOMERS FACTS TO KNOW

4/5/2015

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LOOK AT THESE FACTS…
  • The Baby Boomers (those born between 1946 to 1965) approximately 5,000,000 of them are poised to make a great impact on the Canadian economy.

  • The oldest Baby Boomer reached 65 years old in 2011.

  • Canada has over 1,000,000 small businesses (employs between 1 – 99 employees) or a total of 98.22% of all businesses registered in Canada.

  • Retiring Boomer business owners will sell or bequeath $1 trillion worth of assets over the next two decades.

  • These assets are held in more than 1 million privately owned businesses.

  • More than 50 percent of these companies are expected to change hands within the next 3 – 7 years. Based on the fact that in 7 years from 2015, the oldest Boomer will be 76 years old.

  • The sale of almost 500,000 businesses over the next 3 to 7 years represents a significant increase in the annual number of businesses that will be sold.

  • These owners of businesses should have a valuation performed by a qualified business appraiser/valuator, to map out a strategy for selling and structuring the sale of the business.

  • Planning ahead will enable business owners to achieve the best transaction possible during this Boomer-induced wave of business sales.

  • The 500,000 businesses likely to change hands over the next 3 - 7 years might involve a large number of boomer-to-boomer sales.

  • Baby Boomers ages 45 to 64 form businesses at a higher rate than other age groups.

  • 55 to 64 year oldS form businesses at the highest rate of any age group.

  • Many of the Baby Boomers are too young to retire; they typically have ample capital through savings, investments or other assets; they have job-related skills accumulated through a lifetime of work; and many have lost faith (and money) as a result of large company layoffs and restructurings; and many will buy their own business in coming years.

  • Many Boomers find themselves unhinged from their traditional employment safety nets. This dislocation has fueled an intense desire and need to have control of their destinies.

  • Ironically, now small business ownership is seen as much more safe and secure than working for a large company.

  • So, in the coming years, not only are we likely to see Baby Boomers selling businesses they now own, we will also see additional Boomers (who’ve spent their lives working for someone else), buying businesses.

  • The next two decades will see a significant increase in the number of small and mid-sized businesses being bought and sold by Baby Boomers, in addition to the other generations of Canadians that business brokers regularly deal with.

Other Sources: 
Key Small Business Statistics from Industry Canada
Generations in Canada from Industry Canada

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Jey Arul is the Principal with VR Business Brokers in Edmonton. Jey specializes in helping business owners to successfully divest from ownership of small and medium-sized businesses. Moreover, his clients benefit from his Business Valuation knowledge as a member of the International Society of Business Appraisers. You can reach him confidentially at jey@vralta.com, or on LinkedIn. Alternatively, visit our website to learn more.

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Ideas to Grow Your Business in 2015

3/15/2015

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A few simple basic things business must do today. It is interesting thing to see how sometimes simple things are often disregarded. 



Use A Professional Voice-Mail Message

Don’t be clever and cute. Identify your company, yourself, indicate your availability and when the caller can expect to hear from you.


Get On The Internet
Today you must have proper communication tools and email addresses are essential. Check your emails at least twice a day.


Consider A Website
A website can help establish your presence, providing customers and suppliers with information about your company and what you have to offer.


Hand Business Cards Out At Every Opportunity
Passing out business cards at every opportunity – even to people you know – is a good reminder of what you do.

Stimulate Word Of Mouth
Encourage existing customers to refer new customers to you. The best new customer is one that has been referred to you.


Write And Use A Marketing Plan
Develop a detailed marketing strategy that covers at least the next 12 months. Map it out so you know what you have to do and when. Continue marketing even when business is good.


Do Market Research
It is important you don’t guess the potential demand for your products and services. You need real numbers based on reliable research.


Watch Changes In Your Market
Very few markets remain static. If you don’t recognize the changes in your market, you can’t respond to them. External circumstances may change your customer base so you have to constantly re-evaluate your market and how you can reach it.


Network
Join your industry’s trade association and your local chamber of commerce to enhance your image, meet potential customers and receive industry information.


Jey Arul, is the President of AJS Advisory Partners Inc in Edmonton and the President of International Business Brokers Association (Canada).

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Three Resolutions to Make your Business Easier to Sell in 2015

1/12/2015

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It’s the time of year when we should all be thinking about and planning ways to improve our businesses and ourselves in 2015. In my practice, I commonly run into businesses that aren’t in a good position to sell even though they may be profitable. This is usually because the business is too reliant on the owner for three things: knowledge on how to run the business, marketing power in the business, and actual management labour for the business. Here are some explanations of these issues, and tips for ways to remedy them and increase the attractiveness of your business:

1.     Systematize Your Business, and Codify the System
Owners who have owned and operated the business for many years know all the ins-and-outs of what to do in every situation. Very few owners, however, properly codify the systems that they have developed to run the business efficiently. Very often, most of the knowledge is locked away inside the owner’s mind. By creating complete and detailed policies and systems manuals for the business, owners can effectively remove the need for employees or a future buyer to constantly refer to them to get the answer to a business problem. If a buyer can come into a business purchase knowing that, once he or she takes over, there will be detailed systems and guides in place to help them develop their ability to run the business, that business becomes significantly more attractive. Moreover, in small and medium-sized business sales it is typical for the previous owner to remain with the company for as long as multiple years in order to smooth the transition and teach the new owner how to run the business. With detailed systems in place, the amount of time the previous owner will have to spend with the company after the sale is usually greatly reduced.

2.     Change your Branding from Personal to Corporate
One of the biggest fears of buyers looking at a business is that they will be unable to maintain existing relationships with clients, business partners and suppliers, and that as a result revenue and profits will fall significantly. This is exacerbated in companies where the owner has based all of the branding and marketing solely around himself or herself. Of course, this is also a natural result of starting one’s own business and running it from day one. Business owners looking to sell in the future should be extremely cognizant of the nature of their relationships with other companies and persons of interest. It is helpful if the business is big enough that the marketing and client relations can mostly be handled by a separate (talented) employee, but that is often not the case. By spending a couple of years focusing all marketing and representation of the business around the business name rather than on a cult of personality for the owner, you reduce risk of client attrition for a buyer and increase the attractiveness of the business.

3.     Make Yourself Useless
Many owners I meet with have owners who work sixty hours or more per week running the business. It is typical and sometimes unavoidable that a buyer will have to accept a significant personal labour commitment in order to successfully purchase and transition a business. That being said, the most attractive businesses are the ones where there are management and systems in place that allow the business to run smoothly in the owner’s absence. If a business can afford to hire a manager and is profitable to the point where the owner can reap the benefits without a full-time personal commitment, the business is more likely to attract all types of buyers. Specifically, financial experts or private equity firms who have little interest in full time management will now become potential buyers.

Best wishes for a great 2015.


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Blake Murdoch is a Business Broker with VR Business Brokers in Edmonton. Blake specializes in helping business owners to successfully divest from ownership of small and medium-sized businesses. Moreover, his clients benefit from his legal knowledge as a member of the Law Society of Alberta. You can reach him confidentially at blake@vralta.com, or on LinkedIn. Alternatively, visit our website to learn more.

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