4 Questions to Ask Yourself Before Buying a Business
When in the process of buying a business, some buyers have accidentally overlooked important questions that need to be asked. However, you don’t want to find yourself in a situation where you wish you’d found out details that would have impacted your decision-making. With that in mind, let’s take a look at some often-overlooked inquiries.
1. What Is Included in the Sale?
It is possible to get so focused on the purchase of the business itself, that you overlook key details such as what is included. Don’t just assume that you’ll also receive important assets such as real estate, inventory, or machinery. All of this must be carefully outlined and documented. You will want to know exactly what you’ll be getting for your investment.
2. What Assets Are Included?
You’ll want to get the ins and outs of the proprietary materials and ensure that they are included with the business. If there is intellectual property, such as patents and copyrights, formulations, or software, you’ll want to ensure it is included. If it’s not included in the sale, you’ll want to know why. After all, the success of the business could depend on these.
3. How Can You Grow the Business?
Before you buy a business, it’s a good idea to ask yourself about its potential for growth. Many sellers will be prepared to provide you with ideas and strategies. If it is deemed that the growth for the business is limited, this is something you’ll want to determine in advance. Also, it is important to think about the amount of working capital you’ll need to not only run the business, but also to make any necessary changes.
4. What is the Staffing Situation?
You’ll want to think about how dependent the business is on the current owner or manager. If and when the current owner leaves, how much will that impact operations? You’ll also want to know in-depth information about who the management team is and how experienced they are. It is essential that your expectations are in line with reality.
As you can see, many variables must be taken into consideration before you sign on the dotted line. Much of this will be handled during the due diligence process. However, it is essential that you ask the right questions and speak up whenever you need clarity on an issue. When a business is properly vetted, you’ll not only be satisfied, but you’ll also be more successful.
Copyright: Business Brokerage Press, Inc.
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When It Comes to Selling Your Business, Let Others Do the Heavy Lifting
While brokerage professionals are working to sell your business, it’s important for you to keep running things in a smooth and seamless manner. In countless cases, sellers have made the mistake of letting things slide simply because they are distracted while trying to sell. You’ll want to make sure things remain the same, as prospective buyers will otherwise start to become nervous. Be sure to keep the premises in tip top condition. Things such as operating hours and inventory levels should remain unchanged. After all, if sales and earnings decrease, that will raise a red flag for buyers.
Business brokers and M&A advisors will help tremendously with various details and events that will take place during the sales process. From start to finish, they will keep their eye on the prize so that you have the time and energy to focus on running your business. The same holds true for other professionals who may help you, such as attorneys and CPAs.
Get Professional Advice on Pricing
You may have a pre-established figure in your mind of what your business is worth and how much you expect to make when you sell. However, the truth is that you will only receive what the market will allow. That’s why it’s so important to get a professional valuation before you decide on a price. If you set too high of a price on your business, it will only slow down or even halt your journey towards successful results.
Keep Things Confidential
Until your sales transaction is completed, you’ll also want to make sure the highest standards of confidentiality are held. If your vendors and employees know that you are selling, it could lead to circumstances that are detrimental to the value of your business. For example, key employees could seek employment elsewhere and/or vendors could terminate contracts.
Decide On Your Strategies
Will you be willing to stay on in some capacity? In many cases, this decision can help increase what you receive for your business. Buyers will often pay more when a seller stays on for a designated period of time as they see this as a reduction in their risk. Would you be willing to offer seller financing? Again, buyers will see this as a sign that you believe in the future success of the business.
Prepare in Advance
It’s always best to prepare when you are not experiencing external pressures. You never know when life could take its toll and force you to sell. That’s why so many sellers start preparing years in advance by taking actions such as cleaning up paperwork, handling litigation and/or environmental issues, and organizing documents.
Selling a business can be highly distracting for business owners. That’s why most reach out to a business broker or M&A advisor. In fact, the best policy is for business owners to start talking to brokerage professionals quite a few years in advance. That way they can make sure everything is optimized for positive results.
Copyright: Business Brokerage Press, Inc.
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Valuation. Strategy. Results.
At PGP Advisory, we always emphasize the significance of valuation. Even if you have no plans to sell, intentionally adding value is one of the best ways to strengthen your business and protect yourself from unforeseen events. We work with clients in San Antonio, Austin, Atlanta and beyond. No matter where your business is located, life throws curve balls. Our experienced team of professional business brokers in San Antonio, knows what buyers look for in a business. The factors that result in a premium sale price are inherently good for day-to-day business. Our unique advisory service starts with a valuation and business analysis. We identify strengths and weaknesses, then we develop a realistic strategy designed to add value, streamline operations, reduce owner dependency, and increase profitability. We draw on academia, years of experience, and a deep understanding of what makes a well-rounded business broker in San Antonio. Implementing best practices early will result in a more efficient and profitable business that is ready to sell when the time is right. By planning in advance you are much more likely to achieve your financial goals.
- We offer a free automated valuation to get started. You will receive a broad perspective on your business’s potential value. Click here to proceed.
- Click here to schedule your free custom consultation. During this meeting, we’ll be able to provide more comprehensive insights about your business and its current worth.
- PGP Advisory also offers a more robust and detailed valuation model. Click here if you’d like to get started with a more in-depth business valuation that takes into account additional factors, such as your market.
Business valuations can highlight strengths and weaknesses, and expose opportunities for improvements to add value. Many of our San Antonio, Austin and Atlanta clients use their business valuation results to build and help locate new opportunities. Contact us today if you would like to discuss setting up your valuation and the most appropriate option for you.
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What’s In a Number? Must-Have Metrics For Your Business
April Kicks Off Financial Literacy Month
Financial Literacy Month is a nationally recognized campaign to bring awareness to the need for more financial education in schools and for adults. During Financial Literacy Month, financial institutions, nonprofits, and human service agencies increase their focus on the importance of financial literacy through events, programs, and counseling.
We see a goal that goes beyond helping just consumers learn more about finances to helping entrepreneurs actually improve the financial management of their most valuable asset- their business. The result is improved business and personal financial stability and success.
Why Financial Literacy Matters
- Parents rank teaching financial responsibility to their children near the top of their wish list.
- Only a handful of states require high school students to take a personal finance course before graduation.
- Poor financial literacy leads to poor decision-making which leads to poor behavior which limits the household’s ability to reach its financial goals.
- Increased financial literacy will help drive wealth for small businesses and their owners.
The Importance of Business Metrics
Last month, PGP Advisory discussed the importance of incorporating our top 7 value drivers into your business strategy to increase cash flow, as well as reduce risk, thus enhancing the overall value of your company. We established that the valuation process involves an assessment of your company and should be a crucial part of any business owner’s standard operating procedure.
The essential next steps to running a successful business, require a thorough analysis of the work, sales, and financial results. This cannot be done without tracking relevant business metrics. Measuring your organization’s performance requires thorough data collection and analysis. But with countless examples of business metrics, how do you know which ones are worth tracking? The ideal combination of key performance indicators (KPIs) will depend largely on your individual business’ needs.
What Gets Measured – Gets Managed
Business Metrics Every Company Should Know
For all businesses, it is critical to track operational metrics such as output, quality, and productivity on a regular basis. The specific measures will vary from company to company, but your productivity metrics improve operations by highlighting opportunities to standardize work, eliminate waste, and solve systemic problems. The result is happier customers, reduced costs, and a consistent operation that is easier for you (and any future owner of the business) to run.
Gross Margin is one of the most important metrics that an entrepreneur should know. It is crucial to running your business on a day-to-day basis. Gross margin lets you know how much of each sales dollar is available to pay overhead and profit after direct expenses are paid. Many businesses are seeing input costs such as wages, materials, and freight rise. Businesses with strong market positions are often able to adjust pricing to maintain their gross margins.
ROI measures the efficiency of an investment. It can be used to compare different investments made into your business. It is a great way to indicate what is working and what isn’t. For companies looking to grow through acquisition, ROI is a simple metric to compare the relative attractiveness of a potential target.
The current ratio is used to test a company’s liquidity and working capital. The current ratio is the company’s current assets divided by its liabilities. Calculating the current ratio, you will see if your company is readily available to pay its short-term liabilities like taxes, debts, and expenses. A business should keep its current ratio over 1 which means that there is enough working capital for healthy operation. For growing companies, it is an important indicator of whether or not you have sufficient working capital to fuel continued growth.
These two metrics answer the following: How much do you make per customer or lead during its lifetime? How much does it cost to acquire a customer? Knowing your LTV and CAC of your customer is a piece of the crucial information you can obtain. Every dollar of revenue is not equal. Recurring revenue from loyal, “sticky” customers are a valuable asset for your company. CAC and LTV are measures that inform which customers to target, the most effective and efficient sales and marketing approach, and how to ultimately grow more profitably.
The importance of web-analytics can’t be argued in the digital era. Every online business should have a basic understanding of web analytics.
What’s In a Number?
Why should your business be so concerned with metrics? For starters, these metrics are golden tidbits of information and can mean the difference between success and failure. There are many more metrics that exist for your company to track, such as project management metrics. The ones that matter most depend on your specific type of business. For example, if you sell products, tracking your inventory size may be important.
PGP Advisory recommends your company remain judicious in your choice of metrics to track. Business owners can easily become overwhelmed with data or spend too much time just collecting and analyzing rather than using the insights to actively manage your business.
With the appropriate metrics for your company in hand, you can steer your organization in the right director toward achieving your business goals.
Takeaways from the Latest BizBuySell Insight Report
Whether you are thinking of buying or selling a business, it’s worth taking a look at the quarterly BizBuySell reports. The findings from these publications are taken from analysis of sales and listing prices of approximately 50,000 businesses across the United States. The report covers the statistics of sales prices and successful transactions. It also discusses the trends that are at play. Regardless of your role in the business world, these trends likely will have some sort of impact on you.
A Boom for Sellers
The latest BizBuySell report, which covers Q4 of 2021, found that now is a very positive time for sellers. Q4 actually surpassed the pre-pandemic numbers of the fourth quarter of 2019. Of course, this is a major shift away from the sales numbers in 2020. It is typical to see transitions dip in the fourth quarter; however, 74% of brokers stated that their sales were steady during this time period. Experts say that this strength has carried into early 2022.
Other notable sales statistics include the following:
- 8,647 closed transactions were reported in 2021, an increase from 7,612 in 2020
- Sales prices increased 16% year-over-year
- Median cash flow grew 10% year-over-year
Buyers are Looking for Quality
In terms of what buyers are currently looking for, 60% of surveyed buyers indicated that strong financials were simply a “must have” when they were considering a business. This number is in stark contrast to 18% of buyers who responded that discounted opportunities were a top consideration.
Labor Shortages a Factor
The BizBuySell report also discussed the prevalent factor of labor shortages. In fact, 64% of owners surveyed say that this issue has impacted them. Business brokers agree that labor shortage is currently the largest problem for small businesses. Another corresponding issue is that of supply chain disruptions, which 75% of the business owners responding to the survey said had an impact on them.
A More Balanced Landscape
In the survey, brokers were asked if they believed that owners were more or less likely to sell their business in 2022 versus 2021. The general trend was towards brokers believing that there would be more businesses sold this year as compared to last year. Last year, the view was that buyers had the edge over sellers. However, now it seems as though brokers feel that the landscape has shifted and become more balanced overall.
Copyright: Business Brokerage Press, Inc.
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