What Else Are You Doing With Your Money?

When you start asking yourself, “What is my company worth?” it is tempting to directly value the items with the company. However, this does not begin to account for the true value, particularly if your company uses or creates proprietary technology. Opportunity cost, or what else you could buy with your money, is an often-overlooked but very important indicator of value.

Return on investment (ROI) is one of the most important indicators of whether a business is a good or a bad purchase. The higher the rate of return, the more money you are making for every dollar you put into it. When looking to buy a company, many investors want to know what your ROI is. Usually expressed as a percentage, ROI is equal to the annual gain from the enterprise divided by the cost of the investment. Whereas many other measures of value are subjective, ROI is not. It cuts right to the bone of the issue. Where investors can find more substantial returns on investments elsewhere, they will (and should!) take a different business opportunity. However, this calculation can also be swayed depending on what factors are utilized to derive it. For instance, is the ROI calculated on EBITDA, pre-tax earnings or after tax earnings and is the investment based on cash invested or cash and debt incurred? Knowing the manner in which ROI is being figured can help you determine how attractive an investment is when compared to alternatives. 

Potential investors and those who are considering selling a business should also be considering what returns they could get on their investment if they choose to do something other than purchase a business. In many cases, savings accounts and bonds will return the least because they are also the safest investments. Generally, the riskier the investment, the greater the potential return. Recently, the stock market, which was averaging around 8% ROI, has suffered catastrophic losses. This has prompted investors to search for something less risky. Purchasing a business or joining an investment group has been a great way for those searching for substantial investment income to diffuse financial risk while still enjoying higher ROI than more traditional, risk-adverse investments.

When valuing your company, it is also important to remember that the dollar has recently suffered a loss of value. This means that your company may carry a higher value today than previously if you are an attractive candidate for an acquisition by an overseas entity that has been the benefit of the dollar swing or if you export your product line to countries with a more attractive exchange rate as sales may have grown significantly without a change in your company’s operation. Knowing what your company is worth will be easiest if you know how to utilize ROI and recognize the benefit of recent currency fluctuations.

Other Alternatives To Selling Your Business

Should I sell my company? If you’ve run into the glass ceiling that some sectors seem to bring with them, it might feel like it is time to sell. However, there are a couple of different options that many business owners doesn’t think of until they have signed on the dotted line.

Expansion

It seems ludicrous to suggest that you could expand whenever you’re facing problems with revenue. However, you might be able to reduce your costs by a vertical expansion rather than a horizontal one. Taking in more of the supply chain might enable you to reduce your product costs, allowing you to either make more profit per unit or to reduce your output costs and therefore undercut your competitors. For example, if your business is growing strawberries and other fruit, you might consider creating at least part of your own compost as fertilizer instead of purchasing all synthetic fertilizer from an additional source.

Outsourcing

Outsourcing does not only refer to sending your labor to India. It can also many employee pooling or contracting for services like human resources. It is no secret that maintaining a human resources department is expensive. If you made the mistake of hiring the wrong individual for your human resource personnel, you will find that a single wrong choice can haunt you for decades in terms of poor employee performance and retention. Instead, hiring a firm to handle your staffing and training needs can be the more economical and more successful option. For basic, non-industry specific needs like paperwork, contracting labor can be an excellent way to get just the amount of help you need instead of hiring personnel to fill this position full time.

Mergers

Maybe your business has gone as far as it can go by itself. In this case, a different name or producing a wider number of products can be just the jolt your business needs to take off. A merger or acquisition is only the right decision if you see yourself staying in the same sector for a large amount of time and can demonstrate the benefits your company can bring to a merger or acquisition. After all, no other successful business wants to be dragged down by a company with less than stellar revenue and earnings reports. However, if your financials are solid and you are just looking for a step up, a merger can be a great way to capitalize on the work you have put into your business.

Don’t Take The Decision To Sell Your Company Lightly

We have all been there: that day when everything goes wrong, you’ve already worked an 80-hour week and one more machine breaks down, one more key employee tells you that he or she is moving on, one more quarter comes back in the red. You begin to ask yourself, should I sell my company? As tempting as it may be at the end of that long day, don’t make this decision without considering all the implications and possible scenarios.

Taxes

The single largest implication for most people who are considering selling a business is taxes. In most cases, those who are selling a business will want to minimize their tax burden, possibly by participating in a 1031 exchange. This type of tax-deferring exchange requires the employment of a qualified intermediary, a person who specializes in dealing with 1031 exchanges. These professionals know the specific laws that pertain to reducing tax burdens and can guide you through the process. It is a good idea to consult both a qualified intermediary and your regular accountant to make sure that you will reduce your tax burden as much as is legally possible. When discussing this matter, the purchase of another similar property will defer your tax liability the greatest amount, often wiping away anything that you might presently owe. If this is the case, carefully consider before making the exchange. If you are trying to get out of the business entirely, then your options to minimize your tax bill are more limited. However, it is important to visit with your CPA concerning this issue.  In many cases, the manner in which the purchase price of your business is allocated can have a significant impact on your net dollar position after the sale and taxes. In some cases, realizing your net cash position after the sale may result in a reconsideration of a decision to sell and other alternatives need to be explored.

Utilizing An Expert

A professional who is experienced in selling businesses will help you work through the tough decision that you are making. It is not worth wasting their time or yours if you are only half-hearted in your conviction to sell. Once you have made the decision to sell, an expert in the field can assist you in making the sale run smoothly and quickly. No one wants to be dragged through months of marketing their company followed by no sale or long, drawn out negotiations. Utilizing an expert’s services will help you get through the process with the least amount of stress on you, while helping you create greater value for your company.

If you only have one business to sell, you need to make sure that you do it right. There are a lot of hard questions when it comes to deciding whether to sell your property. Direction from your attorney, your CPA and a qualified intermediary can all be to your advantage and help you make sure that you are making the right decision.

Valid Reasons To Sell Your Company

One of the most important questions to ask yourself when you are positioning a business for sale is why. Selling your business for the right reasons will make a sale very easy and increase interest with potential buyers. Selling for the wrong reasons can result in a drawn-out sales process that ends with you not getting what you put into the business, or worse, a bankruptcy sale.

There are so many valid reasons to sell a company. Here are just a few.

• Age: If you are getting to the age where heirs are a consideration, it might be time to sell your business. Particularly if the people to whom you would heir your business make extremely poor decisions or simply don’t deserve it, it makes more sense to sell your business rather than giving it to them and knowing they will run it into the ground.

• Family: In some cases, you can have a very successful business and just not have the time to give it and your family. Young children want and deserve a large portion of your time. If your marriage or your family is suffering because of all the time you are spending with your business, it might be the right timing to move on to something that will be less stressful and less time-consuming. If family is a primary reason, it is always a good idea to sort it out with your spouse beforehand. However, if you are suspecting an impending divorce, make time to speak with your financial advisor before doing anything. In some cases where you owned your business prior to marriage or your spouse signed pre-nuptial agreement, the business will be safe from divorce proceedings whereas it will not be once it has been converted to cash.

• Growth: If you have expanded as far as you can go and desire something more, it is a good time to sell your business. A business will sell the best when it is at peak production and generating a large amount of revenue. Don’t wait until the peak has passed you by and your business is on a downhill spiral. Knowing your market will help you determine when the right time to sell is and how to price your business competitively.

Remember that when it comes to selling your business, it needs to be a well thought out decision. Don’t do something rash just because you’ve had a bad day, quarter, or even year. There are always people looking for a steal. If you are selling for the right reasons, your business will be competitively priced in the marketplace and should bring exactly what it’s worth.

Make Your Business Turn-Key To Get It Ready For Sale

Are you ready to sell your business, or do you just think you are? If you have a business to sell, there are several things you can do to encourage buyer interest while readying yourself for handing over the keys. One of the goals of positioning a business for sale is to make it easy for the buyer to take over.

Know Your Market

In order to sell your business, it helps to know who is interested in it. Most people are looking for a successful business to invest in. Look carefully at your sector and what is the norm. If your business varies from that a great deal, you will need to encourage your specialist to spotlight the differences between yours and similar businesses if this variance helped you to be successful. However, if this is a possible detriment, he or she will need to portray the successes you have had and the similarities between your business and other prosperous business within your sector. Occasionally, there will be buyers interested in a bargain because they believe they can turn it around. For this type of buyer, spotlighting defects and making rectifying them seem inexpensive and simple will be a good selling strategy.

Contracts

You need to know what state your contracts are in prior to placing your business for sale. Are most of your contracts preparing to run out or will they be in place for another five years? You can offer to buy out contracts for the new buyer if he or she is unhappy with the current state of affairs and you have a number of years left to fulfill them. If possible, the ideal set-up is to have six to twelve months left on contracts at the time of the sale. This will help the new owner have a smoothly running business for a few months and then re-negotiate contracts to how he or she like them.

What State Is Your Business In?

Are you selling a forerunner in the industry or is your business suffering from diminishing returns due to poor business decisions? If you are suffering from the effects of buying expensive new equipment that is generating poor returns or an overcrowded workspace preventing your workers from achieving peak efficiency, it can be time to change a few things. Removing redundant items can assist you in achieving a better workflow in the space and make the entire manufacturing or research floor look cleaner.

Knowing what buyers want will assist you in meeting their needs. Work with your specialist to assist you in finding out what buyers in your sectors are looking for in terms of existing contracts and machinery. When you make the decision to sell, being well informed will assist you in making a quick sale.

Preparing For A Merger

If you are preparing for a merger with a larger or more prominent company, don’t be frightened into undervaluing your company or abandoning your employees. How to show my company value is a crucial question asked by many business managers in the face of a takeover. Here is how you can make sure your company doesn’t get the short end of the stick.

• Know your business. Making sure your business doesn’t get undervalued will involve knowing every aspect of your business. If all of the calculations on return on investment (ROI), monthly expenses by division, and staffing costs are not available as you prepare for your initial meeting, you need to either get everything together yourself or postpone the meeting. Don’t go in unprepared.

• Get a professional valuation. Better than your own supposition or even that of your accountant is the opinion of a third party. Experts who know the most important values to include in your valuations will be able to give you a true picture of what your company is worth.

• Be sure to include a valuation of any patents or other intellectual work that your company brings with it. You can also include an ROI figure on specific projects that have brought a lot of revenue with them. Showing the amount of revenue that just one of your projects generates can increase the overall valuation of your company.

Staffing concerns are also important to bring to your initial meetings. If you want to bring some of your staff and other key roles with you, you will need to be able to provide concrete examples of both the revenue they are generating and the work they do. Collaborative efforts might have worked well for your company, but they don’t do much in the way of preventing someone from getting fired during a merger. Be prepared to have to make cuts on your own as part of the merging process. A list of individuals who ought to be pruned, and others who don’t yet represent deadwood but are not as productive as they could be will be a good place to start. Likewise, if you intend to be on the governing board of the newly created company, you need to be able to show where your leadership brought inspiration and success where others might have failed.

Overall, a merger can be a very stressful event. Even more so than just selling a business, you will need to be able to define what your business is worth and why. Be sure that you have solid examples of what cuts ought to be made and what the most important and valuable traits your business brings to the table.

Improve Short-Term Profitability By Reducing Your Costs

When you are attempting to sell your company, one of the first things you probably thought about was how to show my company value. Value is not always cut and dried, but most potential buyers want to know what the profitability picture looks like. Even if you have had a bad quarter or two, there are ways to reduce short-term costs that can improve your company’s profitability to make it more desirable in the current market.

Labor Costs

Labor costs and the associated payouts, which include employee insurance and pension programs, are one of the most obvious cuts to make. Unfortunately, they are also some of the most difficult. No one wants to be the bad guy who makes layoffs. However, removing some people from a stagnating work force can make enough difference in your quarter-by-quarter profitability to justify the decision. Not only will this improve your direct labor costs, but it can also add to your dollars generated per employee and dollars per square foot, another important factor in selling your business. In addition, it can reduce indirect costs, such as those costs associated with employee health benefits and 401K matching. If many of your employees are hourly, you might be able to reduce these same costs by reducing hours but increasing shifts worked. While many of these strategies can reduce costs, it is important that you don’t irritate your employees so much that they quit. After all, hiring people is expensive and high employee turnover can be a bad sign for prospective buyers.

Overhead Costs

Energy costs are often some of the most crippling cost any business will face. If you haven’t already, focus on reducing things like electricity costs. If you do not have 24-hour production, there is no reason why the lights have to stay on for 24 hours a day, though many factories keep lights on as a theft deterrent. In reality, a tall fence and security lighting is far more effective than leaving on a bunch of lights. Focusing on reducing waste and improving the amount of recycling you do can be beneficial for two reasons. Increasing recycling can reduce the amount of trash you take to the landfill and, in turn, reduce your trash costs. Doing more recycling will help your business improve in the eyes of buyers who are seeking a “greener” business opportunity, simultaneously creating value and reducing your costs.

As you work to reduce costs, keep in mind that some cuts are actually more expensive than they appear on the surface. Pay special attention to employee needs; you want to cut costs in the short-term to improve your financial statements, not cause your employees to go on strike or leave the workforce. Most business will focus on adding things to improve the value of their balance, when in reality, less is sometimes more. Careful attention can reduce costs will increasing things like implicit value.

Value Is Relative

Value-added seems to be the hit buzzword of the last decade. Value is indicative of how much more desirable an item is because of specific attributes, making it worth more in a person’s opinion. When people use their dollars to buy things, it means that they value those items more than they value the money they have. Since investors and other people obviously have different things that they value, considering what most investors consider important will help you when you are creating value to sell in a business.

What Do Potential Buyers Value?

Investors value different things, depending on their previous buying experience and how much capital they have to work with. Those with less capital but a lot of business experience might be willing to buy a business that has previous financial difficulty but also clearly has a lot of potential. Most investors, however, are looking for something that will bring steady income without potential problems. This means that creating value in your business can be as simple as showing potential buyers a few years’ worth of your profit statements.

When buying a property, a new owner may see value in convenience, such as having contracts for purchasing and selling already in place. This is a good way for them to avoid an initial hiccup in production as they transfer into ownership. Arranging to have employee contracts stay with the company can also be a way for convenience to add value. Unfortunately, this can also work against you if the new owner wants to hire his or her own employees.

Flexibility

One of the easiest ways to ensure that a buyer has the option to keep employees if it is desired is to discuss it beforehand. This can be addressed in the buying contract, as well as existing contracting with purchasers and suppliers. However, it will not be common knowledge unless you specify that these items are negotiable. Flexibility can be the key to selling your business quickly instead of it languishing on the market for months, if not years. Many buyers will find value in having more than one option when it comes to hiring labor and arranging purchasing and marketing agreements.

Finding the right buyer can ensure that he or she gets a good value and that you get the price you need. It is important to know what type of buyers your sector typically attracts and what is customary in terms of sale conditions. Value is extremely subjective and will depend upon what the buyer desires.