Do You Know Who Is Going to Buy Your Business

If you know who is going to buy your business, you have already dealt with the significant core perception necessary for business strategic planning: that inevitably, voluntarily or involuntarily, you will transfer your business interest. The reality check for the owner-manager of a business is the perception of and planning for the inevitable transfer of the business interest. The owner and the business will separate, the principal unknown factor is when.

The estate planner waits for the client to say “When I die” instead of “If I die.” Similarly, business strategy cannot be effective if there is a denial about the inevitability of the transfer of the business. Once the inevitable transfer is acknowledged, even though the time may be impossible to know, the probable buyer and the terms of the transfer, may be envisioned. Business strategy should have a primary goal of formulating the transfer of the business to known and probable buyers for the highest possible price. This is the essence of being able to realize maximum value for the business interest of the owners of the business.

Buy means that in exchange for cash and other consideration, you transfer a business interest to a buyer. In finding a buyer, it is helpful to ask: “Do I know anyone who will give me cash for my business interest?” For most businesses, the logical purchaser is someone who knows the business and is capable of raising the cash to make the purchase. Very likely, this person is already a part of the business. Moreover, it will be easier to identify a buyer when the buyer is someone you know and someone who is familiar with the business. There is, however, a downside to selling to someone already involved in the business.

Someone in the business knows certain things that persons outside the business will pay to learn. Put another way, there are certain items of know-how or good will that an inside buyer will not pay for because the buyer already knows them. A person outside the business, a third-party buyer, will pay for this knowledge. Therefore, to maximize the price (the value received for the business) the sale should be to a third-party buyer.

Do you know third-party buyers? Probably not. If you do not know a third-party buyer, then find one. But this search will take time, and the planning for it should be part of the strategic plan. What do you do in the interim? If you die or become disabled in this interim time what happens to the value in your business? How will it pay out to your family? For the interim, the probable buyers will be the only ones known, the ones already involved in the business and who may already be owners. There should be an owner agreement in place to assure a value for each business interest. For foreseeable trigger events (for example, death, disability, termination of employment, or withdrawal) there should be an enforceable sale at an acceptable price to provide assurance of value to each owner.

To find the unknown third-party buyer, you need to role play. There are certain groups that usually contain buyers for a business: competitors, similar businesses in other markets seeking growth, and investors. Place yourself in their position, assume a requirement of rationality, and ask: “Would you buy the business interest?” If not, then ask: “Why not?” If the purchase of the business interest does not make sense, the first task is to meet the rationality test: the purchase of the business interest you have for sale must make sense. In making this determination you will be directed toward people who would have an interest. You need to interact with these potential purchasers to see if your role playing was accurate. Again, ask “Why not?” if there is no interest. This feedback is the most reliable feedback you will ever obtain about how well your business is managed.

Critical to your understanding of the potential third-party buyer is the requirement that the purchase be for a controlling, if not total, interest in the business. The owner agreement, in addition to establishing an assured insider sale for interests in the business, also needs to provide for a transfer of a controlling, if not a total interest, to a third-party buyer. Most of the time, for all owners, receiving the maximum value for their business interests will be in the best interest of all.

There is no better way to plan and manage your business than with the contemplated buyer looking over your shoulder. Accounting must be current. Human resources records up to date and in compliance. All regulatory requirements must be met. Taxes must be paid up to date. Use the same diligence checklist as a sophisticated buyer would use to check the status of the business.

When you approach planning and management with the perspective of a potential buyer, you will see the things that make the sale attractive, and you will be getting to know the buyer of your business. The business will become more valuable and will be sold for a higher price when the inevitable sale must take place. Rather than denying the inevitable will happen, when the sale happens, you will have provided for a transfer providing maximum value for your business interest. To obtain maximum value for your business interest, you need to know who is going to buy your business.

10 Survival Tips for Small Business Owners

The reality for many small business owners is that they were forced into starting something of their own. Perhaps they were retrenched, fired or unable to find a job.

What this means is that often small business owners really haven’t even had time to obtain some training in basic small business practices such as finance, human resources management and marketing.

The other real danger is that the small business owner works so hard in the business, trying to push for more sales, handling negotiations with suppliers, making month-end payroll and trying to get big customers to pay on time that they don’t catch major problems in their business before they become a threat to their businesses survival.

Newspaper reports recently indicated that about 4,000 businesses went insolvent in 2013. The causes for these business failures were not reported on but it doesn’t take a rocket scientist to figure the usual fatal mistakes: bad business decisions, running out of cash, a market that has dried up or even an employee when employees who have embezzled the company.

Here are 10 practical survival tips for small business owners:

1. Stay inside your “circle of competence”: the investor Warren Buffett avoids making investments outside his “circle of competence”. Starting something new, venturing into a new market requires competence that the existing small business owner may not have. Stick to the knitting in bad times.

2. Keep focused on cash flow: When the cash dries up, the game is over. In hard economic times its important to monitor cash flow more frequently, if not daily. Set up a simple system and watch your cash like a hawk. Big customers want to take ever forever to pay and suppliers want their money now. This makes it vital to manage cash carefully.

3. Don’t sign sureties: when cash runs out, the temptation is to go to the bank to increase your overdraft. Don’t sign sureties that for a small loan require confiscation of all your business and personal assets. Enough said.

4. Temptation: Act ethically at all times: even what may seem harmless will become a major issue if it involves and an unethical business practice. Ensure you have a clear red line where you will not cross over. In this economy with people desperate, unethical, explotative small business are on the rise. Detect them early and avoid them at all costs. Some are not paying their taxes, operating illegally and not complying with health regulations and should be shut down by the relevant authorities.

5. Take time to work on your business: Working in your business gives you very little time to work on your business. Make time each week to review where your business is going and how you can improve your operations and increase your market.

6. Insurance cover: Have insurance cover in place for fire, theft and personal liability: It sounds like a no-brainer but how many small business owners have adequate insurance? Don’t be wiped out because of this.

7. Business advice: The biggest risk that a business often faces is poor business advice. Airlines and utilities are virtually bankrupt because of bad business decisions and have to be bailed out. Double check business advice and rely on your own common sense and savvy.

8. Avoid the dangerous number 1: there is a danger in having one big customer or one key supplier. Check your business for this kind of risk and make backup plans.

9. Keep a watchful eye out for unusual employee behaviour: One of your employees could be handling too many critical tasks, employees could be taking out stock without you knowing it and finance or bookkeeping employees could be involved in an invoicing scam. Watch out for suspicious behaviour.

10. Be frugal: keep costs down and avoid unnecessary purchase of new assets. Set your small business a cost reduction percentage target and stick to it.

These 10 tips for small business survival are just a few that any small business owner should keep in mind during these economic times.

If you are in any way concerned that there could be un-seen or hidden risks in your business, get in the right professionals or a business adviser before it’s too late.