Chicago Business Broker

It Is Never To Soon To Start Thinking About Selling Your Business

Selling A Business Is Not Like Selling A House

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Just as it took longer to build you business than it did your house, it will take longer to transfer it to someone else.

If you think  you can simply cash out of your company, you have not prepared yourself to maximize your gains.  It’s best to figure on a 3-7 year post sale involvement.  Selling businesses is about LEVERAGE.  Buyers are looking to minimize their return on investment, which means you (the seller) needs to carry a note (ideally 50% of the sale price) in order to get top dollar.

Carrying a note, or financing the sale, requires you to act as a bank for 2-3 years.  In this capacity you must watch over your investment by reviewing financials on a monthly or quarterly basis, advising the new owners as necessary, and make sure payments are made in a timely fashion.

If all goes well, you’re paid in full in 2-3 years and can move on.  If not, you’ve been paid 60-70% of the price you sold the business for to take a 1-2 year break.  In the case of a default, you regain ownership of the business ,  take1-2 years to prop it back up and sell it again.

Fortunately, a default situation is rather rare (under 5%) but if you don’t prepare yourself for the post sale involvement, you’ll get 30-50% less for you company when selling.

Capital Gains Tax Increase Could Cost You A Maserati

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If you’re considering selling your business in the next 3-5 years, sooner may be better than later.

At the last minute in 2010 the government decided extend  capital gains and personal income tax rates  another two years, giving business owners more time to enjoy low rates.  Don’t let this gift go to waste

As it sits right now,  in 2013 the capital gains and income tax rates will increase and the hike will have a drastic effect on your sale.   A 5% increase in these taxes would increase taxes $100,000 on a $2 million sale. That doesn’t include any federal or state income taxes that will be increasing and taking an even larger portion of your proceeds.

In order to avoid getting hit with these extra taxes consider putting your business up for sale in late 2011 so you can close before the increases kick in.

Buy Low, Sell High – Your Company is the Best Stock in Your Portfolio

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When I began investing in the stock market, I was great at picking the stocks that would shoot up 25%, 50% , 100% but invariably held on to these too long and watched them come right back down.  I can still name them today, Tempur Pedic, Jones Soda, Lucent and Under Amour; just to name a few.  It wasn’t until I learned to develop an exit strategy for each stock I purchased that I began seeing some serious growth in my portfolio.

Business owners start their companies and run them every day never giving serious thought to when they should cash out.  This is a serious mistake.  As we’ve all learned from the past five years, things change and there are many factors that are outside of our control.  Key employees leave, economic trends fluctuate, and competition can come out of nowhere.  Just like with stocks, each small business has an optimal time to sell it.

Procrastinating when it comes to thinking about selling your company can cost you dearly.  Educating themselves on the selling of their business should be included in the top priorities of each business owner.  It should rank up there with increasing revenues, reducing costs and managing cash flow.

The worst plan is no plan at all.

K.I.S.S. Keep It Simple – Make Money

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Sometimes the simplest concepts make the best businesses.  In my time working as a business broker I am constantly astonished at the plethora of unique business models and ways to make money.

If you would have approached me three years ago and asked me my opinion on a dog walking business or an e-bay reselling business I would have chuckled and dismissed both concepts.  Well, let me tell you, I may have chuckled, but these business owners are laughing…laughing all the way to the bank!

The bottom line in business is profit and the number one factor to selling a business is the transferability of said profit.  Therefore the simpler the business model the easier it is to transfer the cash flow to someone else and the more people want to buy it.

With the dog walking model, you typically get paid in advance in the form of a package (60 walks for $300) and then hire independent contractors to walk the dogs that get paid after they perform the service.  This serves two huge purposes, it provides awesome cash flow and makes your largest expense a variable one – almost a guarantee against an operating loss.

The E-Bay business model is primarily a consignment one and can be operated from home until a steady revenue stream warrants otherwise.  This means no cost of goods sold and basically a risk free business model.  The largest investment that has to be made is the time listing the items.

Both of these businesses are such that customers tend to be a little hard to find, but are largely referral based and extremely loyal.  So the customer list becomes a very tangible asset and easily transferable.

So if your considering starting a business or already running one, the simpler you keep it’s operation the easier it will be to sell it.  Keep it simple – make money.

A Change of Perspective…a Story for the New Year

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The business we start is not always the business we end up with.  When we start a business, we all have a vision of what it will look like and how it will feel to run it.

When my friend Jon started his first business in 1994 it had a well thought out road map to success.  The science put into planning the revenue stream, system implementation and acquisition of staff could have been done by a Harvard MBA.

As well done as that plan was, it did not account for 9/11 or the economic aftermath that followed.  Needles to say, the company he found himself running in 2002 was like nothing he ever considered.  It was not much fun as he had dreamed.  He was bored with it and began to look as customers as a burden rather than an opportunity.  This mind set lead to diminished customer service and an eroding customer base.  Something had to change…..FAST.

He discussed his dilemma with me and I suggested that he change his perspective.  After some serious thought, he decided to look at his company as a means to an end and set a 3 year timeline to max it out and sell it.

Soon every customer was looked at as a stone in the pyramid he was building and customer service became a priority again.  This new perspective removed his emotional attachment completely from the equation and allowed him to take a detached view.  Setbacks were no longer taken personally and the company began to grow and Jon started having fun again.

In that three year period revenues grew from $465,000 to $570,000 and the cash flow went from $74,000 to $130,000.  The business was sold in the 4th year for $490,000.

Sometimes the only difference between the problem and the solution is the angle from which you’re looking at it.

Sellers Market, Buyers Market & the Law of Diminishing Returns

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The market forces of supply and demand that we all learned in Economics 101 apply just as much to buying and selling a business as they do to buying and selling a home.  Right now there are a plethora of buyers and a limited number of profitable businesses for them to buy.  This translates to increased multiples being paid and quicker selling times for good businesses.

This is something to think about if either A) you’re running a profitable business that you will want to sell in 5 years or B) you possess the skill set to sell your profitable business now and start another one and build it up quickly.  In five years, more and more Baby Boomers will be looking to exit their businesses. As a result, supply will increase, valuations will drop and it will become a buyers market.  Therefore, it is possible, if not probable, that a business currently valued at $500,000 today could increase revenues and profits by 75% in the next five years and sell for the same or less as it would today.   This is called  the law of diminishing returns…too often learned in the “School of Hard Knocks”.

Timing is everything and right now is a pretty good time to be a seller.