Most business buyers and sellers are wondering what 2021 and beyond will bring. BizBuySell and BizQuest President Bob House provided a range of insights stemming from BizBuySell’s 3rd Quarter Insight Report and a survey of over 2,300 business owners.
The simple fact is that the pandemic has most definitely had a major impact on the buying and selling of businesses. This fact is obvious. But diving deeper, there are a range of insights that can be gleaned.
First, owners do understand that COVID is a massive force in business right now. According to the survey, 68% of owners feel that they would have received a better price for their business in 2019 than in 2020. Only 37% of respondents felt that they would receive a better price this year. Of owners who felt that they would receive a lower price in 2020 than in 2019, 71% of these owners said that their assessment was directly tied to the pandemic and its accompanying economic impact.
A question on the survey asked owners if the pandemic had impacted their exit plans. 55% responded that the pandemic had not changed their exit plans. Additionally, 22% said that they now planned on exiting later, and 12% stated that they planned on exiting earlier. In short, the majority of business owners were not changing their exit plans.
On the other side of the coin, buyers are acknowledging that the present seems to be a very good time to buy. A staggering 81% of buyers stated that they felt confident that they would be able to find an acceptable price point. In terms of their purchasing timeline, 72% of respondents stated that they were planning on buying a business soon. Survey follow-ups indicated that large numbers of buyers were also planning on buying in 2021.
Generational differences are playing a role as well. Baby Boomers tend to be more optimistic than non-boomers as far as their overall views on the recovery. 43% of Baby Boomers now expect the economy to recover within the next year as compared to just 30% of non-Boomers. House pointed out, “Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were preparing to retire, as small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle.”
Based on the information collected by BizBuySell’s 3rd Quarter Insight Report and their survey, it is clear that there is a new wave of buyers on the horizon. The report supports the notion that the pandemic has made small business ownership an attractive option for new entrepreneurs. Factors driving new entrepreneurs into the marketplace include everything from being unemployed and wanting more control over their own futures to a desire to capitalize on opportunities.
Finally, House notes that 2021 could be a “perfect storm for business sales,” as 10,000 Americans will turn 65 each and every day. This means that the supply of excellent businesses entering the marketplace will likely increase dramatically.
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Goodwill is a term that might cause a little confusion for some. But at its heart, it is a relatively straight-forward concept. Goodwill is generally viewed as a term that encapsulates everything from a business’s reputation to the goods, services and products it provides. The key idea is that there is goodwill if the business is viewed as a true and functioning business that has longevity in the marketplace.
The Importance of Reputation
It is important to point out that many of the aspects that go into defining goodwill are not easily noted on a balance sheet. One of those elements has already been mentioned in the form of reputation. A good reputation is an intangible asset that is hard to put an exact dollar amount on. Imagine that you had a choice between two businesses that were almost identical. However, one business enjoyed a strong reputation while the other had a reputation for poor customer service and goods and services. This decision would be an easy one for most prospective buyers.
Going Beyond the Numbers
When a buyer pays more than the recognized value of a business, goodwill usually plays a major role. There are many variables that can be included into goodwill such as quality and track record of management; strength of the local economy; the loyalty of the customer base; good relationships with suppliers; copyrights; trademarks and patents; name or brand recognition; specialized training and knowhow. The list goes on. Business brokers and M&A advisors will be sure to highlight these goodwill factors to prospective buyers. Factors that impact the longevity of a business, and its long-term potential, should not be overlooked.
The Evolving Meaning of Goodwill
In recent years, the accounting profession has changed how it deals with the concept of goodwill and how it is factored into decisions. Since the rise of the Industrial Revolution, many large companies were built around the ownership and use of heavy equipment and machinery; however, in the last two decades there has been a shift away from tangible assets and towards intangible assets.
Assets under the umbrella of intellectual property, including patents, trademarks, brand names and more, are now considered key aspects of goodwill. In short, in the last twenty-years, goodwill has taken on a more complex and varied meaning. Today, businesses are not necessarily based around massive factors and huge assembly lines. Workers and management in the world’s largest companies 50 years ago would be hard pressed to explain the inner workings of some of today’s corporate juggernauts.
Goodwill is more complicated than ever before. This factor serves to underscore the value, and importance, of working with an experienced, capable and proven business broker or M&A advisors. The goodwill elements within a business need to be highlighted so that prospective buyers fully understand the business’ real value.
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For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.
The Buyer and Seller Are in Agreement From the Beginning
In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.
The Buyer and Seller Don’t Lose Their Patience
Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.
No One Likes Surprises
The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.
The Buyer and Seller Must Both Feel Like They Got a Good Deal
If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.
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There is a direct relationship between the asking price and the amount of cash on the table at the time of the sale. Buyers and sellers alike should keep one fact in mind. Most businesses involve some level of seller financing. It is customary for both buyers and sellers to have concerns regarding this kind of financing; after all, sellers don’t want to take their businesses back from the buyer. Buyers want to generate enough money to help the business thrive and make a living. One proven way to ensure the successful sale of a business is to turn to the experts.
Screen out Window Shoppers
The simple and very established fact is that when you choose to work with the professionals, it can streamline the entire sales process. Business owners are typically very busy people. That means they don’t have time to waste with window shoppers. They also don’t want to divulge confidential information to parties that don’t possess the means to actually follow through with a successful sale.
Business brokers and M&A advisors know that most prospective buyers are just dreamers or will ultimately fail to qualify. When you work with the professionals, it means that you have a shield to protect you and your valuable time. Experienced brokers have a range of techniques that screen out unqualified candidates and match you with buyers who are the best fit.
Anyone who has ever sold a business, or even contemplated selling a business, knows all too well that confidentiality is of the utmost importance. Sellers need to know that the information they reveal will not spill out all over the web. Brokers are experts maintaining confidentiality and impressing upon prospective buyers the tremendous importance of honoring the agreements they sign.
It is important to note that leaks regarding the sale of a business can cause a range of often unexpected problems. Key employees may get nervous about their future prospects and begin looking for a new job, competitors may begin attempting to poach employees, or customers and key suppliers may get nervous and turn to your competitors. In short, serious buyers and sellers alike benefit from maintaining confidentiality.
Matching the right seller with the right buyer is truly an art and a science. Many factors are involved ranging from financing to psychology. When the right match is made, then it is possible to move through the process of seller financing more quickly and with fewer roadblocks or complications. Working with a business broker or M&A advisor is the single most important step that any buyer or seller can make to help ensure that seller financing, and in fact the entire sales process, progresses as smoothly as possible.
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No two companies are quite alike, and this also means that there are many reasons why companies can fall into trouble. While the number of variables involved in operating a company are practically endless, there are a handful of reasons why companies can fall on hard times. Let’s take a closer look.
Companies that lack focus can often run into considerable trouble. Not understanding their customers and what they need or want can lead to endless problems. It is vital that companies frequently stop and assess who their customers are and whether or not they are properly servicing their needs.
Not too surprisingly, many companies can run into trouble because of poor management. Management problems are not one-dimensional, but instead take a variety of shapes. Management that isn’t focused, is incompetent, or simply doesn’t care about the business can translate into a business’s premature death.
Under the umbrella of “management problems” also falls such missteps as poor financial controls, quality control problems, operational issues, and/or not keeping up with technological advancements. At the end of the day, many of the problems on our list have at least some management issue missteps at their heart.
Loss of Key Employees or Clients
The loss of a key employee or a key client can spell serious trouble. Of course, no management team can predict every eventuality. However, when there is a loss of a key employee or client, and there is no plan for replacement, then management does shoulder at least some of the blame. The savviest companies take steps to ensure that there are ways to replace the most important employees and clients.
Failure to Compete
More than one business has been buried by the competition or failure to see a new wave of competition coming. For example, countless mom and pop video rental stores were absolutely bludgeoned by the introduction of Blockbuster Video a generation ago.
While it is true that sometimes market forces are so aligned against a business that survival is almost impossible, that is normally not the case for most businesses on a year-to-year basis. The most effective and competent management can see the competition out on the horizon. Or at bare minimum, they have an emergency plan in the event that the competition becomes more intense.
All too often by the time a business realizes that it is in trouble, it is already too late. If the problems can’t be fixed, then it may be time to consider selling the business. But such decisions must be made quickly in order to prevent additional bloodletting.
Optimally, a business is sold while it is doing well. Regardless of whether a business is thriving or experiencing difficulties, a business broker or M&A advisor can be an invaluable ally in helping a business reach its full potential.
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