Should I Buy a Business or a Franchise?

Want to be your own boss but not sure which way to go about it? Here, you can weigh up the pros and cons to see whether buying a franchise or a business would suit you best:

Finance

Franchise

One of the positives of buying a franchise is the increased number of loan options available to you.

Brand names and a transparent track record of cash flow are preferred by banks and other lenders, so choosing a franchise will make it easier to secure funding. Franchises that have fewer locations may be less attractive to lenders as they have not quite proven the feasibility of the business in all types of environments.

The franchise will often provide information and advice regarding financing the acquisition.

However, unlike buying a business, you will have to pay for the use of their name through your sales (for example, McDonalds charges 5%) and contribute to the national marketing spend.

You will also be asked for an initial franchise fee, and you will need some working capital.

Business

Similarly, success in financing the purchase of a business will be determined by the type of business you want to buy. If you go for a business that has had a rocky financial past, a bank will be more reluctant to lend to you.

One of the slightly more tricky aspects of buying a business is that you should be prepared to pay a larger proportion of the price upfront – around 30 to 50 percent, and be able to finance the rest. However, if you still want to buy a business but don’t have the cash up front, there are several other ways that you can do so.

You could co-op buy the business – maybe with someone else who previously wanted to buy it but didn’t have enough money. Lease with an option to buy is another possibility whereby a down payment is made, enabling you to lease the business as a minority stockholder.

Implementing an ESOP (Employee Stock Ownership Plan) would provide you with capital by selling stock to employees in the business. You could also use the assets of the business to get financing from factors, finance companies and banks…..Continue reading at Should I Buy a Business or a Franchise?

Guest blog post by BusinessesForSale.com

Improve Your Turnaround’s Forecast

Today’s business climate poses many challenges – from increased global competition to a tight capital environment – that can hinder or even destroy a business. Companies struggling with poor cash flow, inadequate capital and weak leadership are especially vulnerable. Such companies can provide significant upside potential to the right buyers. But to turn an unprofitable company around, new owners must have an implementation plan and be ready to execute it.

Getting to the Core

If you’re a potential buyer of a troubled company, you must examine it closely for hidden values, such as untried territories or poor leadership. Then decide if these opportunities mitigate acquisition risks and potentially provide enough financial benefits.

It’s essential to understand the company’s core business – specifically, its profit drivers and roadblocks. Without a clear understanding of this, you may misread the company’s financial statements, misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action.

Due Diligence Matters

While due diligence is an important part of any acquisition, it’s probably the most critical stage in a turnaround deal.

Buyers should use a professional business intermediary who will take the time necessary to perform due diligence, request the supporting documentation needed and perform personal audits that cross-check reported and actual data. At this stage, it is important that the source of the company’s distress (such as maturing products or overwhelming debt) is pinpointed to determine what, if any, corrective measures can be taken. You also need to determine if the business harbors significant liabilities, such as pending legal judgments, product claims or dissatisfied customers.

This is the time to find hidden flaws. But due diligence may also unearth potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance with its industry peers’ can help reveal where opportunity lies.

Hit the Ground Running

hit the ground runningGenerally, the first post-transaction step is for new owners to determine what products drive revenue growth and which costs hinder profitability. This may be the time to divest the business of unprofitable products, services, subsidiaries, divisions or real estate. Staff cuts may further be in order. Make sure you keep key players. They may be expensive, but as long as they are pulling their weight and have good relationships, they have value when retooling.

Implementing a longer-term cash-management plan and forecast based on receipts and disbursements are also critical. Owners can manage each line item of the company’s weekly or daily receipts and disbursements in accordance with:

• Profit and loss projections,
• Changes in working capital, and
• Major debt and capital expenditures.

With a strong cash-management plan and a thorough evaluation of accounting controls and procedures, buyers should be able to identify lost revenue opportunities, such as unbilled services. This plan can also help buyers determine where they might be able to cut costs.

Mapping the Future

Buyers should ensure that accounting and reporting systems are producing the data necessary to run effective management reports. If these systems don’t accurately capture all company transactions and list all assets and liabilities, company leaders will be unable to fully pursue opportunities or respond to potential problems.

One troubled manufacturing company, for example, wasn’t tracking future purchase commitments. When the new owner took charge, it prepared and circulated among managers a comprehensive commitment and contingency report that helped senior management renegotiate the terms of the customer agreements.

Because the task may seem overwhelming, it’s easy for new owners to focus only on the business’s day-to-day operations. But a strategic plan that maps the path toward revenue growth and improved cash flow is necessary. Buyers may find, for example, that the company’s best revenue-producing assets aren’t reaching customers and that their potential could be realized with a more sophisticated marketing campaign or bigger sales staff. Macro- and micro-level planning is equally important.

Return to Profitability

Only a small window of opportunity is available to realize a turnaround’s potential. To take full advantage of it, buyers must get up to speed on the acquisition’s products, departments, delivery systems, staff and overall operating systems as soon as feasible.

Insurance specialists can also be used in a risk-management role, evaluating company insurance coverage and claims. Auditors may be useful for interviewing accounting personnel and financial statements to verify their accuracy. Finally, private investigators can research the backgrounds of key executives for possible fraudulent activity and misrepresentations.

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Keys to Negotiating a Successful M&A Deal

Keys to Negotiating a Successful M&A Deal  Whether you’re buying or selling a business, a few guidelines can help you negotiate a deal more effectively and improve your chances for an advantageous outcome. While you’re probably already familiar with basic negotiation strategies, most parties to an M&A transaction can use a refresher course when it comes to what may be the biggest deal of their lives.

Know Yourself

Good negotiators start by knowing themselves. Before you enter into sale negotiations, take time to identify your goals and your tactics for achieving them. If you’re buying, what’s your “reservation price”-the most you’re willing to pay? Would you be able to walk away from the deal if the seller refuses to budge on price?

If you’re selling, similar questions apply:

  • What’s the lowest offer you’ll accept?
  • Are you in a hurry to sell?
  • What conditions will you require as part of the sale?

For example, the retention of certain employees may be a priority. Also be prepared to speak confidently about your business’ strengths and address any perceived weaknesses. Since the buyer’s negotiating leverage emphasizes your weaknesses, you need to be aware of them and ready to provide a solution that mitigates an adverse effect on the buyer’s offering price.

Know the Other Party

Knowing the other side is as important as understanding your own priorities. This knowledge allows you to map out the negotiation ahead of time. As a buyer, you should have a thorough understanding of the business-gained through extensive due diligence.

If you’re a seller, it’s essential to know that your buyer can afford to purchase the business and, if the deal will be seller-financed, how well the company will be run while the note is being paid off. It’s also helpful to learn if your buyer has looked at many other businesses. Buyers who know they have other options if your deal falls through will probably drive a harder bargain.

Gathering knowledge involves more than research; you also need to be a good listener.

If you’re talkative by nature, make an effort to speak less and listen more when meeting with the other party. The better you understand them, the greater chance you have of anticipating their moves and preparing counter offers.

Build a Relationship

There are plenty of opportunities for differences of opinion in any business transaction, and a business sale is no different. Establishing a cordial relationship can go a long way toward reducing misunderstandings or unintended offenses. Social occasions such as dinner or a golf outing can break the ice. Expressing interest in the other party’s opinion and a sense of humor also can help build a good working relationship.

Going back on your word, exaggerating points or misrepresenting facts in an attempt to strengthen your position, on the other hand, can damage goodwill. Finally, don’t try to box the other party into an untenable position-it’s a tactic that’s likely to misfire.

Flexible is Vital

Selling a business is a complicated process, of which price is only one component. When entering the negotiation stage, keep in mind other items that are subject to bargaining:

  • Down payment amount;
  • Interest rate on a seller loan;
  • Collateral;
  • Seller warranties;
  • Earn-out provisions;
  • Non-compete agreements.

Also consider the structure of the deal-whether the company’s stock is being acquired, or just its assets. In general, sellers prefer a stock sale and buyers prefer an asset transaction, which provides better cash flow after the deal.

Good negotiators take advantage of the multifaceted nature of the process by remaining flexible throughout. This may mean compromising on some elements to get the ones that are most important to you, such as those related to financing terms, the closing date, employee retention or seller warranties.

With so many moving parts to consider, flexibility can get you past obstacles. If you’re hung up on a tough issue-say, the price of a particular asset-try putting it aside temporarily, moving to less controversial points such as the price of other assets, and then circling back later.

Selling a Family Business Isn’t Business as Usual

selling family businessFamily businesses may resemble their non-family counterparts in most ways, but there’s one crucial difference. Whenever close relatives work together, deep emotions invariably become involved – emotions that can further complicate the already difficult decision whether to sell a family enterprise.

If you’re thinking about selling a family business, don’t overlook what your emotions are telling you about the potential sale. In some instances, of course, you’re better off listening to your head. But in this case, it’s just as important to consider what your heart is telling you too.

Why You Might Sell

Your decision to sell a family business may start with financial need. Maybe you’re looking ahead to retirement and want to feel more secure. Or maybe you see stiff challenges ahead for your company, with fewer growth prospects available or increased competition looming.

You might also look to sell a family business if you’re concerned that no one in the next generation has stepped up as an obvious management successor.

In addition, the stress of working together can be too much for some families to handle comfortably. Family strife is always unpleasant, but when family members who work together don’t get along and the tensions spill into the workplace, it can make for a destructive personal and professional environment.

Why You Might Not

Selling a family business can feel like selling a part of your family. If you sell, your decision will have a significant impact on the lives of people you care about – relatives, employees, and, especially if the business is in a close-knit community, local residents.

Your decision to sell may be especially stressful if you’re thinking of selling a business handed down to you over many years. You may wonder about what your forebears would do in your shoes.

With such factors to consider, you may decide to refuse an otherwise attractive offer and keep your business going – a decision that will allow you to maintain your independence, and pass on to future generations the same opportunities that you received.

Yet before you turn down an attractive offer, make sure you discuss your expectations with the members of the next generation. If your chosen successors aren’t interested or able to manage the business, you may be setting the stage for serious family conflict.

No Easy Answers

Sometimes, selling your business may be the best solution for everyone involved, providing you and your family with the assets you need to pursue your next dreams.

But because the decision to sell can be highly emotional, make sure you are comfortable with the idea of selling. Just because the numbers may add up doesn’t mean you’ll be happy when you no longer have the business that has been an important part of your family

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5 Common Valuation Myths

business valuation

Business valuation is a complex discipline. Much of its lingo, logic and underlying mathematics can be incomprehensible to those outside the profession, giving rise to many misconceptions. So let’s set the record straight concerning five common valuation myths.

 

1. Net income and net free cash flow are synonymous.

Net income is an artificial accounting concept that is separate from cash flow. Net income includes a deduction for depreciation expense, which many small businesses base on accelerated tax schedules rather than assets’ useful lives. And net income excludes debt service, financing proceeds, owner distributions, capital expenditures and changes in working capital. Accordingly, net income is a poor substitute for net free cash flow.

For example, consider a fictitious business with obsolete fixed assets. Its equipment is in dire need of repair and replacement, because the owner pays himself excessive distributions in lieu of making regular capital improvements. On the surface, the company may appear more profitable than its competitors because its assets have been fully depreciated and current net income includes no depreciation expense.

Substituting net income for net free cash flow may overvalue this hypothetical business. Net income disregards the company’s need to update equipment and the shareholder’s reluctance to reinvest in future operations, whereas net free cash flow accounts for capital expenditures and working capital requirements. In sum, free cash flow is more inclusive and more relevant to value because it represents the amount of cash available to investors in excess of the current operating needs of a business-the essence of value.

2. Unprofitable companies aren’t worth much.

Historic profits are relevant in business valuation only to the extent that they may help predict future cash flow. For example, startups and high-tech ventures may incur losses until they are up and running. Despite being unprofitable, these businesses often possess value because of their potential to generate future cash flow. Hard assets and internally generated intangibles such as patents and proprietary software also contribute value.

Profit also may be artificially suppressed for tax reasons. For example, some professional service firms intentionally minimize net income for tax purposes through partner bonuses. Cash businesses, such as car washes or restaurants, may underreport cash receipts to evade taxes. Values for these companies are often higher than their reported income would otherwise indicate.

3. If its competitor sold for 1.5 times revenues two years ago, a business should sell similarly today.

Although comparable transactions may seem to provide objective, convenient valuation evidence, a lone transaction doesn’t provide a representative sample. A competitor’s sale might include buyer-specific synergies or unique terms, such as an earnout or employment contract for the seller. Consider, too, the reliability of the informant. Like fish stories, transaction details often become exaggerated.

Take, for example, public companies in the funeral industry. In the late 1990s, they aggressively acquire small funeral homes, driving industry pricing multiples to record highs. Although these roll-ups intended to introduce economies of scale and professional management, the strategy failed and forced many acquirers into bankruptcy or reorganization. Today the industry has largely recovered, and pricing multiples have returned to more realistic levels.

4. Tax status has no impact on value.

In several landmark cases-including Gross v. Commissioner, Wall v. Commissioner, Heck v. Commissioner and Adams v. Commissioner – the Tax Court accepted IRS arguments that S corporations (and other pass-through entities) are worth more than otherwise identical C corporations because of their numerous tax benefits.

The most notable advantage to electing Subchapter S status is exclusion from corporate-level income taxes, including corporate-level capital gains tax after a statutory holding period. And S corporation shareholders may receive tax-free distributions as long as their equity basis in the company remains positive.

When valuing S corporations, valuators must decide on a case-by-case basis whether to apply after-tax discount rates and pricing multiples to either tax-affected or pretax earnings. Factors to consider when making this complicated decision include the valuation’s purpose, relevant case law, the company’s distribution history and whether the business interest possesses elements of control.

5. Business value matters only when it’s time to buy or sell.

This is perhaps the biggest valuation myth of all. In truth, virtually every business could benefit from a regular valuation study. From an operational perspective, many business owners have no idea what their asset is worth. An informal valuation can teach management what drives value and ways to increase short- and long-term cash flow. Furthermore, a valuator can shed light on economic conditions and industry trends. This knowledge can improve operating efficiency and, ultimately, increase sales proceeds when the time comes.

Understanding business value is also an important part of contingency planning for key person life insurance, buy-sell agreements and succession plans.

One universal truth

If you’re confused about business valuation, you’re not alone-its ins and outs are frequently misunderstood. An experienced valuation professional can help clear up any myths and ensure your company is accurately appraised.

Every Business Is A Risky Business!

business riskEvery business faces risks, but some companies are riskier than others. Assessing  a company’s risk is an important part of estimating its value. Risk and value are inversely related. That is, the higher a company’s risk, the lower its value. Risk is a function of a company’s external threats and internal weaknesses, but these forces only tell part of the story. On the flip side, a business’s strengths and opportunities minimize risk and, therefore, build value. A Business Intermediary can help you further understand the relationship between risk and value, but remember when valuators focus exclusively on one side of the story, their conclusions are likely to be skewed. For example, to minimize an estate’s tax burden, an appraiser might unduly emphasize a company’s weaknesses and threats to justify excessive valuation discounts. Conversely, the IRS’s expert might downplay these negative elements and, instead, call attention to the business’s strengths and opportunities.

Framework for evaluating risk

Providing a complete, accurate depiction of a company’s future performance requires the valuator to consider both positive and negative aspects of its operations.A strengths, weaknesses, opportunities and threats (SWOT) analysis provides a four-pronged framework for analyzing risk that links a business’s internal strengths and weaknesses to the opportunities and threats in its external environment. This popular tool helps valuators organize their thoughts and provides a holistic risk assessment.

1.      External forces: opportunities and threats.

Before jumping head first into a company’s financial performance and operations, the valuator assesses the external environment in which a company operates.

Opportunities are favorable conditions that — if exploited — may enhance shareholder value. Alternatively, threats are barriers that jeopardize future performance. In many cases, management has little control over these external factors.

2.      Internal forces: strengths and weaknesses.

After the valuator understands the company’s external forces, he or she is ready to identify its internal strengths and weaknesses relative to its competitors’. Strengths are competitive advantages or core competencies that enhance value. In contrast, To complicate matters, strengths and weaknesses sometimes overlap. Consider former Disney CEO Michael Eisner. Although he fueled the company’s financial revival in the late 1980s and 1990s, Eisner’s inability to train a suitable successor has depressed the entertainment giant’s stock in recent years.

3.      Strategic management.

During the valuation process, the valuator also addresses whether a company recognizes and manages its strengths, weaknesses, opportunities and threats. Are the company’s short- and long-term goals congruent with these factors? Does management plan to mitigate threats and correct weaknesses? Is the company taking advantage of potential opportunities and exploiting its strengths? A company’s value can be adversely affected if management is unaware of these internal and external factors or if management fails to incorporate them into its strategic plans.

4.      Impact of information on value estimate.

Finally, valuators use the information obtained from their analyses to help them:

_ Select the appropriate valuation technique,

_ Forecast future income streams,

_ Decide on relevant selection criteria and other subjective adjustments under the market approach,

_ Build discount and capitalization rates when using the income approach, and

_ Quantify valuation discounts, such as discounts for lack of marketability and control.

Review and investigate

In adversarial situations, a valuator’s subjective decisions may come under attack. Attorneys and clients need to review valuators’ written reports to ensure that all risk factors have received adequate attention. They also should investigate exactly how these risk factors affect the appraiser’s computations and assess whether any factors have been double-counted. Above all else, a valuator’s subjective decisions should be well supported and reasonable. Contact a Business Intermediary to find out more about business value vs risk, buying a business or selling your existing business.

 

The VR Transaction Process: 20 Steps To A Successful Sale – Part 1

With over 30 years of experience in selling small to medium enterprises (SME), VR has developed a dynamic and effective Transaction Process to promote a win/win outcome for both Buyer and Seller.  Over the next two blog entries, we shall be sharing with you the 20 Step VR Process to Selling your business.  Here are the first 10 Steps to a successful sale:

1.     Initial Meeting:

The initial meeting serves as an introduction to VR and explanation on how VR can help maximize the value of your business and answer any questions. During this meeting your VR Intermediary will ask to review your business tax returns, company financials, brochures and sales materials, and any other pertinent information to understand your company.

Read the full article here.