What is Your Business Worth? 6 Rules of Thumb to Consider
By: Justin Farmer
I work with extremely successful and exceptionally bright professionals who, after years of hard work, have grown a business that has going concern. But like most savvy business owners, my clients come to realize that it is time to transition and “pass the baton”, so to speak, to a younger professional who can carry the business into the next generation. But selling a business is a lot of work. And certainly selling a professional service business must be harder (or so many of my clients think). Then the question remains: is it worth it? The short answer: absolutely. Sure, there are countless moving parts and factors to consider when selling a business. But with the proper planning and team in place, you can maximize your return on investment.
Now that you have decided to sell your business, I am sure you are longing to know how much value can be obtained from selling it. And, even more, how do you go about determining value? Let me speak candidly for a moment: valuing a business, which has grown organically over the course of 20+ years, is no easy task. And while business valuation is not an exact science, I can assure you that there is a way to determine, with 100% certainty, what the value of your business is: put it on the market!
If you don’t want to test the market before having a general idea of what your business is worth (a good idea), take a look at the following six general rules of thumb. With some objective reflection, you should feel confident in what the market will bare when you put your business up for sale.
- Starting Point: In general, the starting point for the value of a law practice begins at 0.9-1.0 times annual gross revenue. If you have an accounting practice, the starting point is closer to 1.0-1.2 times annual gross revenue. Other private practices, like medial or dental, have yet a different multiplier. But as you apply the following factors, you can expect the multiple to increase or decrease slightly.
- Payment Terms: Cash is king. You should plan on having both a cash (lower) and seller-financed (higher) price in mind. For instance, if a buyer brings 100% of the purchase price at closing (or darn near), then you should be willing to take the “lower” cash price as the risk of not getting paid falls close to zero. Conversely, if you are willing to finance all, or a majority of the purchase price, then the total purchase price should be higher.
- Ownership Transition: The more you are willing to provide by way of transition assistance, the higher the potential multiplier. Keep in mind that with either a cash or financed price, the buyer is paying you for a certain amount of transition assistance. As a seller, you should expect to provide transition services as part of the deal, including making introductions to key clients, referral sources, and the like. But the more you are willing to help ensure a successful transition, the higher the value to the buyer and, therefore, the larger the multiplier you are likely to receive.
- Client Relationships: Continued patronage from repeat clients is an important factor that you should be tracking long before taking your business to market (if you aren’t tracking this, start now). The more you can show that revenue is tied to clients that come back month-over-month or year-over-year (depending on your practice), the better. Think about it: your business is attractive so long as revenue is coming in the door with or without you. So, the more automatic the reoccurring revenue is, the higher the multiplier you can expect.
- Client Concentration: Having revenue concentrated with one or a few “large” accounts can sometimes cause a decrease in potential value of a professional service business. However, the contrary is also true: having no concentration, but revenue that is spread across a variety of clients, can actually increase value. If you do not have a high concentration of revenue tied to any one large client, then you have minimized the risk of losing a substantial amount of revenue if any one client were to leave, thus creating a higher potential multiplier.
- Profitability: Last, but certainly not least, is profitability. How much does it cost to run your practice? How much cash do you have left over at the end of the year? If you are running a professional service business with overhead of 50% or less, then you are in very good shape. Having healthy net income and gross revenue that is growing year-over-year shows a potential buyer that there is less risk of drop-off in the future. And when it comes to determining value, and ultimately finding a buyer who can obtain financing, profitability is something that a lender looks very closely at to determine if the business can service future debt. In sum: higher and/or increasing profitability = higher multiplier.
As you can see, determining the value of your business is really one part science, one part art, and one part math. And while, ultimately, you can assign any multiplier to your business that you want; the true test comes when you take your business to market. Until then, the above should get you moving in the right direction until you are ready for the market to set the actual price.
SBA Loan Programs – An Introduction
By: Justin Farmer
As we have established thus far, the U.S. Small Business Administration (SBA) is designed to help you get the funding you need to start, purchase or expand your small business. Though the SBA does not lend money directly, it does back and supervise the lending process, removing much of the uncertainty for both lenders and applicants alike. This article provides a brief overview of each of the SBA’s four main loan programs. I will be discussing each loan program in more detail at a later date.
- General Small Business Loans: Otherwise known as the 7(a) Loan Program, this is the most common and popular of the four SBA loans. Its purpose is to assist with the starting of a new business or the acquisition, expansion, exportation or continuing operation of an existing one. Expenses covered include: start-up costs (including real estate and construction), equipment costs, general inventory, and/or short and long-term working capital. Proceeds can even be used to refinance debt. Loans of $150,000 or less can be guaranteed up to 85%. Loans greater than $150,000 can be guaranteed up to 75%. Priority is given to women, minorities, veterans, and those businesses located in low-income or rural areas.
In a hurry? The SBA also offers SBAExpress. Loans falling under the SBAExpress program are capped at at $350,000 with a 50% guarantee, but the application turnaround time is under 36 hours. (This is not to be confused with Export Express Loans, which are solely for expanding into foreign markets.)
- Microloan Program: As the name suggests, loans dispensed through this program are smaller and have a shorter term than general small business loans. They are much more community-oriented and are generally dispensed by experienced non-profit, community-based organizations to small businesses or non-profit childcare centers. These microloans can be up to $50,000, but average right around $13,000. Unlike 7(a) loans, microloans cannot be used to repay debt or purchase real estate. They must be repaid within a maximum of six years.
- Real Estate and Equipment loans: Formally called the CDC/504 Loan Program (CDC standing for Certified Development Companies), loans acquired via this program are specifically long-term, fixed rate loans for “major fixed assets.” That is, the proceeds are only intended for real estate, building construction, and long-term equipment with the purpose of providing jobs and stimulating the local economy. For example, the proceeds can be used to build a manufacturing warehouse, but not to invest in rental real estate. The one exception is that a portion of the take may be used to refinance debt if that debt is associated with equipment or facility expenses.
- Disaster Loans: If your business has been negatively affected by disaster and is located within a declared disaster area, you may be eligible for a low interest SBA disaster loan. There are two such loans designated for business use: Business Physical Disaster Loans (BPDL) and Economic Injury Disaster Loans (EIDL). BPDL’s cover what your insurance may not. Businesses of all sizes and most private non-profits are eligible. EIDL’s “provide the necessary working capital to help small businesses survive until normal operations resume after a disaster.” Small businesses, agricultural co-ops, and most private non-profits qualify. Both cap at $2 million and require you to first register with FEMA before applying.
For more information on all of these programs, you can visit the SBA website here: https://www.sba.gov/loan-programs
What is the Small Business Administration (SBA)?
By: Justin Farmer
As my first article on the Small Business Administration “Buying a Business is Easy: 5 Steps to Secure SBA Financing” received so much attention, it seems prudent to continue delving into this topic. This will therefore be the first in a small series on just that. Stay tuned.
The origins of the SBA began with Depression and WWII era economic institutions like the Reconstruction Finance Corporation (RFC) and the Smaller War Plants Corporation (SWPC). These direct lending programs were meant to bolster small businesses against the swelling wave of ‘big business.’ As these institutions fell out of favor, President Dwight D. Eisenhower proposed the SBA to replace them. Congress was favorable to the idea, and the SBA was created as part of the Small Business Act on July 30, 1953.
The original function of the SBA was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns” in part by guaranteeing that small businesses received a “fair portion” of government contracts and sales of surplus property. That portion, nowadays, stands at exactly 23%.
Unlike its predecessors, the SBA is not a direct lending program (with the single exception of Disaster Relief Loans) and does not give federal grants. Instead, the SBA backs loans provided by lenders that adhere to its guidelines thus greatly reducing the risk to the lender. This allows entrepreneurs and small business owners to qualify for loans even when the minimum annual payments would exceed the standard two-thirds of the previous year’s profit. As stated on the SBA.gov website, “when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty.” This guarantee is only available to borrowers without access to other reasonable financing opportunities. And deferential treatment is given to women, minorities and veterans.
Besides general financing, the SBA provides face-to-face and online counseling and training, aids small businesses in procuring government contracts, and engages in legislative advocacy. There are also several resources available via the SBA website, including instructional articles, actual online classes in the Learning Center, and the LINC tool that connects appropriate borrowers and lenders based on needs. If online isn’t your style, they have at least one office in every state (two in Washington) and an over-the-phone assistance line.
The SBA mission statement is to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” The point is to give small business owners (and potential small business owners) a leg up when they might not otherwise have one.
Yet despite the size and breadth of the SBA, it remains a rather unfortunately well-kept secret. Many people are either not familiar with the SBA at all or not aware that they could qualify for its assistance. By acting to connect private practice owners with experienced lenders, I hope to remedy that fact. If there are any particular questions that you have about the SBA, please ask. I’ll do my best to answer you questions in turn, as I progress through this series.
Networking Made Easy – Part Two: The Strategy
By: Justin Farmer
Part one: Networking Made Easy – Part One: Expanding Horizons
Networking is one of the those business-world buzzwords that everyone uses but few people understand. “Networking” isn’t just shaking the right hands or flashing the right smile. It is more than being personable and charismatic or regularly updating your social media. It is doing so strategically. The next time you are invited to a networking event or an event with networking potential adapt your game plan to utilize these five tips.
- Start Early: People frequently make the mistake of waiting too long to engage. In short, don’t. Networking events are exhausting, and when someone is tired they are far less likely to care about your spiel then when they were fresh and sober. Don’t wait for the free liquor to warm up your confidence. Instead arrive confident then engage early and close cleanly. Your preparation and confidence will show.
- Value Everyone: Yes, every event will have its big fish and its little fish, but aiming solely for the top is rarely going to be your best strategy. There’s a reason Herman Melville’s Ahab is considered a tragic hero. Little fish, like you, are just as hungry for opportunity yet fewer people are vying for their attention. They might be well connected. They might have a great product. Or they might just have something you need. You never know, so dismiss no one.
- Have a Plan: Just showing up with a plan to ‘network’ isn’t going to cut it. You need to get more specific. Are you looking for a mentor, a business partner, a client, an opportunity for cross-promotion or some combination of these? Do you know how you would pitch yourself and/or your company in each of these scenarios? If not, it’s time to get to work. You should know your goals for the evening and prepare your talking points ahead of time. Yet don’t be too pushy or self-absorbed once you’re there either, which brings us too…
- Be a Connector: Reciprocity is a powerful social instinct. By connecting two other people together, you are proving that you not only thought of them beyond their usefulness to you, but that you listened well to each of them in the first place. That is a striking indicator of your character and automatically inclines both of those individuals to want to help you. They will likely even go above and beyond to actively help you just to return the favor.
- Take Notes & Follow-up: Last but not least, make sure you follow-up soon after the networking event – between 24 to 48 hours later. If you wait longer than two days, the chances of your contact remembering you and taking your interest seriously rapidly diminish. Taking notes can help with keeping your initial interactions authentic. As long as doing so doesn’t interfere with your ability to carry on a conversation, taking notes while networking actually makes you appear more attentive and genuine.
Networking Made Easy – Part One: Expanding Horizons
By: Justin Farmer
Part Two: Networking Made Easy – Part Two: The Strategy
So you’ve finally crossed that threshold and are starting your new business. Congratulations! You’ve made the right choice. But now what? How do you build up your customer base and build working relationships when you’re, well, new? Relying on your family and friends will only get you so far. It’s time to expand your network. Here are some suggestions you may not have considered.
- Social Media: With both Twitter and LinkedIn boasting approximately 300 million active users and Facebook having surpassed the billion mark, social media is no longer a private playground. Businesses small and large, local and international are signing on, and using these online mediums as free marketing platforms. If your business doesn’t have it’s own social media page, make one now. Update your content regularly and selectively. Not only are you networking, you are crafting your business’ public image.
- Blogs: Unlike general social media, blogs are slower paced. You aren’t clawing your way to the top of the feed. Not every business needs a blog, but they are useful for expressing expertise and personality. If you do choose to keep a company blog, update at a gentle pace with pointed and relevant content. You don’t want to inundate “followers” with “update” or “new post” emails. That’s a good way to get sent to the spam folder – the exact opposite of what you want.
- Networking Groups: Technology is great but nothing beats a face-to-face meeting. It’s a scientific fact the people remember something better when it has more tangible context. Compared to the sterile online environment, networking groups are a kaleidoscope of sights, sounds, tastes, smells and touches. Nearly every major city has regular networking group events. Seek them out (or start your own) and show up prepared to leave an impression and a business card. Networking groups help push you from a connection that’s merely known, to one that’s liked, trusted and eventually referred business.
- Public Speaking: If you have the opportunity to speak at an event, do so. Think of it as a chance to showcase your confidence, knowledge, intelligence and charisma, as well as an excuse to tastefully promote your business. For a handful of minutes, you are the center of attention and authority in that room. Take full advantage of it. Do well and desirables will approach you.
- Publications: Similarly, you should consider getting published. Writer, contributor, editor – it doesn’t particularly matter when you’re starting out. Every bit of publication adds credence to your name and expertise. If you’re new to writing, start small (local papers, journals) and work your way up. Blogs make for good practice as well. Writing is like a muscle, and it too needs its exercise.
- Board Membership: Small, private practices live and breathe by their reputations. Sitting on a community board is an excellent way to give back to your community and grow your brand.
- Coffee Meetings: Don’t underestimate the power of an in-person follow-up. Once all of this networking has begun to take effect, you’ll probably notice an uptick in your number of meeting requests. Though time is precious and rare, a 30-minute meeting over coffee with the right contact may have far reaching benefits. Remember to treat each meeting as a chance to grow your brand. Marketing is rarely free, but paying with your time now will pay off huge in the long run.
- Buy It: Last but not least, if you’re just starting out, breaking in to a new industry, or are one of the lucky few with the extra capital to burn, you can always purchase someone else’s network. When you buy a business, one of the items that comes neatly wrapped-up for you is that business’ network: the clients, the referral sources, and the business partners (also known as ‘goodwill’). You, and the seller, will still need to convince those sources of business to remain with the business through the transition, but, unless you royally screw up, Newton’s law of inertia dictates they’re going to stay.
Buying a Business is Easy: 5 Steps to Secure SBA Financing
By: Justin Farmer
One of the most daunting aspects of striking out on your own is the inherent financial insecurity. You are exchanging constraint and stability for freedom and risk. Hesitance is normal, but it should not stop you from chasing your independence, especially when there are government agencies designed to help. One of these is the government-backed U.S. Small Business Administration or SBA. The SBA’s business financing programs “[provide] small business with an array of financing…from the smallest needs in microlending – to substantial debt and equity investment capital.” The most common SBA small business loan allotment is about $130,000-140,000. Yet they range from just $5,000 to $5,000,000.
Now I am sure you have several questions. Sure, financing is readily available, but how do you go about getting an SBA loan if you are in the process of buying a small business? Do you qualify? And if you do, should you accept SBA financing? To address these questions, consider the following five steps.
- Get Pre-qualified: When preparing to buy anything, let alone a business, you need to know what you can pay. Begin by exploring the SBA website (www.SBA.gov) to familiarize yourself with the different loan types available. Collate the documents listed there (SBA’s “Business Loan Checklist”) into a preliminary loan application packet. Then go to your nearest bank or lending institution that participates in SBA programs and meet with a lending agent. (For location suggestions, email me at justin@privatepracticetransitions.com). You do not need to make any final decisions at this point. This meeting is more about making you aware of your financing options.
- Understand the Deal: Simply put, know what you’re getting yourself into. Before you buy a business or accept a loan, educate yourself on the processes involved. You don’t need to know the intricacies of every step, but you should be able to converse intelligently and freely with your lending agent, broker, or private practice transitions expert. As they say, know enough to ask the right questions. Many of you may already be familiar with these processes. Fantastic! If that’s the case, please proceed to step three.
- Be Prepared to Make a Deal: This may seem obvious, but getting into the buyer mind frame is important. Are you really ready to take the plunge or would six months from now be better? Is your family ready? Will you be financing through the SBA? How much down payment can you afford now? Will you be asking the seller to finance part of the deal? Answer these questions, make a decision, and then be prepared to pivot.
- Evaluate and Develop your Strengths: Being your own boss is a big responsibility. It is not beyond you. The best small business owners are honest with themselves. They know what they’re good at and where they need to improve. You can do this, too. Make three lists: one for your business strengths, both concrete and abstract; one for your general, ‘okay’ business skills; and one for those items with which you truly struggle or have no experience at all. Be candid. If you are afraid of the numbers side of running a business, then you need to remedy that now. You will need understand, and feel comfortable, with the deal you are about to make.
- Trust your Advisors: The President of the United States has advisors and so should you. This doesn’t mean you need an official Board of Advisors – you can have one, but it isn’t necessary depending on the scale of your proposed business. Instead, consider having a collection of confidantes, people you trust who are, frankly older, wiser and more experienced in this type of venture than yourself. Get their opinions on your business proposal and loan options.
The Affordable Care Act & Why We Still Need Private Care
By: Justin Farmer
It’s no secret that the Affordable Care Act (ACA) can be a nasty minefield for doctors in private practice to navigate. In the attempt to universalize healthcare and reduce costs generated by the ACA, the federal government incentivized physician clumping. Hospitals, Affordable Care Organizations (ACO’s), and private networks can more easily offset the accruing losses, pad that 90-day no-pay grace period, and afford the mandatory conversion to electronic medical records. So why, oh why would a physician want to remain in private care?
For all of those reasons just listed.
To explain, the ACA is designed with the sole purpose of extending the healthcare umbrella over those with pre-existing conditions or general poor health, providing healthcare for low-income patients, and cutting overall healthcare expenditures. These are all good things. However, these items all cost money – more money than can be offset by federal subsidies or a redistribution of contributed funds from high-income insurance customers. The result? Payments allotted to physicians are driven down.
The ACA claims that the increased insured-patient pool makes up for the difference, while ignoring the fact that time is a non-renewable resource. When a doctor’s schedule is full, the only way to increase earning power is to shorten the amount of time spent with each patient – something that doctors managed by a healthcare enterprise are forced to do.
This situation is compounded by the ACA’s new payment structures. Instead of paying per service rendered, the ACA saves money by paying per condition. The assumption is that this encourages more efficient use of healthcare resources and higher quality (over quantity) care. The downside is that those assumptions do not distinguish between poorly managed cases and complicated cases, or cases where the patients themselves are remiss (either intentionally or unintentionally) in their own healthcare maintenance. In all three scenarios, it is the healthcare entity that bears the cost, which it then transfers onto its doctors. Management and administration have to make profits too, after all.
In the case of primary care, this prevents holistic medicine (as this kind of thorough assessment takes time) and promotes more referrals. Healthcare as a system is evolving from a service industry to an industrial economy measured in inputs and outputs. Again, none of this is promoted intentionally by the ACA. Nonetheless, the results we are seeing are to be expected when the unit of measure is quantitative rather than qualitative.
In this environment, doctors have a choice: either join a larger organization and submit to the industrial complex or remain independent and self-managed. It is the same choice faced by many up and coming business professionals with a few caveats.
Remaining an independent physician will be hard work. Paperwork is increasing, (without a precedent of goodwill) online reviews are putting more emphasis on office décor and bedside manner than medical expertise, and insurance payments are sometimes more trouble than they’re worth. But while your finances might be lower and your hours sometimes longer, the perks of being your own boss are abundant.
Being put to the grindstone by higher management is generally referred to as ‘high demand, low control.’ Doing so without any perceived recognition or appreciation is called ‘high demand, low reward.’ Both of these conditions are linked to an at least two-fold increase in cardiovascular problems and risk of death from heart disease, and a significantly increased chance for obesity, anxiety, depression, or back and neck pain.
Being your own boss means freedom, flexibility and control over your own life: setting your own schedule, hiring your own staff, setting the rules and determining what kinds of patients you see (not to mention the tax breaks). It’s not a lifestyle for everyone, but if you’re an independent go-getter with a determination to provide excellent healthcare no matter what, private practice is by far the best way to go.
What is Goodwill and How Does One Transition It?
By: Justin Farmer
It is common sense that a business is worth more than its tangible assets, but appraising that extra, invisible value can be tricky. Elements such as reputation, customer base, existing networks, and brand recognition all contribute to the value of a business without ever showing up on the balance sheets. When a business is bought and transitioned, those nebulous, intangible assets are lumped together as something called “goodwill.” And, ironically, goodwill is often one of the largest components involved when calculating a business’s final market value.
According to AccountingCoach.com, “…goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase.” When goodwill trades hands, business owners are essentially selling their expended efforts, while prospective entrepreneurs are paying a premium for future profits.
Thus, the value of goodwill can be ascertained by looking at how easily, or difficult, the transition of goodwill from seller to buyer will be. For private practices dependent on their practitioner (for example: a solo lawyer, doctor, or accountant), this means there is significant worth in a facilitated and efficient transition. That is, there is value in making sure potential goodwill isn’t lost when the original practitioner steps down. To put it simply: the smoother the transition, the higher the goodwill’s value.
Like most businesses, several components of a private practice’s goodwill transition automatically, such as benefits earned from previous and ongoing advertisements, and business-owned copyrights and trademarks. For those items that do not, such as brand loyalty, there are many options available to make a successful transfer of goodwill more likely, such as non-compete agreements; chaperoned or otherwise directed introductions; the seller taking on a business development role; and a period of mentorship whereby the buyer learns the ‘secret recipe’ for success. These stepping-stones should be laid out precisely and accurately in the purchase and sale agreement. Vagueness leaves both the buyer and the seller vulnerable to misunderstandings, can disrupt business functions, and, ultimately, diminish the goodwill.
For small business owners in the market to sell, what this all means is that your business is possibly worth far more than you may initially suspect. You have cultivated the goodwill of your business for years. You have painstakingly built up a stellar reputation that has market value. Acknowledge that hard work, and do not undersell your efforts. At the same time, you must accept that selling means passing the torch, not dropping or fumbling it. Properly handling the shift of not just your tangible business assets, but your intangible business assets as well, including goodwill, is both critical and potentially very profitable.
Closing the Loop with Private Practice Transitions
By: Justin Farmer
The US currently faces a unique generational gap in its workforce. This gap causes office discord, managerial nightmares, and networking problems, as two very different age demographics are forced to make nice with little guidance as to how.
These two demographics are the baby boom and millennial generations. Baby boomers, born between 1945 through 1964, are classic post-WWII products. They are conventionally characterized as hardworking and materially-motivated. Millennials, also referred to as Generation Y or echo-boomers, were born (arguably) between the mid-1980’s and early 2000’s. They are commonly characterized as being academic, entitled and risk-averse. Quite clearly the differences don’t stop at age.
But how did this clash develop, what about the generation in between, and why should you, as a small business owner, care about any of this? The answers, as I will discuss below, are tied together.
Three major factors converged to create America’s current workforce situation: the size of each generation, the recent US recession, and increased life expectancy.
Famous for it’s sheer size, the baby boom generation originally numbered 76.4 million people, according to the US Census Bureau. By the conclusion of 1964, baby boomers comprised approximately 40% of the US population. Millennials have exceeded that number. While less clearly defined, the most recently accepted count for the Millennial population is 86 million. This is the largest generation America has seen yet. The generation between these two, Generation X, is roughly half that. Picture two wave crests with a trough in between.
Next, consider the effects of the 2007-2009 Great Recession. The economic downturn hit right when baby boomers would have traditionally been retiring. No longer able to afford retirement, baby boomers stayed in the workforce en masse. This has been further compounded by increased life expectancy and human vitality. Simply put, people were and are working longer.
The recession’s timing couldn’t have hit millennials entering the workforce more perfectly. The number of Americans working or looking for work swelled. Hence US unemployment and underemployment (US Bureau of Labor Statistics category U-6) soared. Staring down student loan payments they could no longer afford due to a dearth of jobs, a vast number of millennials (and some Gen X’ers) went back to school, with the hope of deferring student loan payments. The net result: a better-educated, more debt ridden, millennial generation.
A better-educated populace is a good thing in theory. However, what this demographic is gaining in graduate-level education, it is losing in on-the-job experience. Today’s employers are frequently frustrated by recently-graduated-applicants’ lack of pragmatic job skills, expectations and knowledge. And it’s no secret that millennials have a bad reputation with their forebears. This economic climate has created the perfect storm of traditional, seasoned management and impatient, untested up-and-comers.
For someone planning on selling their private business, a product of decades of personal effort and expertise, this clash of values between buyer and seller can be more than just frustrating. It can be downright discouraging. But let me be crystal clear: this is also an amazing point of opportunity.
Experienced small business owners are vast caches of information unto themselves. Young entrepreneurs are hungry for that knowledge and desperate to avoid becoming trapped in the corporate ladder. The goal of Private Practice Transitions is to unite these two forces through careful and imaginative facilitation. In this way business owners get peace of mind, confident that their business will continue in the manner they have striven so hard to build, and aspiring entrepreneurs get the mentorship and opportunities they need.
Two people speaking entirely different languages can still accomplish great things. They just need an interpreter. Private Practice Transitions is that interpreter, closing the loop between one generation and the next.
7 Ways to Prepare for the Transition of Your Business
By: Justin Farmer
Congratulations, you’ve made the decision to sell your business. You’re ready for the transition. But you have more questions than answers regarding how to begin? Like many small business owners, you’re probably feeling overwhelmed by the sheer volume of the task before you. Do you hire a consultant? Organize your books? Notify your employees and clients? What comes first? The questions can seem endless. But while getting started can be the hardest part of the process, it certainly doesn’t have to be.
- Create a Timeline: First and foremost, you need to generate a realistic timeline that works for you. Do you need an immediate exit strategy or are you willing to be a bit more patient and play the market? If your business is already stable and profitable, between one and three years of preparation time is very reasonable. Once you’ve set your ideal sell date, work backwards from there. You know your business. You know what needs to be done. Keep in mind that, even after you’ve found a buyer, the vast majority of business sales take between six and twelve months to complete.
- Pick Your Strategy: In other words, who are you selling to and how are you going to find them? If you have your own personal network, fantastic. If not, you need to consider your marketing strategy. Examine your professional network for potential referrals. Many people in your situation cut the hassle entirely and hire a broker. Brokers not only have expertise and connections that you don’t, they also have access to exclusive listing services.
- Clean Up Your Books: It may be self-evident, but this is the time to shore up your books. Clean up loose ends, check discrepancies, and generally make sure your books reflect the reality of your business. Consider compiling a document packet that you can present to prospective buyers. In it should be copies of relevant financial statements and tax returns going back at least three years (if possible); property-related paperwork; a day-to-day operations manual; and a list of frequently used vendors, suppliers, and other important services.
- Value Your Business: There are several ways to determine what your business is worth. The trouble is choosing which one to implement. Do you use balance sheet based valuation? Income based? If income based, what multiplier do you use. Unless you are absolutely stellar at finance, hire a professional to check over your books and calculate the value of your business.
- Don’t Get Sentimental: Get comfortable with that number you just calculated. Take a deep breath and reassess. Make the decision now so that you can accept what the market is willing to pay later. Essentially, you are establishing your “settlement” authority. Coming to grips with this early on will expedite negotiations later.
- Structure the Deal: As sexy as a clean cut, cash pay-out seems, expecting one may not be practical if you’re trying to hook young entrepreneurs. Most buyers simply won’t have the cash. Sellers willing to provide at least some financing themselves typically sell their businesses for 15% more. There is a greater level of risk involved, but it’s balanced against increased revenue and potential tax benefits.
- Look to the Horizon: Don’t get broadsided by free time. Thinking about your days post-sale now isn’t wishful thinking, it’s pragmatic planning. As Professor David Ekerdt, director of the University of Kansas Gerontology Center said, “Most people define themselves by their job. When they retire, they need a narrative about who they are now. Finding that answer is important for the next phase of your life.” Even if you aren’t retiring, planning that next phase now (or at least thinking about it) increases your chances of actively and healthfully enjoying it.