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The Downsides of Overvaluing Your Business

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When thinking about selling your business or preparing to do so, assigning the proper value is very important. An entire segment of our customer service at Utah Business Consultants is dedicated to helping people like you consider all the factors involved before setting the right value on your business, and we know how vital it is.

The benefits proper business valuation are somewhat self-evident, but on the flip side, the downsides of improper valuation can be more severe than you might think. Many might assume that the worst that will happen if you value your business too highly is you won’t get any bites, and you’ll have to reduce the price – this couldn’t be further from the truth. Let’s look at a few of the specific downsides of overvaluing your business.

Reputation

No matter what industry your business operates within, your reputation is a very big deal. It’s a factor in every major marketplace on earth, and consistent overvaluing of a business is a very quick way to lose part of that reputation among your peers and potential business partners.

If you’re consistently overvaluing in a way that seems shady to people on the outside, they might assume you’ll be the same way in any business dealing. If you’re straightforward and present robust figures, however, it bolsters your reputation and makes others more willing to work with you when other choices are on the table.

Investors

Many businesses require investors who are part of the long term process, and trust between you and your investors is vital. Will investors be interested in working with you on future projects if you overvalue your company and complicate or even torpedo the sale process? Maybe, but it’s certainly less likely.

Larger Market Dynamics

This is less of an individual concern than the two broad areas above, but consistent overvaluing of businesses in the marketplace creates inefficient market dynamics. It sets a standard that vendors and buyers inherently adjust to over time, which can cause inflation and a normalization effect that can make proper valuation more difficult and eventually nearly impossible. It’s a vicious circle after it goes on long enough – everyone just accepts the new norms, and no one benefits.

Need to know more about properly valuing your business, or any other part of exit planning or selling your business? Utah Business Consultants is a top business broker in Utah, and our expert staff is standing by to serve your needs.

Foundational Elements of Exit Planning

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For a number of business owners, a successful exit from a business is their entire goal when starting the business in the first place. If you’re looking at selling your business, a business broker like Utah Business Consultants is here to provide high quality exit planning services.

A good exit plan will have three primary elements: An exit planning advisor, an advisor team, and a process that these entities carry out. Let’s look at each of these elements and lay out their basics.

Exit Planning Advisor

An exit planning advisor is at the head of the spear, the person coordinating the efforts. The entire process starts with this person, whose duties may include:

  • Explaining the exit process to owners, management and other advisors
  • Guiding the process from start to finish
  • Using tools to ensure collaboration among advisors
  • Coordinating between owners, advisors and themselves
  • Assuring that the plan follows the process steps laid out in our third section momentarily
  • Making recommendations for the owner and owner’s advisors to consider, with input from the advisor team

In most cases, business owners start by hiring a qualified exit planner. This person can keep everyone in line and ensure a successful exit.

Advisor Team

Especially for any moderate or large-sized business, the advisor team will also be vital. Each advisor will add expertise in various areas related to the process steps – some may have a background in legal documents or ownership transfer while others might be in charge of properly valuing the business for sale. In some cases, a business owner’s advisors will be qualified to join the advisor team themselves.

Process

The process for exit planning will vary between companies, but will include a detailed examination of every factor at play. It will involve coordinating between multiple areas, planning efficiently, and keeping the big financial picture in mind throughout.

For more on the vital factors of exit planning, or to find out about our other business brokerage services, speak to the pros at Utah Business Consultants today.

Basic Exit Planning Requirements, Part 2

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It takes a lot to sell a business successfully, and the pros at Utah Business Consultants are here to help. If you’re looking to sell your business, or even just to have a good exit planning strategy on the books for future planning purposes, we’re here to help.

Last month in this space, we went over part one of our two-part blog series on the steps you need to take to prepare your business for an exit planning execution. Here is part two.

Show Proprietary Elements

Potential buyers of a business love to invest in a proprietary element. This doesn’t mean you have to have a patent in play necessarily, though this can be helpful. Really, you just need at least one process or service that is unique – if possible, you should name it and own it as well. All exclusive elements of your business should be highlighted as primary selling points to potential buyers.

Separated Owner

This may sound weird if you’ve never been through the process before, but as an owner, you have to remove yourself from the business and the process of exiting. If the business is only doing well because of you, you’ll decrease its value by selling it – the potential buyer needs to be able to ensure that they’ll retain value once you leave. In some situations, a buyer might look to lock you into a long-term earn out, which keeps you involved for a set period of time.

Solid Bookkeeping

No business gets acquired without books that are properly maintained, going all the way back to the beginning of the business. Many small business owners struggle with bookkeeping – if this is the case, find a good outsourced company to keep good records. Your books need to have been audited regularly for the sale to proceed as expected.

Long-Term Management Team

A potential buyer may want to get an owner out of the business, but they’ll want to see a management team that has an eye to the future. If employees all have the option to leave after a business sale, this may be a big negative to the buyer. Put good employee contracts in place with your key management team – give them a bonus in the event of the business being sold rather than equity in the business.

For more on steps to take to prepare for a business sale, or to learn about any of our business exit planning services, speak to the pros at Utah Business Consultants today.

Why Every Business Needs an Exit Strategy

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If you’re like many business owners, chances are you’d only consider selling your business if you were coming to a specific financial or life point where you were ready to move on. But in today’s modern business world, most brokers and advisors recommend significant business exit planning from the very beginning, even if you don’t have any immediate plans to sell.

At Utah Business Consultants, we can help you put this sort of advanced plan into place. Here are some of the benefits you may find from establishing an exit planning strategy as early as possible.

Sets a Roadmap

For starters, planning an exit strategy can actually be a great way to determine the general direction of your business as a whole. An exit strategy brings a defined timetable for certain progress elements, from profits all the way down. It also helps you find specific benchmarks for success through the process, whether or not you’re actively looking to sell.

Enhances Value

When we say “value” here, we don’t necessarily mean raw monetary value in a vacuum – an early exit strategy is no guarantee that your business will sell for a larger figure when you do move on. What we mean, though, is that having an exit strategy enhances the value to you as an owner: You’ll be guiding it toward a conclusion you’re prepared for, which allows you to take the proper steps to maximize your return.

Informs Decision Making

If you don’t have a planned exit, it’s easy to get caught up in the day-to-day factors of the job rather than the long-term strategy behind the business. An exit strategy keeps these kinds of long-term factors firmly in view.

Allows for Flexibility

Chances are, your initial exit plan will need to be revised over time as circumstances change. But if you have a plan in place from the start, it’s easy to adjust your benchmarks within that framework without having to start all over again. And if an unexpected event takes place that accelerates the need to move on, you already have a process in place for doing so.

For more on why every business should have an exit strategy from the start, or to learn about our business exit planning services, speak to the pros at Utah Business Consultants today.

Basic Exit Planning Requirements, Part 1

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Whether you’re looking to sell your business in the short term or not, all small business owners should be invested in basic business exit planning strategies from the very beginning. An exit plan helps keep your business moving in the right direction, plus helps create a trigger event that signals it’s time for you to exit the business.

At Utah Business Consultants, we’re here to help. In part one of this two-part blog series, we’ll look at four basic areas you should consider as part of your exit strategy.

Sourcing Your Buyers

Many business owners simply assume that someone will want to buy their business when it comes time to sell, and this is a big mistake. Only about 25 percent of saleable companies actually accomplish their exit, according to exits.com.

An important part of the plan is keeping an ongoing list of potential buyers. These may be people who have approached you in the past about your business, or competitors in your field who might be interested in buying you out at a certain point.

Showing Growth Patterns

Potential buyers for your business want to see good growth patterns, with steady and predictable growth they can count on. The occasional dip here and there is totally understandable, as long as you can offer an acceptable reason why they took place. Major growth swings, however, could be a red flag for a buyer.

Reoccurring Revenue

Buyers want to see that you not only have revenue, but also the form in which it’s paid to you. Potential buyers always enjoy seeing services that involve predictable revenue sources, such as subscription-based products or services. They also like seeing automatic advanced billing, with reoccurring payments for revenue.

Standard Operating Procedures

If you don’t have a written set of standard operating procedures, you should get to work on this immediately. This should essentially be a plan that would allow your business to function even if you disappeared off the face of the earth tomorrow – things like your executive strategy, core values, marketing and sales plans, management practices and basic operating procedures should be included. If you were looking at two possible companies to buy that were similar, and one had these procedures laid out while the other didn’t, which would you choose?

For more on basic elements of the exit strategy, or to learn about any of our exit planning services, speak to the pros at Utah Business Consultants today.

5 Mistakes to Avoid When Selling Your Small Business

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By Debbie Allen

Updated May 11, 2017

Everyday small business owners (retailers) make drastic mistakes when selling their business and lose thousands of dollars in the process. All their hard work and long-term investment goes down the drain. As entrepreneurs, they had once dreamed of owning their own business and building it to success. They then plan to reap the rewards in the form of a successful business sale. Sounds like a great plan! But, making the sale is not as easy as it may appear.

…Read More!

Tips for Marketing Your Business for Sale

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When you’re looking into selling your business, there are a ton of factors to consider. Proper business valuation is huge – going too high or too low can both have enormous financial consequences if you get it wrong. There’s also the issue of any outstanding debts, expenses or other finances to complete before any sale can be possible.

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The Sweep Precedes the Inspection

The Sweep Precedes the Inspection

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Business owners often hear the question, “Are you ever going to put your company on the market?” The response of the potential seller is usually unique, varying from, “Sure!” to “not in a million years” to “everything has its price.” Most do not think of a specific date, but rather place the broad “when the time is right” qualifier over their sale. …Read More

Selling Your Business to Employees

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Setting the Rules

Structuring a transaction through an employee buyout should accomplish the same objective as selling to an outside buyer. Your objective is to structure a sale that maximizes value while minimizing risk (tax consequences included). If an employee group can fulfill that objective, the offer is worth considering; if not, look elsewhere.

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Tips For Buyers

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Don’t be greedy.

Sellers deserve a fair price for the years they have spent developing their business.  Be prepared to pay for the goodwill of the business.

Have a good reason to be buying.

Buying a business is hard work!  It takes commitment!  Employees will be counting you. Spend time deciding why you want the responsibility of owning a business.

…Read More!

It's Time to Sell

Seven Signs that it’s Time to Sell

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I’ve been a CPA for thirty eight years and a Business Broker for nineteen. By now I know the signs that indicate when a business owner should consider selling his or her business.  Sales have been flat for several years. This indicates that you have either taken the business as far as you are able, or that you are burning out and just don’t care anymore. …Read More

Adding Value to Your Business

Adding Value To Your Business

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If you are considering selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. …Read More