Business Sales Ramp Up in 2011

Many owners are not ready to sell their business, either emotionally or business-wise. Then a health problem or a bad year forces their hand. Well, the past few years have been a time to cut unnecessary expenses, make ends meet and to patiently wait for the market to rebound.

But 2010 saw a slight improvement in the business-for-sale market and many experts expect that 2011 will be a turning point. Financing options are improving for buyers and banks are putting a new focus on lending.

So, if you're thinking of selling your business this year, here are four tips to maximize your profit

Plan Today for the End 
Steven Covey said "Keep the End in Mind" when planning today, even if it is 10 years away. Like they do for any big purchase, business buyers will do their research before signing on the dotted line. That means it's important for sellers to be ready to demonstrate their business is worth the asking price. Make sure your financial records are kept in order. 

Keep a minimum of three years of documents, including expense records. These are essential to establish buyer trust in the economic history of the business. Over-reliance on one or a few key customers and any outstanding legal issues are actually a target for some private equity firms.

Don't forget the physical elements of the business as well. Tidy up and get done those building improvements such as painting the storefront, cleaning up the distribution facility or re-decorating the interior. The physical appearance is often the first impression a buyer gets, so make sure it's a positive one.

Understand Your Fair Price
To set your asking price accurately, you need to know where you are in the market compared to other businesses for sale. Overestimating your value can lead to a long and difficult sale process, while underestimating will leave money on the table. Expect an improved selling environment in 2011, but don't make the mistake of asking for pre-recessionary prices.

Take a look at your own financials as well. If your business' revenue and cash flow have declined, take that into consideration. Buyers will. 

The downturn is here to stay and looking back at past year's revenues will not make buyers agree that those days will return. The goal is to set a price that will attract the greatest number of serious buyers and enable you to close a deal at the highest possible price.

Market Professionally
One way to get a leg up on the competition and ensure the best possible outcome is to hire an accomplished business advisor. Check references carefully and see if you can find additional references they don't provide themselves. 

Be Prepared To Offer Financing
In today's market, seller financing is essential. That means you may be required to take a minimum of 20 percent of the sale price in the form of a buyer note that the buyer will pay back over time, with interest. This also means that you'll have an investment in the business even after the sale. The buyer and lender will expect you to participate in a successful transition with the new owner and to help get them off to a strong start.

The Sizzle or the Steak?

Putting the building blocks of the business into a plan for investors is one of the top teaching methods for an MBA student. I would heartily recommend the gruelling process to any person trying to be top in their field. It is a realistic teaching method that replicates the stress of presenting your business model and future revenue streams to Bay Street financiers, as well as bringing the defeats which build up business resilience. As John Rothschild, Founder of Prime Restaurants said in the evening during his fireside chat to the room of entrepreneurs, "We all get beaten down and scarred, but we all get back up again."

The Ivey Business Plan Competition is the best in the country at attracting top students from the USA and across Canada. Perhaps it could be the $30,000 prize money, or the added benefit of spending a few days with the best and brightest students as they put in the foundation stone of potential new businesses.  

This year, I had my team at Loewen & Partners look at the four business plans and executive summaries to weigh up which plan they thought was the most fundable idea. I like to read the plans beforehand and compare my team's views with my own. Usually the business plan reflects the best idea and it is pretty obvious which plan and team deserves to go to the finals. 

This year was different. 

The most financially exciting business idea had a well written executive summary, but not much information for the investor. If they were trying to attract an Angel investor for seed capital, they were not building a compelling case for me. Yet, the problem was that their IP technology came out of the hugely reputable Waterloo University, and it was immediately fundable. The judges would all know the government would add in grants or loans.

At Ivey, during the judge’s briefing, we went over how to judge who goes to the finals. Was it based on effort and excellence of the plan or was it based on who I would see getting financing. I was told the winner would be the company most likely to attract investment dollars for their concept today in VC world. In other words, the steak over the sizzle must win.

It was heartbreaking to see my top ranked team get bumped by the weakest presentation, despite the relevant PowerPoint and the carefully crafted speeches. If the weak plan had been presented by a team demonstrating true entrepreneurial vigour, I could forgive the lack of financials.  

That was sadly not the case. 

In the end, the weaker team won because their plan was green tech, which we all knew is immediately fundable by VCs. Anyone see a bubble here?

In comparison, the team who’s work I admired, would not attract funding from a Canadian based VC as it was a start up in China. In my book, Money Magnet, I lay out the reasons VCs and Angels say yes to a business investment, and the first rule is it has to be within 3 hours driving time. China clearly does not fit that rule. If only this excellent team had read the chapter on Angel and seed investing in my book. Barring that, if only they were seeking seed money at a MBA competition in China.

There you have it: the steak had to win. 

The sizzle, although it got my mouth watering, was not enough for seed investors. It is not often that I have judge’s remorse, but the competition left me reflecting on how business success is about being in the right industry at the right time.  I have no doubt, that hard working team will benefit from their effort in the real world. Perhaps, in five years time, maybe we will be reflecting on how a business plan competition spawned a Chinese business success story.

Can Canada ever have one market regulator?

I sit on the Board of the Exempt Market Dealers Association which works with the Ontario Securities Commission to develop regulation of the private placement market. The Board has 21 Directors, most of whom are lawyers. Before you groan, I must rush to say that it is a pleasure working with smart, articulate and often wryly amusing worsmiths, because lawyers are wordy.
The Exempt Market Dealers Association is a national body, even though Canada actually has 13 regulators. Apparantly we are the only country in the world with more than one securities commission, and who is our companion country?
Bosnia! Not great company, one could say.
So What is the purpose of the Exempt Market Dealers' Association?

1. To protect investors from unfair, improper, or fraudulent practices; 
2. To foster fair and efficient capital markets and confidence in those markets.

What do you think of these guiding principals?

• facilitating the reduction of systemic risk, including through monitoring of systemic events or developments and cooperation and coordination with other financial authorities; 
• recognizing that the business and regulatory costs and other restrictions on the business and investment activities of market participants should be proportionate to the benefits sought to be realized;
• maintaining the competitive position of Canada’s capital markets, which is desirable as capital markets are international in character; facilitating innovation in Canada’s capital markets; 
• promoting the informed participation of investors in the capital markets to support effective and responsive securities regulation; 
• recognizing regional markets and sectors.

Value Creation is Changing

The capitalist system is under siege, says Michael Porter, Harvard Business School and the originator of the term Competitive Advantage. Porter talks about how business is a popular choice to play the role of the bad guy in Hollywood and how there is a deluge of opinions about it causing societal problems. Business has tried to take on “Social Responsibility” but this openness and good will seems to have opened up more criticism. Private equity, which has saved thousands of jobs and protected the longevity of companies, is also under fire and being questioned.

This declining trust has caused politicians and market regulators to add more rules and policies to cripple the capitalist system. 

As always, business needs to be the first to step forward in a new direction and look for solutions. Already there are signs that business has been the first to recognize, the business model that worked well ten years ago may now be growing swiftly stale.

One such framework to review is the way business views value creation. It is the short time financial focus in a bubble, while missing customer needs and broader societal influences that determine long term success.

Obviously, those companies who are large enough to have the luxury of participating in round tables and what not, and can take the time to influence and brainstorm the issues. 

Yet in Canada, 80% of company owners run smaller businesses and from the ones I see on a daily basis, they are running on whiffs of fumes. For example, plastic bag manufacturers are having to deal with plastic bags manufactured with logo and all in China and shipped at a tiny cost. How can a small Canadian based company making slim profit margins compete? How can the Canadian government demand more from their taxes, paperwork and health and safety regulations while opening up the door to competitive products not burdened with labour law or higher capital costs?

Secret: Build better products

I valued Ben Horowitz talking about Cloud Technology and how to build a good company. He is so truthful about the 3:00am in the morning fearful meltdowns.
Ben says there is no way to build a new company without a transformational product. What is really important is the product, not the business model, the business plan or hiring MBAs. Innovating and coming up with something way better is key. The big firms have a hard time doing innovation.
Here is Andreeson's other half, Ben Horowitz, taking about how to build a good company. A brief list of Ben's points:

1. When a bankrupt Apple got Steve Jobs back as leader, his new strategy was "build a better product" and it worked. 
2. Skills to win the market are then important. Do you take the market and sell your excellent product?
3. Be a good person as CEO. No one wants to work for a CEO who is a jerk.
4. The key ingredient really is leadership, not management. Leadership is the ability to get people to follow you, if only out of curiosity.

Ben Horowitz was a co-founder of Opsware (formerly Loudcloud), which was acquired by HP in 2007. Earlier, he was vice president and general manager of America Onlines E-commerce Platform division, where he oversaw development of the companys flagship business.