Key Mistakes that Could Impact Your Sale
The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.
Copyright: Business Brokerage Press, Inc.
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Exploring the Offering Memorandum
Are you a business owner who is interested in selling? If so, there are some strategies you should undoubtedly use. At the top of the list is the all-important offering memorandum. The offering memorandum, often referred to as a selling memorandum, is a straightforward but highly effective way to help you obtain the highest possible selling price.
Shaping the Executive Summary
The offering memorandum must be factual. However, at the same time, this memorandum allows for a bit of business promotion and selling, which can be included in the executive summary portion of the document. After all, potential buyers will want to know more about your business and why buying it would be a savvy decision.
In short, the executive summary section of the offering memorandum goes over the highlights of your company. It should include an outline of several key factors. Everything from an outline of the ownership and management structure, description of the business and financial highlights to a general review of your company’s products and/or services should all be covered. Additional points to include would be variables, such as information about your market, and the reason that the business is for sale.
Your executive summary, simply stated, is extremely important. A coherent and compelling executive summary will motivate prospective buyers to learn more. In short, you want the executive summary of your offering memorandum to shine. It should capture the attention and the imagination of anyone that reads it.
Other Essential Elements to Include
Some elements are absolutely a must to have in your offering memorandum. An overview of your company and its history as well as its markets and products are all good places to begin your offering memorandum. Other key elements ranging from distribution, customers or clients and the competition should also be included.
Factors such as management, financials and growth strategies should not be overlooked, as many prospective investors may flip to those sections first. Finally, be sure to include any competitive advantages you may have as well as a well-written conclusion and exhibits. The more polished and professional your offering memorandum, the better off you’ll be.
An easy way to improve the overall quality of your offering memorandum is to work with a seasoned business broker. A professional business broker knows what information should be included in your offering memorandum. He or she will also know what not to include. Remember that your offering memorandum may be the first point of contact between you and many prospective buyers. You’ll only get one chance to make a first impression.
Copyright: Business Brokerage Press, Inc.
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Effectively Utilizing Confidentiality Agreements
Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements. A failure to adhere to this essential contract can lead to a myriad of problems. These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere. Needless to say, issues such as these can stand in the way of a sale successfully going through. Maintaining confidentiality throughout the sales process is of paramount importance.
Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace. There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.
By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process. Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale.
Today, these contracts have evolved and now cover an array of potential seller concerns. A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.
Creating a solid confidentiality agreement is serious business and should not be rushed into. They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential. Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed.
A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company. Every business and every situation is different. As a result, confidentiality agreements must be tailored to each business and each situation.
When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality. The last thing any business wants is for its confidential information to land in the hands of a key competitor. Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.
The Hidden Benefits of Planning Your Succession Strategy
Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance. In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.
Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts. At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy.
In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families. In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits. In other words, it is about more than preparing to hand one’s business over to a new party.
Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business. The fact is that selling a business is usually a layered process that can even take years to complete. Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well. Additionally, selling can be an emotional and stressful process which further complicates the entire matter.
For most business owners, selling a business represents the single greatest financial move of their lives. As such, it is often accompanied with significant stress and anxiety. It is essential not to underestimate the emotional and psychological side of the sales equation. Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself.
A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling. Developing a succession strategy is a way to think through such issues well in advance.
Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold. As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business. If you want to receive the optimal price for your business, then your business should be in tip-top shape. This means diving into your books and records and getting everything in order. Working with an accountant or an experienced business broker can be invaluable in this process.
Copyright: Business Brokerage Press, Inc.
Business Owners Can’t Always Sell When They Wish
A recent article in Forbes called , “Study Shows Why Many Business Owners Can’t Sell When They Want To” written by Mary Ellen Biery, provides some thought-provoking ideas. The article takes a look at an Exit Planning Institute (EPI) study that outlined shows that many business owners are not able to control when they can sell their businesses. Most business owners believe they can sell whenever they like, but the reality is that selling is often easier said than done.
In the article, Christopher Snider, the President & CEO of the Exit Planning Institute, noted that a large percentage of business owners have no exit plan in place. This fact is made all the more striking when you note that most owners have up to 90% of their personal assets tied up in their businesses. EPI’s study indicates that most business owners are interested in selling within the next 10 to 15 years, but most are unprepared to do so. According to the EPI only 20% to 30% of businesses that go on the market will actually sell. The reason for this is that most businesses have not been groomed and prepared for sale.
As of 2016, Baby Boomer business owners, who were expected to begin selling in record numbers, are waiting to sell. As stated in the Fortune article, “Baby Boomers don’t really want to leave their businesses, and they’re not going to move the business until they have to, which is probably when they are in their early 70s.”
The EPI survey of 200+ San Diego business owners found that 53% had paid little or no attention to developing an exit plan, 88% had no written transition plan in the event they were “hit by a bus”, and a whopping 80% had never consulted their lawyer, CPA or financial advisor about how and when to exit their business. Further, only 58% of surveyed business owners had done any type of formal estate planning.
The biggest concern according to the studey is that most surveyed business owners don’t know the value of their business. Viewed another way, most business owners don’t have a clear idea of how much their business is worth and if it will be adequate to fund their needs during retirement.
The survey suggests that many business owners are not “maximizing the transferable value of their business,” and are not “in a position to successfully sell their businesses so they can harvest the wealth locked in their business.”
All business owners should be thinking about the day when they will have to sell their business. Now is the time to begin working with a broker to formulate your strategy so as to maximize your business’s value.
In the interest of full disclosure, Richard Jackim, the managing partner at Sports Club Advisors, Inc. is the founder of the Exit Planning Institute and created the Certified Exit Planning Advisor (CEPA) program and designation. He sold EPI to Chris Snider in 2012.
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The 3 Pillars of Value for a Fitness Club or Business
How do you maximize the value of your fitness club or business? What’s the difference between a club worth $150,000 and $1,500,000? Health, fitness and sports clubs and related fitness businesses typically sell for between 3 times and 6 times their cash flow. That’s a big range, but where you fall in that range is up to you.
In order to maximize the value of your club or business, remember that there are three basic categories of factors affect the value of a fitness club or business: return on investment, risk profile, and growth prospects.
Return on Investment
Buyers look to the cash flow of your business or your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to see what kind of pay back they will get on their investment. As a result, if a buyer offers you 4 times EBITDA for your club, they are basically saying that it will take them 4 years before they will recouped the purchase price and begin seeing a return on that investment. As a result, doing whatever you can to improve your cash flow or profitability will have a multiplier effect when you sell your club or business.
Risk Profile
The risk profile of your club club or business is largely subjective and based on the buyer’s impressions. Their impression of risk directly affects how long they are willing to wait before they see a return on their investment. So, if your club has a higher than average risk profile, buyers may only be willing to pay you 3 times EBITDA, because they are concerned about the long-term prospects of your business.
Here is a list of some of the factors that buyers look at to determine the risk of a particular business:
- Are the long-term and short-term trends in revenues and earnings positive or negative?
- Is total membership stable?
- Are financial statements complete and accurate ?
- Is operating data presented in a clear and concise way?
- Does the business have an experienced management team willing to stay on after the sale?
- Are margins at least equal to industry averages?
Growth Prospects
Buyers are basically buying the future performance of your fitness club or business. As a result, to maximize their return on investment they want it to be bigger and more valuable when they decide to sell it years in the future. As a result, buyers will try to project how they could grow your business once they own it. Help them see the growth possibilities by understanding the following:
- What are the prospects for increasing overall membership?
- How successful would we be in introducing new programs?
- What other sources of revenue could this club or business generate?
- Could we grow by acquiring other clubs in the area?
- How much would it cost to expand or enhance the club’s current facilities?
Small changes you make today can have a huge impact when you decide to sell. Contact Us if you would like to learn more about how you can maximize the value of your sports club or business.
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Selling Your Fitness Studio or CrossFit Gym: The Hard Truth About Selling
I was recently approached by the owner of a fitness studio/CrossFit affiliate who was interested in selling. When we prepared a Market Assessment for her I could tell she was shocked that our estimate of the fair market value of her gym was so different from what she was expecting.
I won’t speculate as to how she determined the value of her gym, but I thought it would be helpful to summarize how small format fitness studios and CrossFit gyms are valued so you can have realistic expectations before you decided to either buy a gym or sell one.
The hard and simple truth is that 80% or more of the of gyms we evaluate are not set up to be saleable. That means that 80% of the time no buyers will be willing to submit an offer or if they do sell, they will sell for much less that what the owner was expecting.
The number one reason gyms are not saleable is they are founder centric, i.e., the gym owner or founder does all the work. She teaches the classes, runs the books, handles the admin, does the social media, and builds the membership base.
In the simplest terms, gyms like this are basically offering a buyer an opportunity to buy a job.
If you own a fitness studio or CrossFit gym and want to receive anything beyond the book value of your business, you’ll need to make sure it can run smoothly without you. I mean this literally. You need to be able to hang up the phone, turn on your vacation auto-responder, and leave for a 1-2 month vacation without the business missing a beat. If your gym or studio cannot run without you, make sure it can before you think about selling.
Once your gym can run on its own, a buyer is going to be looking at two things: your bottom-line cash-flow and year-over-year earnings growth. This means they want to see the business is profitable, and they want to see those profits are growing.
The more money the gym makes and the faster that number is growing, the more a buyer will pay. This is because buyers are investors who are seeking a return on their investment. Buyers are investing in the future cash flow or profits of your gym or studio. The expected amount of those future profits determines how much they’re going to be willing to pay today.
To determine the value of your gym, buyers will apply what is referred to as a “capitalization of earnings” or an “earnings multiple” approach. You’ll often hear gym owners referring to a “2x” or “3x” or “5x” earnings multiple when they acquire a business. What that means is they are paying two times, three times or five times, the yearly cash flow of the gym to buy the business. Buyers tend to pay a lower multiple for gyms with profits that bounce around from year-to-year and that have a record of low historic growth. On the flip side, they tend to pay higher multiples for gyms with steady profits and above average growth prospects.
To be candid, the growth prospects for most individual yoga or fitness studios or CrossFit gyms are limited. You can only have so many clients before you need to invest more money to expand your physical space or open a new location.
Because the earnings potential of most gyms is limited by the number of people that you can fit in your gym and the number or classes or programs you can offer, the earnings multiple buyers will pay for a gym is also limited. Most likely, you’d receive something in the realm of a 2x or 3x earnings multiple, provided your gym can run without you and generates more than $100k a year in profit.
What does this mean?
Your gym certainly has value, but it is important to realize that your gym is probably not the golden retirement nest egg you were hoping it would be.
If you are still committed to selling, focus on building a solid, self-operating business. Focus on developing a good management team and trainers and being a good boss. Work hard to acquire and develop loyal clients and introduce new initiatives to help make your business unique. Then focus on improving your earnings each year. When you have completed these tasks you will have something to sell, but by then you may just decide that if the business can operate without you, you may want to simply retire and manage your gym as an investment and not exit at all.
Click here for your Free Opinion of Value or give us a call at (888) 270-0028
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Top Reasons Why Sports and Fitness Clubs Don’t Sell
When you try to sell your sports or fitness club, the most common feed back you will get from potential buyers is “no thank you”. The fact is, buyers are quick to say “no” and slow to say “yes” when it comes to evaluating any business – and health, fitness and sports buyers are no different. Buyers are quick to say “no” because they want to make the best investment possible, especially because most buyers will only have one shot at making a successful acquisition.
Over the last 20 years we have learned that buyers have a series of hot buttons or checklist items that they want to see when evaluating a business.
- Growing (or at least stable) revenues and earnings
- Growing industry or market segment overall
- Positive demographic trends
- Stable club membership or customer base
- Diversified revenue streams
- Low customer & vendor concentration
- Experienced and committed management team willing to stay with the club or business after the sale
- Well maintained assets and facilities
- Margins that are above (or at least equal to) industry averages
- Realistic expectations of your business or club’s value
These ten items are the basic value drivers of any business. If your club or fitness business can answer yes to these items buyers are likely to be interested in your business. If not, take some time to fix the value drivers that are getting in the way of your successful exit. Addressing them before the sale will greatly enhance the value of your club and the likelihood of a successful sale.
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Legal Documents Involved in Selling a Fitness Club or Business
The goal of any successful transaction should be to benefit both parties. The following legal documents make sure that all of the terms and disclosed and agreed to so that there is no misunderstanding later on.
The goals of these legal documents are to :
- Create a safe and secure environment in which both parties feel comfortable sharing information and conducting due diligence
- Define the terms of the transaction including what is being sold or purchased, the purchase price, terms, and the buyer and seller’s obligations
- Protect both parties against misrepresentations and fraudulent actions
- Provide a process of legal remedy should that the buyer and seller’s agreements be violated.
Below are just a few of the most common documents you can expect to run across in buying or selling your leisure or fitness related business or health, fitness or sports club.
Letter of Intent
A letter of intent provides the general framework of a final transaction. Although it is not a binding contract like the final purchase agreement, it certain sections of the letter of intent like confidentiality, remedies, and non-compete provisions are often binding.
The letter of intent provides a high level outline of the terms that the buyer is proposing, including the total purchase price, what is being purchased, the amount of seller financing requested and the terms, the expected closing date, a period of exclusivity to allow the buyer to do due diligence, and any other elements or terms that are important to the buyer.
Sellers usually respond to the letter of intent with a counter offer. Once everything is accurately documented and agreed to in the letter of intent, the final purchase agreement should mirror the terms in that letter of intent. If during due diligence the buyer discovers some facts that were not disclosed or that we misrepresented, i.e., the financials are different that presented or material facts were not disclosed prior to signing of the letter of intent, the final purchase agreement may account for these differences (assuming the buyer does not walk away from the deal).
The key to ensuring that a letter of intent leads to a final purchase agreement is make sure all material facts are presented and that they are accurate and verifiable.
Purchase Agreement
The purchase agreement is the governing document in the transaction. It is often 30+ pages long and includes all of the terms and provisions of the deal and is the binding agreement that governs the transaction. All other closing agreements (non-compete agreements, employment or consulting agreements, asset allocation agreements, promissory notes) are tied to this agreement.
Drafting the purchase agreement is typically held to the end of due diligence because of its importance. Because it is time consuming and expensive to draft this document, buyers will only instruct their attorneys to prepare the purchase agreement once they have completed their due diligence and are comfortable with everything about a company.
In some highly competitive transactions, a buyer may be willing to provide a conditional asset purchase agreement instead of a letter of intent. The goal here is to demonstrate the buyer’s eagerness and commitment to getting a deal done, but this is pretty rare.
Buyer Promissory Note
If a transaction involves seller financing, and the financing is in the form of a seller loan, one of the key transaction documents will be a buyer’s promissory note. The promissory note is an agreement that spells out the amount of seller financing provided to the buyer, the payment schedule, interest rate, and default remedies related to the seller financing.
A promissory note is typically tied to a purchase agreement so that both parties (and the courts if necessary) understand the context under which the note was issued.
Asset Allocation
The asset allocation is an agreement between the seller and buyer about how the purchase price should be applied to the different assets the buyer acquired. The asset allocation agreement itself is not a complex document, but its implications can be significant from a tax standpoint to both the buyer and seller. Sports Club Advisors recommends that buyer and seller consult a tax attorney or tax advisor regarding the implications of the asset allocation for their deal before an offer is accepted and then again before signing the Asset Allocation Agreement.
Non-Compete Agreement
Most purchase agreements include a non-compete clause within that document itself. However, many attorneys like to have the non-compete agreement as a separate document. Doing this allows the terms of the non-compete agreement to be more fully defined and to have different remedies from the Purchase Agreement. Sellers should always expect to sign a non-compete agreement when they are selling fitness center, sports club, or fitness related business. Buyers need to be assured that they will have an adequate time to recoup their investment and will not be immediately competing with the seller.
Bill of Sale
The bill of sale is a receipt that acknowledges the buyers receipt of assets and the seller acknowledging the receipt of purchase price as spelled out in the purchase agreement. It exists to protect against any claims of a lack of delivery. As a result, it should only be signed when the purchase price and assets being sold have been received by each party.
Additional Documents
While these documents appear in every transaction, each club or business is unique, and every buyer and seller have unique needs, so it is not uncommon for transactions to require additional documents, like leases, assignments of contracts, consulting agreements, indemnification agreements, or lien waivers.
When selling your health club or fitness related business, you should hire the most qualified M&A attorney you can find to represent you. These legal documents are intended to protect you, and while attorneys fees represent an additional cost, the cost is minimal compared to the expense of a lawsuit.
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What to Expect in Due Diligence
If you have never been through a due diligence you are likely in for a big surprise. For most sellers the due diligence process is stressful and demanding. Due diligence is often the most stressful part of any deal, for both buyer and seller. Knowing what to expect can greatly reduce that stress, make the process go more quickly, and also reduce the possibility of a renegotiation or cancellation from the buyer.
What is the Purpose of Due Diligence
Due diligence is the process a buyer goes through to verify the information that has been presented and ensure, as much as possible, that there have not been any significant omissions by the seller. Most of due diligence serves to verify the legal status, the financials, past history of the business, and your general ability to sell the business. In addition, a buyer may verify different aspects of the company to make sure it is in good health. In many ways, due diligence is akin to bringing a used car to a mechanic for a thorough inspection before you buy it.
A proper due diligence is important for both the buyer and the seller. With significant assets at stake for both parties, having a proper due diligence insures that the buyer is fully aware of what they are buying – including the risk – reduces the possibility of a dispute after the closing.
So while due diligence may be uncomfortable for the seller, a seller should take comfort knowing that a proper due diligence helps protect both the buyer and the seller after the sale.
Be Prepared
You should always expect to verify your business with 3rd party documents. Bank statements, tax returns, merchant statements, corporate filings, etc. A buyer may request multiple forms of verification as well such as tax returns and bank statements.
Many sellers complain at the sheer volume of documents requested in due diligence. The fact is, document requests from buyers can lead to boxes full of information. If you are planning to sell your business in the near future (i.e., 3 months – 1 year) you should start preparing a due diligence package now. This will help reduce stress at the time of the sale. Most sellers are not prepared to provide all of the documentation a buyer will request and only start doing so when there is an offer on their business. By preparing ahead of time you can simply modify what you have already put together to match what your buyer is looking for. Sports Club Advisors can share with you a due diligence check list to help you begin to organize your due diligence files.
Expect Additional Requests
Due diligence usually starts with one list of requests and questions, but it almost never ends there. When a buyer starts to do due diligence on your business, they will likely do it in stages, focusing on the most important things first and then expanding their scope as they get comfortable with the most crucial items. As a result, sellers should always expect that due diligence will consist of multiple rounds.
One of the advantages of working with a broker like Sports Club Advisors is that we can help identify what are reasonable due diligence requests and when a buyer request is over reaching or becoming a stall tactic. Dealing with unreasonable buyer requests takes diplomacy and an independent,objective viewpoint which we provide.
In Conclusion, Have a Plan
As a seller, due diligence may seem like something you want to avoid, but for reasons covered above, due diligence actually benefits the seller as well as the buyer. As a seller, you should want your buyer to know exactly what they are buying so there are no surprises. Surprises after a closing often lead to arbitration or lawsuits, something that neither the buyer or the seller want.
Because of the detailed nature of due diligence, if you can prepare and gather your due diligence “data room” or file drawer in advance, before putting your company on the market, you will make your investment bankers job easier, create a favorable impression on prospective buyers, and eliminate one of the most stressful parts of the transaction for yourself.
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