Posts Tagged ‘outstanding’
If you are determined to receive the best price for your business when it’s sold, it is important to prepare your business for its eventual sale.
The five key aspects of the preparation process are.
1. Stop Running the Business
Many buyers have been conditioned to think that a business cannot perform without the original owner. Many prospective purchasers are afraid that once the current owner leaves, the company will underperform and this fear prevents many businesses from ever being sold.
When preparing your business for sale it is a good idea to reduce the amount of time you spend running the business on a day to day basis. Most small businesses are built around the owner/manager which is why prospective buyers feel the business will falter once it has changed hands. If you can show that the business can operate profitably without you then you have a business with value that should sell for a premium.
2. Hire Managers
Buyers like stability and they dislike risk. One way you can decrease the perceived risk of acquiring your business is to put good managers in place. If you are able to hire managers and build in a chain of command that removes you from the day to day running of the business, while ensuring it still runs efficiently, you have taken away a significant stumbling block for many buyers.
A profitable business which comes with well-trained managers who know the business well, and are willing to continue running it from the day one, is an attractive proposition that many buyers will not pass up on.
3. Put Business Systems in Place
During the preparation period, aim to have all your business processes documented and working in a defined system. All business practices should be well-defined and each member of your organisation should have a clear role with a well understood job specification. Use the preparation period to build in systems which explain and document how each process of your business works and all employees should be well versed in how these systems work.
Building in systems is important as it will improve a buyer’s confidence and this will lead to better offers. A business that works smoothly and efficiently, with clearly defined processes and systems, is a positive for many buyers as this reduces the amount of time and resources they have to spend understanding and fixing inefficient practices.
4. Legal Issues
It is very important to settle any legal disputes or issues that may affect the sale of your business as any buyer worth their salt will conduct some form of due diligence if they are serious about purchasing your business.
Many deals have collapsed due to legal issues or disputes that the vendor has failed to sort out or disclose. If you are able to solve these issues prior to negotiations and due diligence you have paved the way for a successful sale. Issues such as lease agreements on property and equipment, outstanding payments or court settlements and other potential liabilities should be tackled prior to the negotiation period as these issues are notorious for collapsing deals.
It’s also a good idea to turn any verbal agreements you have with key suppliers and customers into written contracts. Prospective buyers want to feel confident that all the key aspects of the business are tied down and enforceable by law.
5. Housekeeping
It is important to pay attention to your premises and ensure that all equipment and stock is up to date, that your office looks neat and professional and all unsold or out of date inventory is moved on. First impressions of your business count so it’s important you make a good one.
You should also use this period to begin looking at your company accounts. Many small businesses are set up to minimize tax but this method of accounting leads to lower valuations as many offers are made by applying a multiple to yearly profits. If you are able to adjust your accounting methods or at least build in a framework that shows the business’ true profitability this will eliminate much of the time wasted haggling over the business’ value.
It is a good idea to look at the situation with your debtors and reduce the amount of bad debt on your books. Buyers are weary of purchasing businesses where it seems the level of bad debt is too high or businesses where the customers take too long to settle accounts. You should use the preparation period to reduce the amount of bad debt and possibly restructure how certain accounts are paid.
If you are determined to receive the best possible price for your business it is important that you take the time and effort to prepare your business for sale otherwise you risk leaving money on the table. A poorly prepared business is rarely sold so it is important not to cut corners during this period.
There are numerous ways to determine the value of a company. When you can determine it’s value, you can then determine the value of its traded shares. The most basic way to do it is to look at the company’s market value, which is also referred to as its market capitalization, or market cap.
So how do you calculate a company’s market capitalization? It’s not as diffuclut as you might think. It’s simply the number of shares a company has outstanding multiplied by the current share price. So as an example, if a company has a million shares outstanding and its current share price is $15, the company’s market cap is $15 million…Simple eh?
How large a company is can be measured by its market cap. Here’s a list of the the five basic stock categories of market capitalization:
1) Micro cap – These are companies that are under $250 million. These stocks are the smallest available and tend to be the most risky.
2) Small cap – These companies are worth $250 million to $1 billion dollars. The stocks of these companies are less risky than micro caps, but still have a lot of growth potential. However, the key word in this description is “potential”, so still make sure you do your homework!
3) Mid cap – Mid cap companies have a value of $1 billion to $5 billion. This kind of company gives investors a good compromise between the small and large cap companies. This gives the investor the chance to invest in a company that have have a degree of safetly found in large cap companies while still having some of the growth potential of a small cap company
4) Large cap – these companies are referred to as “blue chips” and have a worth of $5 billion to $25 billion. These companies are more for conservative investors as they appreciate on a steady rate and are relatively safe.
5) Ultra cap – These caps can also be referred to as “mega caps” and are the real “big boys” of the share market. Companies such as General Electric and Microsoft are good examples. Investing in these companies can be very expensive, but you can be assured the company won’t go bankrupt (and have ther share values drop to zero) over night.
So which ones should you go for? It all depends on what your goals are. Large caps tend to do better than small caps, but remember that even a company like Microsoft was once a small cap and therefore small caps have a lot greater growth potential.
An easy way to think of this is to compare stocks with trees. Think of a small cap stock as an oak tree that is a year old, and think of a large cap stock as a giant redwood that is over 200 years old. In a storm (ie turmoil in the stock market as we tend to see every few years), the oak tree is going to have rough time and may even die, while the redwood will be very sturdy and highly unlikely to suffer much damage after the storm is over. However, the oak tree still has a lot of potential for future growth whereas the giant redwood may not grow very much more over its lifetime.
Even though market capitalization is an important consideration, it shouldn’t be the only way to decide. It’s just one measure of value. If you are going to become a serious investor, you will need to look at numerous other factors to determine if a company’s shares are worth investing in.