Top 8 Things Business Owners Do To Crush the Value of their Business

Top 8 Things Business Owners Do To Crush the Value of their Business

8 Mistakes Business Owners Make that Hurt their Business Value
Mistake #1: Keep your financial records as obscure and inaccurate as possible to make sure that the IRS can’t figure out if you made a profit. Effect: If the IRS can’t figure out if you made a profit neither will a buyer.

 

Mistake #2: Don’t know what your competitors are doing, just assume you know what you don’t know. Effect: If you don’t know where your prices or services fit in the market your prices are probably too low. If they are too low you are missing profit. A smart business buyer will know this and buy your business based on your under-achieved profits, they will then increase the prices and make more money from your business than you did.

 

Mistake #3: Don’t document any systems, just spend 20 hours a day at the business and when somebody needs to know something they’ll ask. Effect: If you get hit by a truck, the business will be in the tank before you’re out of the hospital.

 

Mistake #4: Let people who you didn’t train….. be the people who train the new guy. Effect: See #3 above.

 

Mistake #5: Mix your personal finances with your business finances. (Relates to #1 above). Effect: You won’t be able to plan since you don’t know what your real business results are. If your business makes $200,000 but you spend $250,000 it’s the owners fault, not the businesses.

 

Mistake #6: Don’t get the proper business insurances you need. Example, many businesses who should have product liability coverage..don’t. Often they also fail to obtain adequate umbrella coverage or have policies that don’t adequately cover the risks. Do you know the difference between a claims made policy and an as occurred policy? Effect: Buyers don’t want to be exposed to litigation, which is inadequately insured, created by the business before they buy the business. I have seen more businesses fail due to under-insurance than I’ve seen businesses fail because customers don’t pay their bills.

 

Mistake #7 – No documented policies related to employees, i.e. vacation, sick pay, etc. Are employees classified as salaried who should not be? Are there 1099 contractors who really should be W-2 employees? Effect: If the best buyer for your business is a big company they will spend a lot of time in due diligence of employment practices and they don’t want to inherit confusion and risk. There is huge risk in poor employee documentation and policy inadequacies. If you have more than 4 employees you should seriously explore outsourcing your HR functions to professionals.

 

Mistake #8 – Let your customer concentration get out of balance. Meaning one or two customers represent a huge portion of your business Effect: A business with 2-3 customers that do 90% of the business has more risk than a business that has 100 customers each doing 1%. If your top customer does 75% of your business it might be easy for you to manage one customer but if that customer leaves you, you’ll take BIG steps backwards. Try to get your largest customer to represent no more that 10% of your total sales.

 

While it’s easy to get wrapped up in making a business profitable, always keep an eye on the things that make a business valuable.

I can guarantee every business owner one irrefutable fact. You will exit your business, either willingly or not, but it is 100% guaranteed. 


What other things do business owners do to crush the value of their businesses?

 

 

Business Charity can be Good for your Business

Many business owners I encounter say they want to have business charity or “give back” and will start doing so after they …hit it big. I’m sure many of them mean what they say and I’m equally sure that many, many of them will never get to the point where what they’ve achieved is enough to start “giving back”.

Should You make A Charitable Cause Part of Your Business Model Instead of Just a Part of Your Hopes?

 

There are many benefits to a business if they make a serious and genuine effort to support a charitable cause on a consistent and ongoing basis. A few well known businesses do this and many other lesser known companies do as well. Business charity is not only good for your communities..it’s good for your business. Never underestimate the power of a good business plan.


The best known of these companies is Ben & Jerry’s Ice Cream Foundation. Every year Ben & Jerry’s contributes a percentage of their profits to the foundation and distributes grants based on a complex process of applicatsions and evaluation. What they do is not nearly as important as how they do it. Everything you see from Ben & Jerry’s references their commitment to this charitable cause. It’s on the ice cream containers, the Ben & Jerry website and all promotional materials. Why does Ben & Jerry’s do what they do?

First, I think they truly care about giving back and making a difference in communities.

Second, it’s great for employees. Nearly everyone wants to be part of something bigger than themselves.

Third…it’s great for business. Supporting a company that is trying to do more than just earn a profit is emotionally satisfying for a large percentage of people.

Can every business do what Ben & Jerry’s does? Probably not but that doesn’t mean you shouldn’t do anything. Give this some thought, how much is it worth to have employees who care just a little more? Or customers who respect what you do a little more? Or suppliers who respect what you’re trying to do?

It has been my experience that, like many things in business and life, getting started is the most difficult part. It doesn’t have to be complicated. Here are some ideas on how to start, this worked for us:

 

•   Be genuinely committed, no faking it! – Make the commitment that supporting a cause is part of your business, everyday..not just when it’s convenient or when you’re rolling in the money.

 

•   Pick a Cause You or Your Employees have or can develop an emotional attachment to – In my business we support two causes every year. One is Cystic Fibrosis Foundation. We support this cause because an associate in our firm is very committed to this organization. He sits on the board and works tirelessly at fund raising for this terrible but under-funded disease. Our other cause is the Pulmonary Hypertension Association for whom we sponsor the annual fundraisers The Woodlands CrawPHish Festival. We chose this effort because a local attorney and friend of our firm, whose family has been touched in a very personal way by this disease, is very active and works year-round to raise money to cure adolescent pulmonary hypertension. In addition, this Crawfish Festival is great fun and we invite employees, clients and referral sources for a great day.

 

•   Commit to a Financial Contribution – The tendency with many is to view charitable donations as the “extra” money available in a good year. Although any contribution is good, it is better for your business and the charity if you make a financial commitment and stick to it. Why is it good for the business?

 

•   Market Your Charitable Efforts Consistently – By making your financial commitment without fail, you can embed that in your marketing efforts. Market your support on your website and other marketing materials that you are producing anyway…there’s no additional costs. As an example, I have recently been invited by a financial advisory firm to a wine event by Tithe Wines. The mission of Tithe Wines is to make great wines AND contribute 10% of their revenue (not profits.. 10% of top line revenue, that’s a commitment) to Living Water which is a charity with a mission to provide clean, safe water in poverty stricken places around the world. Had Tithe wines not partnered with a financial adviser who I know to present this event, it is highly unlikely I would have ever heard of this wine. Now I get to try some new wines and help bring clean water to people that need it. Tithe Wines is doing their part by supporting a great cause and I’m happy to help them do so.

 

With business charity doing good can go hand in hand with a business doing well…In fact it can help give you an edge. Start with your employees, find a cause they can connect with then build that commitment into your business plan and day-to-day activities.

 

Small business owners can make a difference in their communities and can make a big difference over a long period of consistent charitable contributions. Get involved, do good.

 

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Anatomy of a Successful Small Business Purchase

 

Although the names, location, types of businesses and other details have been changed for confidentiality purchases this Hub reflects real transactions in the world of buying and selling a business.

 

The Buyer

 

Susan, 45, had been employed in the corporate world for 15 years and had done well, worked hard and gotten good performance ratings. She felt like she would be with her company for a long, long time. She thought that right up until the moment when, on a Friday afternoon, she opened an email from the company CEO stating that the company had just agreed to be acquired and more details about what that means to individual employees would be forthcoming in the next few weeks and months.

This news wasn’t a total surprise since there had been rumors for months but now it was real. Susan felt like her group might get consolidated and that, though she might survive, she was fairly certain that would require a move for her family. However, within weeks it became apparent that no one in Susan’s group was likely to survive the merger and now they were just waiting on the details of a severance package, if there was to be one.

Susan began as many in her situation often begin, she updated her resume, did a quick analysis of her current financial situation and started thinking about where she might look for another job. She started going through her contacts and she quickly found out that another job at her pay grade was likely to be very difficult to find. In addition, she wondered what would happen if her job search went on for months or even years, would she need to use up her savings and 401k money just to live on while she was looking for work?

 

What other options did she have? One of her contacts asked her if she ever consider owning her own business. Susan had only occasionally given it a brief thought but decided to investigate it more closely since she had no idea what the process of buying a business entailed.

 

Susan’s financial situation wasn’t great but wasn’t terrible either. She had some liquid assets (about $30k cash), not much debt, pretty good credit and her 401k plan had about $125k in it. She considered her 401k sacred and had no plans to touch it until retirement. Susan’s salary was $90,000 per year with the occasional bonus….although there hadn’t been one for the last two years.

Susan had no idea how to find a business to buy and didn’t know what are the right questions to ask when buying a business so she did the obvious, she googled buy a business Houston Texas.

That’s how Susan found us.

The Seller

Arthur had owned his small manufacturing business, XYZ, Inc, for 30 years and was comfortable. It had been a good business for him. Arthur had recently turned 68 years old and, although he had hoped otherwise, his children had their own careers and weren’t returning to run the family business.

 

Arthur was talking to his accountant about his taxes and mentioned he had had some health problems. His accountant asked Arthur if he intended to run the business until they carried him out on a stretcher or did selling the business make more sense for him? After talking with his wife Arthur decided selling the business was the right thing to do. He could get the value of his business to fund his retirement, relax, travel more and enjoy his family.

 

Arthur told his CPA he was ready to sell and his CPA referred Arthur to us.

 

That’s how Arthur found us.

 

The Business

 

XYC is a light manufacturing business that makes a variety of small parts used in the transportation industry. Arthur hadn’t really worked on growing the business for the last 10 years. He had a variety of regular customers and didn’t have any organized sales effort. At this point in his life he felt like growing the business would be more work than he wanted to do. He liked his 30-40 hour work week.

 

•   XYZ did $1,200,000 in annual sales most years and didn’t vary much from year-to-year

 

•   XYZ’s net profit available to Arthur was consistently around $180,000 per year. This $180,000 is often called Seller’s Discretionary Earnings (SDE) because it includes Arthur’s salary and all of Arthur’s substantial benefits. Many of these benefits are in pre-tax dollars so they can’t be directly compared to a salary that might be earned from working as an employee at a big company.

 

•   XYZ didn’t have any debts other than what was normal accounts payable owed to suppliers.

 

•   XYZ was located in a leased building and did not own the real estate.

 

•   Asking Price for the Business $675,000 – FYI- How we determined the asking price is too long for this post and I’ll create another Hub to describe the business valuation logic and methodology.

 

The Transaction

 

Susan came to us looking for a business to buy and based on her experience, skills, lifestyle and financial capability we decided to present XYZ company to her. (Here is a post about Confidentiality when buying a business). Susan liked the industry and the business location. We provided her with some high level financial reports for her review and Susan decided she wanted to look more closely at this opportunity.

 

We arranged for Susan and Arthur to meet to tour the business and for Susan to ask Arthur all the questions she felt were important. After due diligence, research and negotiations here is the final transaction that was completed and Susan purchased the business which she still runs today.

 

Selling price $655,000

 

Susan’s down payment was $110,000 which she obtained, tax & penalty free, from her 401k plan.

 

Susan received an Bank Loan with an SBA Loan guaranty for $605,000 (the bank included some working capital to assure Susan’s financial comfort). Terms: 10 years @ 6.0%. Click here for a Hub about using aSBA Loan to acquire a business.

 

Results:

 

•   The business was earning $180,000/year.

 

•   Susan’s bank note payment is $80,000 per year.

 

•   Earnings available to Susan in excess of debt payments = $100,000/year ($180,000 – $80,000)

 

•   The business is paying the debt. On a straight line basis Susan is building $60,500 per year in equity ($605,000 divided by 10 years). That’s a 55% investment return per year on Mary’s equity of $110,000, I doubt you can get that kind of return over 10 years in any other investment.

 

Summary:

 

•   Susan was able to immediately replace her $90,000 per year, fully taxable salary with $100,000 per year of income that had significant tax advantages.

 

•   Susan had no worries about being laid-off ever again. She did have a business to run that comes with it’s on worries but at least Susan feels like she is in complete control and can manage any problems successfully.

 

•   When the day comes for Susan to sell the business she expects the value of the business to have far outgrown the value of her $110,000 had she left it in her 401k plan and relied on the luck of the stock market. Susan, like Arthur before her, is now in total control of her retirement investment.

 

If you have the skills to operate a successful small business the financial rewards can be tremendous.

If you want a good book on Buying a Business here is our recommendation:

 

The 2% Solution for Disputes among Business Partners and Partnerships

Preparation Avoids Business Partnership Problems that could Kill a Business     

Many people start a business with friends, neighbors, relatives or spouses and it’s often a partnership 50/50 arrangement. Rarely is there a written business partnership agreement and this can be a big mistake. These arrangements often work well until there is a problem but then…the problem could be a big problem and the dispute can spin out of control quickly. It is not uncommon that these problems wreck a business and do significant, sometimes fatal, damage.

Small business partnerships should come with a warning label “Caution: Partnerships work best when the partners document the problem resolution methods before entering the partnership.”

There are many advantages of a partnership which can lead to business success far beyond what an individual might have accomplished on there own. However, the success of a partnership 50/50 agreement is often determined by the care taken when the partnership agreement is put in place. A good and well defined partnership in business agreement can serve as a tool to help you run your business professionally and increase your chances of getting outside investors.
I’ve seen what appear to be small issues to outsiders become big issues to business partners. A simple and very effective solution is available to business partners who have the foresight to set up a system to break impasses should they arise. A business partnership dissolution doesn’t have to be a financial catastrophe for the business or it’s owners if there is a well documented and thought out business partnership agreement.

I have seen businesses fail because the owners were stuck on issues that most of you would say “oh, that would never happen to us” but you are rolling the dice. What happens if your business partner is involved in a divorce and suddenly there is a new spouse in the picture who thinks 50/50 means opportunity?

I saw a situation a few years back (I know you’re thinking I’m making this up but I’m not) where one partner put out a contract on the other. The partner got out on bail and showed back up at the business! He was a 50/50 owner and the other partner couldn’t do a thing about it without resulting in a lawsuit and a request for an injunction and restraining order through the court system.
Another benefit of going through these “what if” scenarios with your soon to be business partner is it will help you understand how they think and how they might react in a business crisis which will surely present itself in one form or another.
The 2% Solution
This is elegant, simple and highly practical. In your LLC partnership or operating agreement put in a provision that grants a third party, agreed to by the partners, a 2% voting interest. Each partner would have 49% voting rights each. That way if the partners agree they have 98% vote and they can do what they want. But if the partners disagree, they take their problem to their 2% voting partner and whichever position the 2% takes means there is 51% of the votes and that’s the decision.
Some attorneys may prefer to have a separate business partnership document or member agreement to govern this issue, certainly get legal advice from a business attorney.
Remember, the only time the 2% vote is required is if the partners can’t agree on an issue. As long as the partners agree then the 2% vote doesn’t effect anything. And that’s exactly the purpose of this partnership agreement, to have a mechanism to resolve issues when the partners can’t agree.
The important part of this strategy is to do it long before there are any disputes. It will be much easier to select who the 2% voter is if there aren’t any pressing disputes at hand.
Here’s an excellent guide to forming a good partnership. Setting up your business partnership correctly at the beginning is the key to resolving inevitable problems in a manner that doesn’t destroy the partnership or the business.