Raymond Melcher

Raymond Melcher

Monday, 11 July 2016 16:20

As Seen Through A Business Buyer’s Lens

Marathon’s largest category of business activity is SELLER representation with a smaller part of our activity involving BUYER representation. We contract with either the seller or the buyer, but never both, on a specific transaction. 

On behalf of our sell side clients, we spend a great deal of time with buyers. Hence, we understand buyer thought and behavior processes that drive a buyer’s considerations during the process of buying a business. It never ceases to amaze me how differently buyers and sellers view the same business.
To benefit potential business sellers, I will herein offer some thoughts that commonly run through the minds of buyers. My purpose is to give sellers a glimpse of what buyers see through a buyer’s lens. This insight may help sellers be better prepared to deal with the complex and emotional process of selling a business.
Let’s look at a common scenario…..the 68 year old owner of a long time established profitable business with annual revenue of $2 million wishes to sell his business so that he can retire. Through the lens of the business owner, the business seems large, stable, profitable and with a bright future. He is proud of his dedicated employees and loyal customers. He sees his facility as a good facility for the business. Accordingly, the seller believes his company should be very saleable and at a premium price with favorable transaction terms and conditions.
On the other side, here’s what a buyer is likely to see through his lens about this $2 million business…….The business is only doing $2 million in revenue and in today’s world, size matters. The buyer is concerned about the ability of the business to scale up to a larger size. The buyer knows the business has been stable and profitable, but he envisions new competitive pressures coming from the “big boxes” and the internet . He worries if the business is vulnerable and that profit margins will shrink and sales growth may be hard to come by. The buyer recognizes that the employees have been good employees, but he believes the company may have to “re-tool” the employees to be able to compete differently against the new competition. And the buyer sees a need to diversify the product selection and the R & D required and new learning that will be required may disrupt the current employees. The buyer, who sees a need for growth and diversification, believes the building may not satisfy the business needs for long and he may have to relocate….and the neighborhood is declining and he worries about the declining value of the building. And because he sees a need to scale up and diversify, he believes his capex requirements for new equipment will be substantial.
Moral of the Story..….The buyer sees the business as a good business to buy but sees the risks and challenges that lie ahead. The seller sees his “baby” as a great company poised for growth. The seller thinks he has created a foundation that can be built upon and wants value for it. The buyer doesn’t want to pay the seller for the future growth that the seller will create and only wants to pay for what history has generated.
So what happens during the selling process ? The business is put on the market with all of the positives and strengths highlighted. But the buyer and seller it differently……glass half full and glass half empty analogy. The result is often that the buyer places a much lower value on the company than what the seller thinks its worth.
Conclusion……Both buyer and seller looked at the same company with the same interest….a sale of the company.…..but they see things differently through their respective lenses.. The effect is a valuation gap between what the buyer wants to pay and the seller wants to sell for. As Donald Trump’s book is titled, “The Art of the Deal” now comes into play. The goal is to create a successful transaction for both parties.
More to follow in future articles about negotiating a good deal for all parties.

By: Ray Melcher, President
610-898-8086
This email address is being protected from spambots. You need JavaScript enabled to view it.
www.vrmarathon.com
May 2016

Thursday, 24 March 2016 16:35

Selling a Business..... Basic for Success

My associates and I are often quizzed about the process of selling a business. It’s something that many people only do once in their life and its common for business owners to tell us that they really didn’t plan much for the eventual sale of their business. In fact, a common question of us is “is my business saleable?” So, much of what we do at Marathon is to educate business owners and often their accountants, attorneys and others about the sale process. And the earlier the education process begins, the better for the business owner in terms of the success that he or she will likely experience when it is time to sell the business.
There’s much more to it than this space will allow, but following are a few thoughts about the factors that are considered by buyers of businesses that determine salability, price and transaction terms. The concepts that follow are relevant here because they are all factors that can be influenced or controlled by a business owner leading up to a sale event. Some factors such as the weather, the economy, government regulations, etc. are generally not within a business owners’ direct control but many factors as follows, are within a business owners control... and hence a business owner can have some control over the sale success for his or her business.
Here goes...
1. Cash Flow is the major value driver. Stable and increasing cash flow to cover debt service, owner compensation, future investment in the business, etc. matters most.
2. Business reputation is important. Buyers of business usually want to benefit from the success of a business built on its good reputation for customer service, product quality, fair prices, etc. rather than having to fix a poor reputation.
3. Good financial records is a big plus whereas sloppy, inaccurate or outdated financials is a red flag
4. Documented policies and procedures adds value and increase salability. The easier it will be for a new owner to learn how the business operates and to transfer knowledge from the seller to the new owner, the more attractive the business is to buyers.
5. Trends really matter. A business with declining or very volatile sales, profit and cash can expect a significant price discount vs a similar business with stable or increasing sales, profits and cash flow
6. Size matters. Generally larger businesses command higher relative valuations and are more salable than small businesses regardless of profitability. Being a very small business can be quite rewarding and pleasant while operating the business, but when selling a business, increasing size will increase the salability and relative price to a smaller business.
There are many other concepts and ideas that we share with our clients in planning for a business sale.
These six are among the most basic. Selling a business is not a one size fits all nor cookie cutter process. Businesses can get ready to sell the same as one gets a home ready to sell. There are substantive ways to shine up a business so that is sparkles in the eyes of buyers which leads to increased salability at a good price and on excellent deal terms for the selling business owner. For a confidential, no obligation discussion about the possible sale of your business, please call me at 610-898-8086 X22 or on my mobile at 484-797-9796. This email address is being protected from spambots. You need JavaScript enabled to view it. to email me.

Monday, 29 February 2016 18:45

The American Dream, Owning your Own Business

How many times have you heard someone say they would like to own their own business?  As a long time banker and now a strategic business advisor who works almost exclusively with business owners and business leaders, I have heard that comment more times than I could ever remember.

What is it about owning a business that elicits that comment?  Is it the perception of job security?  Financial independence?  Controlling your destiny?  Personal satisfaction?  Pride of ownership?  Satisfy entrepreneurial desire?  Other?

All of these perceptions of what one can experience from owning a business can be realized. It can truly be like living The American Dream.

But, we would be naïve to think that owning a business is always all peaches and cream. There can be sleepless nights when worrying about meeting payroll or getting an order completed and delivered on time to a good customer or handling an irate customer over a mistake that your employee made or whether to relocate the business and incur higher expenses when you are bursting at the seams…..or others too many to list here.

Notwithstanding the pros and the cons of owning a business,  my experience is that once someone owns a business, they would never want to give it up to work for someone else ever again. Owning a business can be a very special and passionate experience, and decisions about the business can cause wide-ranging emotions.  

So, owning a business can be like living the American Dream.  But, there always comes a time when that dream must come to an end. The dream ends because of the occurrence of “life events” that usually leads to a business owner having to transfer management and ownership of the business to someone else. Examples of life events are reaching retirement age, health problems, becoming burned out, divorce, partner squabbles, family tragedy, Peter Principle kicks in, planned successor decides to pursue another career path or many others.

The good news is that there is an abundance of people who desire to experience the American Dream of owning a business who you can sell your business to when a life event says it's time to do so.  It’s a beautiful thing when a business owner who has worked hard his or her whole life building a business can sell it to a new owner who intends to perpetuate the business and the business owner converts the “paper” wealth in the form of net worth on the balance sheet to “liquid” wealth in the form of cash or securities in your bank or investment account that solidifies, and often enhances, the financial quality of life for the business owner.   Thus begins a new Dream for the former business owner as he or she enjoys the fruits of his or her labor.

Buying an existing business is generally far superior to starting a new business from scratch.  The supply of buyers for businesses is usually bountiful. The concept of buying an existing business is appealing since the new owner gets an established location, a market-proven and accepted product or service, positive cash flow from day one, an established customer base and a more predictable Return on investment (ROI) compared to starting from zero. 

So whether living the American Dream as a business owner and being thankful for having that opportunity or being among the huge number of people desiring to own a business, there are lots to look forward to. Enjoy the dream while living it knowing that when a life event arises, that tells you its time to put your business in someone else’s hands to perpetuate, that that event has a great chance of liquefying your wealth as your reward for being a good business person.  And for the fortunate successor to management and ownership of a business, get ready to smile as you begin living your version of the American Dream.  And then some day, you too, will transfer the business to the next owner, and you too will experience that thrill of wealth creation and having the satisfaction of knowing that you “done good” for your customers, employees, family, and community.  And so it goes….

Ray Melcher is President and CEO and co-founder of Marathon Capital Advisors and its sister company Marathon Franchise Advisors, both divisions of Marathon Business Group, LLC, headquartered in Wyomissing, PA. Since 2006, Marathon has been offering merger & acquisition advisory services, business brokerage, strategic planning, loan brokerage and succession planning for privately owned businesses located in the eastern half of PA, New Jersey, Delaware, and Maryland.

 By Raymond H. Melcher, Jr.  President, Marathon Capital Advisors (This email address is being protected from spambots. You need JavaScript enabled to view it.)

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