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You Might be Dealing with a Bad Business Broker if…

Business brokerages are no different than any other businesses – there are good firms and there are bad firms. So how do you determine a bad business broker from a good one? First, don’t confuse a broker’s personality with his/her business practices. There can be very poor business brokers with likable personalities, so it’s important not to choose a broker just because you like the individual – you really need to understand if you’re dealing with a good firm.

When it comes to signs you should be looking for that point to a bad business broker, here are some important things to consider.

You might be dealing with a bad business broker if…

You’re having difficulty getting references quickly

When you ask for references, you should expect to get a minimum of three names, and you should expect to get that information immediately. A good business broker has numerous references at his/her fingertips, and doesn’t need time to look for people who will give a good recommendation.

In addition, don’t just limit yourself to references the broker provides you. See if the broker has any Google reviews, or check the specific agent’s LinkedIn account to see what people have said about him/her. Even a bad business broker can scrounge up a decent referral or two, so don’t just count on what a reference says. Take the time to do a little digging on your own also.

The broker charges upfront fees

First, a disclaimer about upfront fees: Just because a business broker charges upfront fees does not mean it’s a bad firm. With that said, if a broker is asking for money upfront, you certainly need to do your homework and understand why.

Are upfront fees typically required by brokers in your area? In some parts of the country just about every broker requires fees upfront, while in other areas most reputable brokers don’t charge anything upfront. Do enough research to know what’s standard in your market.

Does the broker apply all of your fees to the final commission at closing? You want to make sure that if you are paying a fee upfront that those dollars will be applied to the broker’s final commission. If you pay $25,000 upfront and the broker’s commission ends up being $100,000 after the sale, you should only owe him/her $75,000 at closing.

What is the broker’s “pitch?” Be leery of why a broker is asking for a fee upfront. He/she should be able to give you a clear explanation as to why a fee is justified, what it covers and how the amount is determined.

You don’t understand the marketing plan

Effectively marketing a business for sale is not easy. So it stands to reason that any good business broker will have a defined program he/she employs on every single business listing. This plan should not be a mystery to you – the broker should be able to explain his/her marketing program so that you can understand what will be done.

A bad business broker won’t have a defined and thoughtful marketing plan, or he/she won’t be able to explain the plan to you. There is a major difference between “hoping” a business sells and “selling” a business. A bad business broker hopes listings will sell and has no real plan to overcome difficulties in the process, while a good business broker knows the likelihood of selling every listing is extremely high because of the system he/she has in place to market the business.

The broker lets the buyer dictate the process

How does a buyer actually buy a business? If you’ve been involved in a business acquisition before, then you know there are literally hundreds of steps and details that need to be handled in order to close a transaction. Bad business brokers leave this process up to the buyer and allow the buyer to take charge.

Your broker needs to be the authority in this process, and should be able to walk you through how he/she manages buyers and the buying process. A good business broker provides a buyer with a detailed, step-by-step plan that guides the buyer through the entire gauntlet of the acquisition, and then works with the buyer to make sure all his/her needs are being met and questions are being addressed along the way.

Having a clear buyer plan is also imperative in order for the broker to provide adequate protection for you. By letting a buyer dictate the process, you are running a huge risk. Without proper oversight, buyers could unintentionally damage your business simply because the broker is not there to guide them.

The broker doesn’t provide you with a detailed business valuation

Anyone can quote you a value for your business. Some brokers might actually be willing to give you an estimate over the phone after asking a few simple questions, while others might look over your financial statements for a day and then give you a verbal estimate, and some may even just email you a number. These are all signs of bad business brokers.

You deserve much more than a “back-of-the-napkin” estimate when it comes to determining your business’ value – you certainly didn’t put years of blood, sweat and tears into your business only to have it reduced to a number a bad business broker spends an hour “calculating.”

valuation-paper-on-clipboard-with-glasses

You should expect a business broker to provide you with a comprehensive, detailed, written business valuation report. A good business broker should not only explain the “what,” but also the “why,” “when,” “who” and “how.” While you may not agree with the valuation you get from a broker, you should at least be able to respect the process the broker went through and the effort he/she put into the analysis.

Also, be on the lookout for a broker who gives you a high value without supporting it. Bad business brokers are notorious for presenting you with unrealistic values to get you excited so you’ll list your business with them. Their hope is that when offers start to come in at a lower, more realistic price, that you’ll break down and accept it. This is a tactic called “seller’s fatigue” and bad business brokers will use it.

The broker doesn’t seem that interested in you or your business

At its core, a business acquisition is pretty basic – one party buying something from another party. That’s exactly how a bad business broker looks at your deal. It’s just a transaction and a commission.

How can a broker effectively represent your business if he/she hasn’t taken the time to really dive in, ask the tough questions and ultimately understand what makes your business unique and valuable? Furthermore, how can a broker expect to represent you if he/she hasn’t made the effort to understand your motivations for selling and what’s truly important for you to accomplish after the sale?

Your broker should be passionate about your business and your goals, otherwise he/she should never accept your listing.

You haven’t heard anything negative about your business

There is no perfect business. Period. Every business has problems and challenges that will make it difficult to sell. Some of these issues are quite serious, while others are minor – but in either case your broker should be discussing these topics with you and offering solutions on how to overcome them.

A bad business broker either ignores a business’ problems or chooses to avoid discussing those problems with you for fear of losing the listing. If you haven’t heard any concerns coming from a broker who is evaluating your business, that should be a major red flag. A good broker will discuss challenging aspects of your business with you, making sure you understand his/her concern.

At the end of the day, choosing a business broker is a life-changing decision because selling your business is a life-changing event. While you want to avoid “analysis paralysis,” it’s in your best interests to take the extra time to ensure that the business broker you are choosing to handle the most important transaction of your life is not only someone you can trust and feel comfortable with, but is also someone who avoids the bad business broker red flags outlined above.

 

Reasons to Consider Buying an Existing Franchise

You’ve decided you’re tired of corporate America or some other job that isn’t satisfying and you want to obtain the freedom that is only found in owning your own business. Many people in your shoes choose to buy a franchise. Often this is a good solution since franchises typically have a higher success rate than independent start-ups. 

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Franchises are businesses in a box.  It is being in business for yourself but not necessarily by yourself.  While statistics of the success rate of franchises are in dispute, there is no doubt that most franchises succeed over time. In fact, according to IFA Educational Foundation , more than 90 percent of owners renew their franchise agreements at the end of their contracts. This would indicate that franchise owners not only are successful but they are prosperous enough that they want to renew and continue in business. 

When looking at businesses to purchase this makes it very compelling to purchase an existing franchise.    

  • Successful Track Record: If the business is sellable it must have a successful track record. So when you combine the fact that is a franchise that has a tendency to be successful over time with the fact that you can see an established franchise’s track record you can be confident that this should continue in the future.
  • Training: All franchisors require new franchisees to be trained by them. This includes when an existing franchise is being transferred.  As a buyer you can be confident that you will clearly understand how to run the business that you are purchasing. Good franchisors provide training programs designed to bring you up to speed on the latest process techniques and marketing systems that will help you be successful in running the business. They will also have reference materials to assist you in dealing with issues or whatever comes up while you're running your business. When the franchisor is the one training you they have a proven process that works.  Sometimes business owners do not always explain the processes that they follow clearly, so this is eliminated when you buy an existing franchise.
  • Ongoing Operational Support: Unlike an independent business a franchisor has staff dedicated to providing ongoing assistance to franchisees. You can always call on experienced individuals when you hit a rough spot.
  • Purchasing Power: A quality franchise will have the connection that allows you to leverage the buying power of the entire system to negotiate prices for everything you need at significantly lower levels than you could achieve as an independent operator.
  • Brand Recognition: This is one of the main reasons that franchises succeed. When you buy an existing franchise you not only have a regionally or nationally recognized brand but you are buying an established brand and business in a specific marketplace.
  • Easier to Secure Finances: Many start-up franchises are not able to obtain financing from banks adequate enough for many business owners to complete the start-up. When you purchase an existing franchise you are more likely to be able to get the needed financing from a bank.  The reason is because the bank has the track record of success to rely on as well as their confidence that you will be able to operate the business effectively.man-and-woman-shaking-hands
  • Income From Day One: this is certainly a positive over the start-up franchise. Not only do you have a track record at this location but the day you purchase the business you will receive revenue.  As the saying goes, “revenue is king”.
  • Established Customer Base: This is important not only for established cash flow but this can be an avenue to grow the existing franchise. As in anything the previous owner may be burned out or has not promoted the business in a while.
  • Trained Employees in Place: A good franchise not only has training in place for business owners but also employees. This is helpful when purchasing an existing franchise where you are able to have employee’s that have been trained but they also have experience at this location franchise.

I think purchasing an existing franchise is genius.  Yes I said it, GENUIS!  Why?  When you purchase an existing franchise you have a proven business model with a proven track record in a specific market.  Business is not safe. When you buy and or own a business it is risky and challenging, but when you buy an existing franchise you are able to minimize the risk. You are able to have the same benefits of owning a business that you have always wanted but with lower risk. If you’re interested in buying or selling a franchise, contact Sigma for more information.

 

How to Sell a Machine Shop – Manufacturer

The machine shop and Precision machined products industry is very desired and can be a very sellable type of business.  When you are trying to evaluate the possibility of selling your business there are a number of factors to look at to determine if your business is sellable and to get a good idea of what your business is worth. Whether you own a Job Shop or a production type shop there is a market to sell this type of machine shop.

Key areas to evaluate:

Customer Concentration

A simple report that you can find in Quickbooks is “Revenue by Customer” (Here's how you can open the report).  This report shows how total revenue is distributed among your customer base. Customer concentration affects value because it has the potential to determine the success or risk of a business future and can significantly affect the closing price.

Types of Customers

Manufacturing in the US is affected by the economy.  While this is an obvious statement, the customers you may have come in different categories when it comes to HOW the economy affects their business and therefore affects your business. It is important when valuing a Machine shop to look at the industries that your clients serve: Medical, Automotive, Aerospace, Oil and Gas, maintenance products, construction, or Retail. Each one of these sectors (and many more) are effected by the economy in different ways. Business buyers are looking to buy a machine shop that is or has the potential to grow rather than shrink.

Certifications

Certifications are a good indicator of systems and processes that you have in place for your business.  It is a proven fact that businesses with well-organized processes are more valuable than those that have less structure. The International Organization for Standardization (ISO) provides a certification that is important to strategic buyers and has an impact on the impression of financial buyers. Certifications such as ISO 9000 traditionally help the value of the machine shop significantly.

Employees

Having Machinists that have earned tenure can certainly help, as well because skilled machinists are difficult to find. Employee turn-over is always an issue with shop help but companies that have low turnover are typically more desirable.

Technology

The condition of machines and the level of technology within the shop are significant influences that can affect the price of your machine shop. Short run machine shops using design and prototyping capabilities could demand a premium. Any equipment that needs to be repaired or replaced should be taken care of before attempting to sell your machine shop.

WIP and Raw Materials

Work in progress is extremely important when selling your machine shop, as are raw materials. Production costs include materials and labor used in producing goods as well as allocated overhead. Backlog, a line-item expense for repairs and maintenance, availability of qualified labor, and client industry trends are all issues a potential buyer should investigate in valuing a machine shop.

Once we have accessed the areas above we can begin looking at the financial performance of the machine shop. While only a professional business broker has the proper expertise to provide the business valuation of your machine shop, the following formulas can give you an idea of what the value of your business will be and how our business brokers determine the sales price.

 

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Sigma Mergers & Acquisitions LLC: 18170 Dallas Parkway, Suite 203, Dallas, Texas 75287
Dallas Business Broker, Mergers & Acquisitions Dallas / Fort Worth / Texas

214-396-8100 Office
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