The Facts of Business Life

by Bill McBean

  Selling the Customer at Level 5

  As far as selling is concerned, there are only two ways to sell a business—an asset sale or a share sale. An asset sale is one in which you sell the assets associated with the business, including goodwill, but the seller retains responsibility for all the liabilities associated with those assets. A share sale is one in which you sell the company’s assets and the buyer assumes all the liabilities associated with the business. The more knowledge you have about the differences between an asset and a share sale, the better and more informed a decision you will be able to make, and the better your chances of maximizing your business’s value. If you are unfamiliar with the difference, you should have an accountant explain them to you.

  When you are first beginning to enter into negotiations with potential buyers, price is usually their primary concern, and they are likely to want to know what it is sooner rather than later. At this point, though, your primary concern should be to develop a presentation that provides those buyers with the information they need in order to make an informed decision. There are essentially three elements to this presentation. The first is explaining to them exactly what it is you are selling; that is, which assets will be included in the sale and their book value and replacement cost. The second concerns whether the real estate is to be part of the total sale price, if you would consider leasing your facilities, or if you would be passing on a third-party lease and how you attach a value to it. And the third is telling the prospective buyer about your past profits and why these profits will have to be taken into consideration in the overall purchase price.

  So regardless of whether you are offering an asset or a share sale, the first step in the selling process is to provide the potential buyer with your sales and value story; that is, to do your sales presentation. After you’ve made your presentation, if there is still interest on the buyer’s part, you should work together to draw up a plan so you will both know what will happen at each step of the process. For example, you may want to start with a confidentiality agreement, after which you could begin to explain the specifics of your business. Next, assuming the buyer likes what he or she has heard, the buyer would be expected to provide some sort of assurance that he or she is in a strong enough financial position to buy what you have to sell. Once this has been done, the next step might be for you to release your business’s financial information. Regardless of what kind of process you set up, it is important that there be one. A selling process gives you control, helps both of you focus, and, if the negotiations stall, enables you to go back to your last item of agreement and use it as a new starting point to look for common ground.

  Regardless of the type of business, at the core of almost all business sales, there are essentially three things for sale: goodwill, assets, and real estate. Goodwill, as I mentioned earlier, is the amount sellers ask buyers to pay above and beyond the value of the company’s assets to compensate them for the future profits they will be giving up by selling the company. This amount is usually calculated based on a number of years. For example, if your business averaged $1 million a year in profits over the previous three years, you might ask for a goodwill payment of $3 million. However, goodwill is difficult to negotiate because of its subjective nature. That is, although the company’s profits represent actual figures, how much the seller is entitled to receive to compensate him for selling the company is obviously open to debate.

  Nevertheless, the question of goodwill is a good place to start the negotiation process, because if you are going to insist on receiving goodwill, it should be put on the table up front. That way if the prospective buyer is unwilling or unable to pay goodwill, you will know that he or she is the wrong buyer, and it’s best to know that sooner rather than later. However, if you do start the negotiations with a discussion of goodwill, it may not be advantageous for you to get down to the final goodwill number right away. Instead, you would be better served by spending some time selling the concept of goodwill and what it covers, such as your customer base, internal processes, experienced employees, and future profits. This is important because your buyers may not know what goodwill actually includes, and it’s your job to tell them so you can be sure you’re talking about the same thing.

  After goodwill, the next item to be taken into account in a sale is the company’s assets. Assets, in this sense, are the physical items the company owns; that is, machinery, vehicles, computers and office equipment, inventory, and anything else that should be listed on your company’s balance sheet. So if you and your potential buyer can come to some sort of understanding regarding goodwill, the discussion about assets should be considerably easier. You provide a list of assets and negotiate a price based on either their replacement value or their book value, or somewhere in between.

  The final element of the sale is the real estate. In most cases, an outside appraiser is brought in to determine the price, which makes the real estate transaction fairly straightforward. However, as I’ve alluded to elsewhere, in business, even things that look routine often are not. For example, in a fair number of cases, even after both parties have agreed on an appraisal valuation, they discover that the lending institution’s terms and conditions drive up the anticipated operating costs so the buyer needs more cash than expected. That is, the down payment he or she has to make turns out to be larger than anticipated, which leaves the buyer with less cash to pay for goodwill and assets. This situation presents a problem for both parties, and it would accordingly be in both of their interests to find a solution. One way of dealing with it might be to work out a leasing agreement. Making such a deal can actually be beneficial for both sides, because it can lower the buyer’s costs and free up down payment cash that the buyer can then use to pay for goodwill and the company’s assets.

  In the end, no matter how you look at it, the stakes are always high when you’re selling a business, and negotiations are never easy. Ultimately, how successful you will be in selling your business comes down to attracting the right qualified buyers, developing a strong value story, being flexible and creative, and having good negotiating skills.

  Keeping the Customer at Level 5

  At this level, keeping the customer means something different than at all the other levels. At Levels 1 through 4, it means getting them to come back after an initial purchase and buying from you again. At Level 5, it means keeping all your potential buyers interested in what you have to sell—your company—until either they or someone else buys it. Accomplishing this is tricky at best, particularly since the time frame can be so long. It is necessary, though, because until the sale goes through you can never be sure who the ultimate buyer will be.

  Eventually, of course, you will have to choose someone to take to the dance; that is, you will have to get serious about a particular buyer. Unfortunately, that means the other potential buyers are going to feel left out in the cold. And while you don’t want to burn any bridges, stringing potential buyers along is never a good strategy, because they are likely to know far more about what is going on than you think they do. The problem, then, is how to move forward with the buyer you are most interested in selling to while, at the same time, keeping other potential buyers from giving up. At this point, you have several options. One is to tell potential buyers that you have another interested party and need to evaluate their competitiveness. Another is asking all your potential buyers to put up a significant deposit to demonstrate their interest in buying your business. And a third is drawing up a negotiation schedule that will allow you to negotiate with several buyers at once. Each of these options has its obvious downside, but they have a common upside, which is that one of the potential buyer may not want any other competitors to be considered, and accordingly surprise you with an offer you may not be able to refuse. At the very least, though, it is essential that throughout the process you stay on respectful terms with all your potential buyers.

  Finally, not every negotiation works out. It could be because the buyer decided for s
ome reason that he or she wasn’t interested in the deal after all. It also could be because you realized that the buyer you’d been pursuing wasn’t going to be able to provide you with what you wanted. Regardless of the reason, you may well have to go back to one of your previous candidates to re-present the opportunity. Unfortunately, in a situation like that, you’re likely to have to do some damage control, and that’s hardly the strongest position to be in. If you should find yourself in this position, the best strategy is to say that you simply picked the wrong candidate for whatever reason. It’s important to give a reason, though, because the potential buyer will otherwise think it was about price, which may not be the case. Of course, no one likes to have to start all over again, but if you have to, there’s no reason why a second—or even a third—negotiation shouldn’t be successful.

  There are essentially three marketing concepts that you, as an owner, must keep uppermost in your mind. The first, of course, is that if you don’t market your business, you won’t have one. The second is that the more effective and well thought out your marketing is, the quicker your business will realize its goals. And the third is that the best marketers are not the ones who spend the most money, but rather the ones who get the most out of the money they spend.

  As I have shown, these three concepts must be applied, as appropriate, at each of the five levels of business, that is, on the planning levels as well as on the action levels. What that means is that if you want to achieve success, maintain that success, and get the kind of reward at the end of your business career that you are entitled to, it is essential that you learn everything you can about your market, design both internal and external processes to facilitate sales, plan and execute sensible internal and external marketing programs, and make sure you and all your employees know how to attract the customer, sell the customer, and keep the customer.

  Marketing represents one of the highest costs your business is likely to incur, but it’s even more expensive if you do it wrong or don’t do it at all. This is why the facts you learn during your research at Level 1 have to be matched to the processes you develop at Level 2, and then implemented at Levels 3, 4, and 5. And it’s this orderly sequence that provides you with a valuable tool with which you can compete, succeed, and maximize the opportunity you have decided is right for you.

  Chapter 8

  Fact 6: The Marketplace Is a War Zone

  The Marquis of Queensbury Rules do not apply in free markets. Competition for customers and their disposable income, that is, their money, is the order of the day—every day. So if you’re an owner of a small or large business, an entrepreneur, or an investor in any of these enterprises, the law of the jungle applies. And that means you have to be strong, smart, and agile, or die. The reason it’s this way is that the marketplace is finite, meaning there is a limited number of customers and money to be spent. And it’s these customers, and their money, who will determine your fate. It’s not a friendly battle, the stakes are high, and the difference between success and failure is as distinct as night and day. If you don’t understand this concept, or don’t like the idea of it, business ownership is in all likelihood not for you. That’s just the way it is. The marketplace is a war zone, and the battle never ends.

  If you think I’m overstating the situation, think about the last recession. As of this writing, the economy seems to be starting slowly back on the road to recovery, but there’s been a lot of damage done. Home builders, car dealers, banks, financial brokerages, real estate brokers, and other businesses have had to close. Literally every industry has been affected in one way or another. Because potential customers have limited disposable income, businesses find themselves competing for sales not only within their own industries but with other industries as well. Credit for businesses and consumers is harder to get, and unemployment is high. And fewer people working means fewer customers and less business for everyone. In addition, because of the economic uncertainty, those fewer consumers have slowed down their spending. As a result, the competition has become fierce, which has led to all-out warfare based on price, giveaways, rebates, extended hours, and all kinds of event-type marketing. If this isn’t a war zone, I don’t know what is.

  One of the things that makes competition difficult—not just in downturns but all the time—is that your competitors don’t all compete the same way. Some companies are aggressive, some are lazy and unmotivated, and others are moderately successful and content with their market positions. Moreover, there are some companies that compete on price, while some compete on location or convenience. Others compete on service or the quality of their products, while still others compete on depth of selection or on the basis of their market reputations. And these are just some of the more common competitive niches owners develop. This presents a problem because, being so diverse, your competitors are hard to pin down. Since they all have different perspectives, they all have different tactics, so the best you can do is try to anticipate what they’re going to do. And that’s not easy, and it’s not going to get any easier.

  But there’s also another important difference in the ways companies compete that makes the war zone such a difficult place to do business. Some businesses fight hard and cleanly, while others, frankly, cheat in a variety of ways, and still others operate in a gray area by using half-truths, innuendoes, and misleading statements. As difficult as it is to compete against companies that fight fairly, it’s even harder to compete against those that don’t. While knowing this is true doesn’t make competing any easier, one thing you can do is encourage customers who have had bad experiences to report these businesses to your local Better Business Bureau. Thankfully, while there are certainly companies that operate this way, there are still more honest competitors than dishonest ones, and eventually these questionable businesses close down. In addition, with today’s social media, it’s hard for a bad business to hide, which means they won’t survive for as long as they might have 10 years ago. The point is that from time to time your business may lose customers to these shady operators, and as upsetting as it may be, you can take comfort from the fact that they won’t exist for long and the customers you lose to them will be back, especially if you keep track of them.

  The bottom line is that, whether you like it or not, all these competitive realities are continually in play. They are also always in a state of flux. That is, you never know when one or more of your competitors is going to make a decision to change direction or tactics, and that makes an already volatile marketplace an even more volatile one. Ultimately, there are only two possibilities in the marketplace war zone—you win or you lose. If you win, you make money. If you lose, you not only don’t make money, you lose your investment. In fact, if you lose, you not only get your butt handed to you, you pay for the privilege—and in front of your friends and family.

  The Benefits of Understanding the Marketplace War Zone

  Understanding the marketplace war zone helps you evaluate the competitiveness of the market, consider how others compete, and determine if it’s a marketplace you can survive in.

  Understanding the marketplace war zone enables you to choose a competitive niche and clearly market to it.

  Understanding the marketplace war zone helps you recognize lazy and incompetent competitors that are vulnerable to attack, and shows you how to attack them successfully.

  Understanding the marketplace war zone helps you recognize competitors that have become complacent and lost their competitive edge, and how you can take advantage of it to increase your market share

  The Realities of the Marketplace War Zone

  The marketplace is not always fair; someone is always looking for an advantage.

  If one or more of your competitors crosses an ethical line, it doesn’t mean you have to go there yourself.

  Price as a competitive weapon is not as important as many people believe—it should be only one of the many weapons in your arsenal.

  Keeping up with your customers’ wants and needs is
a challenge, but keeping up with your competitors’ changes and tactics is equally important, and something that all successful businesses do.

  Winning is a serious business for every successful business, so if you try to take one of your competitors’ customers away, you should expect them to fight back.

  Competing in the war zone means if you find a competitive edge, you should go at it hard because your successful competitors will do the same.

  New innovations in products and technology constantly change the competitive landscape, so in order to compete successfully you must stay up to date.

  There are three major elements that are critical to success in the marketplace war zone: the products or services you sell, how well your business operates, and how your business competes. Although these elements are extremely different, they are connected, and understanding this connection is important to a business’s long-term success. Exactly how they are connected will become clear as you learn more about each of the elements.

  The Products or Services You Sell

  Not all products or services are viewed equally by consumers. Some companies have inherent advantages over others in the marketplace. Rolex watches and Mercedes-Benz automobiles, for example, have a reputation for quality. Similarly, a company that’s been around for a long time has an advantage over a start-up simply because of its longevity. Newly opened big box stores such as Best Buy are also likely to take customers away from even thriving local businesses. Having advantages like these leads, not surprisingly, to greater sales, and greater sales lead to higher gross profits, which is the reason you sell things in the first place.