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Last Update: Sunday March 29, 2020

Key Idea: Play Hardball

Host Hattie Bryant points out that with great confidence the owners held firm on their price.

Key Question:

A: 

As hard as it may be to accept the idea, buying or selling a business is a lot like buying or selling a classic car, as long as you keep it up, it can actually appreciate with age. It all boils down to the age old rule, value is defined based on the willing buyer/willing seller maxim.
 
Lots of assets such as cash and accounts receivable, and liabilities are readily valued at cost. Long-term assets such as buildings, land, and equipment often require a professional appraisal. There's a little "wiggle room" here, but not too much. Frequently, both the buyer and the seller obtain appraisals and the resultant amounts are averaged to arrive at the purchase price component. The challenge is always in valuing that goodwill. Don't underestimate that value, and be prepared for the buyer, and his or her team, to underestimate it as much as they think they can.

Q: How do I get the highest price possible for my business without scaring the buyer away?

A:
Another tough question! Remember, both your broker and a qualified CPA have assisted you in doing a formal valuation of your business. This value is real. Don't back down from it with a "fire sale" mentality. There are other buyers out there; if this one is shopping for a bargain, let him or her go elsewhere. As you negotiate, be mindful of the synergies between your business and the existing business of the buyer. In both Tracy's and Bob's cases, their businesses were synergistic with the businesses of the buyers. In cases like these, the value of the acquisition target is actually greater than the value of the target on a stand alone basis.

Q: What are the advantages to the buyer of buying a business that dovetails seamlessly into his or her current operations?

A:
There are two ways to grow a business. You can expand your sales with new customers, new products, new sales to existing customers, etc. These are all examples of "organic growth", where the business is nurtured and expands. The second, faster way to grow a business, is by acquisition.

The Art Institute already has a marketing department and a process for recruiting new students. Remember, they told Tracy that they were coming into the San Diego market either way, on their own or through the purchase of her school. Tracy was smart enough to recognize that it would be expensive for them to build their own school, staff it, recruit students for it, etc., all without a local reputation.

And what about Bob? Just how valuable do you think his customer list is to the Foster's Group? Marketing is expensive. Target marketing provides a much bigger value, a much greater potential for return. Bob recognized that he brought this value to Foster's and he capitalized on that recognition. You can do the same but only if you stand firm and recognize both the intrinsic value of your business and the incremental value to the buyer.

Think about it

Who should buy your business and what would if do for them if they did?

Clip from: Sell To A Public Company

La Jolla and Dallas: Every day the press reports, especially The Wall Street Journal and Forbes, about how big business acquires small businesses in order to grow.

If you are running a good business and have market share in your industry segment, you should consider preparing for that call or knock on the door, "Can I buy your business?"   In most every episode of this show we explore how and why the founder of a business gets started and how they get over the hurdles. This week we look at how they received a very large check for the fruits of their labor.

Today, we spend time with Tracy Myers and Gary Cantor, the founders of Advertising Arts College, and Bob Orenstein, founder of International Wine Accessories (IWA). Both have completed all eight steps within the business cycle, and they define what it means to "Exit At the Top." You met Bob a couple of years ago when we did his story about starting IWA from the extra bedroom of his townhouse.

Both stories are important.

Gary and Tracy's story is for all of us who are not even thinking about selling, then there comes a knock on the door.  Bob's story is for the rest of us who know that we have created a substantial asset. Bob, however, knew that his "time" was coming. Bob was strategic and spent several years getting ready for the day, and then it took over four years to consummate a deal.

To say the least, every one of us should have an exit strategy.

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International Wine Accessories, Inc. (IWA)

Robert Orenstein, founder

10246 Miller Road
Dallas, TX 75238
2143496097

Visit our web site: http://www.iwawine.com/

Office: 2143496097

Business Classification:
Home products

Year Founded: 1988

Play Hardball

TRACY: They told us that they wanted to be in San Diego County, and if we weren't going to sell to them, they would open up a school I presumed.

HATTIE: Well that's kind of hardball, wasn't it?

TRACY: A little bit. I wasn't that fearful of it, though. I thought that might actually be good for us. They're going to draw awareness to these particular areas of study. They do a lot of advertising. They're very good at it. I wasn't so sure it was going to hurt us, but I thought, `Oh, my gosh. We should probably get their name.' And we did. We changed our name from The Advertising Arts College to The Art Institute of California. Like, oh, my gosh. They've changed the name of the school. You know, in a strange way, it made us more valuable to them, because we secured the name that they wanted. You can't convince someone with words that your business is valuable. There is way too much due diligence that's done. It's a lot more than that.

HATTIE: It's about the numbers.

TRACY: It's about the numbers. It's about the revenue. And they worked with our CPA that we had used for years, and our bookkeeper, both very valuable people all along throughout the years.

(Voiceover) There were around 400 students at the time that they bought it, and tuition was $10,000 a year at that time. And they could see, looking at the books over the years, because we kept them all, that every year we acquired more and more students.
 
 

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