October 10, 2024

You’re the Boss Blog: Selling a Business? It’s the Details That Count

Creating Value

Are you getting the most out of your business?

When we last left Holly Hunter, she had sold her business. She had received her down payment but the following payments had stopped after about a year. And it was obvious she had made some mistakes.

While Ms. Hunter’s mistakes are easy to spot in retrospect, it’s also easy to understand how sellers fall into these traps. She was ready to move on. She thought she had a good deal. She was paid about a third of her selling price of $1.4 million in cash and the rest was held as a seller’s note. And for about a year, things went well, at least on the surface.

But there were problems brewing, starting with the new owner’s decision to change the nature of the business. This is hardly an unusual thing. I generally advise selling business owners that they should expect to be disappointed by what the buyer does with the business, and that certainly proved to be the case for Ms. Hunter.

Some of the problems were related to an important hire Ms. Hunter had made before selling. The hire, a certified financial planner, was in tune with Ms. Hunter’s method of operation and investment advice. As time went on, however, this person became more and more disenchanted with the type of service and products being offered by the new owner. The employee felt she was being pushed to sell products that weren’t appropriate for her clients, and she didn’t think the new owner was interested in her concerns.

Eventually, the employee left the firm — and took along most of its staff and clients. This could not have happened had Ms. Hunter retained ownership. She had made sure that her employee signed a covenant promising not to compete, and the agreement made sure that the employee understood that Ms. Hunter’s clients and staff belonged to Ms. Hunter and the firm. There was clear legal language in place stating that both were off limits if the employee were to leave.

When the firm was sold, however, the transfer of the non-compete agreement to the new owner slipped through the cracks. As discussed in previous posts, Ms. Hunter had hired a business broker who did not represent her interests exclusively. We also know that her lawyer was not an expert in mergers and acquisitions. That, combined with Ms. Hunter’s inexperience in business sales, made it easy for this issue to be missed.

From the outside, it looks as if the new owner was not keeping his eye on the ball. It’s pretty hard to lose most of your clients and employees and not know that trouble is afoot. As a result, both he and Ms. Hunter became big losers. With both employees and clients gone, there was no cash left to pay the note that was owed Ms. Hunter. The buyer declared bankruptcy, and there were no assets left for Ms. Hunter to attach. She did try to sue her ex-employee but was informed that the covenant was not transferred and as a result there was no legal remedy.

When you sell a business, it’s often the seemingly small details that become crucial, especially if the seller doesn’t get paid in full and chooses to accept a note or an earnout, which is the promise of future compensation tied to the performance of the business (I’m not a big fan of earnouts!). Ms. Hunter learned these lessons the hard way, losing more than 50 percent of the purchase price through non-payment of her note. She found there was no remedy, only additional legal bills that she would have to pay.

Unfortunately, Ms. Hunter’s story is not unusual. When owners sell their businesses, they routinely enter transactions in which they essentially agree to serve as a bank for the buyer. The new owners get to run the business as they wish, and they rarely are interested in hearing advice from the selling owner. Several months down the road, if things start falling apart, the problems surface when the new owner “forgets” to pay the old owner. Suddenly, it becomes clear that years and years of work are not going to pay off the way the selling owner expected.

Do any of these lessons resonate with you? Have you done anything in your business to make sure that, when it’s time to leave, you manage to protect the value you have spent years building?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/01/10/selling-a-business-its-the-details-that-count/?partner=rss&emc=rss

You’re the Boss Blog: Why We’re Trying Another Infomercial

Sustainable Profits

The challenges of a waste-recycling business.

We are about to take another shot at something that ended in failure five years ago. Yes, we are making another infomercial, but this time I think I know what I’m doing. Actually, that may be an exaggeration. This time, I at least have the experience of having gone through the process once before.

I have long had a fascination with infomercials, the cultural phenomenon that fills that great void of American television time between 1  and 5 a.m. If you are an insomniac and in the mood for TV between those hours, you may be lucky enough to catch classics like Tony Little hawking the Gazelle or Ronco selling GLH (“Great Looking Hair”), a product that allows you to “spray on the hair you always wish you had.” Still, while infomercials have earned a cheesy reputation, I believe that, done right, they can yield phenomenal results.

The first thing you need, of course, is a product, preferably one that is easily demonstrated and that screams value. Some of the most popular categories include food preparation (the Jack LaLanne Power Juicer), weight loss (the infamous Shake Weight for Men), skin care (Proactiv) and body-shaping underwear (you don’t have a Booty-Pop?). Bear in mind, according to people I’ve met in the industry, women between 30 and 60 represent the demographic that spends the most money on infomercials.

In retrospect, our first infomercial, which was broadcast in 2005, missed the mark. We were pitching plant food, which is bought by women, and we thought had an amazing offer: for one easy payment of $29.95, plus shipping and handling, you would get three types of plant food, a gardening book, and, wait, if you called now we’d throw in three pots, soil and herb seeds!

So why didn’t it work? Beyond the poor production values and the 30-minute format we chose, we didn’t appeal to what gets infomercial buyers off the couch and running to their phones, credit card in hand: an amazing unbeatable value on something unusual that will solve a problem. In other words, something you don’t run into every day at Walmart (not including the “as seen on TV” section, of course). In the end we ended up spending $40,000 between production and the media buy with profits coming in at slightly more than $7,500. In short: failure.

But if entrepreneurship has taught me anything, it’s that you should never let failures set you back. So in 2012 we will be releasing a new infomercial. This time, instead of selling plant food, we are going to pitch our new gold-and-silver recycling program. It’s basically your classic cash-for-gold model, which has already produced some epic infomercials, like the Cash 4 Gold Super Bowl Infomercial from 2009. But this time, instead of going cheesy, we are going to try the more upscale approach employed by Proactiv and Bose.

Our new infomercial will explain that TerraCycle will not only send you money for your “broken, unwanted and mismatched jewelry,” we’ll recycle it, and we’ll take an additional 2 percent of what we pay you and donate it to the school or charity of your choice. What a deal!

Most infomercials are short-form (two minutes) or long-form (30 minutes). You can hire a professional infomercial group to film the “creative” for you (and probably spend in the low six figures), or you can do what we did back in 2005: buy a video kit and do it yourself. It helps to know a little about video and editing, but the good news is that today a nice camera, a good microphone and Final Cut are all the tools you need. In 2005, we ended up spending around $10,000 to produce our first 30-minute infomercial. Our new one will run two minutes and cost closer to a few thousand dollars to make.

Here are some of the basics I learned making the first one: get that 1-800 number in there frequently (that’s the only way people will pay you), include an “upsell” (“Wait! We’ll throw in an extra set of knives if you order this face cream!”) and, most important, have a call to action (“Call now as supplies of our amazing wearable towel won’t last!”). We also learned that it is common practice to try to “hide” profit in those shipping and handling charges. How else can they offer to rush you a second double-chin toner free?

Once the infomercial is ready to run, the fun begins. A number of media-buying groups can get you a 30-minute national spot on a random channel at 3 a.m. for a few hundred dollars. Then you’ve got to pay $25,000 to $50,000 for the media buy, as well as a few more dollars for the nice folks who will answer your 1-800 calls (use multiple numbers so that you can track where the calls come from).

When evaluating the results, look at the ratio between the money spent on airtime and the profit returned. If you get anything above a 1:1 you are breaking even — and, in a sense, building your brand free. And if the ratio is above 2:1 you have hit a home run. (The first TerraCycle infomercial generated a ratio of 0.25:1, which is terrible.) What’s really interesting is that, apparently, if your infomercial performs a certain way on a five-figure airtime test, it is likely to duplicate that performance if you invest millions in air time. That’s why, if your test shows a 2:1 test performance, there are a number of funds that will bankroll a major airtime investment. This ability to repeat results is one of the amazing aspects of the industry — and the main reason I am so fascinated by its potential.

Infomercials are somewhat like the Internet in their potential. That is, if you find a good product, make a great creative spot, and get lucky, you can with relatively little investment generate millions over a short period of time. That’s the theory anyway. I’ll let you know how the next one goes.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

Article source: http://feeds.nytimes.com/click.phdo?i=657ee1cadc88b7ac429509198ba9f958