Are You Emotionally Ready to Sell?

Quite often sellers don’t give much thought to whether or not they are ready to sell. But this can be a mistake. The emotional components of both buying and selling a business are quite significant and should never be overlooked. If you are overly emotional about selling, then this fact can have serious ramifications on your outcomes. Many sellers who are not emotionally ready, will inadvertently take steps that undermine their progress.

Selling a business, especially one that you have put a tremendous amount of effort into over a period of years, can be an emotional experience even for those who feel they are more stoic by nature. Before you jump in and put your business up for sale, take a moment and reflect on how the idea of no longer owning your business makes you feel.

Emotional Factor #1 – Employees

It is not uncommon for business owners to form friendships and bonds with employees, especially those who have been with them long-term. However, many business owners are either unaware or unwilling to face just how deep the attachments sometimes go.

While having such feeling towards your team members shows a great deal of loyalty, it could negatively impact your behavior during the sales process. Is it possible you might interfere with the sale because you’re worried about future outcomes for your staff members? Are you concerned about breaking up your team and no longer being able to spend time with certain individuals? It is necessary ultimately to separate your business from your personal relationships.

Emotional Factor #2 – Do You Have a Plan for the Future?

Typically, business owners spend a great deal of their time and energy being concerned with their businesses. It is a common experience that most owners share. Just as no longer being with your employees every day may create an emotional void, the same may also hold true for no longer running or owning your business.

Your business is a key focal point of your entire life. No longer having that source of focus can be unnerving. It is important to have a plan for the future so that you are not left feeling directionless or confused. What will you do after you sell your business and how does that make you feel? Before you sell, make sure that you have something new and positive to focus on with your time.

Emotional Factor #3 – Are You Sure?

Are you sure that you can really let your business go? At the end of the day many business owners discover that deep down they are just not ready to move on. Are you sure you are ready for a new future? If not, perhaps it makes sense to wait until you’re in a more secure position.

Addressing these three emotional factors is an investment in your future well-being and happiness. It is also potentially an investment in determining how smoothly the sale of your business will be and whether or not you receive top dollar.

Copyright: Business Brokerage Press, Inc.

monkeybusinessimages/BigStock.com

Learn the Dynamics and Save the Deal

Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.” Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.

Neglecting the Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business. At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball. Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits. A potential buyer could become concerned if the business flattens out or falls off.

Solution: For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history. This is no time to be overly cost conscious. The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.

Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family. The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.

Solution: By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.

Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached. It happens, perhaps more frequently than not. The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.

Solution: Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach. Involving senior management can also prevent information leaks.

Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively. According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs. With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.

Solution: Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some. Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important. If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.

Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction. Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets. If the owner is selling real estate, an environmental study is necessary. If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction. These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.

Solution: The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.

Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run. However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.

Solution: If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.

Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time. The potential buyer probably will have a similar set of expectations.

Solution: Decide ahead of the negotiation which are the very important items and which ones are not critical. In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.

Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end. For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time. It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties. What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months. If it does, this means that the deal is dragging and is unlikely to close. The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.

Solution: Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost. The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.

Copyright: Business Brokerage Press, Inc.

Pictrough/BigStock.com

Selling: What Does An Intermediary Expect From You

If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary. You probably have wondered what you could expect from him or her. It works both ways. To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you. By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:

• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second. It takes this kind of partnering to get the job done. You have to return all of his or her telephone calls promptly and be available to handle any other requests. You, other key executives, and primary advisors have to be readily available to your intermediary.

• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary. Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale. Only they can provide the necessary information.

• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer. An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc. The lines of communication must be kept open.

• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers. They will need to know just what is required, and expected, from such visits.

• You will rightfully expect the intermediary to develop a list of possible acquirers. You can help in several ways. First, you could offer the names of possible candidates who might be interested in acquiring your business. Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.

• Keep your intermediary in the loop. Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents. Now is not the time to assume that the intermediary’s job is done. It may just be beginning as the details of financing are completed and final deal points are resolved. The intermediary knows the buyer, the seller, and what they really agreed on. You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.

• Be open to all suggestions. You may feel that you only want one type of buyer to look at your business. For example, you may think that only a foreign company will pay you what you want for the company. Your intermediary may have some other prospects. Sometimes you have to be willing to change directions.

The time to call a business intermediary professional is when you are considering the sale of your company. He or she is a major member of your team. Selling a company can be a long-term proposition. Make sure you are willing to be involved in the process until the job is done. Maintain open communications with the intermediary. And, most of all – listen. He or she is the expert.

Copyright: Business Brokerage Press, Inc.

monkeybusinessimages/BigStock.com

Family-Owned Businesses Do Have Choices

Family-owned businesses do have some options when it comes time to sell. Selling the entire business may not be the best choice when there are no other family members involved. Here are some choices to be considered:

Internal Transactions

  • Hire a CEO – This approach is a management exit strategy in which the owner retires, lives off the company’s dividends and possibly sells the company many years later.
  • Transition ownership within the family – Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
  • Recapitalization – By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
  • Employee Stock Ownership Plan (ESOP) – Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset. ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

  • Third party sale – The process could take six months to a year to complete. This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after the closing.
  • Complete sale over time – The owner can sell a minority interest now with the balance sold after maybe five years. Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
  • Management buy-outs (MBOs) – Selling to the owners’ key employee(s) is an easy transaction and a way to reward them for years of hard work. Often the owner does not maximize the selling price, and usually the owner participates in the financing.
  • Initial public offering (IPO) – In today’s marketplace, a company should have revenues of $100+ million to become a viable candidate. IPOs receive the highest valuation, but management must remain to run the company.

Source: “Buying & Selling Companies,” a presentation by Russ Robb, Editor, M&A Today

Copyright: Business Brokerage Press, Inc.

mangostock/BigStock.com

Who Is Today’s Buyer?

It has always been the American Dream to be independent and in control of one’s own destiny. Owning your own business is the best way to meet that goal. Many people dream about owning their own business, but when it gets right down to it, they just can’t make that leap of faith that is necessary to actually own one’s own business. Business brokers know from their experience that out of fifteen or so people who inquire about buying a business, only one will become an owner of a business.

Today’s buyer is most likely from the corporate world and well-educated, but not experienced in the business-buying process. These buyers are very number-conscious and detail-oriented. They require supporting documents for almost everything and will either use outside advisors or will do the verification themselves, but verify they will. A person who is realistic and understands that he or she can’t buy a business with a profit of millions for $10 down is probably serious. They must be able to make decisions and not depend on outside parties to do it for them. They must also have the financial resources available, have an open mind, and understand that owning one’s own business means being the proverbial chief cook and bottle washer.

Today’s buyers are usually what might be termed “event” driven. This means that the desire to own their own business is coupled with a need or reason. Maybe they have been downsized out of a job, they don’t want to be transferred, they travel too much, they see no future in their current position, etc. Many people have the desire, but not the reason. Most people don’t have the courage to quit a job and the paycheck to venture out on their own.

There are the perennial lookers. Those people who dream about owning their own business, are constantly looking, but will never leave the job to fulfill the dream. In fact, perspective business buyers who have been looking for over six months would probably fit into this category.

Business brokers spend a lot of time interviewing buyers. Here are just a few of the questions they will ask. The answers they receive will determine whether or not the prospective buyer is serious and qualified.

  • Why is the person considering buying a business?
  • Has the person ever owned their own business?
  • How long has the person been looking?
  • Is the person currently employed?
  • What kind of business is the person looking for?
  • Is he or she flexible in the kind of business?
  • What are the most important considerations?
  • How much money is available?
  • What is the person’s timeframe?
  • Does the person’s experience match the type of business under consideration?
  • Who else is involved in the purchase decision?
  • Is the person’s spouse positive about owning a business?

There are other questions and considerations, but those cited above reveal the depth of a buyer interview. Business brokers want to work only with buyers who are serious about purchasing a business. They don’t want to show a business to anyone who is not qualified, which is simply a waste of their time and the seller’s time.

Copyright: Business Brokerage Press, Inc.

SCPhotog/BigStock.com

Why Deals Fall Apart — Loss of Momentum

Deals fall apart for many reasons – some reasonable, others unreasonable.

For example:

• The seller doesn’t have all his financials up to date.
• The seller doesn’t have his legal/environmental/administrative affairs up to date.
• The buyer can’t come up with the necessary financing.
• The well known “surprise” surfaces causing the deal to fall apart.

The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum.

This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don’t notice the waning or missing momentum. Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it.

Let’s say a buyer can’t get through to the seller. The buyer leaves repeated messages, but the calls are not returned. (The reverse can also happen, but for our example we’ll assume the seller is unresponsive.) The buyer then calls the intermediary. The intermediary assures the buyer that he or she will call the seller and have him or her get in touch. The intermediary calls the seller and receives the same response. Calls are not returned. Even if calls are returned the seller may fail to provide documents, financial information, etc.

To the experienced intermediary the “red flag” goes up. Something is wrong. If not resolved immediately, the deal will lose its momentum and things can fall apart quite rapidly. What is this hidden element that causes a loss of momentum? It is generally not price or anything concrete.

It often boils down to an emotional issue. The buyer or seller gets what we call “cold feet.” Often it is the seller who has decided that he really doesn’t want to sell and doesn’t know what to do. It may also be that the buyer has discovered something that is quite concerning and doesn’t know how to handle it. Maybe the chemistry between buyer and seller is just not there for one or the other of them. Whatever the reason, the reluctant party just tries to ignore the proceedings and lack of momentum occurs.

The sooner this loss of momentum is addressed, the better the chance for the deal to continue to closing. Because the root of the problem is often an emotional issue, it has to be faced directly. An advisor, the intermediary or someone close to the person should immediately make a personal visit. Another suggestion is to get the buyer and seller together for lunch or dinner, preferably the latter. Regardless of how it happens, the loss of momentum should be addressed if the sale has any chance of closing.

Copyright: Business Brokerage Press, Inc.

Rawpixel.com/BigStock.com

Personal Goodwill: Who Owns It?

Personal Goodwill has always been a fascinating subject, impacting the sale of many small to medium-sized businesses – and possibly even larger companies. How is personal goodwill developed? An individual starts a business and, during the process, builds one or more of the following:

• A positive personal reputation
• A personal relationship with many of the largest customers and/or suppliers
• Company products, publications, etc., as the sole author, designer, or inventor

The creation of personal goodwill occurs far beyond just customers and suppliers. Over the years, personal goodwill has been established through relationships with tax advisors, doctors, dentists, attorneys, and other personal service providers. While these relationships are wonderful benefits, they are, unfortunately, non-transferable. There is an old saying: In businesses built around personal goodwill, the goodwill goes home at night.

It can be difficult to sell a business, regardless of size, where personal goodwill plays an integral role in the business’ success. The larger the business, the less likely that one person holds the key to its profitability. In small to medium-sized businesses, personal goodwill can be a crucial ingredient. A buyer certainly has to consider it when considering whether to buy such a business.

In the case of the sale of a medical, accounting, or legal practice, existing clients/patients may visit a new owner of the same practice; they are used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. However, if existing clients or patients don’t like the new owner, or they don’t feel that their needs were handled the way the old owner cared for them, they may look for a new provider. The new owner might be as competent as, or more competent than, his predecessor, but chemistry, or the lack of it, can supersede competency in the eyes of a customer.

Businesses centered on the goodwill of the owner can certainly be sold, but usually the buyer will want some protection in case business is lost with the departure of the seller. One simple method requires the seller to stay for a sufficient period after the sale to allow him or her to work with the new owner and slowly transfer the goodwill. No doubt, some goodwill will be lost, but that expectation should be built into the price.

Another approach uses some form of “earnout.” At the end of the year, the lost business that can be attributed to the goodwill of the seller is tallied. A percentage is then subtracted from monies owed to the seller, or funds from the down payment are placed in escrow, and adjustments are made from that source.

In some cases, the sale of goodwill may offer some favorable tax benefits for the seller. If the seller of the business is also the owner of the personal goodwill, the sale can essentially be two taxable events. The tax courts have ruled that the business doesn’t own the goodwill, the owner of the business does. The seller thus sells the business and then also sells his or her personal goodwill. The seller’s tax professional will be able to give further advice on this matter.

WavebreakMediaLtd./BigStock.com

Copyright:Business Brokerage Press, Inc.

The Three Ways to Negotiate

Basically, there are three major negotiation methods.

1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”

2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.

3. This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm. The buyer may want to move the business.

There is an old adage that advises, “Never negotiate your own deal!”

The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good advocates for their side and they understand the company and the seller.

How do the parties get together in a win-win negotiation? The first step is for both sides to work with their advisors to settle on the price and deal structure positions. Both sides should be able to present their side of these issues. Which is more important – price or terms, or non-monetary items?

Information is vital to a buyer. Buyers should keep in mind that the seller knows more about the business than he or she does. Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal. Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.

Bob Woolf, the famous sports agent said in his book, Friendly Persuasion: My Life as a Negotiator, “I never think of negotiating against anyone. I work with people to come to an agreement. Deals are put together.”

Rawpixel.com/BigStock.com

Copyright: Business Brokerage Press, Inc.

Due Diligence — Do It Now!

Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a buyer’s perspective in performing due diligence as part of an annual review of the business. Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door.

This process, when performed by a serious acquirer, is generally broken down into five basic areas:

• Marketing due diligence
• Financial due diligence
• Legal due diligence
• Environmental due diligence
• Management/Employee due diligence

Marketing Issues
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry. For example, here are just a few questions concerning the market that due diligence will help answer:

• What is the size of the market?
• Who are the industry leaders?
• Does the product or service have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What’s the downside and the upside of the product/service? What is the risk and potential?

Financial Issues
Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? and (2) Are the seller’s claims supported by the figures? If the answer to both is yes, the following should be carefully reviewed:

• The accounts receivables
• The accounts payable
• The inventory

Legal Issues
Are contracts and agreements current? Are products patented, if necessary? How about copyrights and trademarks? What is the current status of any litigation? Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see and would it be acceptable?

Environmental Issues
Not too long ago this area would have been a non-issue. Not any more! Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate. Possible acquirers – and lenders – are really “gun-shy” about these types of problems.

Management/Employee Issues
What employment agreements are in force? What family members are on the payroll? Who are the key people? In other words, who does what, why, and how much are they paid?

Operational Issues
The company should have a clear program covering how their products are handled from raw material to “out the door.” Service companies should also have a program covering how services are delivered from initial customer contact through delivery of the services.

The question is, do you give your company a “physical” now, or do you wait until someone else does it for you – with a lot riding on the line?

tashatuvango/BigStock.com

Copyright: Business Brokerage Press, Inc.

Considerations When Selling…Or Buying

Important questions to ask when looking at a business…or preparing to have your business looked at by prospective buyers.

• What’s for sale? What’s not for sale? Does it include real estate? Are some of the machines leased instead of owned?

• What assets are not earning money? Perhaps these assets should be sold off.

• What is proprietary? Formulations, patents, software, etc.?

• What is their competitive advantage? A certain niche, superior marketing or better manufacturing.

• What is the barrier of entry? Capital, low labor, tight relationships.

• What about employment agreements/non-competes? Has the seller failed to secure these agreements from key employees?

• How does one grow the business? Maybe it can’t be grown.

• How much working capital does one need to run the business?

• What is the depth of management and how dependent is the business on the owner/manager?

• How is the financial reporting undertaken and recorded and how does management adjust the business accordingly?

www.BillionPhotos.com/BigStock.com

Copyright: Business Brokerage Press, Inc.

Keys to a Successful Closing

The closing is the formal transfer of a business. It usually also represents the successful culmination of many months of hard work, extensive negotiations, lots of give and take, and ultimately a satisfactory meeting of the minds. The document governing the closing is the Purchase and Sale Agreement. It generally covers the following:

• A description of the transaction – Is it a stock or asset sale?

• Terms of the agreement – This covers the price and terms and how it is to be paid. It should also include the status of any management that will remain with the business.

• Representations and Warranties – These are usually negotiated after the Letter of Intent is agreed upon. Both buyer and seller want protection from any misrepresentations. The warranties provide assurances that everything is as represented.

• Conditions and Covenants – These include non-competes and agreements to do or not to do certain things.

There are four key steps that must be undertaken before the sale of a business can close:

1. The seller must show satisfactory evidence that he or she has the legal right to act on behalf of the selling company and the legal authority to sell the business.

2. The buyer’s representatives must have completed the due diligence process, and claims and representations made by the seller must have been substantiated.

3. The necessary financing must have been secured, and the proper paperwork and appropriate liens must be in place so funds can be released.

4. All representations and warranties must be in place, with remedies made available to the buyer in case of seller’s breech.

There are two major elements of the closing that take place simultaneously:

• Corporate Closing: The actual transfer of the corporate stock or assets based on the provisions of the Purchase and Sale Agreement. Stockholder approvals are in, litigation and environmental issues satisfied, representations and warranties signed, leases transferred, employee and board member resignations, etc. completed, and necessary covenants and conditions performed. In other words, all of the paperwork outlined in the Purchase and Sale Agreement has been completed.

• Financial Closing: The paperwork and legal documentation necessary to provide funding has been executed. Once all of the conditions of funding have been met, titles and assets are transferred to the purchaser, and the funds delivered to the seller.

It is best if a pre-closing is held a week or so prior to the actual closing. Documents can be reviewed and agreed upon, loose ends tied up, and any open matters closed. By doing a pre-closing, the actual closing becomes a mere formality, rather than requiring more negotiation and discussion.

The closing is not a time to cut costs – or corners. Since mistakes can be very expensive, both sides require expert advice. Hopefully, both sides are in complete agreement and any disagreements were resolved at the pre-closing meeting. A closing should be a time for celebration!

starfotograf/BigStock.com

Copyright: Business Brokerage Press, Inc.

“Red Flags” in the Sunset

Unlike that poetic title of an old-time standard song, Red Sails in the Sunset, red flags are not a pretty sight. They can cause a deal to crater. Sellers have to learn to recognize situations indicating there might be a problem in their attempt to sell their business. Very, very seldom does a white knight in shining armor riding a white horse gallop up, write a large check and take over the business – no questions asked. And, if he did, it probably should raise the red flag – because that only happens in fairy tales. Now, if the check clears – then fairy tales can come true.

Sellers need to step back and examine every element of the transaction to make sure something isn’t happening that might sink the deal. For example, if a company appears interested in your business, and you can’t get through to the CEO, President, or, even the CFO, there most likely is a problem. Perhaps the interest level is not what you have been led to believe. A seller does not want to waste time on buyers that really aren’t buyers. In the example cited, the red flag should certainly be raised.

A red flag should be raised if an individual buyer shows a great deal of interest in the company, but has no experience in acquisitions and has no prior experience in the same industry. Even if this buyer appears very interested, the chances are that as the deal progresses, he or she will be tentative, cautious and will probably have a problem overcoming any of the business’s shortcomings. Retaining an intermediary generally eliminates this problem, since every buyer is screened and only those that are really qualified are even introduced to the business.

Both of the above examples are early-stage red flags. Sellers have to be focused so they don’t waste their time on buyers that are undesirable. If a buyer appears to be weak, does not have a good reason to need the deal, or is otherwise unqualified, the red flag should be raised because the chances of a successful transaction are diminished. The seller might seriously consider moving on to other prospects.

Red flags do not necessarily mean the end of the deal or that it should be aborted immediately. It simply means that the seller should pay close attention to what is happening. Sellers should keep their antenna up during the entire transaction. Problems can develop right up to closing. Here is an example of a middle-stage red flag: The seller has received a term sheet from a prospective buyer and is then denied access to the buyer’s financial statements in order to verify their ability to make the acquisition. As a reminder, a term sheet is a written range of value for the purchase price plus an indication of how the transaction would be structured. It is normally prepared by the would-be purchaser and presented to the seller and is non-binding. A buyer who is not willing to divulge financial information about his or her company, or, himself, in the case of an individual, may have something to hide. Due diligence on the buyer is equally as important as due diligence on the business.

If a proposed deal has entered the final stages, it doesn’t mean that there won’t be any red flags, or any additional ones, if there have been some along the way. If there have been several red flags, perhaps the transaction shouldn’t have gone on any further. It is these latter stages where the red flags become more serious. However, at this point, it makes sense to try to work through them since problems or issues early-on apparently have been resolved.

One red flag at this juncture might be an apparent loss of momentum. This might mean a problem at the buyer’s end. Don’t let it linger. As mentioned earlier, at this juncture all stops should be pulled out to try to overcome any problems. If a seller, or a buyer, for that matter, suspects a problem, there might very well be one. Ignoring it will not rectify the situation. When a red flag is recognized, it is best that it be confronted head-on. It is only by acting proactively that red flags in the deal can become red sails in the sunset – a harbinger of smooth sailing ahead.

BackyardProductions/BigStock.com

Copyright: Business Brokerage Press, Inc.

The Confidentiality Myth

When it comes time to sell the company, a seller’s prime concern is one of confidentiality. Owners are afraid that “if the word gets out” they will lose employees, customers and suppliers. Not to downplay confidentiality, but these incidents seldom happen if the process is properly managed. There is always the chance that a “leak” will occur, but when handled correctly, serious damage is unlikely. Nevertheless, a seller should still be very careful about maintaining confidentiality since avoiding problems is always better than dealing with them. Here are some suggestions:

  • Understand that there is a “Catch 22” involved. The seller wants the highest price and the best deal, and this usually means contacting numerous potential buyers. Obviously, the more prospective buyers that are contacted, the greater the opportunity for a breach of confidentiality to occur. Business intermediaries understand that buyers have to be contacted, but they also realize the importance of confidentiality and have the procedures in place to reduce the risk of a breach. Another alternative is to work with just a few buyers. This, however, does reduce the chances of obtaining the best price.
  • Another way to avoid this breach is to try to keep a short timetable between going to market and a closing. The shorter the timetable, the less the chance for the word to get out. One way to keep a short timetable is to gather all of the information necessary for the buyer’s due diligence ahead of time. Create a place where all of this material can be consolidated. This can be as simple as a set of secured file drawers. Such documentation as: customer and vendor contracts, leases and real estate records, financial statements and supporting schedules (assets, receivables, payables), conditions of employment agreements, organization charts and pay schedules, summary of benefit programs, patents, etc. should be gathered. It is not unusual for due diligence examinations to look back 3 to 5 years, so there could be a lot of records.
  • The above means that the seller has to get organized. Selling one’s business is fraught with paperwork. Set up some three-ring binders so all of the relevant paperwork and resulting documentation has a place. These binders should be kept in a secure location.
  • The seller’s employees should be conditioned to having strange people (potential buyers) walk through the facility. One way to avoid suspicion is to arrange to have unrelated people, for example – customers, suppliers, advisors – tour the company facilities prior to placing the business on the market.
  • If sellers have not prepared their employees for strangers walking through the facilities as suggested above, awkward situations can develop. A valued employee may question why tours are being conducted. The seller is then placed in the position of explaining what is happening or covering the question with a “smokescreen.” A seller could reply by saying that the strangers are possible investors in the company. If asked directly if the business is for sale, the seller could respond by saying that if General Electric wants to pay a bundle for it – anything is for sale. Once in the selling process, it is also important to minimize traffic by only allowing serious, qualified prospects to tour the operation.
  • Keep in mind that confidentiality leaks can emanate from many sources. For example, an errant email ends up on someone else’s email. A fax gets sent to the wrong fax machine or UPS or FedEx deliveries go to the wrong people. Establish methods ahead of time on how to communicate with potential buyers or an intermediary.
  • The key to handling confidentiality is for the seller to retain a third party intermediary. They will insist that all potential buyers sign a confidentiality agreement. They will also be able to advise the seller on how to handle the “company tours” and can insure that only qualified buyers are shown the facilities.
  • The “myth” is that confidentiality issues can make or break a deal, or cause serious damage to the seller’s business. The reality is that breaches seldom occur when an intermediary is involved, and if they do occur and are handled properly, there is little damage to the business or a potential transaction.

ziss/BigStock.com

Copyright: Business Brokerage Press, Inc.

A Selling Memorandum

A sellers memorandum includes all those points one would normally expect to see in any business plan, to wit: an executive summary, a business description, financial requirements, target market niche, identification of top management, an operations review, analysis of strengths and weaknesses, and current financial statements and projections.

Guide to Mergers and Acquisitions published by PPC

A proposed sale of a middle-market company almost always begins with a selling memorandum. This document is called many things, including offering memorandum, confidential descriptive memorandum or simply the book. Regardless of what you choose to call it, its purpose is to encourage prospective buyers to take a further look at the company.

For the seller, it has a secondary side benefit. It forces them to take a hard look at the company, its strengths and its weaknesses. Upon reviewing the information necessary to prepare a selling memorandum, the seller may, in fact, decide that it’s not such a bad company after all and elect to keep it. On the other hand, the seller could decide that the current condition of the company needs to be improved before attempting to sell it. Looking at the company through the eyes of a buyer, could also prompt the seller to try to increase the value prior to selling. This may be done, for example, by building a stronger brand loyalty, by entering into employee contracts with key managers, or perhaps by diversifying the customer base.

Assuming, however, that the decision to sell has been made, the importance of the selling memorandum can not be emphasized enough. It is like a strong advertisement for the company and it must tell a good story. It should highlight the positive parts of the company, add value for the buyer, and show the negatives as opportunities. The selling memorandum has to make a good first impression. A seller wants to attract qualified buyers and bring value to the company being sold. This means that the selling memorandum has to be prepared and written by a professional. It is too important a document to do it any other way. It is also the basis of a strong marketing program to attract the best buyer at the best price.

What makes up a strong selling memorandum? It includes quite a few different elements. But, first a few caveats:

  • Don’t include confidential company information or reveal trade secrets. Although the document may be intended for qualified buyers only, once it is disseminated it really becomes a public document. Professional intermediaries and investment bankers do make prospective buyers sign a confidentiality agreement, which does help in this area. Still, with copy machines and email services readily available, it never hurts to maintain confidential information until much further in the negotiations.
  • Make sure that a prospective buyer knows exactly what you are selling. It is assumed unless otherwise mentioned that it is the entire company that is for sale. You don’t want prospects to think that they can purchase just the most profitable portions of the company. Obviously, a seller wants to show-off the excellent parts of the company, but this should not be done at the expense of the not-so-good parts. These can be presented as excellent opportunities.
  • The selling memorandum should not be aimed at the right prospects. If the business requires technical language to best explain it, use it. A buyer, who doesn’t understand it, probably isn’t a buyer.
  • There should be an explanation of how the company works so a prospective acquirer can read through the lines about the selling company’s corporate culture. This element can make or break a sale and it’s best to discover it at the outset.
  • There is always a tendency to include too much information – don’t. Don’t over-sell. You don’t need to include the names of customers and vendors and the names of all the employees.
  • Be sure to also include the blemishes. If there is a pending lawsuit, include. The bad news should be revealed early on – no one likes surprises, especially later in the negotiations.
  • And, finally, and probably, most important, the selling memorandum should be easy to read.

Now, what about the various elements of the selling memorandum. Here are the areas that should be covered in it.

Business Profile (or Executive Summary) – This may be the most important element of the selling memorandum. The entire offering should be covered in brief – no more than four-pages, at most. Many are done in one page. Remember, the sole purpose of the business profile is to generate excitement and interest. It is a selling piece! It should include:

  • Ownership
  • The Business
  • Financial highlights
  • Products and/or services
  • Markets
  • The opportunities
  • Reason for sale (Why is it for sale?)

This business profile is usually sent to possible purchasers. If the prospect is interested further, they sign a confidentiality agreement before receiving the entire selling memorandum. The selling memorandum includes detailed information on the key elements of the company and usually covers the following:

  • Business overview – In other words, who and what is the company? This is the place where everything about the company is summarized: it’s history, the employees (in general), the management team, the locations, any important intangible assets, and the outlook for the business.
  • Company strengths – What does the company do well? This should cover those strengths that bring value to this particular company.
  • Markets – Who are the customers/clients? What and how does the company sell its products or market its services.
  • The Risks – What are they? If there are risks in the business, they should be described and then an explanation of how the company solves them.
  • Financial data – Is the company making money? Cash flow statements are important. Current thinking is that the seller doesn’t have to include all of the available financial data – which the prospective buyer will go through all the financial history as the deal moves forward.

The selling memorandum should include any relevant corporate and/or product brochures as attachments. Prior to putting the business on the market, it is important that an outside valuation be performed. However, the price and terms are not usually a part of the selling memorandum – the marketplace will dictate the price. The purpose of the entire selling memorandum is to generate sufficient interest so that a prospective acquirer will make an offer.

Building Value

Prior to putting a company on the market for sale, the question of value has to be addressed. Increasing the value should, in fact, be considered a year, preferably two, prior to sale. Value is based on profitability, cash flow, management and the overall quality of the operation itself. Here are some considerations in building value, whether the business is going to be sold or not.

  • Are the company’s pricing policies set too low, creating low margins? Perhaps they were set some time ago in order to boost sales. Now might be a good time to review them to make sure they are in keeping with current market conditions.
  • Is the inventory level too high? How about work-in-progress or finished goods? Increasing the turns in inventory can increase cash flow.
  • Are you paying too much for raw material? Talk to your vendors and suppliers, you might be able to get some better prices or terms. Take a look at all of the expenses: utilities, telephone, technology, office expenses – it all adds up.
  • Are there services that could be outsourced for increased savings?
  • Increasing the quality of customer service may entice customers or clients to pay their bill promptly.
  • Are all the employees working together to improve the operation and profitability of the company?

These are just a few of the areas that can and should be reviewed. Although profits are important, there is an old expression that cash is king. The time to take a look at the overall company operations is now.

Measuring the Value of a Company

Consider the following important areas of a company. How does your company stack up in these critical areas? If you were to rank them on a 1 to 4 scale, for instance, what would your score be? The higher the score the more valuable the company! They are considered value drivers – in other words, they are important to a prospective buyer.

  • Profitability
  • Type of business
  • History of company and industry
  • Business growth
  • Customers/Clients
  • Market share
  • Return on investment
  • Quality of financial statements
  • Size
  • Management
  • Terms of sale

For example, in looking at a company’s financial data – are the statements audited or merely compiled? Is the growth of the company slow or is it growing quickly? How about the customer base – is it based on several major ones, or is it spread out over many customers? The time to consider these critical value drivers is now!

pressmaster/BigStock.com

Copyright: Business Brokerage Press, Inc.

Common Seller Questions

How long does it take to sell my business?

It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment (generally 40 percent of the asking price or less), the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.

What Happens When There is a Buyer for My Business?

When a buyer is sufficiently interested in your business, he or she will, or should, submit an offer in writing. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one) or other pertinent details of the business. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time.

At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some positives to seriously consider. There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer — just that all offers should be looked at carefully.

When you and the buyer are in agreement, both of you should work to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business.

What Can I Do To Help Sell My Business?

A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure he or she is familiar with the business closing process and the laws of your particular state. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks (unless there is an alcohol license or other license involved that might delay things), you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.

What Can Business Brokers Do – And, What Can’t They Do?

Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do — as well as what they can’t. They can help you decide how to price your business and how to structure the sale so it makes sense for everyone — you and the buyer. They can find the right buyer for your business, work with you and the buyer in negotiating, and work with you both every step of the way until the transaction is successfully closed. They can also help the buyer in all the details of the business buying process.

A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.

Flynt/BigStock.com

Copyright: Business Brokerage Press, Inc.

Are You Ready to Exit?

If you’ve gone this far, then selling your business has aroused enough curiosity that you are taking the first step. You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself.

Question 1
The first question almost every seller asks is: “What is my business worth?” Quite frankly, if we were selling our business, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.

*Insider Tip:
It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. Only the marketplace can decide what its value is.

Question 2
The second question you have to consider is: Do you really want to sell this business? If you’re really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen. You can increase your chances of selling if you can answer yes to the second question: Do you have reasonable expectations? The yes answer to these two questions means you are serious about selling.

The First Steps

Okay, let’s assume that you have decided to at least take the first few steps to actually sell your business. Before you even think about placing your business for sale, there are some things you should do first.The first thing you have to do is to gather information about the business.

Here’s a checklist of the items you should get together:

  • Three years’ profit and loss statements
  • Federal Income tax returns for the business
  • List of fixtures and equipment
  • The lease and lease-related documents
  • A list of the loans against the business (amounts and payment schedule)
  • Copies of any equipment leases
  • A copy of the franchise agreement, if applicable
  • An approximate amount of the inventory on hand, if applicable
  • The names of any outside advisors

Notes:
If you’re like many small business owners you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.

Make sure the financial statements of the business are current and as accurate as you can get them. If you’re halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper”. As you will see later, pricing a small business usually is based on cash flow. This includes the profit of the business, but also, the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.

Prospective buyers eventually want to review your financial figures. A Balance Sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see income and expenses. They want to know if they can make the payments on the business, and still make a living. Let’s face it, if your business is not making a living wage for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc., and feels that he or she can increase business.

*Insider Tip
The big question is not really how much your business will sell for, but how much of it can you keep. The Federal Tax Laws do determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? The point of all of this is that before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.

soupstock/Bigstock.com

Copyright: Business Brokerage Press, Inc.

10 Tips for a Successful Sale

1.Sellers should find out the loan value of the fixtures, equipment and machinery prior to a sale. Many buyers will count on using it for loan or collateral purposes. No one wants to find out at the last minute that the value of the machinery won’t support the debt needed to put the deal together.

2.Sellers should resolve all litigation and environmental issues before putting the company on the market.

3.Sellers should be flexible about any real estate involved. Most buyers want to invest in the business, and real estate usually doesn’t make money for an operating company.

4.Sellers should be prepared to accept lower valuation multiples for lack of management depth, regional versus national distribution, and a reliance on just a few large customers.

5.If a buyer indicates that he or she will be submitting a Letter of Intent, or even a Term Sheet, the seller should inform them up-front what is to be included:

  • price and terms
  • what assets and liabilities are to be assumed, if it is to be an asset purchase
  • lease or purchase of any real estate involved
  • what contracts and warranties are to be assumed
  • schedule for due diligence and closing
  • what employee contracts and/or severance agreements the buyer will be responsible for

6.Non-negotiable items should be pointed out early in the negotiations.

7.The sale of a company usually involves three inconsistent objectives: speed, confidentiality and value. Sellers should pick the two that are most important to them.

8.A PricewaterhouseCoopers survey of more than 300 privately held U.S. companies that were sold or transferred pointed out the most common things a company can do to improve the prospects of selling:

  • improve profitability by cutting costs
  • restructure debt
  • limit owner’s compensation
  • fully fund company pension plan
  • seek the advice of a consultant
  • improve the management team
  • upgrade computer systems

9.Sellers should determine up-front who has the legal authority to sell the business. This decision may lie with the board of directors, a majority stockholder, and a bank with a lien on the business, etc.

10.Partner with professionals. A professional intermediary can be worth his or her weight in gold.

Kzenon/Bigstock.com

Copyright: Business Brokerage Press, Inc.

The Term Sheet

Buyers, sellers, intermediaries and advisors often mention the use of a term sheet prior to the creation of an actual purchase and sale agreement. However, very rarely do you ever hear this document explained. It sounds good but what is it specifically?

Very few books about the M&A process even mention term sheet. Russ Robb’s book Streetwise Selling Your Business defines term sheet as follows: “A term sheet merely states a price range with a basic structure of the deal and whether or not it includes the real estate.” Attorney and author Jean Sifleet offers this explanation: “A one page ‘term sheet’ or simply answering the questions: Who? What? Where? and How Much? helps focus the negotiations on what’s important to the parties. Lawyers, accountants and other advisors can then review the term sheet and discuss the issues.” She cautions, “Be wary of professional advisors who use lots of boilerplate documents, take extreme positions or use tactics that are adversarial. Strive always to keep the negotiations ‘win-win.’”

If the buyer and the seller have verbally agreed on the price and terms, then putting words on paper can be a good idea. This allows the parties to see what has been agreed on, at least verbally. This step can lead to the more formalized letter of intent based on the information contained in the term sheet. The term sheet allows the parties and their advisors to put something on paper that has been verbally discussed and tentatively agreed on prior to any documentation that requires signatures and legal review.

A term sheet is, in essence, a preliminary proposal containing the outline of the price, terms and any major considerations such as employment agreements, consulting agreements and covenants not to compete. It is a good first step to putting a deal together.

Gajus/Bigstock.com

Copyright: Business Brokerage Press, Inc.

What Makes Your Company Unique?

There are unique attributes of a company that make it more attractive to a possible acquirer and/or more valuable. Certainly, the numbers are important, but potential buyers will also look beyond them. Factors that make your company special or unique can often not only make the difference in a possible sale or merger, but also can dramatically increase value. Review the following to see if any of them apply to your company and if they are transferable to new ownership.

Brand name or identity

Do any of your products have a well recognizable name? It doesn’t have to be Kleenex or Coke, but a name that might be well known in a specific geographic region, or a name that is identified with a specific product. A product with a unique appearance, taste, or image is also a big plus. For example, Cape Cod Potato Chips have a unique regional identity, and also a distinctive taste. Both factors are big pluses when it comes time to sell.

Dominant market position

A company doesn’t have to be a Fortune 500 firm to have a dominant position in the market place. Being the major player in a niche market is a dominant position. Possible purchasers and acquirers, such as buy-out groups, look to the major players in a particular industry regardless of how small it is.

Customer lists

Newsletters and other publications have, over the years, built mailing lists and subscriber lists that create a unique loyalty base. Just as many personal services have created this base, a number of other factors have contributed to the building of it. The resulting loyalty may allow the company to charge a higher price for its product or service.

Intangible assets

A long and favorable lease (assuming it can be transferred to a new owner) can be a big plus for a retail business. A recognizable franchise name can also be a big plus. Other examples of intangible assets that can create value are: customer lists, proprietary software, an effective advertising program, etc.

Price Advantage

The ability to charge less for similar products is a unique factor. For example, Wal-Mart has built an empire on the ability to provide products at a very low price. Some companies do this by building alliances with designers or manufacturers. In some cases, these alliances develop into partnerships so that a lower price can be offered. Most companies are not in Wal-Mart’s category, but the same relationships can be built to create low costs and subsequent price advantages.

Difficulty of replication

A company that produces a product or service that cannot be easily replicated has an advantage over other firms. We all know that CPA and law firms have unique licensing attributes that prevent just anyone off of the street from creating competition. Some firms have government licensing or agreements that are granted on a very limited basis. Others provide tie-ins that limit others from competing. For example, a coffee company that provides free coffee makers with the use of their coffee.

Proprietary technology

Technology, trade secrets, specialized applications, confidentiality agreements protecting proprietary information – all of these can add up to add value to a company. These factors may not be copyrighted or patented, but if a chain of confidentiality is built – then these items can be unique to the company.

There are certainly other unique factors that give a company a special appeal to a prospective purchaser and, at the same time, increase value. Many business owners have to go beyond the numbers and take an objective look at the factors that make their company unique.

iqoncept/Bigstock.com

Copyright Business Brokerage Press, Inc.

Is This the Right Time to Sell?

“Whatever the reason, there should be something other than dollars that motivates you to explore a sale. After all, if it weren’t more valuable to own the business than to sell it, no one would ever buy it.”

Mike Sharp, M&A Today, November 2002

The owner of a successful company is considering selling, thinking now may be a good time. However, he is told by an outside advisor that business is good and that if he holds on to it for several more years he will get a much higher price. On the surface, this makes a lot of sense. After all, when an advisor tells the owner that if he keeps it for three more years the price will double, that’s a terrific incentive to keep plugging away. However, there is another side to what would appear to be sound advice.

The most dramatic downside would be that the business could go downhill rather than uphill as the advisor predicted. Although no one can predict what the economy will do, there are a couple of possible scenarios. The industry itself might be impacted by some new technology or other companies might enter the field. It is also possible that the owner, having considered selling, is just worn out and can’t or won’t maintain the zeal necessary to keep the business competitive. After all, after many years of running the business, the owner may be tired, “burnt out,” or just plain ready to slow down.

There are other areas to consider as well. For example, equipment may need upgrading or replacement, products or services may be aging and need revitalizing. Additional capital may be necessary to keep the company up-to-date and competitive. Leases may be expiring and long obligations required to renew them. In short, what originally looked like a good strategy to increase the selling price, has backfired. The costs of continuing to operate the business have increased dramatically, the owner has lost interest – and now the company is offered for sale.

The right time to sell may be when the company’s industry, product line or service is at or near the height, of its success. There comes a point when the business or its industry is peaking and everyone wants “in” – and that is the time to sell. There is the old story that the time to sell the buggy whip business was just before Ford started producing the Model-T. As they say, “timing is everything.”

The right time might be when the company is at the top of its game. Sales are robust and growing, the balance sheet is squeaky clean, and the employees are productive and happy. Another good time to sell is when there is a solid buyer who is seriously interested in purchasing the company, or perhaps, when a manager within the company is ready to take over in a buy-out of some form.

So, when is the right time to sell? Perhaps when the owner first decided it might be time. However, there is really no best time to sell. No one can tell the owner when it is the time to sell. Outside advisors are well intended, but no one knows when it is time except the owner. And, when it’s time – it’s time!

Copyright: www.bigstockphoto.com/devon

Tips on Avoiding the Dealbreakers

One of the most important steps is to hire the right advisors. This begins with the right professional business broker/ M&A specialist. The right attorney should be added to the team. The right one is an attorney who has been through the sales process many times – one who is a deal maker seeking solutions, not a deal breaker seeking “why not to” reasons. The accountants must be deal oriented, and if they are the firm’s outside advisor, they should be aware that they may not be retained by the buyer, and must still be willing to work in the best interest of putting the deal together.

Getting through due diligence

One of the three or four times a deal can fall apart is half-way into the due diligence phase, when the buyer finds something he or she did not expect. No one likes surprises, and they can’t all be anticipated. An experienced buyer will probably work his way through it, but a novice may walk away. Although sellers too often hope a potential problem doesn’t surface, it always does. Avoid the surprises by putting everything on the table even if it seems inconsequential. It’s much better to expose all the warts up front than to have them surface later.

Where is all the money going?

Prior to offering their business for sale, sellers should figure out what the net proceeds will be after paying off any debt not being assumed, current payables, closing costs and tax obligations. The middle of due diligence is no time for the seller to realize that the proceeds from the sale aren’t what he or she anticipated. On the buyer’s side, there are times when current sales and profits are suddenly going south. If the seller anticipates this happening, the buyer should be told up front the reason for the rapid decline. Otherwise, if it comes as a surprise to the buyer, it might cause some restructuring of the deal.

No chemistry between the buyer and the seller

If everything goes smoothly (a rare occurrence), the buyer and the seller don’t have to be good buddies. However, if problems or surprises develop, good chemistry can save the day. Sometimes a golf outing or a good dinner can bring the parties together. If both parties want the deal to work, having them get together socially – and privately – can, many times, overcome a stubborn legal or financial issue.

Obviously, not all deals work. However, the odds of the deal closing are greatly improved if both the buyer and the seller consider the areas discussed above. Surprises can work both ways, and the buyers too should place their cards on the table. However, when all else fails, it is the desire of both parties wanting the transaction to work that will ultimately close the deal!

Mistakes that Sellers Make

  • Not being flexible in structuring the deal
  • Not checking out the prospective buyer
  • Not believing that time is of the essence
  • Negotiating to win everything
  • Nit-picking every item
  • Not maintaining confidentiality – and failing to insist that the buyer proceed on a confidential basis
  • Not retaining competent advisors
  • Not meeting the buyer halfway

Copyright: bigstockphoto.com/digitalista

Do You Have an Exit Plan?

“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”

From: Selling Your Business by Russ Robb, published by Adams Media Corporation

Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!

The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.

The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.

Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.

The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.

A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.

One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?

An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?

The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.

Copyright: ra2studio/bigstock.com

What Is Burnout?

Burnout can come with a business that’s successful as well as with one that’s failing to grow. The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs of burnout?

• That isolated feeling. The burnt-out owner has been “chief cook and bottle washer” for such an extended period of time that even routine acts of decision-making and action-taking seem like Sisyphean tasks. These owners have been shouldering the burdens alone too long.

• Fuzzy perspective. Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem-solving sometimes goes no further than the application of business Band-Aids that cost money in the long run rather than increase profits.

• No more fun. Of course, owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread – or boredom – should consider moving on to a fresh challenge elsewhere.

• Just plain tired. Simply put, many business owners burn out from the demands placed on them to keep their companies operating day after day, year after year. The schedule is not for everyone; in fact, statistics show that it’s hardly for anyone, long-term.

The important point here is for business owners to recognize the signs and take action before burnout begins to hinder the growth – or sheer survival – of the business. Many of today’s independent business owners feel they’ve worked hard, made their money and sense that now is a good time to “cash-out” and move on.

Copyright: Lichtmeister/bigstock.com

Happy Employees Can Increase Profits…and Value

Happy employees mean happy customers and clients. An unhappy employee can mean loss of business or worse. How does a business owner create happy and contented employees? It all starts with the hiring process – hiring positive people to start with certainly helps. Offering as many benefits as your business can afford is also a plus.

However, one of the big keys is simply for the business owner to treat employees well, and appreciate their contributions. Some owners expect their employees to have the same dedication to the business as they do. They are not owners and don’t have the same privileges as an owner does. In most cases, the business is an owner’s life, whereas the employee has a life outside of the business. It is important that the owner understands this difference.

In the long run, positive and happy owners have happy employees. But if being a good role model doesn’t do the job with workers who remain negative, your only recourse is to get rid of them. Reward your people with praise, and every once in a while give them a dinner gift certificate for two – or their birthday off – anything to let them know you appreciate their work. It’s an inexpensive way to increase profits and subsequently the value of the business. When a potential buyer checks the business, and they will, being waited on by a happy employee can seal the deal.

Copyright: Nosnibor137/bigstockphoto.com

Take a Look at Your Lease

If your business is not location-sensitive, that is, if your business location is immaterial to its success, then the following may not be important. However, lease information is usually helpful no matter what the situation. The business owner whose business is very dependent on its current location should certainly read on.

If your business is location-sensitive, which is almost always true for a restaurant, a retail operation, or, in fact, any business that depends on customers finding you (or coming upon you, as is often the case with a well-located gift shop) – the lease is critical. It may be too late if you already have executed it, but the following might be helpful in your next lease negotiation.

Obviously, a very important factor is the length of the lease, usually the longer the better. If the property ever becomes available – do whatever it takes to purchase it. However, if you are negotiating a lease for a new business, you might want to make sure you can get out of the lease if the business is not successful. A one-year lease with a long option period might be an idea. Keep in mind that you might want to sell the business at some point – see if the landlord will outline his or her requirements for transfer of the lease.

If you’re in a shopping center, insist on being the only tenant that does what your business does. If you have a high-end gift store, a “dollar” type of store might not hurt, but its inclusion as a business neighbor should be your decision. Also, if the center has an anchor store as a draw, what happens if it closes? The same is true if the center starts losing businesses. Your rent should be commensurate with how well the center meets your needs.

What happens if the center is destroyed by fire or some other disaster – who pays, how long will it take to rebuild? – these questions should be dealt with in the lease. In addition to the rent, what else will be added: for example, if there is a percentage clause – is it reasonable? How are the real estate taxes covered? Are there fees for grounds-keeping, parking lot maintenance, etc? How and when does the rent increase? Who is responsible for what in building repair and maintenance?

A key issue for many business owners is determining who holds ultimate responsibility for the rent. Are you required to personally guarantee the terms of the lease? If you have a business that has been around for years, or if you are opening a second or third business, the landlord should accept a corporation as the tenant. However, if the business is new, a landlord will most likely require the personal guarantee of the owner.

The dollar amount of the rent is not necessarily the most important ingredient in a lease. If the business is successful – the longer the lease the better. If it’s a new business, the fledging owner might want an escape clause. And, in any case, the right to sell the business and transfer the business is a necessity.

Copyright: Anton Foltin/bigstock.com

Rating Today’s Business Buyers

Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.

The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.

Synergistic Buyers

These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.

A Final Note

Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.

Copyright: monkeybusinessimages/Bigstock.com

Why Your Company Needs a Physical

Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.

A leading CPA firm conducted a survey that revealed:

  • 65% of business owners do not know what their company is worth;
  • 75% of their net worth is tied up in their business; and
  • 85% have no exit strategy

There are many obvious reasons why a business owner should get a valuation of his or her company every year such as partnership issues, estate planning or a divorce; buy/sell agreements; banking relationships; etc.

No matter what the reason, the importance of getting a valuation cannot be over-emphasized:An astute business owner should like to know the current value of his or her company as part of a yearly analysis of the business. How does it stack up on a year-to-year basis? Value should be increasing not decreasing! It might also point out how the company stacks up against its peers. The owner’s annual physical hopefully shows that everything is fine, but if there is a problem, catching it early on is very important. The same is true of the business.

Lee Ioccoca, former CEO of the Chrysler Company said in commercials for the company, “Buy, sell or get-out-of-the-way,” meaning standing still was not an option. One never knows when an opportunity will present itself. An acquisition now might seem out of the question, but a company owner should be ready, just in case. A current valuation may be as good as money in the bank when that “out of the question” opportunity presents itself.

One never knows when a potential acquirer will suddenly present itself. A possible opportunity of a lifetime and the owner doesn’t have a clue what to do. Time is of the essence and the seller doesn’t have a current valuation to check against the offer. By the time it takes to gather the necessary data and get it to a professional valuation firm, the acquirer has moved to greener pastures.

Having a company valuation done on an annual basis should be as secondary as the annual physical – it really is the same thing – only the patients are different.

Rawpixel/Bigstock.com

Should You Be Selling Your Company…Now?

The answer to the question asked in the title is, “It all depends!” There are all sorts of studies, surveys and the like suggesting that as more and more “baby-boomers” reach retirement age, the market will be flooded with companies for sale. The consensus is that with these privately-held company owners reaching and nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.

While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now – and some reasons that may compel you to hold off. One good reason for any owner to sell “now” is that it just may be time to “smell the roses,” as they say. After running the business for so many years, “burn-out” is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don’t make the effort to replace them. Or, you don’t make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It’s too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.

On the flip side, it is also easy to convince yourself that business is down a bit this year, maybe due to the current economy or recent legislation, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be a good idea. Thirty-five percent of business owners, in one survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value. Unfortunately, no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that “fire-in-the-belly” you once had, so the business may slide even further.

You could also point your finger to the tightening of credit and ask, “How is a buyer going to finance the business?” Despite very low interest rates, borrowing money is now more difficult.

There is an old saying that the time to plan your exit strategy is the day you start running the business. Business owners can’t outgrow interest rates, legislative changes or aging. The time to sell is when you are ready to sell. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, call a professional intermediary.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: slideshowmom via morgueFile

The Confidentiality Agreement

When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don’t want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.

The following are some of the questions that a seller should expect a confidentiality agreement to cover:

  • What type of information can and can not be disclosed?
  • Are the negotiations open or secret?
  • What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
  • What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
  • Which state’s laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
  • What recourse do you have if the agreement is breached?

Obviously, executing an agreement does not mean a violation can’t occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.

While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.

A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes “common ground” between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: pippalou via morgueFile

Common Reasons for Selling

It has been said that the sale of a business is usually event driven. Very few owners of businesses, whether small or large, wake up one morning and think, “Today I am going to sell my company.” It is usually a decision made after considerable thought and usually also prompted by some event. Here are a few common “events” that may prompt the decision to sell:

Boredom or “Burn-out” – Many business owners, especially those who started their companies and have spent years building and running them, find that the “batteries are starting to run low.”

Divorce or Illness – Both divorce and illness can cause a rapid change in one’s life. Either of these events, or a similar personal tragedy, can prompt a business owner to decide that selling is the best course of action.

Outside Investors – Outside investors may include family, friends, or just plain outside investors. These outside investors may be putting pressure on the owner/majority owner in order to recoup their investment.

No Heir Apparent – In this scenario, no family member has any interest in the business; and the owner has not groomed his or her successor. Unfortunately, in this event the owner often continues to run the business until he is almost forced to sell.

Competition is Around the Corner – In this scenario, the owner would have been better off selling prior to competition becoming an issue.

A “Surprise” Offer is Received – This may be about the only reason not truly event driven; an unsolicited offer is presented that is too good to pass up.

Everything is Tied Up in the Company – The owner/ founder sometimes becomes aware that everything he or she has is tied up in the business. In other words, all the eggs are in one basket.

Should Have Sold Sooner – Owning a small to midsize company (or even a large one) is not without its risks. A large customer goes under, suppliers decide to increase their prices, trends change, business conditions change, etc.

Surveys indicate that many small company owners do not have an exit strategy; so, when an event does strike, they are not prepared. Developing an exit strategy doesn’t mean the owner has to use it. What it does mean is that a strategy is ready when the owner needs it.

A professional intermediary can supply a business owner the real world information necessary not only to develop a plan, but also to know how to implement the plan when it becomes necessary.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: luanarodriquez via morgueFile

Considering Selling? Some Important Questions

Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling.

Here are three questions that potential buyers will ask:

  1. Why do you want to sell the business?
  2. What should a new owner do to grow the business?
  3. What makes this company different from its competitors?

Then, there are two questions that sellers must ask themselves:

  1. What is your bottom-line price after taxes and closing costs?
  2. What are the best terms you are willing to offer and then accept?

You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy.

The best way to prepare your business to sell, and to prepare yourself, is to talk to a professional intermediary.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: DodgertonSkillhause via morgueFile

Is Your “Normalized” P&L Statement Normal?

Normalized Financial StatementsStatements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner’s compensation and benefits need to be restated to reflect a competitive market value.

Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company.

For example, legal fees used for litigation purposes would be considered a one-time expense. Or, consider a new roof, tooling or equipment for a new product, or any expensed item considered to be a one-time charge. Obviously, adding back the money spent on one or more of these items to the profit of the company increases the profits, thus increasing the value.

Using a reasonable EBITDA, for example an EBITDA of five, an add back of $200,000 could increase the value of a company by one million dollars. Most buyers will take a hard look at the add backs. They realize that there really is no such thing as a one-time expense, as every year will produce other “one-time” expenses. It’s also not wise to add back the owner’s bonuses and perks unless they are really excessive. The new owners may hire a CEO who will require essentially the same compensation package.

The moral of all this is that reconstructed earnings are certainly a legitimate way of showing the real earnings of a privately held company unless they are puffed up to impress a lender or potential buyer. Excess or unreasonable add backs will not be acceptable to buyers, lenders or business appraisers. Nothing can squelch a potential deal quicker than a break-even P&L statement padded with add backs.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: DodgertonSkillhause via morgueFile

Do You Have an Exit Plan?

“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.” From: Selling Your Business by Russ Robb, published by Adams Media Corporation Whether you plan to sell…

The Devil May Be in the Details

When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.

In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.

One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:

  • Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
  • Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
  • Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
  • Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
  • Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
  • Sellers who have unrealistic expectations for the sale price.
  • Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
  • Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
  • Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
  • Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.

Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jppi via morgueFile

Family Businesses

A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering
selling the business:

  • You may have to consider a lower price if maintaining jobs for family members is important.
  • Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy.
  • Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
  • All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
  • Confidentiality in the sale of a family business is a must.
  • Meetings should be held off-site and selling documentation kept off-site, if possible.
  • Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.

Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisers. They can also move the sales process along as quickly as possible and assist in negotiations.

Keeping it in the Family

It’s hard to transfer a family business to a younger kin. Below are some statistics regarding family businesses.

  • 30% of family businesses pass to a second generation.
  • 10% of family businesses reach a third generation.
  • 40% to 60% of owners want to keep firms in their family.
  • 28% of family businesses have developed a succession plan.
  • 80% to 95% of all businesses are family owned.
Source: Ted Clark, Northeastern University Center for Family Business

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: naomickellogg via morgueFile

What Are Buyers Looking for in a Company?

It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price. Quality of the Earnings Some accountants and intermediaries are very aggressive…

A Reasonable Price for Private Companies

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their…

Top Ten Mistakes Made By Sellers

  1. Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow.
  2. Starting off with too high a price with the assumption the price can always be reduced.
  3. Assuming that confidentiality is a given.
  4. Failing to plan ahead to sell / deciding to sell impulsively.
  5. Expecting that the buyers will only want to see last year’s P&L.
  6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
  7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
  8. Not accepting that the structure of the deal is as important as the price.
  9. Trying to win every point of contention.
  10. Dragging out the deal and not accepting that time is of the essence.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jppi via morgueFile

Why Sell Your Company?

Selling one’s business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.

  • Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
  • No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
  • Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
  • Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
  • Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
  • An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”

There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”

Who Is the Buyer?

Buyers buy a business for many of the same reasons that sellers sell businesses. It is important that the buyer is as serious as the seller when it comes time to purchase a business. If the buyer is not serious, the sale will never close. Here are just a few of the reasons that buyers buy businesses:

  • Laid-off, fired, being transferred (or about to be any of them)
  • Early retirement (forced or not)
  • Job dissatisfaction
  • Desire for more control over their lives
  • Desire to do their own thing

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The buyer will never have owned a business before, and most likely will buy a business he or she had never considered until being introduced to it.

Their primary reason for going into business is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective buyers want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one’s own business, buyers must be able to make that “leap of faith” necessary to take the risk of purchasing and operating their own business.

Buyers who want to go into business strictly for the money usually are not realistic buyers for small businesses. Keep in mind the following traits of a willing buyer:

  • The desire to buy a business
  • The need and urgency to buy a business
  • The financial resources
  • The ability to make his or her own decisions
  • Reasonable expectations of what business ownership can do for him or her

What Do Buyers Want to Know?

This may be a bit premature since you may not have decided to sell, but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your business. Here are some questions that you might be asked and should be prepared to answer:

  • How much money is required to buy the business?
  • What is the annual increase in sales?
  • How much is the inventory?
  • What is the debt?
  • Will the seller train and stay on for awhile?
  • What makes the business different/special/unique?
  • What further defines the product or service? Bid work? Repeat business?
  • What can be done to grow the business?
  • What can the buyer do to add value?
  • What is the profit picture in bad times as well as good?

Buying (or Selling) a Business

The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.

His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyers now want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one’s own business, the buyer must be able to make that “leap of faith” necessary to take the plunge. Once that has been made, the buyer should review the following tips.

Importance of Information

Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don’t overlook a “gem” of a business because you don’t or won’t take the time it takes to find the information you need to make an informed decision. Try to get an understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his “story” may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can’t expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don’t try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure–don’t obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. The seller will be teaching you the business and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer. Don’t depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the “leap of faith” necessary to achieve business ownership. Outside professionals normally won’t tell you that you should buy the business, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: “no.” You will want to get your own answers–an important step for anyone serious about entering the world of independent business ownership.

Selling Your Business? Expect the Unexpected!

According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:

How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.

How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.

Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.

How important is confidentiality?

This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.

Do You Know Your Customers?

It’s always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was. That personal contact goes a long way in keeping customers happy – and returning. It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems like forever, often forcing them to repeatedly listen to a recording saying that the call will be handled in 10 minutes. Small businesses are usually built around personal customer service. If you are a business owner, when is the last time you “worked the floor” or handled the phone, or had lunch with a good customer? Customers and clients like to do business with the owner. Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service.

The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business. When is the last time you visited with your banker, accountant, or legal advisor? A friendly call to your biggest supplier(s) can go a long way in building relationships. A call to one of these people thanking them for prompt delivery can pay big dividends if and when a problem really develops. With most communication now done online, a handwritten thank you to a long-standing customer, someone whose recommendation resulted in a new customer, or a vendor you appreciate stands out among the bills and junk mail.

Owning and operating your own business is not a “backroom” or “hide behind the business plan” business. It is a “front-room” business. Go out and meet the customers – and anyone else who has an interest in your business.

A Listing Agreement is More than Just a Piece of Paper

In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.

For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.

For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.

So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.

What a Buyer May Really Be Looking At

Buyers, as part of their due diligence, usually employ accountants to check the numbers and attorneys to both look at legal issues and draft or review documents. Buyers may also bring in other professionals to look at the business’ operations. The prudent buyer is also looking behind the scenes to make sure there are not any “skeletons in the closet.” It makes sense for a seller to be just as prudent. Knowing what the prudent buyer may be checking can be a big help. A business intermediary professional is a good person to help a seller look at these issues. They are very familiar with what buyers are looking for when considering a company to purchase.

Here are some examples of things that a prudent buyer will be checking:

Finance

  • Is the business taking all of the trade discounts available or is it late in paying its bills? This could indicate poor cash management policies.
  • Checking the gross margins for the past several years might indicate a lack of control, price erosion or several other deficiencies.
  • Has the business used all of its bank credit lines? Does the bank or any creditor have the company on any kind of credit watch?
  • Does the company have monthly financial statements? Are the annual financials prepared on a timely basis?

Management

  • Is the owner constantly interrupted by telephone calls or demands that require immediate attention? This may indicate a business in crisis.
  • Has the business experienced a lot of management turnover over the past few years?
  • If there are any employees working in the business, do they take pride in what they do and in the business itself?

Manufacturing

  • What is the inventory turnover? Does the company have too many suppliers?
  • Is the business in a stagnant or dying market, and can it shift gears rapidly to make changes or enter new markets?

Marketing

  • Is the business introducing new products or services?
  • Is the business experiencing loss of market share, especially compared to the competition? Price increases may increase dollar sales, but the real measure is unit sales.

When business owners consider selling, it will pay big dividends for them to consider the areas listed above and make whatever changes are appropriate to deal with them. It makes good business sense to not only review them, but also to resolve as many of the issues outlined above as possible.

A “Pig in a Poke"

Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained a law firm to deal with the legalities of the sale. What’s left for the buyer to do is to make sure that there are no “skeletons in the closet,” so he or she is not buying the proverbial “pig in a poke.”

The four main areas of concern are: business’ finances, management, buyer’s finances, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry they are not familiar with. The seller, because of his or her experience in a specific industry, has probably developed a “sixth sense” of when the business has peaked or is “heading south.” The buyer has to perform the due diligence necessary to smoke out the real reasons for sale.

Business’ Finances: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited? Is the company profitable? How do the expenses compare to industry benchmarks?

Management: For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates? Is there a lot of change or turn-over in key positions? On the other hand, no change in senior management may indicate stagnation. Are the employees upbeat and positive?

Buyer’s Finances: Buyers should make sure that the “money is there.” Too many sellers take for granted that the buyer has the necessary backing. Sellers have a perfect right to ask the buyer to “show me the money.”

Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis.

By doing one’s homework and asking for the right information – and then verifying it, buying a “pig in the poke” can be avoided.

The Pre-Sale Business Tune-Up

Photo Credit: tallkev via Compfight cc

Photo Credit: tallkev via Compfight cc

Owners are often asked, “do you think you will ever sell your business?” The answer varies from, “when I can get my price” to “never” to “I don’t really know” to everything in between. Most sellers may think to themselves when asked this question, “I’ll sell when the time is right.” Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, “it is a good idea to sell your horse before it dies.”

Four Ways to Leave Your Business

There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don’t have enough cash, or interest, to purchase the business. And, like offspring, they may not be able to manage the entire business. (3) Selling the business to an outsider is always a possibility. Get the highest price and the most cash possible and go on your way. (4) Liquidate the business – this is usually the worst option and the last resort.

When to Start Working on Your Exit Plan

There is another old adage that says, “you should start planning to exit the business the day you start it or buy it.” You certainly don’t want to plan on misfortune, but it’s never to early to plan on how to leave the business. If you have no children or other relative that has any interest in going into the business, your options are now down to three. Most small and mid-size businesses don’t have the management depth that would provide a successor. Furthermore liquidating doesn’t seem attractive. That leaves attempting to find an outsider to purchase the business as the exit plan.

The time to plan for succession is indeed, the day you begin operations. You can’t predict misfortune, but you can plan for it. Unfortunately, most sellers wait until they wake up one morning, don’t want to go to their business, drive around the block several times, working up the courage to begin the day. It is often called “burn-out” and if it is an on-going problem, it probably means it’s time to exit. Other reasons for wanting to leave is that they face family pressure to start “taking it easy” or to move closer to the grandkids.

Every business owner wants as much money as possible when the decision to sell is made. If you haven’t even thought of exiting your business, or selling it, now is the time to begin a pre-exit or pre-sale strategy.

Baby Boomers About to Spark the Turn in Businesses

Pending business sales are building as baby boomers, ages 49-67, enter the twilight of their careers.

First gradually, and then in a flood, mind-boggling assets from the sales will surge to heirs, savings accounts, luxury cars, vacation homes, pet philanthropic pursuits and anything else the generation fancies–reconfiguring the economy.

Business brokers and estate attorneys thought the sales would begin in earnest nearly a decade ago. But the baby boomers, lulled into complacency by the hot economy, lingered to eke out more profits and keep themselves employed a little while longer.

Then the recession, hardly anyone predicted, rudely swept away some of the businesses, and the surviving owners fought to keep their doors open as they watched the value of the businesses dive. Many borrowed heavily to stay afloat.

Today, conditions to spark the long-anticipated wave of sales are turning favorable because:

Click here to read this article further.

Selling Your Business: Why Won’t it Sell?

selling your businessOnce you have made the decision to sell, what are your odds on actually selling your business? Well, research shows that your annual sales dictate how well or not well that your business will sell. If your annual sales are $750,000 or less, your odds on selling your business are only 18%. If your annual sales are $750,000-$2 million, your odds increase to 25%. If your annual sales volume is above $2 million, the odds increase to 30%+. Another thing to keep in mind though is the approximately 75% of all businesses have annual sales of less than $750,000.

So what do all these stats mean? To put it sharply: if you are thinking of selling your business, you have about a one in five chance of it actually selling. The next obvious question raised is why are these odds so low? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why businesses didn’t sell, as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.

  • The business is no longer listed for sale. The cash flow was strong, but a lot of buyers thought that the deal was overpriced.
  • There was serious interest, but the owner got distracted by an arrangement with a friend to solicit offers. None came through.
  • Buyers were intrigued, but the economics of the deal wouldn’t make sense, and the seller wouldn’t negotiate.
  • We had three offers, including an accepted bid for $4 million, but the buyer couldn’t get financing.
  • We almost had the deal, but financing was impossible to find.
  • The deal dragged on for months but fell apart for lack of financing. . .

They say that timing is everything. Many business owners wait until the economy is down  Their own business is also paying the price for the slowdown, so they elect to sell. Now they discover that the price they thought they could get for their business is is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.

One factor that emerges from the comments by intermediaries above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price was in cash. Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find”,
the buyer couldn’t get financing”, and “…fell apart for lack of financing.” The reasons that obtaining financing is so difficult are (1) the business doesn’t qualify for financing, (2) the buyer doesn’t qualify for financing. and, most importantly  most small businesses are not financeable. Banks are generally not interested; the Small Business Administration (SBA), although certainly an option, only comes through in less than 10% of deals. If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.

 

Tips for a Fast Sale!

  • Prepare a current list of fixtures and equipment
  • Have up-to-date financial information available
  • Gather all of the information a buyer might like to review
  • Maintain normal business hours
  • Spiff up the business
  • Set a realistic price
  • Be willing to negotiate

 

Want your business to be one in the five that sells? Here are two major ways to increase your odds of selling your business:

  • Make sure that you are serious before yo put your business up for sale (see our article: Are You Ready to Sell Your Business? for more on that). You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth–it’s what a buyer is willing to pay. Find out if the price you are asking is in the “ballpark’ before you go to the market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.
  • Be willing to finance the sale of your business. Counting on the businesses selling for all cash or assuming that the business can be financed will most likely make your business one of the four that don’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive by selling your business.

Following these guidelines and tips might not sell your business, but it will certainly increase the odds of selling your business. Almost any business will sell under the right circumstances. If you are serious about selling, the fist step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in today’s economic climate.

 

The Perfect Business

The perfect business, the one that would be sure to sell, has the following attributes:

  • A compelling reason to sell
  • A desired or popular industry type
  • An attractive and strategic location (if important for the business type)
  • A reasonable price
  • A reasonable down payment (hopefully 40% of the full price or less)
  • Seller financing
  • Reasonable sales (hopefully increasing each year)
  • Seller earnings of $60,000 or more

 

There is an old adage that goes something like this:

“The worst day of working for yourself is better than the best day of working for someone else.”

Buying or Selling a Business: Why Do Deals Fall Apart?

arguing businessmen selling a businessBuying or Selling a Business: Why Do Deals Fall Apart?

 

In many cases, the buyer and seller reach a tentative agreement when selling a business, only to have it all fall apart. There are some reasons this happens, and once they are understood, many of the worst deal-breakers can be avoided. Understanding is the key word. Both the buyer and seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into the flood-waters and “sink” the sale.

Now, what keeps a sale from closing successfully? Surveyed business brokers across the United States found similar reasons that were cited so often that a pattern of causality began to emerge. A compilation of situations and factors of which affect the sale of a business are explained below.

 

The Seller Fails to Reveal Problems

If and when a seller is not up-front about any of the problems with the business, that does not mean these problems will go away when the buyer takes over. The problems are bound to show up later, usually sometimes after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Event though this may seem a tall order, sellers must be as open about the negatives of their business as they are about positives. Again and again, business brokers surveyed said: “We can handle most problems…if we know about them at the start of the selling”.

 

The Buyer Has Second Thoughts About the Price

In some cases, the buyer agrees on a price, only to discover that the business will not support that price, in his or her opinion. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of paramount importance that the business be fairly priced when selling a business. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts form themselves.

 

 Both the Buyer and the Seller Grow Impatient

During the process of buying or selling a business, it’s easy for either party to let impatience settle in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process of selling a business takes time. However, it shouldn’t take so long that the deal becomes endangered. It is important that both parties should use only those knowledgeable in the business closing process if they are using outside professionals. A business broker is one of the most competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team”. Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar with, but these people may not have the experience to bring the sale to a successful conclusion.

 

The Buyer and the Seller are Not (Never Were) in Agreement

How does this situation arise? Unfortunately, there are business sale transactions wherein the buyer and the seller realize too late that they have not been in agreement all along–they just thought they were. Cases of miscommunication are often fatal to a successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

 

The Seller Doesn’t Really Want to Sell

In all too many instances, the seller does not really want to be selling the business. The idea had sounded so good at the start, but now that things have come down to the wire, the fire to sell has all but diminished. Therefore, it is key that prospective sellers make a firm decision to sell a business prior to going into the market with the business. If there are doubts, these ought to be quelled or resolved. Some sellers enter the marketplace just to test the waters; they want to see if they could get their “price” if they ever get really serious. This type of seller is the bane of business brokers and buyers alike. However, business brokers generally can tell when they encounter the casual (as opposed to the serious) seller. But an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller, is a good seller.

 

Or the Reverse: The Buyer Doesn’t Really Want to Sell

What’s true for the mixed-emotion seller can be flipped around and applied to the buyer as well. Full of excitement and optimism, buyers can enter the sale process but then begin to drag their feet as they draw nearer to the “altar”. This is especially true today with so many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

 

None of the Above

The situations detailed above are the just the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, unforeseen environmental problems, etc. But the good news is that many potential deal-crushers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

 

A Final Note

Remember these four components in working toward the success of the business sale:

  • Good chemistry between the parties involved
  • A mutual understanding of the agreement
  • A mutual understanding of the emotions of both buyer and seller
  • The belief, on the part of both buyer and seller, that they are involved in a good deal

Are You Ready to Sell Your Business?

Thinking to Sell Your Business?

If you’ve come this far, then the option to sell your business has aroused enough curiosity in you that you are taking the first step. You don’t have to make a commitment at this point; this is just you searching to be informed about the necessities of successfully selling your business. This article should answer a lot of your questions to help you through the maze of the process itself.

 

First Question

The first question that most readily comes to a seller’s mind is: “What is my business worth?”. Honestly, if we were sellin gour business that is the first thing we would want to know. However, there are things that need to be solved first to even get to this very important issue. Before asking this question, you have to be willing to sell your business for what the market is willing to pay. If you’re just only looking to make money, then you are not ready to sell.

 

*Insider Tip:

It does not matter what you think your business is worth, or what you want for it. It also does not matter what your accountant, banker, attorney, or best friend  thinks your business is worth. Just like home real-estate, only the marketplace can decide what your business’ value is.

 

Second Question

“Do I really want to sell this business?” is the second question to be considered.If you’re actually serious and have a real, solid reason(s) of why you want to sel, then it will most likely happen. You really increase your chances of selling if your answer is ‘yes’ to this followup question: Do you have reasonable expectations? If you answered ‘yes’ to these two questions, then you are serious about selling.

 

Taking the First Steps

Alright, let’s assume that you already decided to at least take the first few step in actually selling your business. Before you even think about placing your business up for sale in the market, some steps are required before jumping in. The first and very important step you have to complete is gathering information about your business.

The following is a checklist of the items you should get together:

  • Three years’ profit and loss statements
  • Federal Income tax returns for the business
  • List of fixtures and equipment
  • The lease and lease-related documents
  • A lost of the loans against the business (amounts and payment schedule)
  • Copies of any equipment leases
  • A copy of the franchise agreement, if applicable
  • An approximate amount of the inventory on hand, if applicable
  • The names of any outside advisors

 

Notes:

Now if you’re like most other small business owners, you will have to search for most, if not all, of the items on this checklist. Once you gather ALL of the above items (all that are applicable, that is), you should spend some time updating the information and filling in the blanks. It’s pivotal that you take a long, hard look at all of this because you have most likely forgotten much of this information. You want to have all of your information in a neat and orderly format, just as if you were going to present it to a prospective purchaser. Everything starts with this information.

You need to make sure the financial statements of the business are current and as accurate as you can get them. If you’re half way through the current year, make sure you have last year’s figures, tax returns, and also year-to-date figures. Make all of your financial statements presentable. In the long run it will pay to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper”. Later you will see pricing a small business is usually based on cash flow. This includes the profit of the business, but also, the owner’s salary and benefits, the depreciation, and other non-cash items. If the bottom line isn’t what you think it should be, don’t panic. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.

Prospective buyers eventually wan tot review your financial figures. A Balance Sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see your income and expenses. They want to know if they can make the payments of the business (more on this later), and still make a living. Let’s face it, if you business is not making a living wage for someone, it probably can’t be sold, and won’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professionals who only looks for location, etc., and feels that he or she can increase business.

 

*Another Insider Tip:

How much you’re willing to sell your business for is not really the big question, but rather, how much of it can you keep? The Federal Tax Laws do determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your business a corporation, partnership, or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? There are some new tax rules, effective January 1, 2000, that impact certain businesses on seller financing. The point: before you consider price or even selling your business, it is important you discuss the tax implications of a sale of your business with a tax advisor. You do not want to be in the middle of a transaction with a solid buyer and discover that tax implications of the sale are going to net you much less than you had figured.

Pittsburgh | Raleigh Business Brokers – Selling Your Business?

Pittsburgh | Raleigh Business Brokers – Selling Your Business?

Millions of companies are sold or transferred annually.  To most business owners, the sale of a business is a first time experience and for most a once in a lifetime event.  Accordingly, sellers should have your Pittsburgh | Raleigh Business Brokers – TM Business Brokers on your side.  Here’s some additional items to consider.

A corporate buyer, however, may have been involved in quite a few transactions – some that worked and some that did not..  What does this mean for the seller?  The acquirer may have an experienced team or have been through the business transaction process more than once resulting in a lopsided contest — the amateur (the seller) versus the professional (the acquirer).

Selling a business is not like selling real estate.  Confidentiality is, in most cases, critical.  A seller does not want employees, suppliers, and customers/clients to be aware of a possible sale.  The sales process also cannot distract the owner(s) from managing the day-to-day operation of the business.  Real estate is also much easier to finance than a business purchase, unless the acquirer is a first-rate company.

It is important that sellers do their own due diligence on a prospective acquirer to make sure that the acquirer can complete the transaction if both sides are in complete agreement on terms and conditions.  The seller has most likely retained a professional intermediary, paid that firm a retainer, retained legal and accounting professionals, etc.  Since the potential acquirer will want to do his or her own due diligence, it is important that the seller do so also.

Where is the Money?

All acquirers, whether big or little, should be able to show the seller that they have the financial resources to make the deal.  Unless the acquirer is a large and successful company, where acquisition funds are not an issue, an acquirer’s financial statements and/or the company’s financial statements should be made available.  A credit report would also be important.  An acquirer who can complete the sale, subject to due diligence, should not have difficulty supplying this information.

What do References Reveal?

A seller should check for information about any prior deals that the acquirer has made.  This would include any financing contacts or other lenders.  This list would include any previous acquisitions.  Talking to a previous seller can reveal how their deal went; how the acquirer was to work with; whether they did everything they said they would; etc.  Talking to managers of previous acquisitions by the buyer can tell a seller how employees were treated, etc.

Does the Chemistry Work?

It is important that the chemistry clicks between the seller and the acquirer.  Due diligence on both sides can help build the trust necessary for the deal to work both ways.  If the seller is staying with the company for an extended period of time, it is also critical that he or she is comfortable not only with the acquirer, but also with the new management team if it’s not the people who are doing the deal.

Several million businesses change hands every year.  The vast majority of sellers are selling a business for the first time.  It’s very important that they use professional help. Without it, they may likely receive less than fair value, be involved in a difficult selling experience, and may not receive all of the monies due them.  Professional advisers such as intermediaries, lawyers (only those with deal experience) and accountants are necessary.

We have a strong backlog of buyers seeking all types of companies.  Contact your Pittsburgh | Raleigh Business Brokers – TM Business Brokers to learn whether or not you have a sellable business.  Do not make the mistake of relying on an adviser who does not sell companies for a living.  You may be delaying the sale of your business for the wrong reasons.

Now may be your time.  Contact the experienced professionals at TM Business Brokers to confidentially discuss “your” situation today!

Steps Sellers Can Take to “Sell My Business”

Steps Sellers Can Take to “Sell My Business” – Pittsburgh | Raleigh Business Brokers

A potential Seller inquired yesterday “what steps can I take to increase my chances of selling my business?”  We are often asked this question.  As our first reply, we always recommend using your professionals at Pittsburgh | Raleigh Business Brokers

In addition to using an experienced, professional business broker, there are specific steps you can take to increase the chance of a successful closing.

Know why you want to sell your business.  
Before placing your business for sale, it is important that you both know why you want to sell your business and that you are certain about this decision.

Have a plan for what you will do following the closing.

Make sure important parties are on board.  The time to discuss the sale of your business, as well as future plans, with partners, spouses, children and other involved parties is before you list.

Communicate to your outside advisors that you want the deal to work.  Protect your interests, but don’t kill the deal!

Finally, Choose your battles.  Both buyers and sellers need to be willing to compromise.  It is helpful to consider in advance the areas that are most important to you so you can come to the table with a willingness to compromise in other areas.  There must be a win-win for both seller and buyer.

We have a strong backlog of buyers seeking all types of companies.  Contact your Pittsburgh | Raleigh Business Brokers – TM Business Brokers to learn whether or not you have a sellable business.  Do not make the mistake of relying on an adviser who does not sell companies for a living.  You may be delaying the sale of your business for the wrong reasons.

Now may be your time.  Contact the experienced professionals at TM Business Brokers to confidentially discuss “your” situation today!

Pittsburgh | Raleigh Business Brokers – Americans Love Small Business

Pittsburgh | Raleigh Business Brokers – Americans Love Small Business

The following statistics support why we have so many buyers looking to purchase small and medium-size businesses.

Almost nine in 10 adults (88 percent) have a favorable view of small business, compared with the two-thirds (67 percent) who have a positive view of major companies, according to a telephone survey of 1,750 adults sponsored by the Public Affairs Council, a nonprofit group for public affairs officials.  More than half (53 percent) have a “very favorable” view of small business, in contrast to only 16 percent who hold the same view about major corporations.

Read more:

http://smallbusiness.foxbusiness.com/entrepreneurs/2012/08/20/why-americans-still-love-small-businesses/#ixzz25swlmvEK

http://www.businessnewsdaily.com/715-credit-access-small-business-growth-obama.html

We have a strong backlog of buyers seeking all types of companies.  Contact your Pittsburgh | Raleigh Business Brokers – TM Business Brokers to learn whether or not you have a sellable business.  Do not make the mistake of relying on an adviser who does not sell companies for a living.  You may be delaying the sale of your business for the wrong reasons.

Now may be your time.  Contact the experienced professionals at TM Business Brokers to confidentially discuss “your” situation today!

Pittsburgh | Raleigh Business Brokers – “Why Waiting to Sell Your Business Might Backfire”

Pittsburgh | Raleigh Business Brokers – “Why Waiting to Sell Your Business Might Backfire”

The following Wall Street Journal article is a good supplement to our prior post today regarding “The Economy Stole My Retirement”.  This second article summarizes some reasons why a business owner may not want to wait sell a business.  Your decision to do so may very well backfire on you.

http://online.wsj.com/article/SB10000872396390444506004577618054291802614.html?mod=WSJ_SmallBusiness_LEADNewsCollection

This article also does not address the fact that many small businesses simply are not sellable in any market.  The sluggish economy may not be why a company will not sell.  You may have a business that will not sell in a good economy.

We have a strong backlog of buyers seeking all types of companies.  Contact your Pittsburgh | Raleigh Business Brokers – TM Business Brokers to learn whether or not you have a sellable business.  Do not make the mistake of relying on an adviser who does not sell companies for a living.  You may be delaying your retirement for the wrong reasons.

Now may be your time.  Contact the experienced professionals at TM Business Brokers to confidentially discuss “your” situation today!

Pittsburgh | Raleigh Business Brokers – The Economy Stole My Retirement

Pittsburgh | Raleigh Business Brokers – “The Economy Stole My Retirement”

The following Wall Street Journal article summarizes some situations faced by many retirement aged business owners.  A large portion of their net worth is tied to the retirement nest egg in their business.  And, that net worth has declined over the past several years for many owners.

http://online.wsj.com/article_email/SB10000872396390444230504577615861593287688-lMyQjAxMTAyMDMwMDAzODA3Wj.html?mod=wsj_valetleft_email&goback=%2Egde_2907875_member_157100085

What the article does not address is the fact that many small businesses simply are not sellable in any market.  The sluggish economy may not be why a company will not sell.

We have a strong backlog of buyers seeking all types of companies.  Contact your Pittsburgh | Raleigh Business Brokers – TM Business Brokers to learn whether or not you have a sellable business.  Do not make the mistake of relying on an advisor who does not sell companies for a living.  You may be delaying your retirement for the wrong reasons.

Now may be your time.  Contact the experienced professionals at TM Business Brokers to confidentially discuss “your” situation today!

 

Pittsburgh | Raleigh Business Brokers – Buyer Profiles

Pittsburgh | Raleigh Business Brokers – Buyer Profiles

TM Business Brokers report a variety of business buyers are seeking small to medium sized companies.  Just as small business itself has become more sophisticated, the people interested in buying businesses have also become more divergent and complex.  The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer – a category of buyers that is “tried” but not always “true.”  There is something appealing about a family member taking over the business.  There is a sense of keeping the business in the family and an assumption that such an arrangement will translate into the prime advantage of continuity.  Continuity may in fact be the result as long as the family member buying the business treats the role as something akin to a hierarchical responsibility.  This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.”  If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family member as buyer lies in the conflicts that may develop.  For example, does the family member have sufficient cash to purchase the business?  Can the selling family member really leave the business?  In too many cases, these and other conflicts result in serious disruption to the business itself and/or to the sales transaction, not to mention the impact on family relationships.  An outside buyer eliminates these often insoluble problems.

When considering a family member as a buyer, a business owner should carefully evaluate three factors: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers.  The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients.  However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand.  A business brokerage professional can be of tremendous assistance in dealing with the competitor.  They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream.  Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience.  As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners.  However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner).  Again, a business broker professional knows best how to approach these potential problems.

Synergistic Buyers

These are buyers who feel that a particular business would compliment their business and that combining the two would result in lower costs, new customers, and other advantages.  Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase.  Synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria and demands.  These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold.  Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money—such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this category of buyer.  Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace.  Owning a business is a dream of theirs, and one many of them can well afford.  The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job can be an excellent prospect.  Although owning a business is more than just a job, and the risks involved can frighten this kind of buyer, the buyer without a current job will have the “hunger” necessary to take the leap.  A further advantage is that this category of buyer comes with fewer complications than many of the other types.

A Final Note

Your Pittsburgh | Raleigh Business Brokers – TM Business Brokers has the experience needed to sort out the “right” type of buyer.

Pittsburgh | Raleigh Business Brokers – What is a Term Sheet?

Pittsburgh | Raleigh Business Brokers – What is a Term Sheet?

Buyers, sellers, intermediaries and advisors often  use  a term sheet prior to the creation of a formal, legally binding purchase and sale agreement.  However, very rarely do you ever hear this document explained.  It sounds good but what is it specifically?

Very few books about the M&A process even mention term sheet.  It is typically a one page document that states the sale price along with the  deal structure and whether or not it includes the real estate.”  Attorney and author Jean Sifleet offers this explanation:  “A one page ‘term sheet’ answering the questions:  Who? What? Where? and How Much? helps focus the negotiations on what’s important to the parties.  Lawyers, accountants and other advisors can then review the term sheet and discuss the issues.”  She cautions, “Be wary of professional advisors who use lots of boilerplate documents, take extreme positions or use tactics that are adversarial.  Strive always to keep the negotiations ‘win-win.'”

If the buyer and the seller have verbally agreed on the price and terms, then putting words on paper can be a good idea.  This allows the parties to see what has been agreed on, at least verbally.  This step can lead to the more formalized letter of intent based on the information contained in the term sheet.  The term sheet allows the parties and their advisors to put something on paper that has been verbally discussed and tentatively agreed on prior to any documentation that requires signatures and legal review.

A term sheet is, in essence, a preliminary proposal containing the outline of the price, terms and any major considerations such as employment agreements, consulting agreements and covenants not to compete.  It is the initial step to putting a deal together.

Pittsburgh Business Brokers – Ten Steps for Sellers

Pittsburgh Business Brokers – Ten Steps for Sellers
 

1. Place a reasonable price on your business.  Since an inflated figure either turns off or slows down potential buyers, rely on your Pittsburgh business brokers – TM Business Brokers to help you arrive at the best “win-win” price.

2. Carry on “business as usual.”  Don’t become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits.  Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.

3. Engage experts to insure confidentiality.  A breach of confidentiality surrounding the sale of a business can change the course of the transaction.  Pittsburgh Business Brokers – TMBB can channel the process and the parties involved to keep the sale within safely silent bounds.

4. Prepare for the sale well in advance.  Be sure your records are complete for at least several years back and do all pertinent legal or accounting “housecleaning”–as well as a literal sprucing-up of the plant or store.

5. Anticipating information the buyer may request.  In order to obtain financing, the buyer will need appraisals on all assets as well as information to satisfy environmental regulations.

6. Achieve leverage through buyer competition.  This can be tricky; you are wise to let the professional business broker, as a third party, create a competitive situation with buyers to position you better in the deal.

7. Be flexible.  Don’t be the kind of seller who wants all-cash at the closing, or who won’t accept any contingent payments or an asset transaction.  Depend on the advice of your professional business broker to keep the deal sweet instead of sour.

8. Negotiate; don’t “dominate.”  You’re used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too.  With your broker’s help, decide ahead of time when “to hold” and when “to fold.”

9. Keep time from dragging down the deal.  To keep the momentum up, work with TMBB to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.

10. Be willing to stay involved.  Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm’s reach for a while.  Consult with TM Business Brokers to determine how you can best effect a smooth transition.

Pittsburgh Business Brokers – Mistakes Sellers Make

Pittsburgh Business Brokers – Mistakes Sellers Make
 

• Business owners neglect to run their business during the sales process. – The owner of a business with sales under the $20 million range can get so involved in the selling process that they neglect the day-to-day operation of the business.

• Business owners don’t understand the “real” value of their business. – A business may actually command a higher price than the value determined by an appraiser.  The business may be worth more than the sum of its parts.  Pittsburgh Business Brokers – TM Business Brokers can answer the question of real value and help determine a “go-to-market” price.

• Business owners aren’t flexible in structuring the transaction. – In many cases, how the deal is structured is more important than the price or terms.

• Business owners are not looking at the business from a buyer’s perspective. – Buyers may look for different aspects of a business than those the seller looks for.  For example: growth potential, management depth, customer base, etc.

• Business owners start with too high a price. – Sellers obviously want to maximize the price they receive for their business, but today’s marketplace is difficult to fool.  A good buyer may just elect to pass because of an overly aggressive starting point.

• Business owners are impatient. – Sellers have to understand that it can take 6 to 18 months to find a buyer and proceed through the sales process, which includes due diligence, the legal and accounting issues that must be handled, and ultimately the closing.  However, on the flip side, the longer the deal drags, the more likely it is to fall apart.  As the saying goes: Time is of the essence!

• Business owners have insufficient or inadequate documentation. – Sellers should have current real estate and equipment appraisals at the ready along with any documentation a buyer might want, such as projections, business forecasts and plans, and environmental studies.  Having all the documentation and financial records readily available will not only speed things along, but might also provide for a higher price or, even more important, save the deal.

DISCLAIMER: TM Business Brokers, LLC does not offer securities for sale, real estate brokerage services, accounting, tax or legal advice, or financing negotiations. TM Business Brokers, LLC does not audit / verify any information provided by business owners and their third party advisers, and we make no representations or warranties thereto.