Archive for category: Seller Articles

Eventually every business owner will have to turn over control of their business to someone else. There are many options for how this can play out. They range from selling the business to a prospective buyer or selling to a competitor, to turning your business over to a family member. It is key that you start thinking about these options years before you end up in a situation where you actually have to sell. 

Working with a Business Broker or M&A Advisor is one way to determine what sales options are optimal for you based on your specific situation. Let’s explore some of the variables you’ll want to consider when you decide to transfer your business to a family member.

Tax Advantages

There are some significant advantages to transferring your business to a family member. No doubt topping the list of advantages of going this route is the fact that the transfer can be considered a gift. One advantage of this approach is that you’ll reduce your real estate taxes. Depending upon how the agreement is written, you also may be able to maintain some control over the business. For many business owners, this factor can be a big advantage. 

Seller Financing

One issue you’ll want to explore when opting to transfer your business to a family member is seller financing. Seller financing is a common practice when it comes to buying and selling businesses in general. This type of financing is even more common where transfers to relatives are concerned. 

Seller financing opens up the versatile option of implementing a private annuity. A private annuity can serve to spread payments out across a long period of time. This could be a win-win situation for both you and your relative. You would receive a long-term stream of income as a result of ongoing payments. In turn, this decision may very well make ownership more financially realistic for your relative. 

Legal Agreements 

Keep in mind that if you sell your business to a relative, this in no way negates the need for a buy-sell agreement. Even when you are dealing with your most trusted family members, legal agreements must be firmly in place. A buy-sell agreement is an invaluable tool that protects everyone involved. 

This contract clearly outlines all aspects of the arrangement. Your buy-sell agreement should include such key information including the value of the business, amount being paid, information on which employees will be retained, the current business owner’s level of future involvement, and much more.

Working with Professionals

Ultimately, there are a range of potentially powerful benefits associated with transferring a business to a relative. While it is true that you can expect the IRS to closely evaluate the sale, this should not dissuade you from considering this option. Business Brokers and M&A Advisors are experts at buying and selling businesses, and they understand the specifics of transferring a business to relatives. Working with professionals early in the selling process can help you gain tremendous insight into the best way to proceed. 

Copyright: Business Brokerage Press, Inc.

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You understand the finer points and potential of your business better than anyone; however, that doesn’t mean that prospective buyers will instantly see your business’s various strengths. When you are looking to sell your business, you have two very important jobs. The first is to get your business ready to be sold. A second essential job is to showcase your business’s greatest strengths. At the end of the day, you must be the one to articulate why your business is worth buying. This effort, of course, will be supported by your Business Broker or M&A Advisor. 

Understand Who Will Buy Your Business 

Most people have never sold a business before and don’t fully understand what is involved in positioning one’s business for sale. The bottom line is that not every business is a good fit for every buyer. Finding the right buyer for your business will greatly expedite the process. This is yet another reason why it is critically important to work with experienced professionals. Business Brokers and M&A Advisors not only know what buyers are looking for, but also what sellers need to do to get their business ready to sell.

How to Navigate Roadblocks 

Selling a business, especially if you attempt to do so without professional help, is a very time-consuming and often draining process. Successfully running a business requires attention to detail and focus. Unfortunately, these can both suffer when owners attempt to put on yet another hat and handle the sale of their business. 

While you are attempting to sell your business, it is critically important that you maintain normal operations. The last thing you want is to weaken the finances of your business while you are waiting to find a buyer. Remember that it takes months, a year, or even longer to find a buyer for the typical business. Don’t let your business suffer damage in the interim. 

Think Like a Buyer

Preparing your business to be sold isn’t as simple as making a few cosmetic changes and calling it day. Instead, you’ll want to think like a buyer. 

What would you want to see if you were buying a business? You would want to know a great deal about that business and how it operates, who its key employees are, how likely those key employees are to stay, who the main customers and suppliers are, and the strength of the business location and competitors. Of course, you would also want a very detailed picture of the business’s financial situation. 

In short, you would want to clearly understand what the business does and what it’s really worth, how financially healthy it has been in the past, what the business’ prospects are moving forward and, in general, how much effort the business will take to operate. These are exactly the kind of key facts that any serious buyer will want to know. It’s only to be expected that a buyer would expect to learn this information before making a decision. 

At the end of the day, working with a Business Broker or M&A Advisor is one of the easiest ways to streamline the sales process. Thanks to years of experience, they already understand the pitfalls that you may experience as well as what is needed to position your business so that you can find the right buyer quickly and receive the best price possible. 

Copyright: Business Brokerage Press, Inc.

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Both buyers and sellers have a lot of emotion wrapped up in their respective decisions. It’s completely natural to feel that way. Business Brokers and M&A Advisors can assist clients with their concerns and fears by giving them more information about how the sales process works and also discussing common pitfalls to avoid. In this article, we’ll go over some of the various issues impacting buyers. If you are able to anticipate potential issues that could interfere with the deal, you’ll be more likely to be able to overcome those issues. 

The Initial Intake Process 

Buyers should understand that they will need to sign an NDA and treat the non-disclosure process seriously. Brokers representing a seller will be requiring a good deal of information, including financial details, and often even your resume. So don’t be surprised when you’re asked for this information. It’s all a normal part of the process. 

The Lending Process

It’s important to realize ahead of time that the lending process can be slow. It is also very common for lenders to ask for more and more information before the approval goes through. If this happens to you, don’t panic or worry. This too is a standard method of operation. 

Working with Lawyers 

While lawyers are obviously necessary in the process of buying and selling a business, they can also be a source of anxiety. In their efforts to protect their clients, they also can often kill a deal. Of course, get the facts and logistical information that you need from a lawyer, but always remember that lawyers and other business advisors are not the decision makers. If you’re buying a business, the decision is ultimately yours. 

The Non-Binding Offer 

A non-binding offer allows both the buyer and seller to walk away from a deal if terms cannot be agreed upon in a set amount of time. A non-binding offer shows the seller that the buyer is interested in acquiring the business, but this form of agreement isn’t legally binding. The benefit of the non-binding offer is that it allows discussions and negotiations to move forward.  

The Due Diligence Process

The due diligence process is another aspect that allows the buyer to move forward, while simultaneously having protection. At this point, the buyer will receive confidential and sensitive information about a business, such as the financials, inventory, and legal matters. Buyers will also have the ability to conduct additional research and ask the sellers questions. Like the non-binding offer, the due diligence process also means that you have the right to walk away. It is important to have this step available so that buyers can make the most informed decisions possible.

Business brokers and M&A advisors are essential in order to help buyers find the best fit. We not only save our buyers time and energy, but  we also help to ensure that the transaction goes as smoothly as possible.

Copyright: Business Brokerage Press, Inc.

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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.

Copyright: Business Brokerage Press, Inc.

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There can be no doubt that selling your business stands as one of the most complex and important decisions you’ll likely ever make. It is quite often the case that a business represents decades, or even a lifetime, of dedicated work. In this article, we’ll examine some of the key steps that you should take when it comes time to sell.

One of the most important steps that any seller can take is to begin the sales process far in advance of the date that he or she plans to put the business on the market. Working with an experienced business broker or M&A advisor (and doing so preferably years in advance) is one of the single best ways to ensure that you’ll be ready to sell your business when the time comes. It will also help you to avoid the numerous pitfalls that potentially await.

A good brokerage professional can also help identify weaknesses in your business and help you address those issues; however, this is only the beginning. Your broker can help you with everything from strategy and negotiations, maintaining confidentiality and establishing the market value of your business, to connecting you with other seasoned professionals, such as accountants and lawyers.

A third key point that all sellers should consider is their own psychology. It is vital that all sellers remain flexible in their approach to selling their business and also remain respectful of prospective buyers. It is important that you put yourself in the shoes of your buyer and try to think of what they will need to feel confident in their decision. 

The right seller psychology is also absolutely essential. Sellers should not attempt to rush or force a sale or overprice their business. In short, you need to keep “your head in the game” and as much as possible, keep your emotions out of the process. 

Sellers also need to realize that the statistics strongly indicate that seller financing is likely. Only 75% of sellers ultimately receive their asking price, and businesses that are listed as “all cash” generally don’t sell. Reasonable sales terms will greatly increase the chances of successfully selling a business. It is common that sellers fail to realize just how much interest they can generate by financing the sale of their business. A reasonable down payment is also another way to improve the odds of selling a business. Being willing to offer financing makes a clear statement to a prospective buyer that you believe in the business and its ability to generate revenue. From a buyer’s perspective an “all cash” demand can be a red flag.

At the end of the day, an open mind and steady temperament will increase your chances of selling. You may want to sell your business and completely move on to new things. But the reality of selling a business is such that “walking away” may not be feasible. Transitioning your business into the hands of a new owner is usually more of an ongoing process than a “sign on the dotted line and receive a check” type of situation. Understanding this fact, and working closely with a business broker or M&A advisor in advance of selling your business, will help to streamline the sales process and greatly improve your chances of a successful outcome.

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Finalizing a deal is usually a complex process, and there is a good deal of room for error, misunderstandings, miscalculations, and good old-fashioned wild cards.  That is why it is critical to carefully think through the deal process well in advance.  In this article, we’re going to explore the top ten steps you can take to avoid wrecking a good deal.

1. Confidentiality – At the top of our “how not to wreck a deal list” is confidentiality.  It is vital that everyone involved in the deal takes steps to avoid a breach.  Experienced business brokers are experts at maintaining confidentiality.
2. Flexibility  – The second tip on our list is to be flexible. A lack of flexibility can absolutely destroy a deal. You shouldn’t go into a deal expecting to have all of your terms met.
3. Be Open to Negotiations – Just as it is critical to be flexible, it is also important to embrace the concept of negotiation.  Sellers are used to being their own bosses, but when it comes to successfully selling a business, no factor is quite as important as a willingness to negotiate.
4. Advance Preparation – Next on our list of musts to avoid wrecking a deal is to prepare for the sale well in advance.  Sellers will want to make sure that they have several years of records as well as legal and accounting documentation ready and well-prepared.  You can be 100% certain that any serious buyer will want to see your records and take a look at your financials.
5. A Reasonable Selling Price – An inflated price will decrease the number of buyers that take a serious look at a business.  Additionally, an unreasonable price may make a seller look uninformed.  Business brokers and M&A advisors are experts at handling valuations.  One of the single best ways to boost your chances of finalizing a sale is to establish a fair and justifiable price for your business.
6. Maintain Operations – Far too often sellers lose track of the day-to-day operations once their business goes on the market.  It is absolutely vital that sellers continue operating their business as though it may never sell.  The bottom line is that it can take months, or even years to sell.  The last thing any seller wants is for their business to lose value when they are in the process of trying to sell.
7. Keep up the Momentum – A lack of momentum can kill a deal.  Working with a business broker or M&A advisor is an easy way to make sure you maintain momentum throughout the process.
8. Consider Your Buyer’s Needs – Serious buyers will need a variety of information from sellers in order to obtain financing.  You can expect buyers to need appraisals of assets, information on environmental regulations, and more.  Sellers should have this kind of key information ready and waiting.
9. Encourage Competition – Another great way to avoid wrecking a deal is to achieve leverage via buyer competition.  In general, it is a good idea to create a competitive situation – one in which prospective buyers know that there is more than one interested party.  Brokerage industry professionals understand the delicacies of presenting this information.
10.  Seller Participation – Finally, sellers must stay involved in the entire process, and that includes being willing to assist during the transition. Showing a willingness to help during the transition period will help to foster goodwill and trust.

There are many reasons why a deal could potentially fall apart.  You may not be able to control every single variable, but by following the ten key tips outlined in this article, you will be well on your way to increasing your chances of successfully completing a deal.

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When buyers are looking to make a purchase, the most important step they can take is to perform due diligence on both the business and the seller.  Yet, it is important to note that a large percentage of sellers fail to do their due diligence on buyers. 

Deals fail all the time.  Sadly, this means that all parties lose a tremendous amount of time and effort.  Additionally, sellers not only waste time, but often lose money due to business disruptions during the process of working with a prospective buyer. 

Let’s dive in and look at a few warning signs that you should look for when dealing with a buyer.  The sooner you spot these red flags, the sooner you can avoid potential problems.

There are several key questions that sellers should ask. The list includes:

-What, if any, other businesses have you considered to date? 

-How much equity will you be committing? 

-Do you have any experience with my kind of business? 

It is important to look for warning signs early on, as this is the way that sellers can avoid wasting considerable time.  It should also be noted that sellers shouldn’t be afraid to listen to their gut instincts.  If you feel that a prospective buyer isn’t serious and may only be window shopping (or if you feel that the buyer is looking for a far greater deal than you are willing to provide), then simply move on.  When you cut your losses early on, this can free you up to focus on prospective buyers that are a better fit. 

What if your intermediary informs you that there has been no communication from the prospective buyer after they received the memorandum?  Simply stated, this lack of communication could mean that the prospective buyer has changed his or her mind, or was never that serious in the first place. 

Another red flag you might see is when the process is turned over to a junior member of the prospective buyer’s management team.  In other cases, the prospect may fail to provide details or information concerning their financial capability to successfully complete the deal.  If any of these three red flags pop up, you should consider being proactive.  You and your broker might want to reach out to the prospective buyer and ask to meet to discuss the situation. 

Warning signs can also occur just prior to closing.  Even after the letter of intent has been signed, there is still room for problems to arise.  An inexperienced attorney representing the buyer, one that simply doesn’t understand what is involved in a deal, can spell doom for what could have otherwise been a good deal. The same is true for an over aggressive attorney.  One potential remedy for this situation is for your own attorney to intervene and discuss the situation.

Spotting warning signs is about more than not wasting everyone’s time. When you can observe these indicators and act effectively to address them, it can help keep deals on track. Working with a business broker or M&A advisor is an excellent way to not only spot red flags, but also to know how to respond appropriately.  The end result will be more successfully completed deals. 

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What kinds of insights about selling a business might come from experts at private equity firms?  This article includes advice for sellers from industry veteran Lamar Stanley.  Stanley is a Director at Gen Cap America, which is a lower middle market private equity firm in Nashville, Tennessee.  Since 1988, Gen Cap America (GCA) has made 60+ investments across seven committed private equity funds. 

Before joining GCA, Stanley was with the Nashville based private-equity strategy group, Diversified Trust Company.  Stanley holds a B.A. degree from The University of the South and an M.B.A. from The University of Chicago. 

Understanding Small Business

Over the decades, Stanley has amassed a considerable amount of knowledge and expertise.  He points out that it is easy for people to lose sight of the fact that many so-called “overnight successes” are actually the result of ten or twenty years of hard, thankless work.  It is through these years of laser-like focus that entrepreneurs are able to bootstrap their business.  Additionally, these business owners need to not only have a vision, but also the insight to bring on great people to help build their business.

The Benefit of a Deal Attorney

Stanley feels that working with a deal attorney can make a tremendous amount of difference, as it can increase the chances of a successful transaction taking place.  Deal attorneys understand the deal process, which can make all the difference when it comes to streamlining the process. 

“Deal fatigue” can derail what would otherwise be a good deal.  This term applies to how deals can sometimes drag on for months.  Working with an experienced deal attorney can help expedite the entire deal process.  In turn, it can help to avoid the dangers typically associated with deal fatigue.

Preparing in Advance for a Sale

Stanley believes that it is critical for a business owner to think about selling as soon as possible.  Ideally, a business owner should be thinking about selling when they start their business.  He realizes that most business owners can’t hope to prepare for selling as soon as they create the business.  But the point is clear, the sooner they begin the process the better.  Business brokers and M&A advisors can best serve business owners by helping them understand that they shouldn’t wait until a month or week before they are ready to sell their business to get their respective houses in order. 

There are so many important factors involved in getting a business ready to sell.  They range from customer concentration and diversifying suppliers to preparing financial statements and working capital estimates well in advance. 

In particular, Stanley points to the danger of business owners having to deal with preparing their business for sale while continuing to operate the business during the sales period.  What must be avoided is for business owners to essentially have two jobs at the same time, as this increases the odds of deals falling apart from deal fatigue.  The sooner a business broker is involved in the process, the better.

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There are many reasons why small companies are put up for sale.  Some of the more common reasons can actually have little to do with the company’s general performance.  For example, many small business owners discover that they need to sell for health reasons or personal concerns, such as divorce or partnership issues.  While a business downturn or fear of a larger competitor looming on the horizon might prompt many business owners to sell, economic drivers are not the only issue.  Owners may want and need to sell, but often it isn’t always that simple.

Many business owners are looking to retire, but are unpleasantly surprised to learn that they simply can’t afford to do so.  Still yet, many business owners don’t truly want to retire or sell, but instead they just want more freedom in their lives.  The day-to-day responsibilities of owning and operating a small business can take their toll.  Many business owners are looking to make a change and would love to be free of this burden.  This class of owner has already “checked out” mentally, and this can have profound negative consequences for their businesses.

When an owner wants out but discovers that he or she simply can’t afford to sell or retire, it will come as no surprise that there is usually an accompanying drop off in enthusiasm.  Ultimately, the vast majority of owners will start to lose focus.  Often, we find that they stop investing the capital necessary to continue the growth of the business, which can trigger other events, such as the loss of key staff members and/or customers.  Losing a top customer to a major competitor can further accelerate the downward spiral.  The failure of the business to maintain its footing and competitive advantage can lead to a more aggressive posture by existing competitors or even encourage a new competitor to move into the market.

In time, the owner may come face-to-face with the harsh realization that they have no choice but to sell if they are to salvage any of the business’s value.  The best way for a business owner to safeguard against this situation is to sell when his or her business is doing well, as this helps to ensure an optimal price. 

Working with a business broker, even years before one is interested in selling, is one of the single smartest moves any business owner can make.  The time to think about selling your business is now, as no small business owner knows what life or the market will bring.

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The simple fact is that most of us want to control our own fate.  This fact is especially true for entrepreneurs and business owners.  However, the truth of the matter is that for most business owners, their fate isn’t completely in their own hands.  For example, a variety of forces can prevent businesses from establishing their own prices. 

Knowing whether or not your company has pricing power is essential and can influence a range of decisions that you may make.  Let’s take a closer look at what steps you can take to control your own pricing.

What is Pricing Power?

This economic term describes the effect of a change in a product price on the demanded quantity of said product.  Your company’s pricing power is linked to the demand for your products or services.  If you have a high level of pricing power, you can raise your prices over time and maintain your customers. 

Who Has the Greatest Pricing Power? 

It is no great secret that the Amazons, Apples, Wal-Marts and auto manufacturers of the world exercise a tremendous amount of power.  Part of this considerable, and seemingly ever growing, power resides in the fact that the size of these companies now rivals and even surpasses many nation states.  This grand level of power is unique in human history in many ways.  Along with it comes the ability to exercise an almost god-like authority over suppliers. 

Today, these ultra-powerful companies commonly dictate to vendors what prices they are willing to pay, and the quasi-monopolistic nature of these companies often leaves vendors with no choice to comply.  In short, these 900-pound gorillas are telling companies both large and small exactly how much they will pay for a given number of bananas. 

Step 1 – Providing a Branded Product or Service

If you discover that your company doesn’t have pricing power, there are steps you can take.  One step is to produce a branded product or service.  In this way, you are able to offer something of greater value than your competitors.  Through having a branded product or service, it is possible to create a higher perceived value in the minds of not just the Amazons of the world, but in the minds of consumers as well.

Step 2 – Innovating 

Another path towards achieving pricing power is through innovation.  A great example of leading the way in innovation is Apple.  While few companies have Apple’s almost ethereal resources, that is not to say that you cannot find ways to innovate within your own sphere or industry.  Small innovations can often have an outsized impact and help a business stand out from a crowded playing field.  Innovation that leads to patent production is an excellent way to gain a degree of pricing power.

Step 3 – Offering Exceptional Service

A third option for achieving a degree of pricing power is to provide what could be called “mind-blowing” service.  By providing service that is truly a cut above what the competitors can match, your company is positioned to achieve pricing power.  Providing your customers with something they simply can’t get elsewhere is a key way to setting a price that is more in line with what you desire.

There are many marketplace variables that your business can’t control.  The trick is to evaluate your business, your business’s potential and the concrete and practical steps you can take starting today to achieve pricing power. 

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No two companies are quite alike, and this also means that there are many reasons why companies can fall into trouble.  While the number of variables involved in operating a company are practically endless, there are a handful of reasons why companies can fall on hard times.  Let’s take a closer look.

Lacking Focus

Companies that lack focus can often run into considerable trouble.  Not understanding their customers and what they need or want can lead to endless problems.  It is vital that companies frequently stop and assess who their customers are and whether or not they are properly servicing their needs.

Management Problems

Not too surprisingly, many companies can run into trouble because of poor management.  Management problems are not one-dimensional, but instead take a variety of shapes.  Management that isn’t focused, is incompetent, or simply doesn’t care about the business can translate into a business’s premature death. 

Under the umbrella of “management problems” also falls such missteps as poor financial controls, quality control problems, operational issues, and/or not keeping up with technological advancements.  At the end of the day, many of the problems on our list have at least some management issue missteps at their heart.

Loss of Key Employees or Clients

The loss of a key employee or a key client can spell serious trouble.  Of course, no management team can predict every eventuality.  However, when there is a loss of a key employee or client, and there is no plan for replacement, then management does shoulder at least some of the blame.  The savviest companies take steps to ensure that there are ways to replace the most important employees and clients.

Failure to Compete 

More than one business has been buried by the competition or failure to see a new wave of competition coming.  For example, countless mom and pop video rental stores were absolutely bludgeoned by the introduction of Blockbuster Video a generation ago. 

While it is true that sometimes market forces are so aligned against a business that survival is almost impossible, that is normally not the case for most businesses on a year-to-year basis.  The most effective and competent management can see the competition out on the horizon.  Or at bare minimum, they have an emergency plan in the event that the competition becomes more intense.

All too often by the time a business realizes that it is in trouble, it is already too late.  If the problems can’t be fixed, then it may be time to consider selling the business.  But such decisions must be made quickly in order to prevent additional bloodletting.

Optimally, a business is sold while it is doing well.  Regardless of whether a business is thriving or experiencing difficulties, a business broker or M&A advisor can be an invaluable ally in helping a business reach its full potential.

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Mass Mutual Life Insurance produced an ownership transition survey back about a decade ago.  The survey results were based on feedback and answers from family-owned businesses.  It produced some very interesting results, and is worth examining even today.  While the survey at this point is quite outdated in terms of the timeline, there are still many valuable nuggets of information to be gleaned from it.  Let’s dive in and take a closer look at the numbers and what they can tell us for 2021 and beyond.

While the Mass Mutual Life Insurance ownership transition survey had a range of important points, the one that leaps right off the page is the fact that a whopping 80% of family-owned businesses are still being controlled by their founders.  A large percentage of those founders are Baby Boomers who will have little choice but to retire in the next few years.

The survey indicated that 55% of CEOs over the age of 61 or older have yet to choose a successor.  This fact serves to emphasize the fact that a “retirement wave” will hit family-owned businesses, and this will lead to some interesting shifts and opportunities.  And while the survey indicated that 13% of CEOs state they will never retire, the reality of the situation is that ownership will eventually change hands.  Business brokers can expect to see an unprecedented wave of interest in their services.  Additionally, prospective buyers will also have a highly unique opportunity to buy established businesses.

The survey also indicated that 30% of family-owned businesses will be changing leadership within the next five years.  Of course, with that change of leadership, many possibilities open up, including the possibility of selling.  However, it is important to note that while there will be a “retirement wave” amongst the Baby Boomers, not all businesses currently owned by Baby Boomers will be placed on the market.

The survey noted that 90% of businesses currently plan on remaining family-owned, and 85% of businesses plan on having their next CEO be a family member.  However, it is important to keep in mind that even if these numbers were to hold true, that means at least 10% of businesses will be up for sale.

It is likely that this number is far higher now than when the survey was conducted due to the aging nature of the Baby Boomer population and owners looking to sell because of pandemic related issues.  Simply stated, there will be no shortage of businesses for sale in 2021 and beyond.

Another important aspect of the survey to consider is the fact that family-owned businesses are not prepared to sell.  According to the survey, 20% of family-owned businesses have not completed any form of estate planning, and 55% of family owners do not have any formal company valuation for estate tax estimates.  Combine these statistics with the fact that 60% of businesses do have a written strategic plan, and it becomes clear that family-owned businesses, especially those considering selling in the future, are most definitely in need of professional assistance.  Many family-owned businesses are ill prepared for the future and have a range of vulnerabilities.  Business brokers and M&A advisors are uniquely positioned to provide those services.

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When it comes to buying or selling a business, there is no replacement for a solid confidentiality agreement.  One of the key ways that business brokers and M&A advisors are able to help buyers and sellers alike is through their extensive knowledge of confidentiality agreements and how best to implement them.  In this article, we will provide you with an overview of what you should expect out of your confidentiality agreements.

A confidentiality agreement is a legal agreement that essentially forbids both buyers and sellers, as well as related parties such as agents, from disclosing information regarding the transition.  It is a best practice to have a confidentiality agreement in place before discussing the business in any way and especially before divulging key information on the operation of the business or trade secrets. 

While a confidentiality agreement can be used to keep the fact that a business is for sale private, that is only a small aspect of what modern confidentiality agreements generally seek to accomplish.  Confidentiality agreements are used to ensure that a prospective buyer doesn’t use any proprietary data, knowledge or trade secrets to benefit themselves or other parties.

When creating a confidentiality agreement, it is important to keep several variables in mind, such as what information will be excluded and what information will be disclosed, the term of the confidentiality agreement, the remedy for breach, and the manner in which confidential information will be used and handled. 

Any effective confidentiality agreement will contain a variety of key points.  Sellers will want their confidentiality agreement to cover a fairly wide array of territory.  For example, the confidentiality agreement will state that the potential buyer will not attempt to hire away employees.  In general, this and many other details, will have a termination date.

The specifics of how confidentiality is to be maintained should also be included in the confidentiality agreement.  Parties should agree to hold conversations in private; this point has become increasingly important due to the use of mobile phones and in particular the use of mobile phones in out-of-office locations.  Additionally, it is prudent to specify that principal names should not be used in outside discussions and that a code name should be developed for the name of the proposed merger or acquisition. 

Safeguarding documents is another area that should receive considerable attention.  Digital files should be password protected.  All paperwork should be kept in a safe location and locked away for maximum privacy when not in use.

In their enthusiasm to find a buyer for their business, many sellers have overlooked the confidentiality agreement stage of the process.  Most have regretted doing so.  A confidentiality agreement can help protect your business’s key information from being exploited during the sales process.  Any experienced and capable business broker or M&A advisor will strongly recommend that buyers and sellers always depend on confidentiality agreements to establish information disclosure perimeters.

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Only a small percentage of the population is able to go through life without using some form of financing at some point.  Most people have little choice but to finance everything from their home and car purchases to their college education.  Now, with that stated, most business owners would love to receive an all-cash offer for their business.  But the reality of the situation is quite different.  The facts are that owner financing is very common, and it is sometimes the only way to put a deal together.

Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business.  It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.”  The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem. 

Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business.  It might occur to them that sellers are “jumping from a sinking ship.”  It is important that sellers keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.

Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral.  Sellers may want to have some form of outside collateral to secure the loan on their business.  While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well.  As much as buyers worry that a seller’s refusal to provide financing is a red flag, the same holds true for sellers who seek collateral.  Once again, the concern is that if the business was healthy and thriving there should be no need for collateral.  The buyer is left wondering, “What is going on here?  How worried should I be?  Why do they need collateral if this business is so great?” 

Typically, buyers are “maxed out” when buying a main street business.  They are allocating most of their available funds to the down payment on the business.  That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process.  Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.

Navigating the complex interaction between buyers and sellers is no easy feat.  It requires a careful balancing of several different skills, ranging from understanding finance to psychology.  Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.

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Selling a business isn’t always 100% about the price.  It is not like selling a house where typically the most important factor is who places the highest offer.  In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered. 

The idea of selling to a competitor is one that seems attractive to many business owners.  After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider.  But while this point is quite valid, selling to a competitor comes with its own problems.  Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.

A second avenue that sellers will often explore is selling to a financial buyer.  A financial buyer is likely not to be a competitor.  But on the downside, a financial buyer may be unwilling to pay the seller’s price.  It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.

The highest selling price may come from a strategic acquirer.  But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller.  A strategic acquirer may not have the best interests of the company at heart.  When a strategic acquirer takes ownership, key employees and management may be replaced.  The company may even be moved.  Many owners are unprepared for the shock that may come along with a strategic acquisition.

There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business.  It is possible that the best buyer for a company could be one of its employees.  However, this option comes with risks as well.  Key employees and management may leave if the deal falls through, as they now know that the company is for sale.

Finding overlooked buyers is what business brokers do best.  Matching the right buyer with the right business is both a science and an art.  Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.

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An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”

Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”

It seems that everyone is concerned only about full price.  And yet, full price is just part of the equation.  If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved.  On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well.  Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.

Sellers should understand that both what they hope to accomplish in the sale of their business and the structure of the actual sale can dramatically influence the asking price.  Price is obviously important, but other factors may be even more important.  For example, consider a seller with health issues who needs to sell as quickly as possible.  In his case, timing becomes more essential than price.  Another seller may place more importance on her business remaining in the community.  In her case, finding a buyer who will not move the business may supersede price or certainly influence it.

Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller.  The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers.  On the other hand, sellers should also be aware how much the interest on their carry-back can add up to.  If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.

These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price.  During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.

Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.

•    Buyer Qualifications
•    Full Price
•    Amount of Cash Involved
•    Financing
•    Confidentiality
•    Commission/Selling Fees
•    Closing Costs
•    Exclusive Listing
•    How the Business is Shown
•    Advertising/Marketing
•    How a New Owner Continues the Business

By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.

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When you are selling a business, your business broker or M&A Advisor will likely create a Comprehensive Business Review, or CBR.  This comprehensive document can then be presented to prospective buyers once they have signed all necessary confidentiality documentation.  It is essential that this document builds trust between both parties, as this will go a long way towards achieving a successful deal. 

Be Honest

The bottom line is that your CBR will be 95% positive.  The majority of the document will be dedicated towards selling and promoting your business.   Therefore, it only makes sense to disclose some potential problems.  When handled correctly, the disclosure of problems can actually be a strong asset. 

For example, current weaknesses of your business could become strengths in the mind of the buyer.  For example, a business with a very poor online presence represents a substantial opportunity for a buyer to improve marketing and communications.  Summed up another way, don’t be afraid to include negative information, especially if that information represents an opportunity.

Sharing Information

It is important that there is an element of trust between the parties.  Creating that sense of trust begins with the CBR’s seller section. 

Buying a business is radically different from buying a home.  When someone buys a home, they usually don’t care too much about the person who they are buying the home from.  But buying a business is usually a different experience.  Your buyer will want to feel as though they have a fairly clear understanding of who you are and what you are about. 

In the seller’s section, the buyer should get a decent idea of who you are.  Your broker or M&A Advisor will want to interview you to gain ample information to include in your CBR.  Your broker may even want to find out about your family, hobbies, interests and more.  You may even want to consider including photos of yourself and your family.  

The bottom line is that a potential buyer should be able to pick up the CBR and get a good feel for what you are like.  If no level of trust is ever established between the buyer and seller, then it will be much more challenging for the deal to be successful.

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