A Few Things to Consider
Buyers Want Cash Flow
The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your accountant or bookkeeper and begin to get your financial statements in order with cash flow the order of business. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, and look at owners or family compensation. They will consider any excess compensation to employees and family members. Buyers will also look at large one-time expenses such as a new computer system, or remodeling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner perquisites. These are items that a professional business broker considers when advising a selling client on a suggested selling price.
Appearances Do Count
The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will be slightly lower because you haven’t replaced it. The time to “spiff up” the business is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell occurs. Keep-in-mind that anything that increases sales also increases profits and the all-important cash flow!
Everything has Value
There are other things that add value to your business. Don’t discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customized software programs, or good employees. These are termed “off-balance sheet items,” and although not used in most pricing models, they add to value. Look at your business very carefully so you don’t overlook those items that make your business more attractive to the buyer.
Eliminate the Surprises
Long before you put your business on the market — eliminate the surprises! Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises — most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.
Professional business brokers can assist you in the planning process. They know what buyers are looking for and are familiar with current market conditions.
A Seller’s Checklist of Do’s and Don’ts
Do have all of your business documentation ready. Everything starts with it.
Don’t underestimate the value of your business. Owners of privately held businesses usually minimize profits to lower taxes. The financial statements may not reflect the real value of the business.
Don’t overprice your business. The right buyer who is willing to pay the right price may not even want to consider your business because the price is way out of line.
Do offer as favorable terms as you can. Buyers, even good ones, want to leverage the sale as much as possible.
Don’t use a “magic” formula to value your business. Your business is unique, different from every other business out there.
Don’t wait too long to sell. The best time to sell is when business is good.
Don’t wait until poor health or a downturn occurs – sell from strength!
Do allow at least six months to sell your business. The larger the business, the more time you should allow.
Do use a business broker. They can take the mystery out of determining the selling price, prepare a marketing plan of action to maximize the selling price, handle all of the details, and leave you to do what you do best — continue to run your business.
Meet the Customers
Some of you might remember the commercial for one of the major airlines in which a business lost a major client, because they never saw anyone from the company. The president handed out airline tickets to the entire sales staff so they could go out and visit the customers. When asked what he was going to do with the remaining ticket he replied that he was going to go see the lost client. And, a recent study revealed that customers really want contact with the business owner. In fact 83 percent of the decision makers want personal contact with salespeople.
Both of these examples point out the importance of customer contact. From the small shop owner to the CEO of a large company, meeting with the customers is still the smart way to go. With today’s technology, it may be easier to fax, telephone or e-mail a customer or client, but is it really the best way to contact that person? Remember how good you feel when the owner of a restaurant comes to your table and asks how everything is. Nothing beats owner contact!
Is your business resorting to just telemarketing and direct mail programs to contact your customers – both present and possibly future ones? Perhaps it’s time to hire a salesperson to go out and meet the people. Perhaps it’s time to go out and do it yourself. Why not go out yourself and meet or visit your important customers or clients? If you own a retail business – go out and meet the customers. Owning your own business is not a “back-room” or hide behind the business-plan business. It is a “front-room” business – go out and meet the customers!
The Buy-Sell Agreement: No Business Should Be Without One
In the day-to-day activity of making a business work, many owners overlook the importance of the buy-sell agreement. This document (also referred to as a business continuity agreement) is like a will; no one thinks about it until it’s too late. However, it may just be the most important written agreement or document you ever create.
If your business has more than one owner, either partners or stockholders, what happens if one or more of them dies or “wants out”? The same thing holds true in family-owned and operated businesses. A buy-sell agreement can dictate the transfer of business ownership under certain events as described within its specifically-written language.
The well-drafted buy-sell agreement is designed to prevent the following:
- The sale of the company because one of the partners or stockholders desires to exit the business and no one can agree on the price or the terms;
- The necessity to sell or dissolve the business due to the lack of a written agreement determining ownership/management of the business in case of a partner’s, stockholder’s, or family member’s death; (Or, what might prove even worse than a precipitous sale, an heir might decide that he or she is going to get involved in the operation of the business.)
- A lack of agreement on who should take control when an active partner, stockholder, or family member becomes disabled and can no longer run the business;
- A serious dispute on any key issue among the partners, active family members, or stockholders that cannot be resolved; and,
- Questions about business operations following a legally-complicated divorce (or other legal entanglement) involving one of the partners, family members, or stockholders.
The buy-sell agreement can help prevent these situations, as well as many other problems that can befall a business enterprise. In a small business, one of the areas frequently overlooked is the buy-out provision, in the event one of the active partners decides to exit. The buy-sell agreement normally, and properly, provides for the partner, family member, or stockholder to have the first right of refusal in this case. But at what price? If two partners are in disagreement over how to run the business, they will most likely never come to an agreement about its value. A method or formula for valuing the business should be included in the buy-sell agreement; otherwise, the first right of refusal would be no right at all.
In larger businesses, especially those that are incorporated, it is important that the buy-sell agreement specify how the stock of the business should be valued. The agreement should also specify whether the stock must be purchased by the company or its shareholders, or if it can be sold to an outsider. In many cases, life insurance coverage is used to purchase the interest or stock in the business, in the event that one of the partners or majority stock holders dies.
The buy-sell agreement is really the key to the continuation of the business. You can see that the buy-sell agreement, if executed properly, can solve problems surrounding retirement, disability, termination, divorce, bankruptcy, death, and business disputes. Given all the benefits of such an agreement, why doesn’t every business have one?
The answer is simple; most business owners are too busy trying to get the work done and the bills paid. Creating such a document means that the owners must stand back from the business and decide what should happen under a variety of serious situations. The process is time-consuming and also expensive. There are no pre-printed forms; it isn’t possible simply to fill in the blanks and come up with an instant agreement. A lawyer must do the drafting to get a document that will have legal authority in the event that it is ever challenged.
If your business already has a buy-sell agreement, perhaps it is time to review the document, checking for the need to update or amend it. If your business doesn’t have a buy-sell agreement, you should seriously consider creating one. It may be the most important business decision you ever make.
Buy-sell agreements, as well as all of the important documents pertaining to the sale of a business, should be handled by an attorney experienced in such matters. It may seem expensive in the short run, but the careful preparation of any agreement that can affect the rights of the buyer or seller will be a bargain in the long term.
Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost effective than the attorney who handles a general practice.
Business brokers–because of their knowledge and experience–are a good source of information concerning the buying and selling of businesses. They are conversant with the local marketplace, business prices, and terms. In sum, they are an excellent resource.
What Makes a Deal Close?
For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.
The Buyer and Seller Are in Agreement From the Beginning
In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.
The Buyer and Seller Don’t Lose Their Patience
Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.
No One Likes Surprises
The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.
The Buyer and Seller Must Both Feel Like They Got a Good Deal
If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.
Secrets to Closing the Sale Successfully
There are several things to consider when buying or selling a business. The most important is to listen to the other side. There are always reasons why someone wants something – even if you don’t agree at first. Find out where the other side is coming from, then make a decision on whether you can live with it or not.
Next, whether you are the buyer or the seller, you can not have everything your way. You can’t win on every point or issue. Be prepared to give in on those areas that are not as important as those you feel most strongly about. If you are a seller, you may not be able to get a real high price and a real high down payment. You will have to decide which is more important. The same is true for the buyer. You can’t have it both ways.
Always enter the purchase or sale of a business with a spirit of cooperation rather than one of confrontation. The buyer or the seller, as the case may be, is not the enemy. If the seller wasn’t interested in selling, the business would not be for sale. If the buyer did not like the business there would be no negotiation or eventual sale.
The secret of a successful negotiation is laying out all the points on the table for discussion. It is key to understand where everyone is coming from and to understand what is and what is not important to each party. When there is a sense of cooperation among all of the players, a successful deal will usually result.
Don’t Sell Before You’re Ready
The buyer and seller have both agreed on the sale price and the terms of the transaction. Everyone appears satisfied. As the day of closing approaches, the seller seems less cooperative and more apprehensive about selling the business. Ultimately, the sale falls apart. Who’s to blame? The buyer was ready, willing and able to buy the business, and the seller appeared ready to sell.
The decision to sell one’s business is a serious step – a milestone in one’s life, both personally and professionally. Selling represents the end of ownership. It means, for many sellers, heading into uncharted waters. For others, it is the end of a dream — they built the business, or perhaps even started it. A part of them will always be in the business. So, to the seller, selling the business, represents the end of something and the beginning of something else – pretty dramatic stuff. Often, selling the business means parting with one’s biggest asset – the bulk of one’s wealth. The business can be a very personal thing, like a child is a part of the family.
Some sellers, in the middle of the selling process, suddenly realize just how important the business is in their life. Others realize that after the sale they will have nothing to get up for on a daily basis. This sounds good at first, but upon reflection it really doesn’t sound good at all. These are some of the reasons sales of privately-held businesses may not close. Sellers won’t admit their reason, so they masquerade the real reason behind another.
Perhaps, one of the most critical elements necessary for the successful sale of a privately-held business is the willingness of the seller to sell and move on. In some cases, the owner and the business have grown into one – the business becoming his or her alter ego. Before sellers decide to sell, they should make sure they can separate themselves from the business and are prepared to leave it. Sellers should not attempt to sell before they are ready!
Adding Value to Your Business
If you are considering selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. It is perhaps more important to recognize when the buyer arrives at a price at which he or she will leave the negotiations. Buyers naturally try to buy the business at the lowest possible price possible, however most also have a top price over which they are probably not willing to go. Here are some of the “high value” indicators as well as some of the “low value” indicators to consider when evaluating your business.
Indications of High Value
- High sustainable cash flow
- Room for the business to grow
- Anticipated industry growth
- Competitive advantage – location, area, etc.
- Business niche
- History and reputation
- Low failure rate in industry
- Modern, well maintained facility
Indications of Low Value
- Customer concentration on a few major customers/clients
- Reliance on owner
- Poor financials
- Distressed circumstances
- Few assets
- Product or service sensitivity
- Poor outlook for industry – regulations, foreign competition, price cutting, discount stores, etc.
Considering the above factors and how to address them can help a seller look at the business through the eyes of a potential buyer. A professional business broker can help the business owner sort through the many areas that buyers consider when looking at a business and trying to arrive at an initial offering price.
The Small Business Market: Reading Between the “Negative” Lines
Experienced buyers of large businesses have tended to spurn the smaller business, citing traditional “negatives” involved in this type of transaction. Now big-time buyers are throwing away the don’t-buy-small book; or at least, they are beginning to read between the lines. The so-called shortcomings of the small business acquisition can actually be opportunities in disguise.
Let’s take a look at these small-business negatives and see the possibilities or (improvements) inherent in each:
A Good Small Business Is Hard To Find
Experienced buyers often complain about the difficulty of locating a viable smaller business. Furthermore, when a business of possible interest is found, the owner/seller is often trying to manage the transaction single handedly, foregoing the advice of professionals. This negative issue can be resolved instantly by the use of a business broker. For the seller, the business broker will offer the support and expertise needed to launch and consummate the sale. For the buyer, the business broker will pinpoint appropriate businesses for sale, using a knowledge of the marketplace and extensive databases to shortcut the search process.
Business brokers will also be able to present the buyer with small businesses that are not “shopworn,” as can be the case when a business sale has floundered–again and again–in the inexpert hands of the seller. The bigger-time buyers will especially appreciate this, since they are always on the lookout for the unusual and first-time seller.
One Person Is Key
When the owner is also the key employee, what happens after the business is sold? How can the new owners/investors hope to replace the one person who has essentially been the business? This traditional concern paints a far too gloomy–and, in fact, inaccurate–picture. Too many small business owners only think that they are irreplaceable. In most cases, they are not. In fact, new management can bring with it the fresh enthusiasm and energy essential for significant growth. For example, viewed from the outside, the quaint gift shop that is an extension of the personality of its owners might have become just that–too quaint, a clutter of Aunt Susie’s jams, somebody else’s painted beach rocks, aged potpourri. The new management clears out a space to serve gourmet coffees, stocks gift items from an endangered rainforest made by third-world peoples, and the business takes on a whole new life.
Casual Company Structure
Lines of responsibility often blur in the small-business management structure. This problem is compounded when, as in many cases with the small to mid-sized business, the owner is also the manager. Daily concerns override long-term planning, and decisions tend to be driven by instinct rather than by in-depth analysis. The typical informality of small business management is not an insoluble problem by any means. The use of expert, highly specialized consultants and the instituting of an enthusiastic board of directors are two possible initial steps to take. Both groups–consultants and board members–will be invaluable resources to support the existing management and to help formalize the company’s structure. With the burden of managing the business more clearly defined and more equably distributed, a small business will have better opportunities for rapid change and growth.
An additional tip for those owner-managers considering selling their business: Experienced buyers will be more impressed with your business, no matter what the size, if you prepare an operating manual that details the current operation scheme and charts the responsibilities of each employee.
The Owner Keeps the Books
With many small businesses, the owner keeps track of operations and financial reporting procedures–off the cuff or in the head. Even when careful records are kept on paper or computer, the systems may not have kept up with the business and the times. (The operating manual mentioned above will help owners as they plan to sell their business.) The good news for buyers is that the changes needed to update most small business systems will not call for major overhauls. Simple systems improvements can effect dramatic results.
Goodwill Is What’s (Mostly) for Sale
A small business is not typically rich in assets. The investment in capital equipment is minor, and, in the case of S corporations, the majority of earnings go to the owner or owners. What is left to attract the experienced buyer? Mostly goodwill–just what most buyers don’t want to hear. There are, however, two positive sides to the low-assets “negative.” First, it is possible for the new owner to increase assets by the purchase of equipment and by frugal management decisions. Second, the business with a small asset base might receive a lower valuation, which will naturally appeal to any buyer; the experienced buyer will see the further benefit of using the resulting higher cash flow as a means to grow the business.
Leaving the issue of assets aside, most small businesses, in general, are going to sell for much lower multiples than the larger business. A buyer must “buy into” an exit strategy wherein the business will be re-sold on the basis of a higher multiple of earnings as well as simply higher earnings. This strategy has appeal for those buyers who want to buy small businesses at reasonable valuations.
Small Customer/Supplier Base
It is not atypical for a small business to rely on just one customer for 50 percent of its trade, or on a handful of customers for as much as 90 percent. Businesses with such small customer bases (and similarly small supplier bases) survive by cultivating strong relationships and loyalties. This one-on-one way of doing business poses a potential problem for buyers who are doubtful about maintaining these customer-supplier ties.
The seller can alleviate the buyer’s concerns by agreeing to stay on board, as needed, to help maintain key relationships with customers and suppliers. The smaller the customer base–with a few major customers forming the bulk–the more important the seller’s ongoing participation will be. In addition, sellers can use paperwork to their advantage, creating detailed listings of current customers and suppliers, as well as leads to those used in the past or with future potential.
The Uncertain Seller
Is the business really for sale? This is a vital question that any buyer wants answered. In the case of a small business, the decision to sell will involve many emotional factors, including the reluctance on the part of the seller to part with what has been such a large chunk of his life. If the need to sell is caused by family difficulties or by personal burnout, these are fluctuating issues that may leave the seller running hot and cold.
When the seller’s decision-making powers have become skewed, it is wise to enlist the help of a professional. The business broker can assess the seriousness of the seller–as well as that of the buyer. Once it has been determined that both parties are serious, the business broker will keep an eye on the chemistry of each player, fostering patience on the part of the buyer and guiding the seller on a steady path toward a successful sale.
When Selling Your Business, Play to Win
If you are an independent business owner, you are most likely also an independent business seller–if not now, you will be somewhere down the road. The Small Business Administration reports that three to five years is a long enough stretch for many business owners and that one in every three plans to sell, many of them right from the outset. With fewer cases of a business being passed on to future generations, selling has become a fact of independent business life. No matter at what stage your own business life may be, prepare now to stay ahead in the selling game.
Perhaps one of the most important rules of the selling game is learning how not to “sell.” An apt anecdote from Cary Reich’s The Life of Nelson Rockefeller shows a pro at work doing (or not doing) just that:
When the indomitable J.P. Morgan was seeking the Rockefeller’s Mesabi iron ore properties to complete his assemblage of what was to become U.S. Steel, it was Junior [John D. Rockefeller, Jr.] who went head-to-head with the financier. “Well, what’s your price?” Morgan demanded, to which Junior coolly replied, “I think there must be some mistake. I did not come here to sell. I understand you wished to buy.” Morgan ended up with the properties, but at a steep cost.
As this anecdote shows, the best approach to succeeding at the selling game is to be less of a “seller” and more of a “player.” Take a look at these tips for keeping the score in your favor:
Let Others Do the Heavy Pitching
Selling a business is an intense emotional drain; at best, a distraction. Let professional advisors do the yeoman’s duty when selling a business. A business intermediary represents the seller and is experienced in completing the transaction in a timely manner and at a price and terms acceptable to the seller. Your business broker will also present and assess offers, and help in structuring the transaction itself. If you plan to use an attorney, engage one who is seasoned in the business selling process. A former Harvard Business Review associate editor once said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know what’s reasonable.”
Stay in the Game
With the right advisors on your side, you can do the all-important work of tending to the daily life of the business. There is a tendency for sellers to let things slip once the business is officially for sale. Keeping normal operating hours, maintaining inventory at constant levels, and attention to the appearance and general good repair of the premises are ways to make the right impression on prospective buyers. Most important of all, tending to the daily running of the business will help ward off deterioration of sales and earnings.
Keep Pricing and Evaluation in the Ballpark
Like all sellers, you will want the best possible price for your business. You have probably spent years building it and have dreamed about its worth, based on your “sweat equity.” You’ll need to keep in mind that the marketplace will determine the value of the business. Ignoring that standard by asking too high a price will drive prospective buyers away, or will at the least slow the process, and perhaps to a standstill.
Play Fair with Confidentiality
Your business broker will constantly stress confidentiality to the prospects to whom he or she shows your business. They will use nonspecific descriptions of the business, require signatures on strict confidentiality agreements, screen all prospects, and sometimes phase the release of information to match the growing evidence of buyer sincerity. As the seller you must also maintain confidentiality in your day-to-day business activities, never forgetting that a breach of confidentiality can wreck the deal.
Sell Before Striking Out
Don’t wait until you are forced to sell for any reason, whether financial or personal. Instead of selling impulsively, you should plan ahead carefully by cleaning up the balance sheet, settling any litigation, providing a list of loans against the business with amounts and payment schedule, tackling any environmental problems, and by gathering in one place all pertinent paperwork, such as franchise agreement (if applicable), the lease and any lease-related documents, and an approximation of inventory on-hand. In addition, you could increase the value of your business by up to 20 percent by providing audited financial statements for one or two years in advance of selling.
Think Twice Before Retiring Your “Number”
The trend is for sellers to assume they will retire after selling the business. But consider this: agreeing to stay on in some capacity can actually help you get a better price for your business. Many buyers will pay more to have the seller stay aboard, thus helping to reduce their risk.
Keep the Ball Rolling
You need to keep the negotiation ball rolling once an offer has been presented. Even if you don’t get your asking price, the offer may have other points that will offset that disappointment, such as higher payments or interest, a consulting agreement, more cash than you anticipated, or a buyer who seems “just right.” The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. In many cases, the structure of the deal is more important than the price. And when the ball is rolling, allow it to pick up speed. Deals that drag are too often deals that fail to close.
By following these tips, and by working closely with your business broker, you can have confidence in being a seller who, like John D. Rockefeller, Jr., doesn’t “come here to sell.” You will play the selling game–and be a winner.