Tax Impact When Selling Your Business
The purpose of this article is to demonstrate the importance of the tax impact in the sale of your business. Of course it is critical that both buyers and seller consult their CPA or tax attorney before entering into any transaction. Read more
Why Do Deals Collapse?
In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart. There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Read more
Five Kinds of Buyers
Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.
The Individual Buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.
The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.
The Strategic Buyer
This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.
The Synergistic Buyer
The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.
The Industry Buyer
Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.
The Financial Buyer
Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.
Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.
© Copyright 2013 Business Brokerage Press, Inc.
Why Deals Don’t Close
Sellers
- Don’t have a valid reason for selling.
- Are testing the waters to check the market and the price. (They are similar to the buyer who is “just shopping.”)
- Are completely unrealistic about the price and the market for their business.
- Are not honest about their business or their situation. The reason they want to sell is that the business is not viable, it has environmental problems or some other serious issues that the seller has not revealed, or new competition is entering the market.
- Don’t disclose that there is more than one owner and they are not all in agreement.
- Have not checked with their outside advisors about possible financial, tax or legal implications of selling their business.
- Are unprepared to accept seller financing or now unwilling to accept it.
Buyers
- Don’t have a valid reason to buy a business, or the reason is not strong enough to overcome the fear.
- Have unrealistic expectations regarding price, the business buying process, and/or small business in general.
- Aren’t willing (many of them) to do the work necessary to own and operate a small business.
- Are influenced by a spouse (or someone else) who is opposed to the purchase of a business.
What Do Buyers Really Want to Know?
Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same.
- Want to do their own thing; to control their own destiny, so to speak.
- Do not want to work for anyone else.
- Want to make better use of their skills and abilities.
- Want to make money.
These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently.
The important item to note is that money is reason number four. Although making money is certainly important and necessary, it is not the primary issue. Once a person decides to go into business for himself or herself, he or she has to explore the options. Starting a business is certainly one option, but it is an option fraught with risk. Buying an existing business is the method most people prefer. Purchasing a known entity reduces the risks substantially.
There are some key questions buyers want, or should want, answers to, once the decision to purchase an existing business has been made. Below are the primary ones; although a prospective buyer may not want answers to all of them, the seller should be prepared to respond to each one.
- How much is the down payment? Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they probably wouldn\’t be looking to purchase a business in the first place.
- Will the seller finance the sale of the business? It can be difficult to finance the sale of a business; therefore, if the seller isn\’t willing, he or she must find a buyer who is prepared to pay all cash. This is very difficult to do.
- Why is the seller selling? This is a very important question. Buyers want assurance that the reason is legitimate and not because of the business itself.
- Will the owner stay and train or work with a new owner? Many people buy a franchise because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
- How much income can a new owner expect? This may not be the main criterion, but it is obviously an important issue. A new owner has to be able to pay the bills – both business-wise and personally. And just as important as the income is the seller\’s ability to substantiate it with financial statements or tax returns.
- What makes the business different, unique or special? Most buyers want to take pride in the business they purchase.
- How can the business grow? New owners are full of enthusiasm and want to increase the business. Some buyers are willing to buy a business that is currently only marginal if they feel there is a real opportunity for growth.
- What doesn\’t the buyer know? Buyers, and sellers too, don\’t like surprises. They want to know the good – and the bad – out front. Buyers understand, or should understand, that there is no such thing as a perfect business.
Years ago, it could be said that prospective buyers of businesses had only four questions:
- Where is the business?
- How much is it?
- How much can I make?
- Why is it for sale?
In addition to asking basic questions, today\’s buyer wants to know much more before investing in his or her own business. Sellers have to able to answer not only the four basic questions, but also be able to address the wider range of questions outlined above.
Despite all of the questions and answers, what most buyers really want is an opportunity to achieve the Great American Dream – owning one\’s own business!