Seize the Moment — Tips for Sellers (Option B)

If you have made the decision to sell your business, the wisest first move is to contact a qualified business broker professional, who can . . .

  • Advise you on pricing and structuring the sale of your business.
  • Prepare the marketing strategy, using professional resources.
  • Determine the right buyer for your particular business.
  • Educate buyers in the business-buying process.
  • Keep you informed about market reaction.
  • Present offers and point out strengths and weaknesses.

When it comes time to sell, one of the best decisions a business owner can make is to continue managing his or her business efficiently (and profitably), while depending on the services of a business broker to forge the steps of the sale. The business broker professional is an invaluable advisor during the entire process, offering both objectivity and negotiation skills honed through years of experience in the buying and selling of businesses.

Financing Facts

There still aren’t too many ways to finance the purchase of a business. Here are the primary methods:

Buyer Financing

Some buyers may have the cash available to purchase the business. Some may elect to use the equity in their residence, or other real estate. Others may have other assets that they can sell or borrow against.

Bank Financing

Banks may lend against a buyer’s assets as described above. They may also lend against the assets of the business, assuming there is sufficient value to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by business owners have very little relationship to the actual earning power of the business.

Venture Capital Firms

These firms do not, as a practice, lend to small or even many mid-size businesses unless tremendous growth is anticipated. They also usually expect an equity position in the company.

SBA Loans

These have become more popular. There is now some competition among lenders for these loans. Many banks offer them, but the large non-bank companies seem to have the upper hand in both acceptance and service.

Other Sources

This category includes family, friends, relatives, credit cards and leasing companies. Some suppliers have been known to assist in the financing of a small business.

Seller Financing

This is, by far, the largest source of financing available for the purchase of a business. Many industry experts say that about 90 percent of small businesses sell with, or perhaps because of, the seller financing a good portion of the sale price. Buyers have much more confidence in the decision to purchase a business when the seller is willing to assist in the financing. The buyer has confidence that the seller believes the business will service the debt, in addition to providing a living wage.

The Advantages of Seller Financing

Business owners who want to sell their business are often told by business brokers and intermediaries that they will have to consider financing the sale themselves. Many owners would like to receive all cash, but many also understand that there is very little outside financing available from banks or other sources. The only source left is the seller of the business.

Buyers usually feel that businesses should be able to pay for themselves. They are wary of sellers who demand all cash. Is the seller really saying that the business can’t support any debt or is he or she saying, “the business isn’t any good and I want my cash out of it now, just in case?” They are also wary of the seller who wants the carry-back note fully collateralized by the buyer. First, the buyer has probably used most of his or her assets to assemble the down payment and additional funds necessary to go into business. Most buyers are reluctant to use what little assets they may have left to secure the seller’s note. The buyer will ask, “what is the seller not telling me and/or why wouldn’t the business provide sufficient collateral?”

Here are some reasons why a seller might want to consider seller financing the sale of his or her business:

  • There is a greater chance that the business will sell with seller financing. In fact, in many cases, the business won’t sell for cash, unless the owner is willing to lower the price substantially.
  • The seller will usually receive a much higher price for the business by financing a portion of the sale price.
  • Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at 8 percent carried over nine years will actually double the amount carried. $100,000 at 8 percent over a nine year period results in the seller receiving $200,000.
  • With interest rates currently the lowest in years, sellers usually get a higher rate from a buyer than they would get from any financial institution.
  • Sellers may also discover that, in many cases, the tax consequences of financing the sale themselves may be more advantageous than those for an all-cash sale.
  • Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.

Certainly, the biggest concern the seller has is whether or not the new owner will be successful enough to pay off the loan the seller has agreed to provide as a condition of the sale. Here are some obvious, but important, factors that may indicate the stability of the buyer:

  • How long has the buyer lived in the same house or been a home owner?
  • What is the buyer’s work history?
  • How do the buyer’s personal references check out?
  • Does the buyer have a satisfactory banking relationship?

Advantages of Seller Financing for the Buyer

  • Lower interest
  • Longer term
  • No fees
  • Seller stays involved
  • Less paperwork
  • Easier to negotiate

Financing the Business Purchase

Where can buyers turn for help with what is likely to be the largest single investment of their lives? For most small to mid-sized business acquisitions, here are the best ways to go:

Personal Equity

Typically, anywhere from 20 to 50 percent of cash needed to buy a business comes from the buyer and his or her family. Buyers who invest their own capital (usually an amount between $50,000 and $150,000) are positively influencing other investors or lenders to participate in financing.

Seller Financing

This is one of the simplest and best ways to finance the acquisition, with sellers financing 50 to 60 percent–or more–of the selling price, with an interest rate below current bank rates, and with a far longer amortization. Many sellers actively prefer to do the financing themselves, thereby increasing the chances for a successful sale and the best possible price.

Venture Capital

Venture capitalists are becoming increasingly interested in established, existing entities, although this type of financing is usually supplied only to larger businesses or startups with top management and a good upside potential. They will likely want majority control, will want to cash out in three to five years, and will expect to make at least 30 percent annual rate of return on their investment.

Small Business Administration

Similar to the terms of typical seller financing, SBA loans have long amortization periods. The buyer must provide strong proof of stability–and, if necessary, personal collateral, but SBA loans are becoming more popular and more “user friendly.”

Lending Institutions

Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a reliable source of income. Although the terms are often attractive, the rate of rejection by banks for business acquisition loans can go higher than 80 percent.

Source of Small Business Financing (figures are approximate)

Commercial bank loans 37%
Earnings of business  27%
Credit cards  25%
Private loans  21%
Vendor credit  15%
Personal bank loans 13%
Leasing  10%
SBA-guaranteed loans 3%
Private stock  0.5%
Other 5%

Financing the Business Acquisition

The epidemic of corporate downsizing in the US has made owning a business a more attractive proposition than ever before. As increasing numbers of prospective buyers embark on the process of becoming independent business owners, many of them voice a common concern: how do I finance the acquisition?

Prospective buyers are aware that the credit crunch prevents the traditional lending institution from being the likely solution to their needs. Where then, can buyers turn for help with what is likely to be the largest single investment of their lives? There are a variety of financing sources, and buyers will find one that fills their particular requirements. (Small businesses – those priced under $100,000 to $150,000 – will usually depend on seller financing as the chief source.) For many businesses, here are the best routes to follow:

Buyer’s Personal Equity

In most business acquisition situations, this is the place to begin. Typically, anywhere from 20 to 50 percent of cash needed to purchase a business comes from the buyer and his or her family. Buyers should decide how much capital they are able to risk, and the actual amount will vary, of course, depending on the specific business and the terms of the sale. But, on average, a buyer should be prepared to come up with something between $50,000 to $150,000 for the purchase of a small business.

The dream of buying a business by means of a highly-leveraged transaction (one requiring minimum cash) must remain a dream and not a reality for most buyers. The exceptions are those buyers who have special talents or skills sought after by investors, those whose business will directly benefit jobs that are of local public interest, or those whose businesses are expected to make unusually large profits.

One of the major reasons personal equity financing is a good starting point is that buyers who invest their own capital start the ball rolling – they are positively influencing other possible investors or lenders to participate.

Seller Financing

One of the simplest – and best – ways to finance the acquisition of a business is to work hand-in-hand with the seller. The seller\’s willingness to participate will be influenced by his or her own requirements: tax considerations as well as cash needs.

In some instances, sellers are virtually forced to finance the sale of their own business in order to keep the deal from falling through. Many sellers, however, actively prefer to do the financing themselves. Doing so not only can increase the chances for a successful sale, but can also be helpful in obtaining the best possible price.

The terms offered by sellers are usually more flexible and more agreeable to the buyer than those offered from a third-party lender. Sellers will typically finance 50 to 60 percent – or more – of the selling price, with an interest rate below current bank rates and with a far longer amortization. The terms will usually have scheduled payments similar to conventional loans.

As with buyer-equity financing, seller financing can make the business more attractive and viable to other lenders. In fact, sometimes outside lenders will usually have scheduled payments similar to conventional loans.

Venture Capital

Venture capitalists have become more eager players in the financing of large independent businesses. Previously known for going after the high-risk, high-profile brand-new business, they are becoming increasingly interested in established, existing entities.

This is not to say that outside equity investors are lining up outside the buyer\’s door, especially if the buyer is counting on a single investor to take on this kind of risk. Professional venture capitalists will be less daunted by risk; however, they will likely want majority control and will expect to make at least 30 percent annual rate of return on their investment.

Small Business Administration

Thanks to the US Small Business Administration Loan Guarantee Program, favorable financing terms are available to business buyers. Similar to the terms of typical seller financing, SBA loans have long amortization periods (ten years), and up to 70 percent financing (more than usually available with the seller-financed sale).

SBA loans are not, however, a given. The buyer seeking the loan must prove stability of the business and must also be prepared to offer collateral – machinery, equipment, or real estate. In addition, there must be evidence of a healthy cash flow in order to insure that loan payments can be made. In cases where there is adequate cash flow but insufficient collateral, the buyer may have to offer personal collateral, such as his or her house or other property.

Over the years, the SBA has become more in tune with small business financing. It now has a program for loans under $150,000 that requires only a minimum of paperwork and information. Another optimistic financing sign: more banks and lending institutions are now being approved as SBA lenders.

Lending Institutions

Banks and other lending agencies provide “unsecured” loans commensurate with the cash available for servicing the debt. (“Unsecured” is a misleading term, because banks and other lenders of this type will aim to secure their loans if the collateral exists.) Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a reliable source of income. Unsecured loans are also easier to come by if the buyer is already a favored customer or one qualifying for the SBA loan program.

When a bank participates in financing a business sale, it will typically finance 50 to 75 percent of the real estate value, 75 to 90 percent of new equipment value, or 50 percent of inventory. The only intangible assets attractive to banks are accounts receivable, which they will finance from 80 to 90 percent.

Although the terms may sound attractive, most business buyers are unwise to look toward conventional lending institutions to finance their acquisition. By some estimates, the rate of rejection by banks for business acquisition loans can go higher than 80 percent.

With any of the acquisition financing options, buyers must be open to creative solutions, and they must be willing to take some risks. Whether the route finally chosen is personal, a seller, or third-party financing, the well-informed buyer can feel confident that there is a solution to that big acquisition question. Financing, in some form, does exist out there.

Friends and Family: A Financing Option

The first job facing many prospective business owners is rounding up the cash necessary to make the purchase. They may find that banks have made borrowing difficult (or all but impossible), and that even SBA loans have requirements too stringent to meet. One viable option is obtaining financing from the seller; another is to seek help from family and friends.

Borrowing money from family members and/or friends is one of the most frequently-used methods of small business financing. The pluses are obvious–there is trust, familiarity, and a general comfort level when dealing with those you know. The drawbacks are self-evident as well: “doing business” with family and friends comes with cautionary notes of legendary proportions. Everybody knows that family ventures can be complex and stressful, stirring up “bad blood” and lingering ill will. However, by taking the right preventive steps, buyers can take advantage of friendly financial help.

1. Set up an informal meeting to introduce your ideas.

This is the time to “feel out” friends and relatives casually, being sure they understand that this is strictly a fact-finding (and fact-presenting) meeting. Anyone who is not interested or cannot afford to be involved has plenty of opportunity to say so without feeling obligated–or emotionally “blackmailed.”

2. Follow up with a professional business plan.

Those who have indicated interest should now be treated with utmost professionalism. A formal business plan, including detailed financials, and a carefully-drafted business contract should be presented at this subsequent gathering. Consult a business professional for help in establishing a schedule for repayment based on the appropriate interest rates. Nothing will inspire more confidence in lenders than the care taken with this vital paperwork.

3. Be clear about the structure of the business envisioned.

How much voice are investors to have in the business? This is a vital question. Be sure that all parties understand whether this is to be a simple investment or some sort of partnership, and put this agreement in writing.

4. Take care in identifying your borrowing “targets.”

Sometimes willing and eager family members can’t really afford to invest. If possible, try to spread the borrowing around so that no one person bears the crux of the loan. It may take more energy to get smaller amounts from a larger circle of people, but the safety factors for all concerned will more than compensate for the time spent.

5. Keep your investors involved.

Once the buyer becomes an owner and the new business is in operation, friends and family lenders are due more than their repayment. They will want to be informed and updated about the progress of the business. Keeping in touch is a cost-free way to return the vote of confidence your friendly investors have placed in you.

Venture Financing: The Hard Facts

Government financing and venture capital financing account for less than one percent of all new business financing. Sixty-seven percent of all small to mid-sized businesses are financed by personal savings or friends; thirty-three percent are financed by lending institutions. The facts about venture capital financing are especially cold and hard…

  • Venture capital is limited to high-growth potential, high capital-absorbing businesses.
  • Venture capital benefits as few as 1000 businesses a year, and then…
  • The average investment is $2.3 million, divided between 3-4 venture capital funds, which take 40-50-60 percent or more of the business’s equity.
  • Venture capital investors expect the business to grow to $25-50 million within 5 years–at which time the business will go public or be sold.

Negotiating the Price Gap Between Buyers and Sellers

Sellers generally desire all-cash transactions; however, oftentimes partial seller financing is necessary in typical middle market company transactions. Furthermore, sellers who demand all-cash deals typically receive a lower purchase price than they would have if the deal were structured differently.

Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout. Deferring some of the owner’s remuneration from the transaction will provide leverage in the event that the owner has misrepresented the business. An earnout is a mechanism to provide payment based on future performance. Acquirers like to suggest that, if the business is as it is represented, there should be no problem with this type of payout. The owner’s retort is that he or she knows the business is sound under his or her management, but does not know whether the buyer will be as successful in operating the business.

Moreover, the owner has taken the business risk while owning the business; why would he or she continue to be at risk with someone else at the helm? Nevertheless, there are circumstances in which an earnout can be quite useful in recognizing full value and consummating a transaction. For example, suppose that a company had spent three years and vast sums developing a new product and had just launched the product at the time of a sale. A certain value could be arrived at for the current business, and an earnout could be structured to compensate the owner for the effort and expense of developing the new product if and when the sales of the new product materialize. Under this scenario everyone wins.

The terms of the deal are extremely important to both parties involved in the transaction. Many times the buyers and sellers, and their advisors, are in agreement with all the terms of the transaction, except for the price. Although the variance on price may seem to be a “deal killer,” the price gap can often be resolved so that both parties can move forward to complete the transaction.

Listed below are some suggestions on how to bridge the price gap.

  • If the real estate was originally included in the deal, the seller may chose to rent the premise to the acquirer rather than sell it outright. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay a higher rent in order to decrease the “goodwill” portion of the sale. The seller may choose to retain title to certain machinery and equipment and lease it back to the buyer.
  • The purchaser can acquire less than 100% of the company initially and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller’s stock with an option to acquire an additional 10% a year for three years based on a predetermined formula. The seller will enjoy 30% of the profits plus a multiple of the earnings at the end of the period. The buyer will be able to complete the transaction in a two-step process, making the purchase easier to accomplish. The seller may also have a “put” which will force the buyer to purchase the remaining 30% at some future date.
  • A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 in the part of the business that was “spun-off” until the original transaction is paid off.
  • A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.
  • Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.

Although the above suggestions will not solve all of the pricing gap problems, they may lead the participants in the necessary direction to resolve them. The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience and most of all – imagination.

Key Items Necessary for Selling a Business

  • Three years of profit and loss statements
  • Federal taxes for the same three years
  • Current list of fixtures and equipment
  • The lease and related documents
  • Franchise agreement (if applicable)
  • List of encumbrances, loans, equipment leases, etc.
  • Approximate amount of inventory on hand
  • Names of outside advisors with contact information
  • Marketing materials, catalogs, promotional pieces, etc.
  • Operations Manual (if available)
  • Brief history of business

What Makes a Business Unique

Most business owners think that their business is unique. There are obviously many different attributes that can make a business stand out from others. However, there are some key factors that make a business both unique and, at the same time, make it more valuable in the marketplace and more desirable by prospective purchasers. Just as importantly, these unique factors also need to be generally transferable to a new owner. Here are some key ones:

Intangible Assets
One example of an intangible asset could be a long-term lease for a great location that is transferable to a new owner. Other examples include a mailing list of current and past customers, a popular franchise relationship, a well-known product line such as Hallmark, or a well-established mailing program designed to attract new customers or clients. Trademarks and copyrights are some other examples of intangible assets.

Difficulty of Replication
For example, in most jurisdictions, liquor licenses are doled out by population or on some other limited basis. One can not just decide to rent some space and open a liquor store. Franchises often limit the number of units in a geographical area. Selling certain brand collectibles is a license not granted to just any store.

Proprietary Products, Services or Technology
A business owner may have developed, or have had developed, software unique to their business which is a key to its success. Or the proprietary item could be something as simple as a secret recipe for a food item, sauce or other food product unique to a restaurant.

Reputation
There is the pharmacy that is known all over town for delivering prescriptions or other medical needs. And there is the hardware store that will still sharpen knives or fix screens. Then there are the local businesses that have “just what you need” or that special something that makes them known all over town. While these characteristics make these businesses unique, it is up to a new owner to continue them.

When looking at businesses to buy, buyers should look beyond the numbers for the unique qualities that separate a particular business from the pack.

Are You Serious?

There are three good questions to consider before selling your business.

First, “Do you really want to sell this business?” If you’re really serious about selling and have a solid reason (or reasons) why you want to sell, it will most likely happen.

Second, “Do you have reasonable expectations?” You increase your chances of selling if you can answer “yes” to this second question. This can include your expectations about the selling price, the time it will take to sell your business, and the amount of seller financing you are willing to offer.

Third, “What will you do once your business sells?” The time to consider this is before you place your business on the market. This may seem obvious, but many transactions fall through because the business owner did not consider what he or she would do once the business was sold.

A “yes” answer to the first two questions plus having an answer to the third question (other than “I don’t know”) means you are serious about selling.

Selling Your Business? Do-It-Yourself is Risky Business!

When the owner of a business makes the decision to sell, he or she is taking a giant step that involves the emotions as well as the marketplace, each with its own set of complexities. Those sellers who are tempted to undertake the transaction on their own should understand both the process and the emotional environment that this process is set against. The steps outlined below are just some of the items for a successful sale. While these might seem daunting to the do-it-yourselfer, by engaging the help of a business intermediary, the seller can feel confident about what is often one of the major decisions of a lifetime.

1. Set the stage.
What kind of impression will the business make on prospective buyers? The seller may be happy with a weathered sign (the rustic look) or weeds poking up through the pavement (the natural look), but the buyer might only think, “What a mess!” Equally problematic can be improvements planned by the seller that appeal to his or her sense of aesthetics but that will, in fact, do nothing to benefit the sale. Instead of guessing what might make a difference and what might not, sellers would be wise to seek the advice of a business broker–a professional with experience in dealing regularly with buyers and with an eye experienced in properly setting the business scene.

2. Get the record(s) straight.
Although outward appearance does count, what’s inside the books is even more important. Ultimately, a business will sell according to the numbers. The business broker can offer the seller invaluable assistance in the presentation of the financials.

3. Weigh price against value.
All sellers naturally want to get the best possible price for their business. However, they also need to be realistic. To determine the best price, a business broker will use industry-tested pricing techniques that include ratios based on sales of similar businesses, as well as historical data on the type of business for sale.

4. Market professionally.
Engaging the services of a business broker is the key to the successful marketing of a business. The business broker will prepare a marketing strategy and offer advice about essential marketing tools–everything from a business description to media advertising. Through their professional networks and access to data on prospective buyers, business brokers can get the word out about the business far more effectively than any owner could manage on an individual basis.

What Sellers Can Do

In addition to using a 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.

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.

And a Letter of Intent Is…

The Letter of Intent (LOI) is a pre-contractual written instrument prepared by the buyer for the seller, which is usually the preliminary understanding of both parties. The Letter of Intent can also be called Agreement in Principle or Memorandum of Understanding. They all have the same general meaning and lay out the following: What is being purchased and what is not, how much will be paid, and the general terms. It is also meant to be non-binding (more on this a bit later) on either the sell side or buy side.

In any event, most transactions are started with an LOI. The LOI precedes the Acquisition Agreement, better known as the Purchase and Sale Agreement. It is a non-binding agreement subject to the buyer obtaining satisfactory due diligence by both parties.

This is how the LOI has been defined by Stanley Foster Reed, author of The Art of M&A:

“A Letter of intent is a pre-contractual written instrument which defines the respective preliminary understandings of the parties about to engage in contractual negotiations. In most cases, such a letter is not intended to have a binding effect except for certain limited provisions. The Letter of Intent crystallizes in writing what has, up to that point, been oral negotiations between the parties about the basic terms of the transaction. While the Letter of Intent is usually non-binding, it does create a moral commitment and allows the buyer to proceed with the extensive due diligence process with a feeling of confidence. Conversely the seller is required to withdraw the company from the marketplace and not discuss the potential sale with anyone else.”

The elements of the Letter of Intent are as follows:

  • The price of the company
  • The form of purchase: Is it a stock or asset sale? What is being purchased and what is not?
  • The structure of the sale: Specifications about cash, notes, stock, non-competes or consulting agreements, contingencies, etc.
  • Management contracts: Specifics about for whom, duration, and incentives
  • Closing costs and the responsibilities of the buyer and seller, such as environmental due diligence and title searches
  • Representations and Warranties: Boilerplate legal statements
  • Brokerage fees: Who pays and how much?
  • Timing for completion: Drop-dead date for due diligence and financing period; How long before money is exchanged and final closing takes place?
  • Insurance: Proof of insurability; What happens with policies?
  • Disposition of earnings before closing and viability of non-ordinary expenditures before closing (conduct of business)
  • Access to books and records, key customers, and key employees prior to closing
  • Disclosure of any outstanding non-compete agreements or obligations with third parties
  • Stipulation of confidentiality of buyer (a breach could cause the seller to sue the buyer): The buyer promises not to disclose information about the seller to outsiders and to not disclose that negotiations are underway.
  • Seller will take the company off the market for a designated period of time of forty-five to sixty days (a breach could cause the buyer to sue the seller).

The LOI is at the heart of the transaction and reveals key issues early on in the process. The signing of the Letter of Intent begins the buyer’s due diligence process and his or her ability to secure the necessary financing. Although the LOI is just the beginning of a lot of necessary paperwork, both sides will assume that the LOI represents the basics of the deal and that they have reached an agreement in principle.

Selling Your Business? Not So Fast

Most individual company owners only sell one business in their lifetime. 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 advisors such as intermediaries, lawyers (only those with deal experience) and accountants are necessary.

Why Deals Fall Apart

There are lots of reasons why the sale of a business falls apart. The reasons can be grouped into four major categories: those caused by the buyer; those caused by the seller; those caused by a third party; and those caused by “acts of fate”. (Anything that does not fit the first three categories can be lumped into this fourth category of things that just happen.)

Sellers

Some sellers really don’t a valid reason for selling. Without a strong commitment to selling, a deal is very difficult to hold together. Some sellers are just testing the waters. Others are holding out for a price that is just not supportable by the numbers. Sellers who didn’t check with their tax advisors or other outside advisors may be in for some surprises forcing them to withdraw from a pending sale. An unusual, but common, reason is that the seller panics about what they will do once the business is sold.

Buyers

One could almost change the Seller’s information above and label it Buyers. Buyers may discover some unknown (or unmentioned) problem, such as an environmental issue or governmental one.
Many buyers realize during the due diligence process that they aren’t cut out to run a business. Or, they can’t make that “leap of faith” necessary to buy their own business.

Third Parties

Landlords are probably the leading third party cause of a sale not being completed. The next biggest cause comes from outside advisors giving overly aggressive advice to buyer and/or sellers.
Many outside advisors, in their zeal to assist their clients, forget that the goal is to put the deal together.

Acts of Fate

This includes everything else! The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business. Problems may arise, unknown to either party, from federal, state or local government agencies.

Your professional business broker is aware of all of the reasons outlined above and knows how to deal with them. Although business brokers cannot provide legal advice, they are quite familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in business transactions. These attorneys will usually be more efficient and cost-effective than attorneys who do not specialize in business transactions.

Pre-Sale Tuneup

Business owners are often asked, “Do you think you will ever sell your business?” The answers vary from: “Only when I can get my price” to “Never” to a realistic “I don’t really know” with everything else in between. “When will you sell your business?” is often asked, but very seldom answered. Certainly, misfortune can force the decision, but no one can predict this event. Most don’t believe or accept the old expression that advises, “It is always a good idea to sell your horse before it dies.”

There is an also an old adage that says: “You should start planning on exiting your business the day you buy or start one.” You can’t predict misfortune, but you can plan on it. Unfortunately, most sellers wait until they wake up one morning, and just drive around the block several times working up the courage to begin the day working in their business. This is a common sign of “burn-out” and is an-going problem with small business owners. Or, they face family pressure to start “taking it easy,” or to move closer to the grandkids. Now what?

There are really only four ways to leave your business. Obviously, the easiest is to put the key in the door and walk away. It’s also the worst way! The years of hard work building a business has a value. Another way is to transfer ownership to one’s children or child. Assuming one of them is interested and capable, it can mean a successful transfer and a possible income stream. A third way is to sell it to an employee. The employee may know the business, but may lack the interest or skill for ownership or the funds necessary to pay for it. The fourth way, and the one taken by the majority of small business owners, is to sell it and move on. Every business owner wants as much money as possible when selling, so now may be a good time to begin a pre-exit or pre-sale strategy. Here are a few things to consider.

Buyers want cash flow.

Buyers are usually buying a business with a cash flow that will allow them to make a living and pay off the business, assuming it is financed – and most are. Buyers will look at excess compensation to employees and family members. They will also consider such non-cash items as depreciation and amortization. Interest expenses along with owner perks such as auto expense, life insurance, etc., will also be considered. A professional business broker is a good source of advice in these matters.

Appearances do count.

Prior to going to market, make sure the business is “spiffed up”. Do all of the signs light up properly at night? Replace carpet if worn; paint the place and replace that old worn-out piece of equipment that doesn’t work anyway. If something is not included in the sale – like the picture of Grandfather Charlie who founded the business – remove it. An attractive business will sell for much more than a tired and worn-out looking place.

Everything has value.

Such items as customer lists, secret recipes, customized software, good employees and other off-balance sheet items have significant value. They may not be included in a valuation, but when it comes time to sell, they can add real value to a buyer.

Eliminate the Surprises.

No one likes surprises, most of all, prospective buyers. Review every facet of your business and remedy any problems, whether legal, financial, governmental, etc., prior to placing your business up for sale.

Your professional business broker can assist in all facets of preparation. They know what buyers are looking for and they also are familiar with current market conditions.

Thinking About Selling?

Here are some tasks business owners should consider completing before going to market to help their
businesses sell.

  • Remove any items not included in the sale. That family heirloom portrait behind the counter of Grandfather William, founder of the business, should be removed.
  • Remove or repair any non-functioning equipment.
  • Prepare an operations manual to show a new owner all the functions of the business, how things are done, the major customers and suppliers, samples of advertising, and any other information that would help a new owner manage and operate the business.
  • Take care of any outstanding bills and resolve any legal, tax, or governmental issues.
  • Bring your financial statements up to date, and have your accounting professional prepare them for a buyer’s inspection.
  • Clean up the business inside and out. Fill the shelves, clean up the inventory, and paint the interior if necessary.

When Is the Best Time to Sell Your Business?

Many experts say that the best time to sell is when the business is better than it’s ever been. This may be good advice, but few follow it. Why sell when business is good? You just suffered through a few not-so-great years and now the experts are telling you to sell? Right or wrong – good or bad – the decision to sell is generally event-driven. For example: declining health, a partnership break-up, personal issues, too much competition, family member elects not to purchase the business, etc. Retirement sounds like a good reason, but it has no time pressure, unless a seller has made the decision to retire at a certain age.  Even then, when the seller realizes that he or she will have nothing to do after a sale…the idea loses its appeal.

However, one thing that a seller can do, without creating any pressure about selling or not selling, is to take a bit of time every year and prepare – just in case. This means tying up loose ends. Make sure financial records are current and complete, leases reviewed and renewed if necessary, any litigation resolved if possible, licenses and permits updated, agreements and contracts renewed and updated if necessary. You could call this eliminating the surprises, and you could also call it good business.
By doing this, if a potential sale comes out of nowhere – you’ll be ready.

Confidentiality Agreement – What Is It ?

Confidentiality Agreement – A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.

It is common practice for the seller, or his or her intermediary, to require a prospective buyer to sign a confidentiality agreement, sometimes referred to as a non-disclosure agreement. This is almost always done prior to the seller providing any important or proprietary information to a prospective buyer. The purpose is to protect the seller and his or her business from the buyer disclosing or using any of the information provided by the seller and restricted by the confidentiality agreement.

These agreements, most likely, were originally used so that a prospective buyer wouldn’t tell the world that the business was for sale. Their purpose now covers a multitude of items to protect the seller. A seller’s primary concerns are to insure that a potential buyer doesn’t capitalize on trade secrets, proprietary data or any other information that could essentially harm the selling company. A concern of the prospective buyer may be that similar information or data is already known or is being developed by his or her company. This can mean that both parties have to enter into some discussion of what the confidentiality agreement will cover, unless it is general in nature and non-threatening to the prospective buyer.

A general confidentiality agreement will normally cover the following items:

  • A general confidentiality agreement will normally cover the following items:
  • The purpose of the agreement – it is assumed that in this case it is to provide information to a prospective acquirer.
  • What is confidential and what is not. Obviously, any information that is common knowledge or is in the public realm is not confidential. What information is going to be disclosed? And what information is going to be excluded under the disclosure requirements?
  • How will confidential information be handled? For example, will it be marked “confidential,” etc?
  • What will be the term of the agreement? Obviously, the seller would like it to be “for life” while the buyer will want a set number of years – for example, two or three years.
  • The return of the information will be specified. For example, if the sale were terminated, then all documentation would be returned.
  • Remedy for breach or determine what will be the seller’s remedies if the prospective acquirer discloses, or threatens to disclose any information covered by the confidentiality agreement.
  • Obviously, the agreement would contain the legal jargon necessary to make it legally enforceable.

One important item that should be included in the confidentiality agreement is a proviso that the acquirer will not hire any key people from the selling firm. This prohibition works both ways: the prospective acquirer agrees not to solicit key people from the seller and will not hire any even if the key people do the approaching. This provision can have a termination date; for example, two years post-closing.

The sale of a company involves the disclosure of important and confidential company information. The selling company is entitled to protection from a potential acquirer using such information to its own advantage.

The confidentiality agreement may need to be more specific and detailed prior to commencing due diligence than a generic one that is used initially to provide general information to a prospective buyer.

Tips on Maintaining Confidentiality

  • Use a code word or name for the proposed merger or acquisition.
  • Don’t refer to any principal’s names in outside discussions.
  • Conversations concerning the merger or acquisition should be held in private.
  • Paperwork should be facedown unless being used.
  • All documents should be kept under lock and key.
  • Important data maintained on the computer should be protected by a password.
  • Faxing documents should be done guardedly.