The Highest Price Vs. The Best Deal

Naturally, sellers want the highest price they can get for their business. In come cases, however, it might not be the best deal. For this reason, every offer should be scrutinized carefully. When an offer is presented, the first thing a seller looks for is the price. If it is lower than anticipated, the seller’s first reaction is to give it back, initiating the case for its being much too low. A seller should consider an offer carefully and avoid a hasty reaction.

Here are a few alternatives that might offset a lower price:

•    an offer with no or very few, and easily satisfied contingencies
•    a consulting agreement or other deferred compensation
•    a quick closing
•    all cash, if that’s important
•    employment contracts with relatives or long-time employee(s)
•    business vehicle to remain with the seller
•    buyer has a long success record indicating long-term survival
•    short-term payment period if seller financed

When a professional business broker is involved, he or she can point out those areas that may offset the price, down payment or the structure of the deal. After all, the important thing is not what a seller gets, but what he or she gets to keep!

What’s Selling Now?

A recent survey revealed the following percentage breakdown of last year’s business sales by business types. The information was furnished by business brokerage firms nationally and compiled by Business Brokerage Press.       

Retail businesses 17%
Food & Drink related business 14%
Auto related businesses 9%
Distribution type businesses 11%
Manufacturing businesses 16%
Service type businesses 25%
Other 5%
Professional Practices 4%

Figures rounded

Service type businesses include dry cleaners, quick print, video stores, etc.  Other businesses include coin laundries, delivery, product, and vending routes, and any that don’t fit into the other categories listed.

What does this mean to you as a business owner?  It indicates that service type businesses seem to be creating the most activity from business buyers, followed by retail and the food and drink sector.  The service sector has also been the leader in businesses sold by business brokers for the previous two years. This coincides with the growth nationally in the service sector coupled with the broad range of businesses included in it.

The food and drink sector, which includes restaurants, fast-food, taverns and the like, has always been a popular one for buyers. One reason is that most people frequent these types of businesses on a regular basis and therefore are familiar with them. Plus, there has always been a certain “celebrity” status connected with this sector.

However, statistics aside, today’s buyer has more knowledge, experience and education than ever before and is willing to consider almost any type of profitable business.

Where Your Business Is Located Can Affect Its Price

The most recent editions of BizComps, the leading resource for comparable sales data (www.bizcomps.com ) has some interesting information on small business pricing based on the three major regions of the country – Eastern states, the Central states and the Western states.  They cover thousands of actual business sales over a ten year period.  Here is the breakdown:

Location                        Average Sale Price

Western states                    $299,500

Central states                    $221,951

Eastern states                    $285,941

Using the Western states as the base, since that region of the country has the highest average price business, businesses in the Central states sell for 74 percent of the average price in the Western states; and the average price in the Eastern states is 78 percent of the Western states average.

What Will Your Buyer Be Looking For?

The buyer loves your business; it’s just what he or she has been looking for.  He has reviewed your financial statements and has made an offer contingent on several items.  You’ve reviewed the offer and it looks fine, so what’s next?  The contingencies in the deal mean that the buyer or his or her advisors have some concerns. In larger deals, this process might be called due diligence.  However, in the smaller business sale, the items of concern are usually spelled out as opposed to a general review of everything.  The reason for this is that larger businesses or companies have a lot more areas of concern than the typical smaller business.

Most contingencies concern the review of financial statements and/or business tax returns.  Others may involve lease issues, the seller staying on for a set period of time, or some very specific issue such as repaving the parking lot, if the landlord won’t or isn’t required to.

Unfortunately, some contingencies may be hiding other ones such as a list of fixtures and equipment included in the sale.  Sounds easy on the surface, but the seller forgot that two pieces of equipment currently not in use need repair or the walnut desk in the office belongs to Grandfather Smith and is not included.  Or, while reviewing the lease, the buyer discovers that the landlord requires that the business must close by 9:00 PM or some other restriction applies and was not disclosed. Deals have fallen apart over similar issues.

Most contingency problems can be resolved prior to the business being placed on the market.  The seller should do all of the following:

•    Check the status of all furniture, fixtures and equipment (FF&E).  Remove any that are not included in the sale or are inoperable if not in use –  or make repairs.

•    Review any contract such as the lease, any equipment leases, and contracts that will be assumed by the buyer.  Make sure there aren’t “clinkers” in them. If there are, disclose them to a potential buyer out front – and be sure your business intermediary is also aware of them.

•    Be prepared to answer questions such as:

– Are there any environmental, governmental or legal issues?
– How long will you be willing to stay and work with a new buyer – at no cost?
– Will the employees stay?
– Why was last year the worst one in years?
– Why was last year the best one in years?

The list could go on and on, but sellers need to be ready. Buyers don’t like surprises.  A business broker professional knows the process like a book and can be invaluable in preparing the business for the marketplace.

A Seller’s Major Concerns

For many owners, selling their business is a new experience, and there is always the fear of the unknown. Selling a business is a not only a major economic decision, but it can also be an emotional one. After all, many business owners have spent many years, and a lot of hard work building the business. When the decision to sell is made, there will inevitably be accompanying concerns. However, when faced head-on, these concerns can usually be addressed and resolved. Here are some of the major concerns and ideas on how to deal with them.

Getting the Highest Possible Price

Every seller wants to get the highest possible price for their business – that’s a given. Here is an old, but very accurate definition:

  • The Asking Price is what the seller wants.
  • The Selling Price is what the seller gets.
  • The Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Today’s buyers are more educated, more sophisticated, and more demanding than ever before. They seem to be searching for a “sure thing” – yet, many are afraid to make the leap-of-faith necessary to make the final plunge. Buyers are also more numbers conscious than in prior years. Somehow they think they can buy a business and continue with business as usual.

Sellers, on the other hand, must understand that the buyer may buy with an eye to the future, but is only willing to pay for the past performance of the business. The buyers believe that the future of a business is up to them and they should reap the benefits of their efforts. The value or price, however, in their minds, is based on what the seller has done with it.

In order to obtain the highest possible price, the seller should make sure that the financial records are crystal clear. Any issues, whether, financial, operational, legal, or environmental, should be addressed and resolved prior to putting the business on the market. Hidden issues have sabotaged more sales than anything else.

This may seem a contradiction, but the seller must go to market initially with a fair price. Too many times, a seller’s first inclination is to start with a very high, and very unreasonable, price. They may feel that the business is really worth what they are asking and may be unwilling to accept the fact that the price is unreasonable. The thinking is that an interested buyer can always make an offer. Interested buyers will feel that the price is so high that a fair offer would not even be considered. A professional business broker can advise buyers on what is reasonable and what is not.

What is a Contingency?

A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.

It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer’s approval of the seller’s books and records.

The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.

Here are some tips on contingencies:

  • There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
  • It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say – “it ain’t going to happen.”
  • Contingencies should be limited to very important or critical issues – those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
  • Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
  • Contingencies come in all sizes and shapes. Very few offers don’t contain at least one, and usually more than one. They are an inevitable part of selling – and buying a business. A business broker knows what is reasonable and what is not.

A Lease Primer

The following is provided as a simple explanation of common leasing arrangements within a small business transaction. It is not intended to provide legal advice.

The New Lease

A new lease is created generally when the prior lease has expired or is about to and when there are going to be substantial changes to the existing lease. A new lease would be executed between the purchaser of the business and the landlord. It is a new document either drafted by an attorney or used in a standard form that is available at stationery stores and in many books. A new lease involves negotiations between the owner or purchaser of the business and the landlord.

The Sub-Lease

A sub-lease is nothing but a lease within a lease. For example, if the seller of a business is permitted to sub-lease the premises, he or she, as far as a new owner is concerned, is the landlord. In this case, the actual landlord is still dealing with the seller and has no relationship with the buyer. Obviously, the seller needs the permission of the landlord or lessor to assign or sub-lease.

The Assignment of the Existing Lease

This is the most common form of allowing a buyer the use of the premises in which the business is located. In an assignment, the seller is “assigning” all rights to the existing lease to the new buyer. Once the assignment is executed, the seller usually has no more rights in that lease. However, in most assignments, the landlord reserves “all rights” in the lease. In other words, the seller, who may be a tenant or an assignee, is still responsible to the landlord if the buyer does not perform.

Don’t Take the Lease for Granted

The cliché is that the key to business success is: location – location – location. If you own a business in which the location is an important reason for the success of the business, and you are considering selling, then the lease is a very critical issue in the sale. The time to deal with this is not in the middle of a sale, but before you even place the business on the market.

Business brokers can recite many a story where, on contacting the landlord in the midst of a pending sale, they are told that the landlord has other plans for the space when the lease is up next month. Fortunately this is not a common occurrence, but if the lease is an issue, the time to deal with it is now.

The Steps In Dealing with the Lease

The first step is finding the lease.

The second step is to read it.

The third step is to visit the landlord and work out any lease issues.

Before placing your business on the market, you need to see where you stand on the all-important issue of the lease. After reviewing it, set up an appointment to visit the landlord. If there are only a few years left on the lease, see about getting an extension. If you have more than that left, still check into getting an option to renew the lease at the expiration of the present term. After all, if the location works, the longer the lease the better in most cases. It might also be a good time to see if the landlord has ever considered selling the premises. By owning the property, you will never have to worry about leases again.

If location is not important and the business is such that moving it is a non-issue, then obviously the lease is not important. However, if the business is one that is dependent on its existing location, then the lease issue is crucial. The time to iron out any details is before the business is placed on the market.

The Very Expensive Desk Lamp

This is a story based on a true incident – only some of the details have been changed. The buyer and seller were ready to close on a business when the buyer asked to look at the list of fixtures and equipment that were to be included in the sale. After a few minutes reviewing the list, the buyer said that the desk lamp on the owner’s desk was not listed. The seller explained that the lamp was a gift from his parents many years ago and therefore it was not included. The buyer got very upset, stating that the lamp was just perfect for that desk and he wanted it. The seller tried to explain that the lamp had lots of sentimental value, but that he would replace it with another desk lamp. This did not satisfy the buyer, and in order to stop the sale from falling part, the seller agreed to subtract $1,000 from the purchase price to keep the lamp. That made the desk lamp a very expensive one.

The point of this is that when buyers look at a business, they assume that everything they see is included in the sale. Sellers should keep this in mind when selling their businesses. If something is not going to be included in the sale, remove it from the premises prior to any prospective buyer looking at the business. Sellers sometimes think that they can remove the painting on the office wall since their grandmother painted it. The picture really looks good on the wall never imagining that the buyer also will think it looks great on the wall – and the problems begin.

Business broker professionals have seen deals fall apart over a piece of family memorabilia that was never intended to be included in the sale, but was there when the buyer looked at the business. The word to sellers is to remove anything – and the key word is anything – that is not included in the sale. The alternative is to list everything that is not included on the listing agreement, but it is usually less complicated simply to take them home.

One other thing – if there is a piece of equipment that is inoperative, such as the computer on the back desk, or the refrigerator in the basement of the restaurant – get rid of it. Or make sure the listing agreement states that the following equipment is inoperative. Again, it’s really easier just to remove these items.

A professional business broker will see that these potential dealbreakers won’t disrupt the closing.

How Important is the Asking Price?

Depends on whom you are asking. If you’re the seller, you might say that the asking price is too low. The buyer would say, obviously, that the asking price is too high. How can they both be right? Who decides?

Most sellers have an idea of what they want for their business. It can be based on their knowledge of the industry and what similar businesses have sold for. It may be, however, based on just a wish. There is the old, but true, story of the two partners who decided to sell their business. When asked what the price would be, they both responded with the same answer – $2 million. When asked how they arrived at that price, they each said that they wanted to be a millionaire and two times $1 million was $2 million.

Sellers often say that the asking price doesn’t make any difference since it can always be reduced. What they don’t realize is that if the price is not realistic, buyers won’t even look at it. Buyers are aware that they can make an offer, but if the starting point is too high, what they consider a fair price may be so low that why bother even making the offer.

Studies using various data bases comparing actual selling prices of businesses with their asking prices show that the difference is about 15 percent for small businesses. The larger the business, the smaller the spread. Businesses sold for $1 million-plus sell for about 90 percent of the asking price, while smaller ones sell for about 85 percent of the asking price. The important thing to remember is that the data is based on sold businesses only. There is no data, obviously, comparing the businesses that didn’t sell.

Sellers have to keep in mind that starting with too high an asking price may well prevent a very qualified buyer from even looking at the business. You know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn’t. What is the right price? A business broker professional has tools to help sellers arrive at a reasonable starting point. There may be comparable market data based on similar sales. There are methods based on the cash flow of the business and a multiple using other business factors such as location, down payment requirements, competition, annual sales variations and other determinants.

Ultimately it’s the marketplace that decides the ultimate selling price. Serious sellers listen to the marketplace. After all, if 10 buyers are willing to pay X for the business and there are no other buyers, the price is X. The seller doesn’t have to accept that price, but he or she must accept the fact that the market will only pay X for their business.

Since studies of thousands of business sales show that the sales price ends up being, on average, 85 percent of the asking price – so sellers shouldn’t dream or wish for too much.

Why Your Business Won’t Sell

What are the odds of your business actually selling once you have made the decision to sell? Well, if the annual sales of your business are $750,000 or less, research indicates that the odds of your business selling are only 18 percent. If your annual sales are $750,000 to $2 million, your odds increase to 25 percent. If your annual sales volume is above $2 million, the odds increase to 30 + percent. Keep in mind that approximately 75 percent of all businesses have annual sales of less than $750,000.

What does this all mean? To put it bluntly: if you are thinking of selling your business, you have about a one in five chance of it actually selling. This obviously begs the question: why are the odds so poor? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why some businesses didn’t sell-as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.

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

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

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

Tips for a fast sale

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

Here are two major ways to increase the odds that your business will be the one in five that sells:

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

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

The Perfect Business

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

  • a reasonable price
  • a reasonable down payment (hopefully 40 percent of the full price or less)
  • seller financing
  • reasonable sales (hopefully increasing each year)
  • seller earnings of $60,000 or more
  • a compelling reason for sale
  • a desired or popular industry type
  • attractive and strategic location (if important for business type)

There is an old saying that goes something like this: “The worst day of working for yourself is better than the best day of working for someone else.”

Selling Your Business — What’s the Reason?

There was a study done, years ago, that showed that the reason businesses were for sale had a direct relationship to its probability of sale.

Reason for Sale %Reason for Sale %Probability of Sale
Retirement 10-15% 30-35%
Health Problems/Death 15-20% 25-30%
Partnership & Family
Problems/ Divorce
5-10% 15-20%
Burnout/Other Business
Investments
15-20% 15-20%
Under-capitalization 20-25% 10-15%
Insufficient Profits 20-25% 5-10%
Profit Motivated Only 5-10% 0-5%

The above results point out the more serious or valid reason for sale, the higher likelihood that the business will sell. Despite its age the results today would probably be more dramatic. Most of those looking for a business to purchase in today’s market would shy away from businesses that are under-capitalized, showing insufficient profits or any in which the seller was just attempting to sell for profit only. Today’s buyer is better educated, has more knowledge about business and is more wary than his or her predecessor. The financial records better be complete, all information available – and the seller must have a valid reason for sale.

It is evident from the results above that such reasons for sale as: retirement, health issues, family problems followed by “burnout” have the highest probability of sale. Burnout is not a new issue, but it is generally preceded by many years of doing the same thing. It’s difficult to accept burnout from a seller who has been in business for only a short time.

There is an old saying among business brokers and that is that it takes a willing seller – and a willing buyer to complete a successful sale. The moral of all this is that the more valid the reason for sale, the better the chance the business will sell quickly – and without undue problems.

Finding a Buyer Is Just the Beginning

Many people who are selling their business think that once they find a buyer, the business is sold. Unfortunately, the real work is just beginning. Once a buyer is interested, there are the inevitable questions that must be answered. After the questions are answered and the buyer has satisfied himself or herself that the financial aspects of the business are satisfied, the buyer is probably ready to make an offer.

An offer is prepared and it generally contains contingencies or conditions on which the offer is subject to, in addition to offering the price and terms under which the buyer is prepared to pay. Assuming the price and terms are acceptable to the seller, the next step is for the seller to do what is necessary to satisfy the contingencies. These can be as varied to the buyer’s reviewing all of the seller’s financial books and records, a serious look at the lease and its terms to a requirement that the seller pave the parking lot or redo the rest rooms.

Definitions

Offer – an expression of willingness to purchase a property [business] at a specific price [and terms].

Contingency Clause — see Condition

Condition(s) – provision(s) in a contract that some or all terms of the contract will be altered or cease to exist upon a certain event.

Conditional Offer – purchase contract tendered to the seller that stipulates one or more requirements to be satisfied before the purchaser is obligated to buy.

Dictionary of Real Estate Terms, published by Barron’s Real Estate Guides

The first task for the seller is to accept the price and terms then review the contingencies to insure that they are reasonable and acceptable. If the price, terms or contingencies are not acceptable then a counter-offer is prepared and the terms that are acceptable to the seller presented to the buyer. Once the parties agree upon all of these items, then the job of satisfying the buyer’s contingencies is begun. A time period in which all of this must be done is usually specified in the offer. If such a time period was not specified, the buyer could take his or her “own sweet” time before approving – or not. The seller obviously has to furnish the materials and information necessary for the seller to satisfy himself or herself.

If the buyer is satisfied that everything is as represented, he or she signs what is termed a Contingency Removal form. If everything is not satisfactory to the buyer, then the offer can be renegotiated or the sale falls apart and the buyer’s deposit is returned and the seller is now back to square one!

Unfortunately, a lot of time can elapse between the offer and acceptance and the buyer deciding to move forward. Time is the essence of the deal and the longer it goes the more likely that serious problems can develop. If these problems are not addressed promptly, the pending sale can fall apart and then the seller must then look for another buyer and begin the process anew. The professional broker is aware of all of this and can greatly assist the seller in making sure that only serious and committed buyers begin the process.

Let’s assume that the buyer and seller are in agreement on price and terms. Now comes the task of gathering all of the information necessary for an escrow company or closing attorney to draw the necessary paperwork. The seller must also gather the lease information, insurance data, equipment lists, inventory information and everything else necessary to close the sale.

If the buyer is using outside financing, then the seller, along with the buyer, must gather all sorts of financial date to submit to the lender. There are also the various representations and warranties the must be reviewed – and approved, by the parties involved.

As one can see, the path from finding a buyer to the closing of the sale is an arduous one and fraught with problems every step of the way. Only an experienced professional business broker can guide both parties through the maze and insure that every step is addressed and covered satisfactorily.

Sellers – Here’s How Selling Your Business Can be Made Easier

If you’re considering selling your business consulting with a professional business broker is your first step. They can assist in all of the areas mentioned in this newsletter. In addition they can do the following:

  • Greatly increase the number of potential buyers through their own databases and the various Web sites available to them.
  • Help in pricing the business so it will be competitive in the marketplace.
  • Will keep you advised on market reaction.
  • Present only qualified and serious buyer prospects.
  • Handle the details so you can spend your time operating your business.
  • Coordinate all of the paperwork so the sale can be expedited quickly and easily.

Selling a Business?

  1. Prepare for new management. As soon as you make the decision to sell, begin doing what you can to help the business run “on its own.” The business should not, especially now, be just you!
  2. Accept the financing facts. You’ll likely be financing the sale of your business, since banks are traditionally unenthusiastic about loans for the purchase of most businesses.
  3. Make sure your own financials are accurate, detailed, and up-to-date. Get professional help, if necessary, to present yourself well “on paper.” Remember – this means seeing yourself in the same light as a prospective buyer, so rethink all those “perks” and hidden assets.
  4. Spruce up and pare down. Sell unused equipment and inventory. Nobody will want to pay for it – but they might worry it will get tacked on if they see it lying around. This is a good time to see what else needs a bit of spit and polish to make the best possible impression.
  5. Establish a realistic price for your business.
  6. Keep your selling plans to yourself, at least at the outset. Employees might react poorly to your “news,” and you need their stability more than ever at this crucial time.

Selling Your Business — Some Key Questions and Answers

Selling your business is a major decision! You have devoted your time, money and energy to building, running and operating your business. It may well represent your life’s work. You have decided that now is the right time to sell, and you want the very best professional guidance available. This is when working in tandem with a professional business broker can make the difference between just getting rid of the business and selling it for the very best price and terms.

Below are some of the most common questions asked by sellers. The responses are based on both experience and knowledge. If you have questions of your own, ask your business broker professional.

What can business brokers do — and what can’t they do?

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

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

How long does it take to sell my business?

It generally takes, on average, between five and six months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner the business brokerage firm has all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business.

It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments – and support the buyer and his or her family.

Why is seller financing so important to the sale of a business?

Surveys have shown that a seller, who asks for all cash, receives on average only about 70 percent of the asking price, while sellers who accept terms receive on average 86 percent of their asking price. In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of a business selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What happens when there is a buyer for my business?

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

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

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

What can I do to help sell my business?

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

And, finally, your team of advisors must all be working towards the common goal of selling your business for the best price and terms available in the marketplace, and closing the sale as quickly as possible. Only by being as cooperative as possible with everyone involved can your business interests best be served.

Don’t Let Sleeping Dogs Lie

If you’re considering selling your business, and you are employing a professional business broker or intermediary, it’s imperative to be absolutely open with him or her. This is not the time for secrecy — or even for subtlety, especially when it comes to problems. If you’ve been having trouble with your lease, one of your best customers or your fixtures and equipment, spell it out! Any one of these “sleeping dogs” is bound to wake up sometime during the process. After the first growl comes the bite. The sale will get buried deeper than last year’s bone. And the buyer, scared off by the ruckus, will have long since disappeared.

Tell your broker all there is to know prior to the beginning of the marketing effort. Your broker and the buyer are aware that there is no such thing as a perfect business, and buyers are much more likely to deal with the problems of your business during the decision-making process rather than after they have decided to buy.

And it’s not just the sale that’s at stake. Concealing a problem or defect that adversely affects the business can lead to litigation and years in court. It’s not worth it. Problems and defects don’t mean your business won’t command an attractive price. Your professional business broker is prepared to deal with these issues and give you competent advice.

Some sellers try to hide the problems of their business and hope the sleeping dog never wakes up. You’d be well-advised to get him on a good, strong leash instead of letting him “lie.”

The Lease – Buyer and Seller Beware!

The lease is an important issue in many cases, a major issue. Whether you are buying or selling a business, it’s important to understand that if the real estate is not included, the lease is a critical element of the sale process. Other than owning the real estate, there are only three ways the transfer of the business can be handled:

  • A new lease – A new lease can be entered into by the lessor and the new tenant, the buyer.
  • A sub-lease – This can be negotiated between the seller and the buyer. In a sub-lease, the seller of the business becomes the landlord
  •  The existing landlord, who most likely is also the owner of the property, must always approve a sub-lease. In a few cases, the existing lease provides that the tenant has the right to sub-lease.
  • The assignment of lease – This is the most common method of transferring the lease. The seller simply assigns the existing lease to the buyer. The buyer assumes responsibility for the lease, and in most cases, the landlord must approve the assignment. Sellers should be aware, however, that in most cases, they are still responsible for the terms of the lease.

Sellers should take a look at the lease at their business and ask themselves the following questions:

  • Is the lease long enough and the rent low enough to make the business attractive to a potential buyer?
  • Is the rent consistent with similar businesses in the area?
  • Are there any terms or conditions of the lease that might be unfavorable in the eyes of a possible buyer?
  • Most importantly, are you on good terms with the landlord – and can the lease be transferred without any hitches?
  • If there could be any problems with the lease, or the landlord, it’s best to resolve them prior to selling the business. Your business broker professional is a good source to review the lease and its terms from a business sale perspective.

Ten Mistakes that Sellers Make

1. Not knowing what the business should sell for

One of the most costly errors a business owner can make is not knowing the approximate price of his or her business prior to entering the selling process. Although the marketplace ultimately determines the final price, an owner needs to know what the approximate price his or her business is prior to placing the business on the market. Before making the decision to sell, owners should work with someone qualified to place a price on their company.

An experienced business broker has both the technical ability and the market experience to produce the most realistic pricing opinion. The business broker will also be the only alternative for supporting his or her opinion by selling the business.

Fair Market Value

Asking Price is what the seller wants

Selling Price is what the seller gets

Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

2. Not preparing the business for sale

Determining the starting price point is only the first step. Prior to exposing the business to the marketplace, preparation is necessary. A business is certainly not a house, but the same attention to appearance prior to sale is necessary. Financial and legal affairs should be current. Anything a potential purchaser might want to see should be up-to-date, accurate and available for review.

Momentum is very important in business transactions and can make or break a deal. The constant need to develop information for a serious prospect will destroy momentum and with it, possibly, the deal. Demonstrating preparedness places the business in a favorable light and prospective buyers will feel comfortable that everything is in order. Being unprepared can delay a closing, create costly expenditures to play catch-up, and cause prospective purchasers to lose confidence in the deal itself. Too much time almost always works against the deal happening.

3. Not being able to see their business through the eyes of a buyer

This can be very difficult for any seller. It is only natural to see one’s own business in a most favorable light and overlook the blemishes or problems inherent in any business. Sellers have to approach their business realistically, knowing that a potential buyer will be doing the same. By recognizing the deficiencies of their business, sellers are in a much better position to deal with the concerns of the buyer. In fact, the best way to handle any potential problem areas is to bring them up in the very beginning.

4. Not really knowing the buyer

The better you know the buyer, the smoother the transaction. By knowing the buyers, their motives, their interests and their backgrounds, the better equipped a seller is to make informed decisions about whether they are the right people to operate the business. When final negotiations begin, knowing the buyers can help resolve some of the issues that will arise. Are their interests the same as yours? If you, as the seller, are financing the deal, do you feel confident that they can make the payments? The more you know about why a buyer wants to buy your business, the better position you are in to know when to be firm in the negotiations and when to be flexible.

5. Trying to sell the company to a buyer who doesn’t want to buy

There are usually many more potential buyers than there are businesses for sale. The question is — how serious are they? A buyer may indicate a great deal of interest but when it gets down to the wire, he or she may back out of the deal. Some buyers want to buy only on their terms and conditions, some may have too many decision-makers to please, and others only want to buy the “perfect” business. Wasting time on those who aren’t serious about purchasing a business takes away valuable time from those buyers who really want to buy.

6. Being your own worst enemy

Many business owners feel that no one knows their business like they do. They think they can do a deal by themselves. They don’t need, or want, any help. They think they are lawyers, accountants, business brokers and outside advisors all rolled up into one person. Then when the going gets tough, they become impatient and inflexible. They then blame others, usually the buyer, when the deal blows up. As the old saying goes: “The attorney who represents himself has a fool for a client.” The same could be said for the business owner who thinks he can sell his or her own business. Not using outside advisors, such as a professional business broker, is a serious mistake.

7. Not understanding the structure of the deal

Regardless of the size of the deal this could be the scenario: an offer is presented, the seller takes one look at the price, immediately says “no” and refuses to look any further. The price, within reason, is immaterial. The real crux of the deal is how it is structured. Consider the negotiating axiom “You can name the price if I can name the terms.” The terms and conditions are important. A seller may be ecstatic about price only to find that the devil is in the details.

8. Not being able to walk away from the deal

Too many sellers get so involved in trying to put a deal together that they don’t see the big picture. They don’t realize that the deal isn’t a good one. In other words, it’s time to walk away from the deal and go on to the next one. Many sellers don’t want to let the deal get away. Since they have invested a lot of time and effort, and probably expenses, it’s often difficult to just end it. However, in some cases that’s exactly what must be done. If the deal isn’t right, and can’t be fixed, there is no other choice. It’s much better not to do the deal than to do a bad one!

9. Waiting too long to sell

Too many owners wait until the last minute to decide to sell their business. They wait until business is down, or they are completely burned-out, or their business partnership has soured completely. The time to sell is before the emergency happens. The time to sell is when business is good. The time to sell is prior to when exasperation hits. The old adage is that a business owner should think about and plan the eventual sale of the business the day after it is started or purchased.

10. Changing your mind

The sale is progressing nicely, the buyer is happy and the seller well, the seller is contemplating life without the business. He or she realizes that when the business is gone, they will have nothing to do. The business has been a major part of their life for many years. Just before the closing, the seller decides that he or she can’t live without the business and the deal starts to unravel. Sometimes, seller’s remorse arises because a business acquaintance says the price was too low, or there isn’t enough cash involved or offers some other uninformed reason. If it was a good deal in the beginning, don’t let well-meaning outsiders influence the sale. And, if there is even a speck of doubt about selling the business, don’t begin the process. Wait until there is not one shred of doubt.

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!