Price or Terms: The Structure of the Deal

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

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

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

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

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

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

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

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

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

Selling Checklist

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.

Is Your Business Saleable?

Many business owners probably have asked themselves this question. There are many unique and different types of business. Some fill very small niches while others have carved out a unique product or service while still others require a unique or very specialized talent, knowledge or experience. An owner of a “unique” or at least unusual business may feel that there is no one out there who would buy it.

Almost all businesses are saleable, but the big question is: Is the seller willing to sell? Because of Internet marketing and other new technologies, business brokerage professionals know how to reach potential buyers world-wide. Somewhere there is a buyer for almost every business. Locating the right buyer is the job of the business broker professional, who recognizes that the seller’s willingness to sell is the key. Why is a seller selling; what is important and what is not. If a business owner just wants to see what the market might pay for the business; or hopes to “make a killing” on a sale – it most likely won’t sell.

Gauging what is most important in the selling process is very important. Following are some critical factors that every seller or would-be seller should assess:

  • Full price
  • Down payment
  • Keeping existing employees
  • New owner’s plans for the business
  • Confidentiality
  • Selling costs
  • Buyer qualifications
  • Keeping the business locally
  • Providing jobs for children/relatives
  • Structure of the sale

There may be other factors that are important. Keep in mind that every one comes with a string attached. What are the most important ones? Will you bend on them? Will you lose a sale over it? Businesses with a broad appeal and a successful track record are in a much better position to stand firm on the important factors. The unique or niche businesses or those with a less stellar track record may have to be willing to bend on any or all.

Sellers should tell their business broker professional what is really important – and take note of the one or two factors that could be “deal-breakers.”  Remember: almost all business can be sold, but every sale requires a willing buyer – and a willing seller.

You Want How Much for Your Business?

This is often a prospective buyer’s first response when given the price of a seller’s business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price as “blue sky.” Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an “arm and a leg” for the business. Goodwill has been called many things – very few of them good.

However, today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think “Google,” which by now may have achieved the same name recognition as Kleenex. If another search engine company could use that name, the business could be worth millions – even billions. The technology behind the name has a lot of value, but it’s important to remember that the name recognition or brand name, which is known all over the world, is also where the big bucks lie.

How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (What is the value of the secret recipe for Coke?), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included.

Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald’s just mentioned, it may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of “for sale” stainless steel equipment. The real value is the name and what it represents to the dining public.

For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected,  product and specific service names should be trademarked, inventions patented. There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.

Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.

For those who are considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is still hung up on buying the stainless steel equipment, we have a warehouse full of it for sale!

A Business Owner’s Report Card

How does someone else, for example, a potential buyer, rate your business on the issues listed below?   Rate your business and yourself on the time-honored “A” to “F” scale.  You can even use a plus or minus.  What’s your average? Too many business owners operate on gut feel or “from the heart.”  Nothing wrong with that; many people start or buy their own business and operate it successfully with nothing more tangible than this kind of factor. But, every now and then, perhaps once a year, seize the moment and take a more realistic look at your business.  Grade yourself, using the following business report card as yardstick:

1.    Difficulty or the lack of competitive entry
2.    Stature of the business or product . . . exciting/glamorous
3.    Perceived level of required expertise – or licensing
4.    Ability of the business to secure funding — seller carry-back
5.    Volatility of business/customer loyalty
6.    Diversity of customers and/or suppliers. Exclusives?
7.    Length of business – history
8.    Reliability or fuzziness of financial records
9.    Key-man syndrome
10.    Severity of business seasonality
11.    The people factor
12.    Hours of operation
13.    Hazardous work, work place, products, or neighborhoods
14.    Bad lease – no lease
15.    Owner to stay
16.    Trend or erratic numbers –non recurring
17.    Goodwill (Blue Sky) as percentage of price
18.    Sparkling physical appearance or needing upgrade
19.    Regular or home office
20.    Remote location
21.    Contemporary and ship-shape equipment
22.    Franchised or Independent
23.    Visible expansion opportunity
24.    Loyal key employees in place
25.    Broker involved with deal
26.    Potential
27.    Name and reputation

Is It Time to Make Some Changes?

One of the major advantages of small and mid-sized businesses is that it is much easier to make changes with this category of business than it is with the larger kind. The larger company can become so  mired in bureaucracy that it can’t turn on a dollar much less on a dime.  Changes can be a new product or service, expansion into new markets or focusing on existing markets, or a change in direction or positioning.

If your business is small or mid-sized, this might be the time to consider whether change, no matter how minor, might  increase business.  For example, if you’re in a retail business, would a new product or product line increase sales without increasing costs?  If you’re in a service business, are there some new services that can be offered, or existing ones expanded?  It is better to attempt a change rather than not to try one, because in the small and mid-sized business, strategies for change usually can be withdrawn or modified without inordinate damage to the existing business.

One change increasing in popularity is co-branding.  It movement manifests itself in a variety of business combinations, one of the most common being the gas station and convenience store or mini-mart.  Food franchises are also co-branding because one company may own or franchise several brands.  KFC and Taco Bell may share the same premises and kitchens.   Many of the travel plazas will have, for example, a Burger King, a Popeye’s Chicken and a Cinnabon’s (cinnamon rolls) joined together. There are coin laundries that also house espresso bars, tanning salons, and there are small convenience stores that sell soaps and other laundry items for use in washers and dryers, right along with snacks and other products.

Many other small businesses are adding other products and/or services to their existing business.  Even some movie theatres are adding fine dining as a complement to the traditional movie to create a whole entertainment experience.  Perhaps your business would profit by adding something else to the mix. All it takes is a little imagination, some homework, perhaps a trial run, and the courage to give it a try.

Selling Price Defined

When the time comes to sell your business, what makes up the selling price. What is it that you are selling and the buyer is buying? It is important that the selling price be defined in such a way to avoid any confusion. Below you will find some sample wording used by business intermediaries to define the selling price. Keep in mind that this is sample wording only and is presented here merely for informational purposes.

  • The term “selling price” shall include (a) the selling price of the assets acquired plus any obligations assumed by the purchaser, (b) if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.
  • The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:

(a)    The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein.  Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.

(b)    All future, contingent or undetermined amounts in whole, such as an “earnout.” The commission shall be based on the actual amount of such future or contingent payments as and when they are received.

(c)    The current fair market value of all non-cash items such as securities, notes or other property.

(d)    Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner’s historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.

(e)    The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company’s financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company’s business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.

Questions Business Buyers Want Answers To

If you are even thinking about selling your business, it’s important to know the questions that buyers generally want answers to. For example, the first question almost always asked by buyers is: If this is such a good business why is it for sale? How you answer this question can make or break a sale. A vague answer can discourage buyers from further consideration of your business, as they may assume the worst.

If you say you are “burned out’ or just ready to try something new – that’s fine. If you’ve owned and operated the business for 10 to 15 years, buyers will most likely accept your reason for sale and continue their investigation. However, if you’ve only owned and operated the business for two years or less, a prospective buyer may find it concerning that you are already burned out or ready for something new.

If you’re sick, be open about what the problem is; otherwise buyers will think you are just sick of the business. The worst thing a seller can do is to fudge an answer or not provide a completely honest answer. Buyers will, most likely, see right through the given reason for sale and walk away. So, even if you really are tired of or just plain hate running your own business, be up front and explain why. Honesty is always the best policy.

It is also a good policy to engage the services of a professional business broker. Brokers have been through many transactions and can help a prospective seller deal with the reason for sale as well as the other questions a buyer may have. Here is a brief list of other questions buyers often ask and business brokers deal with all of the time:

•    Why should I buy an existing business rather than start one myself?
•    How are businesses priced?
•    What should I look for?
•    What does it take to be successful?
•    What happens if I find a business I want to buy?
•    Do I need outside advisors?

In addition, buyers often want answers to some more specific questions such as:

•    How long has the business been in business?
•    How long has the present owner owned the business
•    How much money is the business making?
•    Are the books and records readily available?
•    Will the new owner help me learn the business?

These and many other questions are ones that business brokers deal with every day, equipping them to help you prepare honest and useful answers.

What Happens If?

You may not have any intention of selling your business today. But, what happens to your business if you get hit by a truck, fall ill or are injured in some other way making you unable to operate your business for a fairly long period of time? Will your spouse step in? Do you have a trusted employee that can run things? Now might be a good time to give this some thought and discuss it with family and advisors.

You have spent time, effort and money building your business. Your business is probably your and your family’s biggest asset. So, what happens to this asset if one of the unfortunate events mentioned above actually occurs? Without some strategies to deal with the unexpected, your business could be in serious trouble by the time you recover and return to work. Or worse, if you fail to survive an illness or injury, your family/heirs will be forced to create a plan of action to run the business or, at least, operate it until it can be sold. The obvious time to come up with a plan for the unexpected is before it happens.

This type of plan is different than an exit strategy. An exit strategy provides a plan that can be followed for a planned retirement or cut-back. Illness, accidents and death are seldom planned events. They are sudden events where the owner and operator of a business becomes incapacitated and, if there is not a written plan of action the business could find itself in jeopardy.

This written plan of action should outline your wishes in the event of illness, injury or death. Is there someone who can run things until your business is sold? If you are the main cog in the company’s success and you are not able to be there, how will your customers and suppliers feel about doing business with your company? Maybe now would be a good time to get key person insurance, increasing your own life insurance to cover taxes in case of death. It may also be a good time to pick a successor – just in case. If there isn’t someone who could take over, is there someone who could at least keep things operative until the business is sold? Maybe it’s time to have your spouse or one of your children learn something about the business – again, just in case. Maybe you have an employee who could keep things running until the business is sold or until you are able to return to work.

In addition to your family and advisors, it might also pay to talk to a professional business intermediary. You may not be ready to sell, but if selling becomes a necessity in the future, a consultation with a business intermediary can provide you with a lot of valuable information about the sales process to help you plan now.

Increasing the Value of Your Business

Considering selling your business? Just want to increase the value of your business? Here are some areas to look at that can fairly quickly increase profits, which are, after all, a main building block in creating value.

•    PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.

•    CUSTOMER SERVICE: Despite all of the above Elevating the quality or amount of customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.

•    EXPENSES: Owners should review what they pay for inventory, supplies, utilities, insurance, technology and any other expenses. Are you getting the lowest price possible? Are you taking advantage of all available discounts, etc.? It may pay to check pricing from other suppliers and vendors. Every saving increase profits and subsequently profits.

•    INVENTORY: In some cases inventory levels may be higher than necessary. Retail operations want their stores to look “busy,” but they don’t need a basement or warehouse full of inventory. In today’s fast-moving economy, inventory can be supplied almost on demand – in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.

•    OUTSOURCING: Some services, especially in today’s environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.

•    EMPLOYEES: Now may be the time to get rid of any disgruntled employees. Happy and contented employees make for a profitable business.

These are just a few areas to consider to help increase profits and, subsequently, increase value.

Unreported Income: “Show Me the Money!”

Prospective buyers don’t want to hear about “what the business really makes” – they want to see the books and records that show what is down in black and white. Here  is the old story about proper accounting procedures, or lack of:

A Greek restaurant owner had his own bookkeeping system.  He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in the cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register.  When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods.  “I don’t know how you can run a business that way,” he said.  “How do you know what your profit is?”

“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back.  Today, your brother is a doctor.  Your sister is a speech therapist, and you’re a CPA.  Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement.   We have a good business and everything is paid for.  Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”

Great story and it is probably an accurate depiction of many small businesses, even in today’s world. Unfortunately, today’s buyers are not going to buy a business—not for anywhere near what the business may actually be worth in the marketplace—without checking the books and records. Buyers will not pay for what they can’t see. Some sellers want it both ways. Since they haven’t reported this income to anyone, they haven’t paid taxes on it; and now they want to sell it as a real number. They also seem to forget the most important part – “skimming” is against the law.

Joseph Bankman, a professor of tax law at Stanford University Law School said, “Nothing is as good as taking half your income off the books to start with; that’s better than any phony deduction. That’s the biggest single source of revenue loss in the tax system.” What these sellers may fail to realize is that the Internal Revenue Service (IRS) has audit guides for many different businesses. It tells them, for example, how to roughly calculate annual sales and expenses of a pizza place by tracking its purchase of cheese. Any seller who doesn’t think that the IRS can’t figure out income and expenses of most businesses is kidding herself. Too many small business owners think that they are getting away with it – but they just haven’t been caught yet. If they kept accurate financial records they probably would get a much higher price for their business, most likely making up for more than what they would have skimmed.

What happens is this: a business owner gets ready to sell, realizes that due to his or her unreported financial dealings, the business won’t sell for anywhere what he had hoped for. Now he is in the position of having to reveal to a prospective buyer how he is skimming from the sales, paying help under the table to avoid the usual employee costs, or padding expenses. Buyers do not look favorably on sellers who attempt to justify their price by revealing how they are cheating the government(s).

Here are some tips for business owners who are considering selling:

•    Plan now to maintain accurate financial records. When it comes time to sell, you will be able to show a prospective buyer where the money is and what it was used for.

•    Keep in mind that a selling price is usually based on the cash flow of the business. The dollar you hide today will most likely be worth two or three times that when it comes to selling price. Think long-term, not short-term.

•    Talk to a business broker professional. He or she can provide some education about  how businesses are priced. They can also offer suggestions on how to gather the necessary information for a prospective buyer.

By following the suggestions above and reporting all income, by taking only legal deductions and maintaining accurate financial records, when it comes time to sell and the buyer says “Show me the money” – you can!

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.