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.

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.

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

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.

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.

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!

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.

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 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.

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.