Are You Ready to Exit?

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If you’ve gone this far, then selling your business has aroused enough curiosity that you are taking the first step. You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself.

Question 1
The first question almost every seller asks is: “What is my business worth?” Quite frankly, if we were selling our business, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.

*Insider Tip:
It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. Only the marketplace can decide what its value is.

Question 2
The second question you have to consider is: Do you really want to sell this business? If you’re really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen. You can increase your chances of selling if you can answer yes to the second question: Do you have reasonable expectations? The yes answer to these two questions means you are serious about selling.

The First Steps

Okay, let’s assume that you have decided to at least take the first few steps to actually sell your business. Before you even think about placing your business for sale, there are some things you should do first.The first thing you have to do is to gather information about the business.

Here’s a checklist of the items you should get together:

  • Three years’ profit and loss statements
  • Federal Income tax returns for the business
  • List of fixtures and equipment
  • The lease and lease-related documents
  • A list of the loans against the business (amounts and payment schedule)
  • Copies of any equipment leases
  • A copy of the franchise agreement, if applicable
  • An approximate amount of the inventory on hand, if applicable
  • The names of any outside advisors

Notes:
If you’re like many small business owners you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.

Make sure the financial statements of the business are current and as accurate as you can get them. If you’re halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper”. As you will see later, pricing a small business usually is based on cash flow. This includes the profit of the business, but also, the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.

Prospective buyers eventually want to review your financial figures. A Balance Sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see income and expenses. They want to know if they can make the payments on the business, and still make a living. Let’s face it, if your business is not making a living wage for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc., and feels that he or she can increase business.

*Insider Tip
The big question is not really how much your business will sell for, but how much of it can you keep. The Federal Tax Laws do determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? There are some tax rules, implemented January 1, 2000, that impact certain businesses on seller financing. The point of all of this is that before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.

10 Tips for a Successful Sale

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1.Sellers should find out the loan value of the fixtures, equipment and machinery prior to a sale. Many buyers will count on using it for loan or collateral purposes. No one wants to find out at the last minute that the value of the machinery won’t support the debt needed to put the deal together.

2.Sellers should resolve all litigation and environmental issues before putting the company on the market.

3.Sellers should be flexible about any real estate involved. Most buyers want to invest in the business, and real estate usually doesn’t make money for an operating company.

4.Sellers should be prepared to accept lower valuation multiples for lack of management depth, regional versus national distribution, and a reliance on just a few large customers.

5.If a buyer indicates that he or she will be submitting a Letter of Intent, or even a Term Sheet, the seller should inform them up-front what is to be included:

  • price and terms
  • what assets and liabilities are to be assumed, if it is to be an asset purchase
  • lease or purchase of any real estate involved
  • what contracts and warranties are to be assumed
  • schedule for due diligence and closing
  • what employee contracts and/or severance agreements the buyer will be responsible for

6.Non-negotiable items should be pointed out early in the negotiations.

7.The sale of a company usually involves three inconsistent objectives: speed, confidentiality and value. Sellers should pick the two that are most important to them.

8.A PricewaterhouseCoopers survey of more than 300 privately held U.S. companies that were sold or transferred pointed out the most common things a company can do to improve the prospects of selling:

  • improve profitability by cutting costs
  • restructure debt
  • limit owner’s compensation
  • fully fund company pension plan
  • seek the advice of a consultant
  • improve the management team
  • upgrade computer systems

9.Sellers should determine up-front who has the legal authority to sell the business. This decision may lie with the board of directors, a majority stockholder, and a bank with a lien on the business, etc.

10.Partner with professionals. A professional intermediary can be worth his or her weight in gold.

Why Your Company Needs a Physical

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Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.

A leading CPA firm conducted a survey that revealed:

  • 65% of business owners do not know what their company is worth;
  • 75% of their net worth is tied up in their business; and
  • 85% have no exit strategy

There are many obvious reasons why a business owner should get a valuation of his or her company every year such as partnership issues, estate planning or a divorce; buy/sell agreements; banking relationships; etc.

No matter what the reason, the importance of getting a valuation cannot be over-emphasized:

  • An astute business owner should like to know the current value of his or her company as part of a yearly analysis of the business. How does it stack up on a year-to-year basis? Value should be increasing not decreasing! It might also point out how the company stacks up against its peers. The owner’s annual physical hopefully shows that everything is fine, but if there is a problem, catching it early on is very important. The same is true of the business.
  • Lee Ioccoca, former CEO of the Chrysler Company said in commercials for the company, “Buy, sell or get-out-of-the-way,” meaning standing still was not an option. One never knows when an opportunity will present itself. An acquisition now might seem out of the question, but a company owner should be ready, just in case. A current valuation may be as good as money in the bank when that “out of the question” opportunity presents itself.
  • One never knows when a potential acquirer will suddenly present itself. A possible opportunity of a lifetime and the owner doesn’t have a clue what to do. Time is of the essence and the seller doesn’t have a current valuation to check against the offer. By the time it takes to gather the necessary data and get it to a professional valuation firm, the acquirer has moved to greener pastures.

Having a company valuation done on an annual basis should be as secondary as the annual physical – it really is the same thing – only the patients are different.

The Deal Is Almost Done — Or Is It?

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The Letter of Intent has been signed by both buyer and seller and everything seems to be moving along just fine. It would seem that the deal is almost done. However, the due diligence process must now be completed. Due diligence is the process in which the buyer really decides to go forward with the deal, or, depending on what is discovered, to renegotiate the price – or even to withdraw from the deal. So, the deal may seem to be almost done, but it really isn’t – yet!

It is important that both sides to the transaction understand just what is going to take place in the due diligence process. The importance of the due diligence process cannot be underestimated. Stanley Foster Reed in his book, The Art of M&A, wrote, “The basic function of due diligence is to assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present, and predictable future of the business to be purchased.”

Prior to the due diligence process, buyers should assemble their experts to assist in this phase. These might include appraisers, accountants, lawyers, environmental experts, marketing personnel, etc. Many buyers fail to add an operational person familiar with the type of business under consideration. The legal and accounting side may be fine, but a good fix on the operations themselves is very important as a part of the due diligence process. After all, this is what the buyer is really buying.

Since the due diligence phase does involve both buyer and seller, here is a brief checklist of some of the main items for both parties to consider.

Industry Structure

Figure the percentage of sales by product line, review pricing policies, consider discount structure and product warranties; and if possible check against industry guidelines.

Human Resources

Review names, positions and responsibilities of the key management staff. Also, check the relationships, if appropriate, with labor, employee turnover, and incentive and bonus arrangements.

Marketing

Get a list of the major customers and arrive at a sales breakdown by region, and country, if exporting. Compare the company’s market share to the competition, if possible.

Operations

Review the current financial statements and compare to the budget. Check the incoming sales, analyze the backlog and the prospects for future sales.

Balance Sheet

Accounts receivables should be checked for aging, who’s paying and who isn’t, bad debt and the reserves. Inventory should be checked for work-in-process, finished goods along with turnover, non-usable inventory and the policy for returns and/or write-offs.

Environmental Issues

This is a new but quite complicated process. Ground contamination, ground water, lead paint and asbestos issues are all reasons for deals not closing, or at best not closing in a timely manner.

Manufacturing

This is where an operational expert can be invaluable. Does the facility work efficiently? How old and serviceable is the machinery and equipment? Is the technology still current? What is it really worth? Other areas, such as the manufacturing time by product, outsourcing in place, key suppliers – all of these should be checked.

Trademarks, Patents & Copyrights

Are these intangible assets transferable, and whose name are they in. If they are in an individual name – can they be transferred to the buyer? In today’s business world where intangible assets may be the backbone of the company, the deal is generally based on the satisfactory transfer of these assets.

Due diligence can determine whether the buyer goes through with the deal or begins a new round of negotiations. By completing the due diligence process, the buyer process insures, as far as possible, that the buyer is getting what he or she bargained for. The executed Letter of Intent is, in many ways, just the beginning.

Buying a Business – Some Key Consideration

  • What’s for sale? What’s not for sale? Is real estate included? Is some of the machinery and/or equipment leased?
  • Is there anything proprietary such as patents, copyrights or trademarks?
  • Are there any barriers of entry? Is it capital, labor, intellectual property, personal relationships, location – or what?
  • What is the company’s competitive advantage – special niche, great marketing, state-of-the-art manufacturing capability, well-known brands, etc.?
  • Are there any assets not generating income and can they be sold?
  • Are agreements in place with key employees and if not – why not?
  • How can the business grow?  Or, can it grow?
  • Is the business dependent on the owner? Is there any depth to the management team?
  • How is the financial reporting handled? Is it sufficient for the business? How does management utilize it?

What Makes Your Company Unique?

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There are unique attributes of a company that make it more attractive to a possible acquirer and/or more valuable. Certainly, the numbers are important, but potential buyers will also look beyond them. Factors that make your company special or unique can often not only make the difference in a possible sale or merger, but also can dramatically increase value. Review the following to see if any of them apply to your company and if they are transferable to new ownership.

Brand name or identity

Do any of your products have a well recognizable name? It doesn’t have to be Kleenex or Coke, but a name that might be well known in a specific geographic region, or a name that is identified with a specific product. A product with a unique appearance, taste, or image is also a big plus. For example, Cape Cod Potato Chips have a unique regional identity, and also a distinctive taste. Both factors are big pluses when it comes time to sell.

Dominant market position

A company doesn’t have to be a Fortune 500 firm to have a dominant position in the market place. Being the major player in a niche market is a dominant position. Possible purchasers and acquirers, such as buy-out groups, look to the major players in a particular industry regardless of how small it is.

Customer lists

Newsletters and other publications have, over the years, built mailing lists and subscriber lists that create a unique loyalty base. Just as many personal services have created this base, a number of other factors have contributed to the building of it. The resulting loyalty may allow the company to charge a higher price for its product or service.

Intangible assets

A long and favorable lease (assuming it can be transferred to a new owner) can be a big plus for a retail business. A recognizable franchise name can also be a big plus. Other examples of intangible assets that can create value are: customer lists, proprietary software, an effective advertising program, etc.

Price Advantage

The ability to charge less for similar products is a unique factor. For example, Wal-Mart has built an empire on the ability to provide products at a very low price. Some companies do this by building alliances with designers or manufacturers. In some cases, these alliances develop into partnerships so that a lower price can be offered. Most companies are not in Wal-Mart’s category, but the same relationships can be built to create low costs and subsequent price advantages.

Difficulty of replication

A company that produces a product or service that cannot be easily replicated has an advantage over other firms. We all know that CPA and law firms have unique licensing attributes that prevent just anyone off of the street from creating competition. Some firms have government licensing or agreements that are granted on a very limited basis. Others provide tie-ins that limit others from competing. For example, a coffee company that provides free coffee makers with the use of their coffee.

Proprietary technology

Technology, trade secrets, specialized applications, confidentiality agreements protecting proprietary information – all of these can add up to add value to a company. These factors may not be copyrighted or patented, but if a chain of confidentiality is built – then these items can be unique to the company.

There are certainly other unique factors that give a company a special appeal to a prospective purchaser and, at the same time, increase value. Many business owners have to go beyond the numbers and take an objective look at the factors that make their company unique.

The Term Sheet

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Buyers, sellers, intermediaries and advisors often mention the use of a term sheet prior to the creation of an actual purchase and sale agreement. However, very rarely do you ever hear this document explained. It sounds good but what is it specifically?

Very few books about the M&A process even mention term sheet. Russ Robb’s book Streetwise Selling Your Business defines term sheet as follows: “A term sheet merely states a price range with a basic structure of the deal and whether or not it includes the real estate.” Attorney and author Jean Sifleet offers this explanation: “A one page ‘term sheet’ or simply answering the questions: Who? What? Where? and How Much? helps focus the negotiations on what’s important to the parties. Lawyers, accountants and other advisors can then review the term sheet and discuss the issues.” She cautions, “Be wary of professional advisors who use lots of boilerplate documents, take extreme positions or use tactics that are adversarial. Strive always to keep the negotiations ‘win-win.'”

If the buyer and the seller have verbally agreed on the price and terms, then putting words on paper can be a good idea. This allows the parties to see what has been agreed on, at least verbally. This step can lead to the more formalized letter of intent based on the information contained in the term sheet. The term sheet allows the parties and their advisors to put something on paper that has been verbally discussed and tentatively agreed on prior to any documentation that requires signatures and legal review.

A term sheet is, in essence, a preliminary proposal containing the outline of the price, terms and any major considerations such as employment agreements, consulting agreements and covenants not to compete. It is a good first step to putting a deal together.

Is This the Right Time to Sell?

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“Whatever the reason, there should be something other than dollars that motivates you to explore a sale. After all, if it weren’t more valuable to own the business than to sell it, no one would ever buy it.”

Mike Sharp, M&A Today, November 2002

The owner of a successful company is considering selling, thinking now may be a good time. However, he is told by an outside advisor that business is good and that if he holds on to it for several more years he will get a much higher price. On the surface, this makes a lot of sense. After all, when an advisor tells the owner that if he keeps it for three more years the price will double, that’s a terrific incentive to keep plugging away. However, there is another side to what would appear to be sound advice.

The most dramatic downside would be that the business could go downhill rather than uphill as the advisor predicted. Although no one can predict what the economy will do, there are a couple of possible scenarios. The industry itself might be impacted by some new technology or other companies might enter the field. It is also possible that the owner, having considered selling, is just worn out and can’t or won’t maintain the zeal necessary to keep the business competitive. After all, after many years of running the business, the owner may be tired, “burnt out,” or just plain ready to slow down.

There are other areas to consider as well. For example, equipment may need upgrading or replacement, products or services may be aging and need revitalizing. Additional capital may be necessary to keep the company up-to-date and competitive. Leases may be expiring and long obligations required to renew them. In short, what originally looked like a good strategy to increase the selling price, has backfired. The costs of continuing to operate the business have increased dramatically, the owner has lost interest – and now the company is offered for sale.

The right time to sell may be when the company’s industry, product line or service is at or near the height, of its success. There comes a point when the business or its industry is peaking and everyone wants “in” – and that is the time to sell. There is the old story that the time to sell the buggy whip business was just before Ford started producing the Model-T. As they say, “timing is everything.”

The right time might be when the company is at the top of its game. Sales are robust and growing, the balance sheet is squeaky clean, and the employees are productive and happy. Another good time to sell is when there is a solid buyer who is seriously interested in purchasing the company, or perhaps, when a manager within the company is ready to take over in a buy-out of some form.

So, when is the right time to sell? Perhaps when the owner first decided it might be time. However, there is really no best time to sell. No one can tell the owner when it is the time to sell. Outside advisors are well intended, but no one knows when it is time except the owner. And, when it’s time – it’s time!

Tips on Avoiding the Dealbreakers

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One of the most important steps is to hire the right advisors. This begins with the right professional M&A specialist. The right attorney should be added to the team. The right one is an attorney who has been through the sales process many times – one who is a deal maker seeking solutions, not a deal breaker seeking “why not to” reasons. The accountants must be deal oriented, and if they are the firm’s outside advisor, they should be aware that they may not be retained by the buyer, and must still be willing to work in the best interest of putting the deal together.

Getting through due diligence

One of the three or four times a deal can fall apart is half-way into the due diligence phase, when the buyer finds something he or she did not expect. No one likes surprises, and they can’t all be anticipated. An experienced buyer will probably work his way through it, but a novice may walk away. Although sellers too often hope a potential problem doesn’t surface, it always does. Avoid the surprises by putting everything on the table even if it seems inconsequential. It’s much better to expose all the warts up front than to have them surface later.

Where is all the money going?

Prior to offering their business for sale, sellers should figure out what the net proceeds will be after paying off any debt not being assumed, current payables, closing costs and tax obligations. The middle of due diligence is no time for the seller to realize that the proceeds from the sale aren’t what he or she anticipated. On the buyer’s side, there are times when current sales and profits are suddenly going south. If the seller anticipates this happening, the buyer should be told up front the reason for the rapid decline. Otherwise, if it comes as a surprise to the buyer, it might cause some restructuring of the deal.

No chemistry between the buyer and the seller

If everything goes smoothly (a rare occurrence), the buyer and the seller don’t have to be good buddies. However, if problems or surprises develop, good chemistry can save the day. Sometimes a golf outing or a good dinner can bring the parties together. If both parties want the deal to work, having them get together socially – and privately – can, many times, overcome a stubborn legal or financial issue.

Obviously, not all deals work. However, the odds of the deal closing are greatly improved if both the buyer and the seller consider the areas discussed above. Surprises can work both ways, and the buyers too should place their cards on the table. However, when all else fails, it is the desire of both parties wanting the transaction to work that will ultimately close the deal!

Mistakes that Sellers Make

  • Not being flexible in structuring the deal
  • Not checking out the prospective buyer
  • Not believing that time is of the essence
  • Negotiating to win everything
  • Nit-picking every item
  • Not maintaining confidentiality – and failing to insist that the buyer proceed on a confidential basis
  • Not retaining competent advisors
  • Not meeting the buyer halfway

Do You Have an Exit Plan?

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“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”

From: Selling Your Business by Russ Robb, published by Adams Media Corporation

Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!

The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.

The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.

Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.

The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.

A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.

One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?

An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?

The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.

What Is Burnout?

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Burnout can come with a business that’s successful as well as with one that’s failing to grow. The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs of burnout?

• That isolated feeling. The burnt-out owner has been “chief cook and bottle washer” for such an extended period of time that even routine acts of decision-making and action-taking seem like Sisyphean tasks. These owners have been shouldering the burdens alone too long.

• Fuzzy perspective. Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem-solving sometimes goes no further than the application of business Band-Aids that cost money in the long run rather than increase profits.

• No more fun. Of course, owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread – or boredom – should consider moving on to a fresh challenge elsewhere.

• Just plain tired. Simply put, many business owners burn out from the demands placed on them to keep their companies operating day after day, year after year. The schedule is not for everyone; in fact, statistics show that it\’s hardly for anyone, long-term.

The important point here is for business owners to recognize the signs and take action before burnout begins to hinder the growth – or sheer survival – of the business. Many of today\’s independent business owners feel they\’ve worked hard, made their money and sense that now is a good time to “cash-out” and move on.

Expanding Your Business

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The term “growing the business” seems to be the term of choice for business people who discuss expansion. Unfortunately, in too many cases, this growing never goes beyond the seedling stage. Business people also talk about “thinking outside the box.” Again, that concept encompasses so much – what box? How far outside? – that it really can be an unfocused way of planning. So many random ideas can come out of such discussions and thinking that nothing really gets accomplished.

It might be a much better idea to focus on one small thing that would increase business. For example, you feel strongly that mailing a circular to your existing customer base or to the immediate neighborhood would increase business, but you never seem to have the time to do it. Why not plan on mailing 1,000 circulars to possible customers over the next 30 days? This means devoting about one hour, two or three times a week, to take this project to fruition. Don’t worry about next month – take one month at a time.

Since it’s said to take about 21 days to create a habit, several months should set the stage for the rest of the year. This will also help predict whether a mailing will indeed increase business. If it doesn’t, take the same time you did to work on the mailing and come up with another idea. What you have done is to “bank” the time you created for the mailing program so that it’s there for you to develop and implement the next plan.

A caveat: don’t work on something that you know you won’t finish, no matter how great the idea. For example, calling all the prospects for your product or service may be a great idea and one that would most likely expand the business. However, you know that is not what you like to do – so, forget it.

Implementing just one plan at a time and staying focused on it is the key. It may be easier to come up with 25 ideas outside the box, but if none ever get implemented, they might as well have stayed inside the box and never have been exposed to the light of day. Work on what you consider to be the best idea, and spend the same time you did on the mailing and develop it. It’s the habit of spending the one hour for two to three times a week that is critical. This creates time for a true growing of the business.

Happy Employees Can Increase Profits…and Value

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Happy employees mean happy customers and clients. An unhappy employee can mean loss of business or worse. How does a business owner create happy and contented employees? It all starts with the hiring process – hiring positive people to start with certainly helps. Offering as many benefits as your business can afford is also a plus.

However, one of the big keys is simply for the business owner to treat employees well, and appreciate their contributions. Some owners expect their employees to have the same dedication to the business as they do. They are not owners and don’t have the same privileges as an owner does. In most cases, the business is an owner’s life, whereas the employee has a life outside of the business. It is important that the owner understands this difference.

In the long run, positive and happy owners have happy employees. But if being a good role model doesn’t do the job with workers who remain negative, your only recourse is to get rid of them. Reward your people with praise, and every once in a while give them a dinner gift certificate for two – or their birthday off – anything to let them know you appreciate their work. It’s an inexpensive way to increase profits and subsequently the value of the business. When a potential buyer checks the business, and they will, being waited on by a happy employee can seal the deal.

Take a Look at Your Lease

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If your business is not location-sensitive, that is, if your business location is immaterial to its success, then the following may not be important.  However, lease information is usually helpful no matter what the situation.  The business owner whose business is very dependent on its current location should certainly read on.

If your business is location-sensitive, which is almost always true for a restaurant, a retail operation, or, in fact, any business that depends on customers finding you (or coming upon you, as is often the case with a well-located gift shop) – the lease is critical.  It may be too late if you already have executed it, but the following might be helpful in your next lease negotiation.

Obviously, a very important factor is the length of the lease, usually the longer the better.  If the property ever becomes available – do whatever it takes to purchase it.  However, if you are negotiating a lease for a new business, you might want to make sure you can get out of the lease if the business is not successful.  A one-year lease with a long option period might be an idea.  Keep in mind that you might want to sell the business at some point – see if the landlord will outline his or her requirements for transfer of the lease.

If you’re in a shopping center, insist on being the only tenant that does what your business does.  If you have a high-end gift store, a “dollar” type of store might not hurt, but its inclusion as a business neighbor should be your decision.  Also, if the center has an anchor store as a draw, what happens if it closes?  The same is true if the center starts losing businesses.  Your rent should be commensurate with how well the center meets your needs.

Because of the World Trade Center disaster, insurance is a big issue.  What happens if the center is destroyed by fire or some other disaster – who pays, how long will it take to rebuild? – these questions should be dealt with in the lease.  In addition to the rent, what else will be added: for example, if there is a percentage clause – is it reasonable? How are the real estate taxes covered? Are there fees for grounds-keeping, parking lot maintenance, etc?  How and when does the rent increase?  Who is responsible for what in building repair and maintenance?

A key issue for many business owners is determining who holds ultimate responsibility for the rent.  Are you required to personally guarantee the terms of the lease?  If you have a business that has been around for years, or if you are opening a second or third business, the landlord should accept a corporation as the tenant.  However, if the business is new, a landlord will most likely require the personal guarantee of the owner.

The dollar amount of the rent is not necessarily the most important ingredient in a lease.  If the business is successful – the longer the lease the better.  If it’s a new business, the fledging owner might want an escape clause.  And, in any case, the right to sell the business and transfer the business is a necessity.

Selling Your Business? Expect the Unexpected!

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According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business.  Great advice, but it rarely happens.  Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling.  The business owner now becomes a seller without considering the unexpected issues that almost always occur.  Here are some questions that need answering before selling:

How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation.  If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle.  Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price.  Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.

How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process.  This takes away from running the business.  Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing.  Micromanaging the sales process takes time from the business.  This is another reason to use the services of a business broker.  They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business.  However, they are well aware that it is the seller’s business and that the seller makes the decisions.

Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital.  These part-owners might very well come out of the woodwork and create issues that can thwart a sale.  A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give.  The answer is for the seller to gather approvals of all the parties in writing prior to going to market.

How important is confidentiality?

This is always an important issue.  Leaks can occur.  The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out.  Sellers should have a back-up plan in case confidentiality is breached.  Business brokers are experienced in maintaining confidentiality and can be a big help in this area.

Do You Know Your Customers?

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It’s always nice, when eating at a nice restaurant, for the owner to come up and ask how everything was.  That personal contact goes a long way in keeping customers happy – and returning.  It seems that customer service is now handled by making a potential customer or client wait on a telephone for what seems forever, listening to a recording saying that the call will be handled in 10 minutes.  Small businesses are usually built around personal customer service.  When is the last time you “worked the floor” or handled the phone, or had lunch with a good customer?  Customers and clients like to do business with the owner.  Even a friendly “hello” or “nice to see you again” goes a long way in customer relations and service.

The importance of knowing your customers and/or clients could actually be extended to suppliers, vendors, and others connected with your business.  When is the last time you visited with your banker, accountant, or legal advisor?  A friendly call to your biggest supplier(s) can go a long way in building relationships.  A call to one of these people thanking them for prompt delivery can pay big dividends if and when a problem really develops.

Owning and operating your own business is not a “backroom” or “hide behind the business plan” business.  It is a “front-room” business. Go out and meet the customers – and anyone else who has an interest in your business.

What Do Buyers Want to Know?

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What is the required capital investment?

What is the annual net increase in sales?

What is in inventory?

What is the debt?

What is the prospect of the owner staying on?

What makes this company different/special/unique?

What further defines the product or service? Bid work? Repeat business?

What can be done to grow the business?

What can the buyer do to add value?

What is the profit picture in bad times as well as good?

Rating Today’s Business Buyers

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Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.

The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.

Synergistic Buyers

These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.

A Final Note

Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.

Why Do People Go Into Business?

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41% joined the family business

36% wanted more control over their future

27% tired of working for someone else

5% were downsized or laid off

*Source: Dun & Bradstreet 19th Annual Small Business Survey May 2000. Totals add up to more than 100% because respondents could choose more than one reason for going into business for themselves. This was published in the May 2001 issue of INC magazine.

Selling a Business: How Long Does It Take?

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A recent survey revealed the following about the length of time that selling a business requires:

Average time from putting the business on the market to time of sale:

Time Period % of Businesses Sold in This Time Period
 1 to 3 Months 9.7 %
 4 to 6 Months 28.3%
 7 to 9 Months 38.0%
10 to 12 Months 15.9%
 13 to 18 Months 7.6%
19 + Months 0.7%

It took from four to 12 months to sell approximately 82 percent of businesses, with 38 percent falling into the seven- to nine-month range. Certainly some businesses sell more quickly, but at the other end of the spectrum, over eight percent are on the market for over 12 months.

Why does it take so long to sell a business?  Price and terms are the biggest reasons.  Not over-pricing the business at the beginning of the sales process is a big plus, as well as a transaction structured to include a reasonable down payment with the seller carrying the balance.  Having all of the necessary information right from the beginning can also greatly reduce the time period.  Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is the key.

Here is the basic information that a prospective acquirer will want to review:

  • Copies of the financials for the past three years.
  • A copy of the lease and any assignments of the lease from previous sales.
  • A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
  • A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
  • Copies of any other documentation pertaining to the business.
  • Supporting documents for patents, copyrights, trademarks, etc.
  • Sales brochures, press releases, advertisements, menus or other sales materials.

In addition, here are some of the questions that buyers may have.  A prepared seller should have ready answers as well as the information to support them.

  • Is the seller willing to train a new owner at no charge?
  • Are there any zoning or local restrictions that would impact the business?
  • Is there any pending litigation?
  • Are any license issues involved?
  • Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
  • What about the employee situation? Are there key employees?
  • Are there any copyrights, secret recipes, mailing lists, etc?
  • What about major suppliers or vendors?

A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business.  Using the services of a professional business broker can also greatly reduce the time period.  They are knowledgeable about the current market, how to market a business and they can advise a seller on price and terms.  They can also recommend professional advisors, if a seller doesn’t have them already.  Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.

Why Sell Your Company?

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Selling one’s business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.

  • Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
  • No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
  • Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
  • Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
  • Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
  • An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”

There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”