“Red Flags” in the Sunset

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Unlike that poetic title of an old-time standard song, Red Sails in the Sunset, red flags are not a pretty sight. They can cause a deal to crater. Sellers have to learn to recognize situations indicating there might be a problem in their attempt to sell their business. Very, very seldom does a white knight in shining armor riding a white horse gallop up, write a large check and take over the business – no questions asked. And, if he did, it probably should raise the red flag – because that only happens in fairy tales. Now, if the check clears – then fairy tales can come true.

Sellers need to step back and examine every element of the transaction to make sure something isn’t happening that might sink the deal. For example, if a company appears interested in your business, and you can’t get through to the CEO, President, or, even the CFO, there most likely is a problem. Perhaps the interest level is not what you have been led to believe. A seller does not want to waste time on buyers that really aren’t buyers. In the example cited, the red flag should certainly be raised.

A red flag should be raised if an individual buyer shows a great deal of interest in the company, but has no experience in acquisitions and has no prior experience in the same industry. Even if this buyer appears very interested, the chances are that as the deal progresses, he or she will be tentative, cautious and will probably have a problem overcoming any of the business’s shortcomings. Retaining an intermediary generally eliminates this problem, since every buyer is screened and only those that are really qualified are even introduced to the business.

Both of the above examples are early-stage red flags. Sellers have to be focused so they don’t waste their time on buyers that are undesirable. If a buyer appears to be weak, does not have a good reason to need the deal, or is otherwise unqualified, the red flag should be raised because the chances of a successful transaction are diminished. The seller might seriously consider moving on to other prospects.

Red flags do not necessarily mean the end of the deal or that it should be aborted immediately. It simply means that the seller should pay close attention to what is happening. Sellers should keep their antenna up during the entire transaction. Problems can develop right up to closing. Here is an example of a middle-stage red flag: The seller has received a term sheet from a prospective buyer and is then denied access to the buyer’s financial statements in order to verify their ability to make the acquisition. As a reminder, a term sheet is a written range of value for the purchase price plus an indication of how the transaction would be structured. It is normally prepared by the would-be purchaser and presented to the seller and is non-binding. A buyer who is not willing to divulge financial information about his or her company, or, himself, in the case of an individual, may have something to hide. Due diligence on the buyer is equally as important as due diligence on the business.

If a proposed deal has entered the final stages, it doesn’t mean that there won’t be any red flags, or any additional ones, if there have been some along the way. If there have been several red flags, perhaps the transaction shouldn’t have gone on any further. It is these latter stages where the red flags become more serious. However, at this point, it makes sense to try to work through them since problems or issues early-on apparently have been resolved.

One red flag at this juncture might be an apparent loss of momentum. This might mean a problem at the buyer’s end. Don’t let it linger. As mentioned earlier, at this juncture all stops should be pulled out to try to overcome any problems. If a seller, or a buyer, for that matter, suspects a problem, there might very well be one. Ignoring it will not rectify the situation. When a red flag is recognized, it is best that it be confronted head-on. It is only by acting proactively that red flags in the deal can become red sails in the sunset – a harbinger of smooth sailing ahead.

The Confidentiality Myth

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When it comes time to sell the company, a seller’s prime concern is one of confidentiality. Owners are afraid that “if the word gets out” they will lose employees, customers and suppliers. Not to downplay confidentiality, but these incidents seldom happen if the process is properly managed. There is always the chance that a “leak” will occur, but when handled correctly, serious damage is unlikely. Nevertheless, a seller should still be very careful about maintaining confidentiality since avoiding problems is always better than dealing with them. Here are some suggestions:

  • Understand that there is a “Catch 22” involved. The seller wants the highest price and the best deal, and this usually means contacting numerous potential buyers. Obviously, the more prospective buyers that are contacted, the greater the opportunity for a breach of confidentiality to occur. Business intermediaries understand that buyers have to be contacted, but they also realize the importance of confidentiality and have the procedures in place to reduce the risk of a breach. Another alternative is to work with just a few buyers. This, however, does reduce the chances of obtaining the best price.
  • Another way to avoid this breach is to try to keep a short timetable between going to market and a closing. The shorter the timetable, the less the chance for the word to get out. One way to keep a short timetable is to gather all of the information necessary for the buyer’s due diligence ahead of time. Create a place where all of this material can be consolidated. This can be as simple as a set of secured file drawers. Such documentation as: customer and vendor contracts, leases and real estate records, financial statements and supporting schedules (assets, receivables, payables), conditions of employment agreements, organization charts and pay schedules, summary of benefit programs, patents, etc. should be gathered. It is not unusual for due diligence examinations to look back 3 to 5 years, so there could be a lot of records.
  • The above means that the seller has to get organized. Selling one’s business is fraught with paperwork. Set up some three-ring binders so all of the relevant paperwork and resulting documentation has a place. These binders should be kept in a secure location.
  • The seller’s employees should be conditioned to having strange people (potential buyers) walk through the facility. One way to avoid suspicion is to arrange to have unrelated people, for example – customers, suppliers, advisors – tour the company facilities prior to placing the business on the market.
  • If sellers have not prepared their employees for strangers walking through the facilities as suggested above, awkward situations can develop. A valued employee may question why tours are being conducted. The seller is then placed in the position of explaining what is happening or covering the question with a “smokescreen.” A seller could reply by saying that the strangers are possible investors in the company. If asked directly if the business is for sale, the seller could respond by saying that if General Electric wants to pay a bundle for it – anything is for sale. Once in the selling process, it is also important to minimize traffic by only allowing serious, qualified prospects to tour the operation.
  • Keep in mind that confidentiality leaks can emanate from many sources. For example, an errant email ends up on someone else’s email. A fax gets sent to the wrong fax machine or UPS or FedEx deliveries go to the wrong people. Establish methods ahead of time on how to communicate with potential buyers or an intermediary.
  • The key to handling confidentiality may be for the seller to retain a third party intermediary. They will insist that all potential buyers sign a confidentiality agreement. They will also be able to advise the seller on how to handle the “company tours” and can insure that only qualified buyers are shown the facilities.
  • The “myth” is that confidentiality issues can make or break a deal, or cause serious damage to the seller’s business. The reality is that breaches seldom occur when an intermediary is involved, and if they do occur and are handled properly, there is little damage to the business or a potential transaction.

Does the Deal Fit?

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“The most successful integrations were directed by people who placed the common good of the combined organization and its customers before all else.”

From: The Mergers & Acquisitions Handbook.

By now, most business owners are familiar with the problems created by the merger of Daimler, the German automobile company, and Chrysler, the American car maker. Here is the classic case of cultural friction adversely impacting what was originally promoted as the merger of “equals.” If any deal can point out the importance of a cultural fit in a merger or acquisition – this is it. The officers of Daimler took complete control and the executives of Chrysler left in droves. Not only were the management styles completely different – centralized versus decentralized, quick decisions versus decisions by committee, supplier rivalries versus supplier partnerships — but, in addition, the American management team received huge compensation packages, while the Daimler people worked on small salaries, but huge “perks.”

Mergers and acquisitions are supposed to produce synergies that bring results.  If they don’t, the culture is too often the reason. John Chambers, the CEO of Cisco Systems, who has been involved in some seventy acquisitions, says that he will not do a deal unless there is a cultural fit. Culture according to one dictionary is defined as the “customary beliefs, social forms, and material traits of a … social group.” The word “compatible” may be a better choice defined by the same dictionary as: “able to exist or act together harmoniously.” Regardless of the semantics, if both companies can’t work well together, the deal is a bad one. The importance of this cultural fit may be influenced by the nature of the deal and the desires of the seller. Here are some examples:

  • The seller sells the company on an all-cash basis and doesn’t really care what happens to the employees, the customers or the new owners. In other words, the seller takes the money and runs.
  • The seller receives sufficient cash that he or she is secure about the transaction. Despite this almost all-cash deal, or the quality of the security for the balance, there is serious concern for the employees and their future with the new ownership.
  • The seller merges the company and/or receives stock in the acquiring firm. Further, the seller’s compensation, to say nothing of any increase in the equity, may be determined by the success or failure of the cultural fit of the merged companies.

Obviously, in the first example, the question of a cultural fit, or any fit, for that matter, is moot. Assuming, however, that the prospective seller fits into one of the two latter situations, how does one determine the compatibility of the two firms? It may be a non-issue if the seller’s company is going to remain autonomous. Or, the acquiring firm may have been through several similar situations and is experienced in the assimilation process. These two examples do not necessarily mean that the companies will mesh perfectly, but they do help. However, if a cultural fit is of concern, what can be done to help assure an orderly blending of the two firms?

It can be as simple as the seller having a casual dinner with the owner or CEO of the acquiring or merging company. Much can be learned one-on-one about how the other company is managed and about its owner’s business philosophy. Is it based on teamwork? Is it entrepreneurial or hierarchical? Is the company customer or policy driven? If the CEO of the acquiring company is reluctant to share a social occasion, then the seller may have already received the answer to the cultural fit question.

Other areas that should be considered: how are the employees of the other company compensated? Or, for example, something as mundane as the company’s product return policy may provide insight into the successful integration of the two businesses. How far apart are the companies’ mission statements?

Absorbing smaller companies can be a lot easier than two firms of approximately the same size merging. There are few companies whose cultural styles are so similar that integration is an easy matter. In many cases, where there may not be a perfect cultural fit, proper communication can resolve most of the issues. Unfortunately, there are some situations, like the Daimler Chrysler example, in which the two companies may never be integrated successfully.

Sellers who are concerned about the right cultural fit should investigate this before the deal gets too far along and, obviously, prior to closing. An intermediary has the knowledge and experience to work with both buyers and sellers on this all-important issue. The right culture may be a “soft” issue when it comes to mergers and acquisitions, but just may be one of the most important.

Selling Your Company — Some Key Points

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  • Settle all litigation and environmental issues before putting the company on the market.
  • Hire a good transaction lawyer, because the buyer will also.
  • If company owners are totally inflexible, the buyer may walk away from the transaction.
  • Be prepared to accept a lower price for lack of management depth, dependence on a small number of customers or clients, and lack of geographical distribution.
  • When a buyer indicates he or she may be ready to submit a Letter of Intent, tell them up front what items you want included. For example, price and terms; what assets and liabilities are to assumed, if an asset purchase; what contracts and warranties are to be assumed; and time schedule for due diligence and closing.  (These are just some of the items a seller might want included.)
  • Be advised that many buyers will view the value of Sub Chapter S corporations to be worth less than if the company is a C Corporation.
  • Make the company more visible by attending trade shows.  Tie up patents, copyrights and trademarks.  Create a public relations program.  These areas all create perceived value.
  • Selling a company involves sometimes-inconsistent objectives: speed, confidentiality and value – pick the two that are the most important.
  • Keep in mind that companies get stale after sitting on the shelf for awhile.
  • Don’t expect your lawyer to win every point of contention – you want a dealmaker, not a dealbreaker.

A Selling Memorandum

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A sellers memorandum includes all those points one would normally expect to see in any business plan, to wit: an executive summary, a business description, financial requirements, target market niche, identification of top management, an operations review, analysis of strengths and weaknesses, and current financial statements and projections.

Guide to Mergers and Acquisitions published by PPC

A proposed sale of a middle-market company almost always begins with a selling memorandum. This document is called many things, including offering memorandum, confidential descriptive memorandum or simply the book. Regardless of what you choose to call it, its purpose is to encourage prospective buyers to take a further look at the company.

For the seller, it has a secondary side benefit. It forces them to take a hard look at the company, its strengths and its weaknesses. Upon reviewing the information necessary to prepare a selling memorandum, the seller may, in fact, decide that it’s not such a bad company after all and elect to keep it. On the other hand, the seller could decide that the current condition of the company needs to be improved before attempting to sell it. Looking at the company through the eyes of a buyer, could also prompt the seller to try to increase the value prior to selling. This may be done, for example, by building a stronger brand loyalty, by entering into employee contracts with key managers, or perhaps by diversifying the customer base.

Assuming, however, that the decision to sell has been made, the importance of the selling memorandum can not be emphasized enough. It is like a strong advertisement for the company and it must tell a good story. It should highlight the positive parts of the company, add value for the buyer, and show the negatives as opportunities. The selling memorandum has to make a good first impression. A seller wants to attract qualified buyers and bring value to the company being sold. This means that the selling memorandum has to be prepared and written by a professional. It is too important a document to do it any other way. It is also the basis of a strong marketing program to attract the best buyer at the best price.

What makes up a strong selling memorandum? It includes quite a few different elements. But, first a few caveats:

  • Don’t include confidential company information or reveal trade secrets. Although the document may be intended for qualified buyers only, once it is disseminated it really becomes a public document. Professional intermediaries and investment bankers do make prospective buyers sign a confidentiality agreement, which does help in this area. Still, with copy machines and email services readily available, it never hurts to maintain confidential information until much further in the negotiations.
  • Make sure that a prospective buyer knows exactly what you are selling. It is assumed unless otherwise mentioned that it is the entire company that is for sale. You don’t want prospects to think that they can purchase just the most profitable portions of the company. Obviously, a seller wants to show-off the excellent parts of the company, but this should not be done at the expense of the not-so-good parts. These can be presented as excellent opportunities.
  • The selling memorandum should not be aimed at the right prospects. If the business requires technical language to best explain it, use it. A buyer, who doesn’t understand it, probably isn’t a buyer.
  • There should be an explanation of how the company works so a prospective acquirer can read through the lines about the selling company’s corporate culture. This element can make or break a sale and it’s best to discover it at the outset.
  • There is always a tendency to include too much information – don’t. Don’t over-sell. You don’t need to include the names of customers and vendors and the names of all the employees.
  • Be sure to also include the blemishes. If there is a pending lawsuit, include. The bad news should be revealed early on – no one likes surprises, especially later in the negotiations.
  • And, finally, and probably, most important, the selling memorandum should be easy to read.

Now, what about the various elements of the selling memorandum. Here are the areas that should be covered in it.

Business Profile (or Executive Summary) – This may be the most important element of the selling memorandum. The entire offering should be covered in brief – no more than four-pages, at most. Many are done in one page. Remember, the sole purpose of the business profile is to generate excitement and interest. It is a selling piece! It should include:

  • Ownership
  • The Business
  • Financial highlights
  • Products and/or services
  • Markets
  • The opportunities
  • Reason for sale (Why is it for sale?)

This business profile is usually sent to possible purchasers. If the prospect is interested further, they sign a confidentiality agreement before receiving the entire selling memorandum. The selling memorandum includes detailed information on the key elements of the company and usually covers the following:

  • Business overview – In other words, who and what is the company? This is the place where everything about the company is summarized: it’s history, the employees (in general), the management team, the locations, any important intangible assets, and the outlook for the business.
  • Company strengths – What does the company do well? This should cover those strengths that bring value to this particular company.
  • Markets – Who are the customers/clients? What and how does the company sell its products or market its services.
  • The Risks – What are they? If there are risks in the business, they should be described and then an explanation of how the company solves them.
  • Financial data – Is the company making money? Cash flow statements are important. Current thinking is that the seller doesn’t have to include all of the available financial data – which the prospective buyer will go through all the financial history as the deal moves forward.

The selling memorandum should include any relevant corporate and/or product brochures as attachments. Prior to putting the business on the market, it is important that an outside valuation be performed. However, the price and terms are not usually a part of the selling memorandum – the marketplace will dictate the price. The purpose of the entire selling memorandum is to generate sufficient interest so that a prospective acquirer will make an offer.

Building Value

Prior to putting a company on the market for sale, the question of value has to be addressed. Increasing the value should, in fact, be considered a year, preferably two, prior to sale. Value is based on profitability, cash flow, management and the overall quality of the operation itself. Here are some considerations in building value, whether the business is going to be sold or not.

  • Are the company’s pricing policies set too low, creating low margins? Perhaps they were set some time ago in order to boost sales. Now might be a good time to review them to make sure they are in keeping with current market conditions.
  • Is the inventory level too high? How about work-in-progress or finished goods? Increasing the turns in inventory can increase cash flow.
  • Are you paying too much for raw material? Talk to your vendors and suppliers, you might be able to get some better prices or terms. Take a look at all of the expenses: utilities, telephone, technology, office expenses – it all adds up.
  • Are there services that could be outsourced for increased savings?
  • Increasing the quality of customer service may entice customers or clients to pay their bill promptly.
  • Are all the employees working together to improve the operation and profitability of the company?

These are just a few of the areas that can and should be reviewed. Although profits are important, there is an old expression that cash is king. The time to take a look at the overall company operations is now.

Measuring the Value of a Company

Consider the following important areas of a company. How does your company stack up in these critical areas? If you were to rank them on a 1 to 4 scale, for instance, what would your score be? The higher the score the more valuable the company! They are considered value drivers – in other words, they are important to a prospective buyer.

  • Profitability
  • Type of business
  • History of company and industry
  • Business growth
  • Customers/Clients
  • Market share
  • Return on investment
  • Quality of financial statements
  • Size
  • Management
  • Terms of sale

For example, in looking at a company’s financial data – are the statements audited or merely compiled? Is the growth of the company slow or is it growing quickly? How about the customer base – is it based on several major ones, or is it spread out over many customers? The time to consider these critical value drivers is now!

Common Seller Questions

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How long does it take to sell my business?

It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment (generally 40 percent of the asking price or less), the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.

Why Is Seller Financing So Important To The Sale Of My Business?

Surveys have shown that a seller, who asks for all cash, receives, on average, only 70 percent of their asking price, while sellers who accept terms receives, on average, 86 percent of their asking price. That’s a difference of 16 percent! In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What Happens When There is a Buyer for My Business?

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

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

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

What Can I Do To Help Sell My Business?

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

What Can Business Brokers Do – And, What Can’t They Do?

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

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

You Can Help!

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You, as the seller, are an integral part of the total marketing program. We would like to offer a few friendly recommendations that will help in the marketing efforts.

It might also be helpful if you took a good look at your business from the perspective of a buyer. Try to put yourself in the place of a prospective purchaser of the business. What would you do to make it more attractive or more saleable? Obviously, the financial records of your business are critical to the sale of your business, but how it looks is also important. First impressions really count! If a potential buyer doesn’t like the appearance of your business, the rest of it may never get a chance.

Here are some suggestions. Check the following to see if any of them are applicable:

Keep normal operating hours. There may be a tendency to “let down” when you put your business up for sale. However, it’s important that prospective buyers see your business at its best.
Repair signs, replace outside lights, etc. You don’t want your business to look as if it has been neglected.
Maintain inventory at a constant level. If you let your inventory slide, your business will look neglected. If anything, increase it so your business will look busy.
Remove items that are not included in the sale or unnecessary items, especially if inoperative.
Repair non-operating equipment or remove it if you are not using it.
Tidy up outside premises.
Spruce up the inside of the business.

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.