Knowing that you want to sell is easy. You decide that. Knowing when to sell, well now that’s a bit tougher. Will the market go up, or down? Is your business packaged properly for sale? Can you demonstrate real value and cash flow?
This all brings us back to the core question, is now the time to sell?

What You Need To Know Before You Sell Your Business

Today’s business buyers are much more sophisticated. There is a lot of information out there (internet, books, magazines) that can be good or bad advice on how to buy a business. What is important to understand is that buyers are looking for stable, quality businesses that can demonstrate the success of the business will continue. Buyers put the most weight on “cash flow.” This is also known as Seller’s Discretionary Earnings (SDE) or adjusted net income. It is crucial that cash flow is calculated correctly and that the process of how cash flow was determined can be supported by documentation. Most sellers focus on the multiple, which is important. However, I pose the question, “A multiple of what?” If the historical cash flow is not calculated correctly, then the value may be under estimated. Buyers need to feel 100% comfortable with the historical cash flow figures or trends since this is what will determine what is available to cover debt service, salary and expansion or growth.

The multiple of cash flow used is a function of many things. There are more than 15 characteristics that affect the multiple. Some of these increase the multiple and some of them can decrease the multiple. It is the multiple that takes the good, the bad and the ugly into consideration. Some of the factors that affect the multiple are consistent historical cash flow, type of industry, years in business, the condition of the facility and the furniture, fixtures and equipment (FF&E), key employees in place, terms of the lease, the type of financing available plus many other factors. An experienced Certified Business Broker can discuss this further and assist in establishing the correct cash flow and multiple for your business.

Pricing Your Business For Activity

Pricing a business is part science and part art. It is no secret that sellers aim high and typically overprice their business. What sellers underestimate is when a buyer is looking at multiple businesses for sale and he or she sees that the multiple is out of the normal range, the buyer will then assume the seller is unrealistic and will most likely pass. This means you may have lost an excellent, qualified buyer that would have been interested if the business was priced correctly. Pricing your business should be taken seriously and be treated in a professional manner that can be supported, otherwise everyone’s time is wasted.

It pays to be realistic. Many sellers assume that the amount of money they need to retire or need for their next venture is somehow related to what their business is worth. That is wishful thinking and obviously not how the value of a business is determined. Studies show that there is usually a 10–15% difference between what a seller wants and what the market will bear. A Certified Business Broker has considerably expertise when it comes time to calculate a reasonable asking price for a business. They know that it is essential that they come up with a price that is fair. As a result, a Certified Business Broker will take many diverse issues into consideration.

Being Prepared Pays Dividends Down The Road

The time spent at the beginning of the process of selling a business can pay big dividends down the road. It is important to prepare your business for sale. What does that mean? Don’t be reactive—get your house in order before you put the business up for sale! Spend time to review your overall business. Review your processes, your policies and procedures, company financial statements/tax returns, inventory, accounts receivables and payables, review the condition of your equipment, the condition of your facility, review your lease agreement, your employee records and compensation, etc. Think of what you would want to see if you were purchasing a business and act accordingly. The more you can address upfront the better position you will be in when a buyer is at the table. One common statement I hear from business sellers is how they underestimated the time needed and overall what was involved with the sale of their business. On average, it can take 6–12 months to sell a business. Selling a business is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with your Business Broker. Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale. Being prepared up front will help this process go smother and more efficient for everyone involved.

In conclusion, selling a business is a time consuming and complex process. It involves knowledge and expertise in a wide range of fields and topics. It is important to understand the dynamics and the many factors that are involved in the sale or purchase of a business. No two businesses or deals are alike. Working with an experienced Certified Business Broker will help in dramatically increasing the probability of selling your business. An experienced Certified Business Broker will assist the business owner in the proper “confidential” way to prepare the business for sale. In addition, a Certified Business Broker will prepare a financial analysis and opinion of value, professionally package the business, put a professional confidential marketing plan in place to reach a wide audience, negotiate and structure a fair deal for all involved, prepare and manage the due diligence process, prepare certain contracts, handle the transfer or creation of a new lease, assist in financing the transaction and manage the entire process from beginning to end to assure confidentiality and so that the seller can focus on successfully running their business. •

CASE IN POINT:

The Importance Of A Lease Agreement And Timing

A husband and wife owned and operated a highly successful 27-year-old garment manufacturing and wholesale distribution business. The couple discussed several times the possibility of retiring and selling the business since the business was doing well. As the saying goes, time is your enemy. Unfortunately, the couple had personal problems and eventually filed for divorce. In addition, shortly after filing for divorce, the wife was diagnosed with cancer. The business owners were fortunate that they had strong, long terms employees who stepped up and ran the business effectively. The husband checked out and left the wife and employees to run the company. The wife was now dealing with running the business, going through a divorce and cancer treatment. The company was stable for the next couple of years. The ex-husband became difficult and uncooperative with the divorce. The ex-wife wanted to sell the business and went to court to receive a court order for the sale of the business. The courts agreed that this was in the best interest of both parties and ordered the business be sold through my firm.

After several meetings, we moved forward to represent the parties in the sale of the business. As we normally do in the course of our work, we analyzed the lease agreement that was in place. I mentioned to the owners that the lease agreement is going to be an important factor in this transaction. Since this was a divorce situation, the owners would not agree to seller finance. I informed the sellers that since the company tax returns were strong, I felt comfortable that the business would qualify for SBA finance once we had a strong buyer in place. I pointed out that since a SBA loan is typically done on a ten year term and that their facility was crucial to the success of the business, the SBA lender would require the total term, including options for the lease agreement be no less than ten years. The sellers were adamant that I not speak with the landlord until we had a buyer and that there should be no issues with the lease. I explained to them that this was risky and that we should contact the landlord to make sure we would not have any issues. They were insistent and we moved forward.

We spent the next month preparing the business and our package. We then put our marketing plan in place and started speaking with prospective buyers. We had numerous meetings over the next several months until we met with a charming husband and wife team that expressed enough interest for us to move forward. The husband and wife team were both looking to leave corporate America to purchase their own business. They were sophisticated and knowledgeable about the process of buying a business. We had several in person meetings and early on they asked about the lease for the facility. The owner commented that they were currently on a month to month lease and they did not want to contact the landlord until we were in escrow. The buyer expressed concerned since this was an important factor in being able to determine a price and obtain SBA finance. I told the seller that my SBA lender will need to make sure we would not have any issues with the lease and that I should contact him sooner rather than later. If the lease is going to be an issue, then the buyer will need to factor in the cost to relocate the business into the offer and the SBA lender will also need to factor this in.

Once again, the seller was insistent that we should wait until we were in escrow. The conversation continued and eventually the buyer submitted an offer that was accepted.

The buyer started their due diligence and worked with the SBA lender on providing what they needed. The question on the lease came up several times and we had no choice but to respected the owners request to wait until we open escrow. The buyer approved the books and records, we moved to an asset purchase agreement and opened escrow almost a month later. The seller then gave me the thumbs up to contact the landlord. I contacted the landlord and to my surprise, the landlord said that he was doing the owners a favor by not increasing the rent and pushing them to sign a new lease. He informed me that this would not apply to a buyer or new owner. The landlord was clear that he would want to bring the monthly rent up to market rent and that he would only consider a five year term. I explained to the landlord and the owners that this would be an issue. The buyer will now be faced with higher rent (an increase of $1,000/month) and this would decrease the cash flow and therefore decrease the value of the business. Furthermore, the SBA lender would not consider financing unless the terms of the lease (including the options) were the same as the term of the loan, 10 years.

To add insult to injury, the landlord said he was going out of the country, on a 14-day cruise and unreachable. We were now about 8 weeks into this transaction from the first time we met with this buyer. It took another 3 weeks to wait for the landlord to return, work out a 10 year lease (5 + 5 year option) and we unfortunately had to renegotiate the purchase price due to the increase in monthly rent. The buyers were extremely frustrated but in the end, we received a new lease, obtain the SBA financing and closed the transaction. The landlord asked why we did not contact him sooner and I replied the sellers were insistent that I not reach out to you until a buyer was in place because they were fearful of what you would say. His response was, “This could have gone a lot smoother if they would have just contacted me upfront.”

Of course I agreed!—M.C.

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The Individual Buyer

Third In A Series

Most owners of small- to mid-sized businesses gravitate toward this buyer when it comes time to sell. 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 can be an excellent prospect. Although owning a business is more than a job and the risks involved can frighten them, this kind of buyer does 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. •

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The Foreign Buyer

Second In A Series

Foreign buyers tend to arrive in the United States with plenty of funds and a huge desire to share in the American Dream. In addition, many have difficulty obtaining jobs in their previous professions because of language barriers, licensing, and specific experience. As business owners, 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. •

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Family Members

First In A Series

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. •

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Here are key factors for selling a business.

Buyers are more educated than ever these days, and they are not taking risks. The current marketplace is such that there is a healthy pool of buyers with impressive backgrounds and liquid funds looking to purchase quality businesses. Buyers are coming out of corporate America and looking to purchase businesses by using their savings or retirement funds through various programs as a source of down payment. Younger Baby Boomers (mid 40’s – 50’s) are also looking to fulfill their dream of owning and operating their own business prior to reaching retirement age. The key is in understanding what motivates buyers in today’s market in order to successfully sell your business.

Determining The Multiple For Your Business

Buyers purchase “cash flow” when they purchase a business. Cash flow, also know as discretionary earnings, is the net income plus certain acceptable owner benefits or “perks.” Businesses with cash flow and “transferable value” are in demand in this economic environment. Buyers are willing to pay a multiple of cash flow which is determined by the type of industry, years in business, key employees being in place,  condition of the equipment and facility, lease terms and the type of finance available. There are many other factors that go into determining this multiple and therefore the value of a business. An experienced Certified Business Broker can assist you in determining the cash flow, multiple and ultimately the correct value of the business.

If the business does not have traceable, verifiable cash flow, then it needs to be sold as a Sale of Assets in Place, which yields a lower value. Although the buyer pool for these businesses is less, there is still a demand for these assets in place by individuals willing to take a risk to turn the business around. The value is ultimately determine by the market place so it is important to highlight the benefits.

Packaging Your Business For Sale

A second key item to selling a business is in packaging it correctly. Buyers need and demand information. They need to know everything about the business to see if it will meet their needs as they are typically putting down a significant portion of their life savings at risk. It is important to package the business so that the features and benefits are outlined clearly. It is also important to clearly outline the cash flow of the business and all the add-backs. The bottom line is the bottom line, so it is important to explain how the cash flow was derived. Buyers will typically not move forward unless they are comfortable with this analysis. In addition, if a buyer does not feel comfortable with a business’s transferable value which includes policy and procedures, whether or not key employees are in place, if the business has growth opportunities and a sturdy marketing plan, if the assets and systems needed to move forward are in place and in good condition, etc., then the buyer will most likely not be willing to take the risk and the business will not sell.

How Buyers Can Finance The Purchase

The last key element is how a buyer finances a business purchase. The choices are limited. Typically there are three methods:

All Cash
This is not common. If a buyer is willing to pay all cash, then the buyer will expect a discount in the purchase price since price is a function of terms.’

SBA Finance
There is a big misconception on how financing with a Small Business Administration loan works. First, these loans are among the highest risk loans for a bank that typically funds the loans using a SBA guarantee. In today’s economic environment, these loans are extremely difficult to obtain. The banks will only consider what is on the selling company’s tax returns. The tax returns must show consistent year-after-year gross revenue and profitability in order to assure the bank that the cash flow is there to cover the debt service. The bank and SBA will also require that the buyer have direct industry experience, good credit, ample reserves and, in most situations, additional collateral to secure the loan.

In some cases, the bank and SBA may require that the seller carry a portion of the purchase price in second position, sometimes with no payments for 3-5 years. This depends on the verifiable cash flow available to cover the debt service. These loans are typically leveraged with 10-25% down, and therefore the payments can be high for the buyer. For some transactions, this may be a viable option, but as you can see, it can be challenging to meet some of the requirements.

Seller Finance
This has been the most common method of financing  in the last five years. The advantage with seller finance is that the seller will be able to set the requirements. Seller finance typically involves a buyer being screened both financially and work-experience wise. This kind of transaction typically begins with requiring 40-50% down and is negotiated from there. When a buyer puts 40-50% down and a seller carries 50-60%, this creates an even playing field. The buyer has “skin” in the game as well as the seller. It is crucial to set up seller finance correctly upfront and put mechanisms in place to reduce the probability of a problem down the road. Again, this is where a Certified Business Broker is key to assisting in this process as well as managing the entire transaction from beginning to end.

Selling a business is an extremely complex process, so it is important to work with a broker who understands the dynamics of selling a business in this current economic environment. No two deals are ever alike. Selling a business can be just as much of an art as a science. When you work with someone who has the experience to analyze the specific situation and develop a custom plan to price, package, market and structure a transaction, the chances of selling a business successfully increase tenfold. •

CASE IN POINT:
Long-Standing Family Business Thinks Out Of The Box

Two partners owned a 50-year-old box manufacturing business that their fathers started. The partners after many years of running the business wanted to sell. They had lost a large long-term customer and the revenue had decreased. The business still had a reputable name, long-term employees in place and a working facility. After much discussion, the partners decided to sell. Their accountant referred them to our firm. We went in and evaluated their business given their situation at no cost and gave them an opinion of value. The value took everything into consideration.

The sellers thought their business was worth more but we explained to them that the recent lower cash flow was bringing down the value. We also explained that financing would be difficult to obtain which our lender confirmed. We agreed on a starting selling price, and after discussing the benefits of seller finance and how we would structure it to secure their position, they agreed to offer seller finance subject to approving the buyer’s qualifications and credit worthiness. We created a detailed package on the business highlighting the features and benefits including the 50-year history, long-term employees in place, financial analysis, among other key factors.

We went to market and started identifying potential buyers. We learned after discussing the business with several buyers, that this would not be an easy business to sell. Most buyers agreed that the business had an excellent reputation, employees and facility but they were concerned with the drop in revenue as a result of losing a large customer. Remember, the majority of buyers purchase cash flow and they must feel comfortable with the company’s transferable value.

The sellers had no formal marketing plan in place and did not do much to generate new business. We suggested to the sellers that they immediately focus on trying to generate new customers in order to show that new business was attainable if someone put in the time and effort to go out and do so. The facility had the capacity to handle more business; someone just needed to generate it. After a short period of time, the company started obtaining a handful of new customers. The revenue began to increase and it became clear that the company could rebound.

We re-priced the business and marketed it using our wide range of company resources. It took some time and speaking to several buyers to discuss the features and benefits, but we eventually found a buyer who saw the transferable value and potential to turn this business around. We had several meetings with the buyer. Once he completed his due diligence, we opened escrow to comply with the bulk sale requirements and complete the transaction. The buyer said one of the main reasons he considered this business was the fact that the seller was willing to finance a portion of the transaction. This made him feel comfortable with the fact that the seller had confidence with the business going forward. The transaction closed and after training was completed we all went out to dinner to celebrate.

The sellers were happy, as they were now able to retire and focus on their other activities. The buyer was happy, as they saw many opportunities to expand the business and had already implemented some of them. The buyer indicated that he was glad he purchased the business, but he probably would not have gone forward unless the sellers agreed to carry the note. Everyone was happy and after several months of operating the business, the buyer has increased the revenue substantially and has indicated that he will most likely pay off the note sometime this year.

Glossary Of Terms

Bulk Sale Requirements: A law that regulates the transfer of business assets so that business owners cannot dispose of assets in order to avoid creditors. If a business owner wants to conduct a bulk sale of business assets — that is, get rid of all or most of its inventory, merchandise, or equipment — the business owner must give written notice to creditors and, in some states, publish and record a notice of the sale. This is also in place to protect the buyer.

Discretionary Earnings: This is the cash flow of the business after adding back certain, traceable, non-business related expenses to the net income.

Multiple: A multiple is derived from a number of business, industry, market, and owner preferences factors. The multiplier is used to convert a single-point business economic benefit into the business value.

Sale of Assets In Place: When a business lacks verifiable cash flow, it can be sold as a Sale of Assets in Place. The business may have value for certain assets that are already in place and ready to be used by a potential buyer. The market place and what a willing and able buyer is willing to pay typically determines the value.

Transferrable Value: The value of a business going forward. Tangible benefits such as policy and procedures, key employees that are in place, growth opportunities for the business, a marketing plan, and any other systems that are in good condition that add value to the business.

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