The Six Most Common Types of Buyers: Pros & Cons

Business owners considering selling should realize that they have many different types of prospective buyers.  Today’s prospective business buyers are more sophisticated and diverse than ever before.  Let’s take a closer look at the different types of prospective buyers and what you should know about each of them.

1.  Family Members

Family members often buy businesses from other family members.  There are many reasons this happens.  For example, a family member is already very familiar with the business.  If a family member is treating the responsibility seriously and has prepared years in advance for the responsibility of owning the business, then selling to a family member can work.

However, there are many potential problems when it comes to selling a business to a family member.  One problem is that the family member simply lacks the cash to buy the business.  This can cause disruptions.  If the family member is unprepared to run the business, then the business can suffer a range of disruptions leading to a loss of business.  Any family member that buys a business must be ready for the responsibility.  An outside buyer usually solves all of the problems that come along with a family member buying a business.

2.  The Individual Buyer

Most owners of small to mid-size businesses like the idea of selling to an individual buyer.  Often these buyers are older between the ages of 40 and 60, and bring with them a good deal of real world business experience acquired in the corporate world.  For these buyers, owning a business is a dream come true.  Many individual buyers have the funds necessary to buy.

An individual buyer who is looking to replace a job that has been lost or downsized is often an excellent candidate.  On the downside, individual buyers quite often have not owned a business before and may be intimidated by what is involved.  At the end of the day, the individual buyer is often easier to deal with than other types of buyers.

3.  Business Competitor

It is quite common for business owners to look to their competitors when it comes time to sell.  No doubt, the approach of selling to a competitor makes sense, as a competitor already understands the business and will likely see the value.

Additionally, a buyer may see buying a similar business as an easy way to expand and increase cash flow.  That stated, it is extremely important to work with a business broker in this situation.  By going through a business broker, it is possible to have a secure confidentiality agreement in place so that the prospective buyer doesn’t learn the name of the business or other details before signing the agreement.

4.  The Foreign Buyer

Foreign buyers often have the funds they need and look at buying an existing business as a way of addressing such issues as language barrier, licensing difficulties and other problems.  Business brokers can be very helpful when working with foreign buyers, as they have experience with the obstacles a foreign buyer may face.

5.  Synergistic Buyers

A synergistic buyer is one that feels that a particular business would complement his or her existing business.  The idea is that they can combine the two businesses and in the process, lower their cost and acquire new customers.  These are just a few of the advantages for a synergistic buyer, and that is why they are often willing to pay more than other buyers.

6.  Financial Buyers

Financial buyers can come with a long list of demands, criteria and complications, but that doesn’t mean that they should be discounted.  With the assistance of a business broker, financial buyers can still be good prospective candidates.

It is, however, important to remember that these buyers want maximum leverage and are often a good option for the seller who wants to continue to manage a company after it is sold.  It is common for financial buyers to offer a lower purchase price than other types of buyers.  After all, buying the business is strictly for financial purposes and it isn’t attached to fulfilling a dream or a family tradition.  Financial buyers are looking for a business that is generating sufficient profits so as to support the business and provide a good return to the owner.

Working with a business broker can help you find the right kind of buyer for you.  Every business is different and every prospective buyer is different.  A business broker can help you navigate the possibilities so you find the right buyer for your business.

Copyright: Business Brokerage Press, Inc.

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5 Things You Need to Know About Confidentiality Agreements

Confidentiality is a major concern in virtually every business.  Quite often business owners become a little nervous when it comes time to sell their business; after all, business owners usually want to keep the fact that they are selling confidential.  Yet, at the same time, business owners want to receive top-dollar for their businesses and sell that business as quickly as possible.  In order to sell a business quickly and receive top-dollar, it is usually necessary to present the business to a range of prospects.  The simple fact is that you can’t sell a business without letting prospective buyers know that it is for sale.

All of this adds up to one simple conclusion: you will need a confidentiality agreement when selling a business.  Let’s look at a few of the key points your confidentiality agreement should cover.

  1. Type of Negotiations

First, your confidentiality agreement should cover whether or not the negotiations are open or secret and exactly what kind of information can be disclosed.

2. Duration of Agreement

Your confidentiality agreement must specify exactly how long the agreement will be in effect.  In most circumstances, it is prudent for the seller to seek a permanently binding confidentiality agreement.

3. Special Considerations

There are other considerations as well, for example, does your business hold any patents?  A buyer could learn about your inventions during a buying process so you’ll want to make sure that your confidentiality agreement protects your patent and copyright interests as well.

4. State Laws

Additionally, your confidentiality agreement must factor in different state laws if the other party is based in a state different than your own.

5. Recourse in the Case of Breach

Finally, your confidentiality agreement should outline what recourse you will have if the agreement is breached.  Having a confidentiality agreement does not offer magical protection against a violation.  However, a confidentiality agreement does ensure that prospective buyers understand the seriousness of the situation and that there are indeed severe consequences if the agreement is not followed.

It is important for all parties involved to realize that a confidentiality agreement is a legally binding agreement that is enforceable in a court a law.  Thanks to a confidentiality agreement, a seller can share confidential information with a prospective buyer or business broker so that a business can be properly evaluated.

With so much on the line, it is vital that you have your confidentiality agreement drawn up by a legal professional.  A good confidentiality agreement is an investment in your business.  It is possible for a business owner to sell his or her business and do so with some degree of confidence that information shared with prospective buyers will not be disclosed.

Copyright: Business Brokerage Press, Inc.

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Financing the Business Sale: 6 Questions to Know

How the purchase of a business will be structured is something that must be dealt with early on in the selling process.  The simple fact is that the financing of the sale of a business is too important to treat as an afterthought.  The final structure of any sale will be the result of the negotiations between buyer and seller.

In order for the sale to be completed in a satisfactory manner, it is vital that the seller answers six key questions:

  1. What is your lowest “rock bottom” price?  It is important for sellers to know what is the lowest price they are willing to accept before they begin negotiations.  Far too often, sellers have not determined what price is their “lowest price” and this can literally cause negotiations to fall apart.
  2. What are the tax consequences of the sale?  Just as sellers often don’t know what their lowest price is, it is also true that sellers often don’t think about the tax consequences of the sale.
  3. Interest rates are no small matter.  It is important to determine what is an acceptable interest rate in the event of a seller-financed sale.
  4. Have unsecured creditors been paid off?  Does the seller plan on paying for a portion of the closing costs?
  5. Will the buyer have to assume any long-term or secured debt?
  6. Will the business be able to service the debt and still give a return that is acceptable to a buyer?

Studies have indicated that there is a direct relationship between more favorable terms and a higher price.  In particular, one study revealed that offering favorable terms could increase the total selling price by as much as 30 percent!

Business brokers are experts in what it takes to successfully buy and sell businesses, and this is exactly the kind of insight and information that they have at their disposal.  Experienced brokers are able to use their knowledge of everything from current market conditions and financing strategies to the knowledge of previous sales and a given geographic region to help facilitate successful deals.

Usually, selling a business is one of the most important things that a business owner does in his or her professional lifetime.  Business brokers understand this fact, and they understand the importance of making certain that the deal is structured correctly.  The facts are that the way in which a sale is structured could mean the difference between success and failure.

Structuring a deal in such a way where it is the best possible deal for both the buyer and seller, helps to ensure that a deal is successfully concluded.  Working with a business broker is one of the best way to ensure that a business will be sold.

Copyright: Business Brokerage Press, Inc.

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Defining Goodwill

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You may hear the word “goodwill” thrown around a lot, but what does it really mean?  When it comes to selling a business, the term refers to all the effort that the seller put into a business over the year.  Goodwill can be thought of as the difference between the various tangible assets that a business has and the overall purchase price.

The M&A Dictionary defines goodwill in the following way, “An intangible fixed asset that is carried as an asset on the balance sheet, such as a recognizable company or product name or strong reputation.  When one company pays more than the net book value for another, the former is typically paying for goodwill.  Goodwill is often viewed as an approximation of the value of a company’s brand names, reputation, or long-term relationships that cannot otherwise be represented financially.”

Goodwill vs. Going-Concern

Now, it is important not to confuse goodwill value with “going-concern value,” as the two are definitely not the same.  Going-concern value is typically defined by experts, as the fact that the business will continue to operate in a manner that is consistent with its intended purpose as opposed to failing or being liquidated.  For most business owners, goodwill is seen as good service, products and reputation, all of which, of course, matters greatly.

Below is a list of some of the items that can be listed under the term “goodwill.” As you will notice, the list is surprisingly diverse.

42 Examples of Goodwill Items

  • Phantom Assets
  • Local Economy
  • Industry Ratios
  • Custom-Built Factory
  • Management
  • Loyal Customer Base
  • Supplier List
  • Reputation
  • Delivery Systems
  • Location
  • Experienced Design Staff
  • Growing Industry
  • Recession Resistant Industry
  • Low Employee Turnover
  • Skilled Employees
  • Trade Secrets
  • Licenses
  • Mailing List
  • Royalty Agreements
  • Tooling
  • Technologically Advanced Equipment
  • Advertising Campaigns
  • Advertising Materials
  • Backlog
  • Computer Databases
  • Computer Designs
  • Contracts
  • Copyrights
  • Credit Files
  • Distributorships
  • Engineering Drawings
  • Favorable Financing
  • Franchises
  • Government Programs
  • Know-How
  • Training Procedures
  • Proprietary Designs
  • Systems and Procedures
  • Trademarks
  • Employee Manual
  • Location
  • Name Recognition

As you can tell, goodwill, as it pertains to a business, is not an easily defined term.  It is also very important to keep in mind that what goodwill is and how it is represented on a company’s financial statements are two different things.

Here is an example: a company sells for $2 million dollars but has only $1 million in tangible assets.  The balance of $1 million dollars was considered goodwill and goodwill can be amortized by the acquirer over a 15-year period.  All of this was especially impactful on public companies as an acquisition could negatively impact earnings which, in turn, negatively impacted stock price, so public companies were often reluctant to acquire firms in which goodwill was a large part of the purchase price.  On the flip side of the coin, purchasers of non-public firms received a tax break due to amortization.

The Federal Accounting Standards Board (FASB) created new rules and standards pertaining to goodwill and those rules and standards were implemented on July 1, 2001.  Upon the implementation of these rules and standards, goodwill may not have to be written off, unless the goodwill is carried at a value that is in excess of its real value.  Now, the standards require companies to have intangible assets, which include goodwill, valued by an outside expert on an annual basis. These new rules work to define the difference between goodwill and other intangible assets as well as how they are to be treated in terms of accounting and tax reporting.

Before you buy a business or put a business up for sale, it is a good idea to talk to the professionals.  The bottom line is that goodwill can still represent all the hard work a seller put into a business; however, that hard work must be accounted for differently than in years past and with more detail.

Copyright: Business Brokerage Press, Inc.

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A Deeper Look at Seller Financing

Buying a business requires a good deal of capital or lender resources.  The bottom line is that a large percentage of buyers don’t have the necessary capital or lender resources to pay cash and that is where seller financing comes into play.  The fact is that seller financing is quite common.  In this article, we will take a deeper look at some of the key points to remember.

Is Seller Financing a Good Idea?

Many buyers feel that a seller’s reluctance to provide seller financing is a “red flag.”  The notion is that if a business is truly as good as the seller claims it to be, then providing financing shouldn’t be a “scary” proposition.  The truth is that this notion does carry some weight in reality.  The primary reason that many sellers are reluctant to provide seller financing is that they are concerned that the buyer will be unsuccessful.  This, of course, means that if the buyer fails to make payments, that the seller could be forced to take the business back or even forfeit the balance of the note.

However, it is important for sellers to look at the facts.  Sellers who sell for all cash receive approximately 70% of the asking price; however, sellers receive approximately 86% of the asking price when they offer terms!

Seller Financing has a Range of Benefits

Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, sellers can get a much higher interest rate from a buyer than they can receive from a financial institution, the interest on a seller-financed deal will add significantly to the actual selling price, there are tax benefits to seller financing versus an all-cash sale and, finally, financing the sale serves as a vote of confidence in the buyer.

Clearly there are no guarantees that the buyer will be successful in operating the business.  Yet, it is key that sellers remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business.  In other words, in most situations, the buyer is heavily invested even if financing is involved.

Business brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business.  Your broker can recommend a range of payment options and plans that can, in the end, often make the difference between a successful sale and failure.

Copyright: Business Brokerage Press, Inc.

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Selling a Business? Be Aware of These Four Potential Issues

We’ve outlined below a few unexpected aspects of the business sale process that can pop up.  Sometimes they severely impact the turnaround time of a sale.  But if you can understand these potential issues better, you will be better prepared to try to circumvent them.

 

1.  Do You Have Time on Your Side?

It’s helpful to use an intermediary who will assist with the filtering of prospects vs. “suspects.”  However, the inclusion of yet another party, in addition to both the business seller and potential buyers, increases the amount of time required to navigate the process.  

Sellers are typically unaware of the time and documentation needed to compile the required Offering Memorandum.  Once completed, the seller must provide both the intermediary and potential buyer more time to review and propose meetings and pricing.  In the interim, owners are faced with the challenge of keeping their business thriving.

 

2.  Trying to Do Too Much

It’s not surprising when a company owner is also its founder that individual is typically used to making all of the decisions.  That’s why business owners in the midst of selling will soon find themselves challenged with the desire to fully be a part of both the selling process and the running of the business.  

Delegation to someone else, such as the Sales Manager, can be truly invaluable.  Think of your top people as extremely valuable resources.  They may have first-hand knowledge regarding additional concerns such as competition and potentially interested acquirers.  Bringing in trusted employees to be part of the sales process can be tremendously beneficial.

 

3.  Delays Due to Stockholders

When mid-sized, privately held companies are supported by minority stockholders, these individuals must be included in the selling process—however small their share may be.  The business owner will need to firstly obtain their approval to sell by using the sale price and terms as influencers.  Of course, issues such as competing interests, pricing disagreements, and even inter-family concerns may cause conflict and further delay the process.

 

4.  Money Issues

Once sellers decide upon a price that they would like to see, it is sometimes difficult for them to accept or even consider anything less.  After all, a business owner likely created the company and may have a strong emotional attachment.

Another factor that often interferes with a successful sale occurs when sellers instantly turn down offers because they don’t meet with their desired asking price.

That’s when the intermediary can often come in to salvage the deal.  A business broker often serves as a negotiator.  He or she can work out a deal that is structured in a manner that works for both sides.

Copyright: Business Brokerage Press, Inc.

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Your Company’s Undocumented Worth

The valuation is a major factor that influences the overall selling price of the property.  Business appraisals are based upon a multitude of criteria and indisputable records such as comparables, projections, discount rates, EBITDA multiples, and more.  

While the appraiser may have all the information he or she needs, the business elements might be overlooked.  That’s why it’s extremely helpful for business appraisers to first grasp the purpose of an appraisal prior to getting started.  Unfortunately, the appraiser is often unaware of additional considerations that may enhance or even devalue a business’ overall worth.  

Is There Unwritten Value?

Business owners generally agree that prospective buyers are mostly looking for quality in depth of management, market share, and profitability.  Though undoubtedly more subjective than documentation, figures, and calculations alone, information regarding key business elements such as market, operations, post-acquisition, value drivers, and fundamentals is highly valued to potential buyers.

Here are some questions to consider regarding a couple of these crucial elements:

Is there an abundance of market competition?

Does pricing reasonably align with the demographic?

Are the company goals consistent with advancing technology?

Are there various and/or global means of reach and distribution?

Does the business have more potential beyond a niche?

What’s the company’s competitive advantage?

What are the strengths and weaknesses of its competitors?

Is there a great deal of alternative technologies?

Are there various vendors?

Is the company’s location convenient to its target audience?

Increased Success & Valuation

Successful businesses thrive due to company-wide values and consistent customer-centric efforts.  In his book The 100 Absolutely Unbreakable Laws of Business, Brian Tracy summarizes this as “a company-wide focus on marketing, sales and revenue generation.  The most important energies of the most talented people in the company must be centered on the customer.  The failures to focus single-mindedly on sales are the number one causes of business failures, which are triggered by a drop-off in sales.”

Tracy continues by pointing out that trends may be the most pivotal consideration and bottom-line contributor to any given company’s success and, therefore, valuation.  For 2017, projected trends include the increased use of video marketing, crowdfunding as a source of product validation, nutrition and fitness tracking products, the use of e-commerce, and the acquisition and training of remote employees.  

Understanding Trends

Start-up companies are likely practicing as many current trends as possible within their limited funding in an attempt to establish market share, while mature companies are hiring millennials to keep their business hip to those same trends in an effort to protect their existing share.  Business owners would benefit from studying and ultimately executing these current trends, as well as from acknowledging the successes and mistakes of their competitors.  

Tracy suggests that daily conversations that encompass problem-solving, decision-making, and team collaboration are pivotal factors in making a company successful.  And those performing all of these necessities?  As Tracy reiterates, top companies have the best people.

Copyright: Business Brokerage Press, Inc.

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Service Businesses Perform Highest When It Comes to Sales

Recently, Business Brokerage Press performed a survey of brokers across the country to see what sells at the highest rate, and what they discovered was very interesting.  Retail business sold at 17%, food and drink related businesses at 14%, service oriented businesses sold at 25%, auto related businesses sold at 9%, manufacturing businesses sold at 16% and distribution businesses sold at 11%.  Businesses labeled as “other” sold at 5% and professional practices at 4%.

What is a Service Business?

Looking at this gathered information, it is clear that “service type businesses” are very hot and doing quite well.  The range for what is considered a service type business is, in fact, rather broad.  It encompasses everything from a dry cleaner and hair stylist business to a massage therapy chain or dental practice.  Just so long as a business is providing a service and doesn’t fall into another category, it falls under the “service oriented” banner.

Food and Drink Businesses

One of the next key nuggets of information from the survey is that food and drink businesses tend to perform quite well too.  Food and drink businesses range from bars to sit down restaurants or fast food establishments.  The simple fact is that people need to eat, and this truth is certainly reflected in the strong performance of food and drink businesses.  The need for certain types of businesses may change with changing times and changing technologies, but food and drink remains a staple.

Eating, for example, isn’t a trend and the tradition of visiting a local bar or restaurant is very established.  In fact, some of the oldest continuously operating businesses in the world are bars and restaurants.  Those looking for a business that has some degree of built in stability and is likely to be at least partially immune to emerging trends will be well advised to consider food and drink businesses.

The Mindset of Today’s Buyers

When you are considering what types of businesses that buyers may find interesting it is important to pause and reflect on the likely profile of prospective buyers.  Today, a large percentage of prospective buyers are well educated and bring a lot of experience to the table.  In short, they are savvy and know what they want.

This combination of education and experience also means that they are open minded and potentially flexible regarding the type of businesses that they will consider.  Most prospective buyers will, in fact, be open to a wide array of potential options.  At the end of the day, the most important factor for most prospective buyers will be whether or not a business is profitable.

The majority of prospective buyers will not be making an emotional buy.  Instead, due to their combination of experience and education, they are very likely to focus on profitability above all else.  Of course, this fact underscores the importance of having your business ready to sell long before the first prospective buyer sees it.

Copyright: Business Brokerage Press, Inc.

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Gaining a Better Understanding of Leases

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Leases can, and do, play a significant role in the buying or selling of businesses.  It can be easy to overlook the topic of leases when focusing on the higher profile particulars of a business.  However, leases are a common feature of many businesses and simply can’t be ignored.

Leases and Working with Your Attorney

Whenever a small business is sold, it is common that leases play a major role.  In general, there are three different types of leasing arrangements.  (If you have any questions about your lease, then you should consult with your attorney.  Please note that the advice contained in this article shouldn’t be used as legal advice.)

Three Different Lease Options

In the next section, we will examine three of the most common types of leases.  The sub-lease, new lease and assignment of lease all function in different ways.  It is important to note that each of these three classes of leases can have differing complicating factors, which again underscores the value and importance of working with an attorney.

The Sub-Lease

The sub-lease, just as the name indicates, is a lease inside of a lease.  Sellers are often permitted to sub-lease a property, which means that the seller serves as the landlord.  It is key to note, however, that the initial landlord still has a binding agreement with the seller.  Sub-leasing requires the permission of the initial landlord.

New Lease

If the previous lease on a property expires or is in need of significant change, a new lease is created.  When creating a new lease, the buyer works directly with the landlord and terms are negotiated.  It is customary to have an attorney draft the new lease.

Assignment of Lease

Assigning a lease is the most common type of lease used when selling a business.  The assignment of a lease provides the buyer with use of the premises where the business currently exists; this works by having the seller “assign” all rights of the lease to the buyer.  Once the assignment takes place, the business’s seller typically has no further rights.  Also, it is common that the landlord will have wording in the contract that states the seller is still responsible for any part that the buyer doesn’t perform as expected.

Disclose All Lease Issues at the Beginning of the Sales Process

No one likes surprises.  If there is a problem with your lease, then this is something that should be disclosed in the beginning of the sales process.  Not having a stable place to locate your business can be a major problem and one that should usually be addressed before a business is placed for sale.  Buyers don’t like instability and unknowns.  Not having a firm location is definitely an issue that must be resolved.

Buyers want to see that you have made their transition from buyer to owner/operator as easy as possible.  Providing clarity of issues, such as leasing, will help you attract a buyer and keep a buyer.  Regardless of whether it is dealing with leasing issues or other key issues involved in buying or selling a business, working with a business broker can help you streamline the process and achieve optimal results.

Copyright: Business Brokerage Press, Inc.

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What is Really in the Mind of Your Buyer?

It is always important to try and put yourself “in the other person’s shoes.”  This fact is of paramount importance when dealing with prospective buyers.  Thinking like a prospective buyer could, in fact, be the difference between selling your business and not selling your business.  Yet, it is important to continue to put yourself in your buyer’s shoes during the entire sales process.

It is easy to think that because everything is going smoothly with the sale of your business that the tough part is behind you.  That may be true, but then again there could still be problems ahead.  Issues can come up at a moment’s notice when either your prospective buyer or his or her advisor raises a red flag.  Additionally, the larger the business, the greater the complexity.  This translates to the greater the risk of problems arising.

The “Little Things” that Could End Up Quite Big

Financial statements are of considerable importance.  Quite often you’ll see contingencies regarding financial statements and/or business tax returns, so be ready and be organized.  Lease issues is another common category for contingencies.  Falling under the lease issue umbrella are topics such as whether or not the seller has agreed to stay on, or issues regarding the property or needs associated with the property if it is a rental.

Other common contingencies can include issues arising from equipment and fixtures that are being included with the sale.  These are areas that could be easy to overlook, but they can serve to throw a major wrench into the workings of a deal.  The so-called “little things” can cause a deal to fall apart.

3 Key Steps for Preventing Disruptions from Contingencies

Step One – Create a Comprehensive List

One easy move you can make to prevent disruptions from contingencies is to make a list of all FF&E or furniture as well as fixtures, equipment or any other items that could be included with the sale.  If an item is not included be sure to remove it entirely.

Likewise, if an item is inoperable then repair it ahead of time.  Or at the bare minimum, you could make a list of items that are currently inoperable and include those items in your list.  Remember, you don’t want a last-minute surprise or misunderstanding to jeopardize your sale.

Step Two – Check Your Leases

Problems with leases can send deals spiraling out of control.  It is a prudent investment of your time to look at things like your leases.  You’ll want to make certain that there are no issues that could be viewed as problematic.  If there are issues, then it is in the best interest of the deal that you disclose this information at the start of any deal.  After all, you don’t want to waste anyone’s time, including your own.

Step Three – Predict Questions and Have Answers Ready

The time you invest in predicting potential questions and having the answers to those questions ready is time very well spent.  You’ll look prepared and that helps build trust.

Be ready to answer questions that are likely to arise such as are you going to stay on with the business for a given period of time and what will be the cost, if any, of you doing so?  What about employees staying on?  Are there legal issues that should be considered?  Being able to answer these kinds of questions is a prudent step.

Considering the needs of your prospective buyer will help you make a sale.  In selling a business, there is no replacement for being organized and prepared.

Copyright: Business Brokerage Press, Inc.

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