Seller Financing

The majority of business sales include some form of seller financing.  Typically, seller financing is when the seller provides a loan to cover part of the purchase price.  The rest of the purchase price is covered by the down payment or often other financing sources are used as well.  Summed up another way, the seller is essentially acting as a bank for the buyer.

When sellers offer financing, it often also helps them achieve a higher final sale price.  Sellers who are not open to seller financing will likely limit their possibilities.

 

Performing Due Diligence

When a seller opts for seller financing, it is necessary to do much of the work that a bank would usually perform, for example, checking a potential buyer’s credit report, financial statements and other key financial information.  After all, if you opt to offer seller financing, then you’ll want to ensure that your buyer will not default.

Usually contracts allow for the seller to take back a business in 30 to 60 days if financing fails.  In this way, the buyer can avoid a potentially serious business problem.

There are often other contractual stipulations as well.  A common clause for businesses involving inventory is that new owners need to maintain a certain level of supplies during the payment period.

 

Providing Benefits for Both Parties

It should also be noted that seller financing is of considerable interest to buyers.  Sellers looking to attract as much attention to their business as possible will want to consider this route.  Offering this type of financing sends a very clear message.  When a business owner is open to seller financing, he or she is stating that he or she has great confidence that the business will generate both short term and long term revenue.  That level of confidence speaks volumes to buyers about the health of the business.

 

What Due Terms Typically Look Like?

In terms of the length of seller financing, 5 to 7 years is typical.  The issue of how much a seller is expected to finance is another issue that draws considerable attention.  While there are no steadfast rules as to what percentage seller’s typically finance, it is common for sellers to finance up to 60% of the total purchase price.

Finally, seller financing does have a good deal of paperwork and points to consider.  Opting to work with an attorney or business broker is absolutely essential to protect all parties involved.

 

Copyright: Business Brokerage Press, Inc.

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The Power of Recurring Revenue

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Buyers and sellers alike love recurring revenue.  But what is it exactly that makes it so attractive?  Recurring revenue is generally viewed as a very good factor as it indicates positive cash flow, the potential for growth, business success and business stability.  Let’s take a closer look at how it can benefit you.

Show You’re in Demand

Businesses, including IT companies, are valued higher if they can show recurring revenue, such as monthly subscriptions, SaaS subscriptions, or a transaction that consistently occurs.  If your business is centered on a subscription based platform and you have high subscription levels, then you can expect keen interest from prospective buyers.

If you want to show a prospective buyer that your business is a good bet, then recurring revenue is a great place to start.  Recurring revenue indicates that you have ongoing consumers and that means ongoing revenue.  But recurring revenue indicates something else as well, namely, it indicates that your business is providing a consistent service that is consistently in demand.

Take the Pressure Off Buyers

Buyers like predictability.  Recurring revenue means that a buyer knows that he or she can buy a business and count on income from day one.

Sellers can often forget that most buyers get nervous when they are making any kind of business buying decision.  The power of recurring revenue is, in part, psychological as it allows buyers to realize that there will be revenue no matter what.  Even if they do little to develop the business, cash will flow in.  In other words, the psychological value of recurring revenue is that it takes much of the pressure off.

Examining Your Annual Recurring Revenue

If your business has a strong annual recurring revenue or “ARR”, then you should place a good deal of focus on this fact.  Many feel that a company’s ARR number is a powerful indicator of a company’s overall health.

Ultimately, recurring revenue indicates a great deal about your company.  High recurring revenue doesn’t just mean that you have a reliable source of income every period.  It indicates that your business is providing a service that is needed and valued.  Strong recurring revenues also indicate that your business is doing many things correctly and that your goods and/or services are of such a caliber that you are generating repeat business.

Visibility and Transparency

Savvy buyers also value visibility and transparency.  Thanks to this kind of consistent income, it is easier for buyers to plan for and manage future expenses and increase a business’s overall stability.

Part of properly showcasing your business is to emphasize your business’s recurring revenues if they do indeed occur.  A seasoned business broker can be an invaluable ally in helping you reveal your business in the best light possible.

 

Copyright: Business Brokerage Press, Inc.

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What is EBITDA and Why is it Relevant to You?

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If you’ve heard the term EBITDA thrown around and not truly understood what it means, now is the time to take a closer look, as it can be used to determine the value of your business.  That stated, there are some issues that one has to keep in mind while using this revenue calculation.  Here is a closer look at the EBITDA and how best to proceed in using it.

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization.  It can be used to compare the financial strength of two different companies.  That stated, many people don’t feel that EBITDA should be given the importance that is frequently attributed to it.

Divided Opinion on EBITDA

If there is disagreement on EBITDA being able to determine the value of a business, then why is it used so often?  This calculation’s somewhat ubiquitous nature is due, in part, to the fact that EBITDA takes a very complicated subject, determining and comparing the value of businesses, and distills it down to an easy to understand and implement formula.  This formula is intended to generate a single number.

EBITDA Ignores Many Key Factors

One of the key concerns when using or considering a EBITDA number is that it is often used as something of a substitute for cash flow, which, of course, can make it dangerous.  It is vital to remember that earnings and cash earnings are not necessarily one in the same.

Adding to the potential confusion is the fact that EBITDA does not factor in interest, taxes, depreciation or amortization.  In short, a lot of vital information is ignored.

Achieving Optimal Results

In the end, you simply don’t want to place too much importance or emphasis on EBITDA when determining the strength of a business.  The calculation overlooks too many factors that could influence future growth and prosperity of a business.

Business brokers have been trained to handle valuations to determine the approximate value of a business.  Since valuations take many more factors into consideration, they also tend to be far more accurate.

 

Copyright: Business Brokerage Press, Inc.

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Five Reasons Business Brokers Improve Closing Rates

It has long been a well-known fact that business brokers can help improve closing rates. In this article, we will take a closer look at the five top reasons why having a business broker on your side can make all the difference in the world.

 

#1 – They Reach the Most Buyers

What seller isn’t looking to reach more buyers? When more candidates are reviewing your business, the odds of selling for your desired price only go up. The simple fact is that business brokers reach the most buyers. In fact, they usually have a long list of prospective buyers waiting.

 

#2 – Business Brokers Know How to Navigate Negotiation Hurdles

As the old saying states, “there is no replacement for experience,” and this definitely holds true for business brokers. Business brokers know what it takes to circumvent negotiation hurdles. Their years of hands on experience means they can spot problems long before they occur, and this dramatically helps them to successfully boost closing rates.

 

#3 – They Know How to Present Your Business

Once again, experience matters. Business brokers specialize in buying and selling, and this means that they understand how to best present those businesses. Showcasing your business in the best light possible and working to eliminate weaknesses in presentation is a vital part of the sales process. Business brokers put their experience to work helping sellers achieve the best presentation possible.

 

#4 – They Stay Focused

Business brokers sell businesses for a living. You, however, by contrast have to worry about the day to day state of your business until all the paperwork is signed.

Additionally, since you are unfamiliar with the process of selling a business, you very well may become bogged down in the process; this is more dangerous than it may seem. Sellers who spend too much time getting involved in the “ins and outs” of the deal may accidentally start to neglect their own business operations. The last thing you want in the time period leading up to a sale is for your business to suddenly flounder.

 

#5 – Business Brokers Are Highly Invested in Your Success

Business brokers only get paid if your business sells. That means they too have a vested interest in your success. You can expect them to do everything possible to ensure that the sale of your business goes through.

 

Added together, these five factors help to explain why business brokers have historically enjoyed high closing rates. If you want to improve your chances of selling a business, don’t try to do it alone.

 

Copyright: Business Brokerage Press, Inc. 

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How to Keep Employees Engaged During an Ownership Transition

Ensuring that your employees stay on course during your ownership transition should be one of your key areas of focus.  There are many key steps that you should take during this delicate time.  Let’s explore the best tips for keeping your employees engaged throughout the entire ownership transition process.

 

Step 1 – Establish and Implement a Training Program Early On

If you are selling your business, then be certain that you train replacements early on in the process.  Failure to do so can result in significant disruptions.  Additionally, if you are buying a business it is of paramount importance that you are 100% confident that there are competent people staying on board after the sale.

 

Step 2 – Address Employee Concerns

No matter what your employees say or how they act, you must assume that they are worried about the future.  After all, if you were them wouldn’t you be concerned at the prospect of a sale?  The best way to address these concerns is to meet with employees in small groups and discuss their concerns.

 

Step 3 – Don’t Make Drastic Changes

Above all else, you want a smooth and fluid transition period.  A key way to ensure that this time is as trouble-free as possible is to refrain from making any drastic changes before or after the transition.  Remember the sale of the business is, in and of itself, shocking enough.

You don’t want to add yet more disruption into the process by making changes that could be confusing or unsettling.  In other words, keep the waters as calm as possible.  Drastic changes could lead to employees quitting or worst of all, going to work for a competitor.

 

Step 4 – Focus on the Benefits

If possible focus on the benefits to your employees.  It is your job as the new business owner to outline how the sale will benefit everyone.  Don’t let your employees’ imaginations run wild with speculation.  Unfortunately, this is exactly what happens when employees and management feel as though they are not receiving any information about the sale.  So don’t be mysterious or cryptic.  Instead provide your employees with information, and keep the focus on how the changes will benefit them both personally and professionally.

Implementing these four steps will go a very long way towards helping to ensure a smooth transition period.  Transition periods can be handled adeptly; it just takes preparation and patience.

 

Copyright: Business Brokerage Press, Inc.

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Is It Possible to Sell to a Business Competitor?

A common question in the realm of buying and selling businesses is, “Is it possible to sell to a business competitor?” The short answer is yes, it is quite possible and rather common. That stated, selling to a business competitor is different than selling to a buyer who is completely new to the industry. The two types of buyers should not be treated the same way, as there are various differing variables.

A Competitor Can Be a Great Buyer

One reason is that a competitor may indeed be the right party to buy your business, is that they usually have an excellent understanding of how your business and your industry works. They may also enter the negotiation process already understanding the value of your business, and this can serve to speed up the process.

Always Proceed with Caution

Competitors, however, must be approached carefully. Unfortunately, there have been many cases where competitors acted as though they wanted to buy in order to acquire access to inside information. That’s why sensitive information like client lists and other “secrets” shouldn’t be shared until the sale is complete and the money is literally in the bank.

Working with a business broker is always a prudent move when it comes to buying and selling businesses; however, when working with a competitor is involved a business broker is even more important than normal. A business broker can act as something of a shield in the process, helping to ensure that you don’t reveal too much prized information until the sale is 100% complete.

Negotiate from a Place of Knowledge

Further, a business broker understands how much your business is worth and can back up that valuation. Having this information before discussing a potential sale with a competitor is of great importance.

Be Prepared to Accept Certain Legal Conditions

Finally, don’t be surprised if your competitor asks you to sign a non-compete or for you to stay on as a consult after he or she has acquired your business. This is a prudent step and one that makes tremendous sense. If you were buying a business from a competitor wouldn’t you want to make certain that the competitor didn’t simply “set up shop” somewhere else a few months or even a couple of years later? Likewise, tapping your expertise is another prudent move for your former competitor.

Summed up, selling your business to a competitor is a potentially great move, but it is also an opportunity that absolutely must be explored with extreme caution. Never divulge critical information to your competitor until the deal is finalized.

 

Copyright: Business Brokerage Press, Inc.

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The Importance of Having a Dominant Position in the Market

In order to get top dollar for your business, it is necessary to prepare for the sale well in advance. In short, a tremendous amount of strategy and preparation goes into a successful sale. The amount you ultimately receive for your business is directly tied to how well you prepare.

At the top of the list of making sure that your business is attractive to potential buyers is to make certain your business is as well positioned in the market as possible. Of course, this is often easier stated than done. Here are some of the best ways to make sure your business is optimally positioned.

 

Tip One – Start Positioning Your Business Well in Advance

Selling your business isn’t something you should just do one day. You should start positioning your business at least one year before the closing.

Quite often, experts say business owners should always operate as though a sale is on the horizon. This makes a great deal of sense on one hand. If you ever experience an unexpected turn of events and need to sell, then you will certainly be ready. Another reason that this advice is solid is due to the fact that operating as though a sale is on the horizon helps you make certain that your business is running as effectively and efficiently as possible.

 

Tip Two – Always Think About Growth

Another way to ensure optimal position in the market is to always stay focused on growth. Asking yourself what steps you can take to grow your business in both the short term and the long term is a prudent move. You should always know what it takes to launch a new growth stage.

 

Tip Three – Customers, Lots of Customers/Clients

You don’t want a prospective buyer to see that you have only one or two key customers or clients. Understandably, this situation should make a buyer quite nervous. It comes across as extreme vulnerability. Having many varied customers or clients is a step in the right direction.

 

Tip Four – Be Ready for Due Diligence

Whatever you do, don’t overlook due diligence. Neglecting or waiting to prepare for the buyer’s due diligence stage until the eleventh hour is quite risky. Have all of your financial, legal and operations documents ready to go. A failure to properly handle due diligence could derail a deal or even reduce the amount you receive.

 

Tip Five – Understand Your Business’s Strengths and Weaknesses

Every business has strengths and weaknesses. Don’t attempt to hide your weaknesses or overplay your strengths. Be transparent!

A business broker is an expert at handling investors and even writing a business plan that you can hand to potential buyers.

Think about boosting your market position while simultaneously increasing the odds that you receive top dollar for your sale. Instead of rushing, take the time to prepare and work with a business broker to achieve the best market position and sale price possible.

 

Copyright: Business Brokerage Press, Inc.

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Are You Emotionally Ready to Sell?

Quite often sellers don’t give much thought to whether or not they are ready to sell. But this can be a mistake. The emotional components of both buying and selling a business are quite significant and should never be overlooked. If you are overly emotional about selling, then this fact can have serious ramifications on your outcomes. Many sellers who are not emotionally ready, will inadvertently take steps that undermine their progress.

Selling a business, especially one that you have put a tremendous amount of effort into over a period of years, can be an emotional experience even for those who feel they are more stoic by nature. Before you jump in and put your business up for sale, take a moment and reflect on how the idea of no longer owning your business makes you feel.

 

Emotional Factor #1 – Employees

It is not uncommon for business owners to form friendships and bonds with employees, especially those who have been with them long-term. However, many business owners are either unaware or unwilling to face just how deep the attachments sometimes go.

While having such feeling towards your team members shows a great deal of loyalty, it could negatively impact your behavior during the sales process. Is it possible you might interfere with the sale because you’re worried about future outcomes for your staff members? Are you concerned about breaking up your team and no longer being able to spend time with certain individuals? It is necessary ultimately to separate your business from your personal relationships.

 

Emotional Factor #2 – Do You Have a Plan for the Future?

Typically, business owners spend a great deal of their time and energy being concerned with their businesses. It is a common experience that most owners share. Just as no longer being with your employees every day may create an emotional void, the same may also hold true for no longer running or owning your business.

Your business is a key focal point of your entire life. No longer having that source of focus can be unnerving. It is important to have a plan for the future so that you are not left feeling directionless or confused. What will you do after you sell your business and how does that make you feel? Before you sell, make sure that you have something new and positive to focus on with your time.

 

Emotional Factor #3 – Are You Sure?

Are you sure that you can really let your business go? At the end of the day many business owners discover that deep down they are just not ready to move on. Are you sure you are ready for a new future? If not, perhaps it makes sense to wait until you’re in a more secure position.

Addressing these three emotional factors is an investment in your future well-being and happiness. It is also potentially an investment in determining how smoothly the sale of your business will be and whether or not you receive top dollar.

 

Copyright: Business Brokerage Press, Inc.

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Learn the Dynamics and Save the Deal

Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.”  Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.

Neglecting the  Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business.  At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball.  Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits.  A potential buyer could become concerned if the business flattens out or falls off.

Solution:  For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history.  This is no time to be overly cost conscious.  The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.

Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family.  The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.

Solution:  By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.

Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached.  It happens, perhaps more frequently than not.  The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.

Solution:  Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach.  Involving senior management can also prevent information leaks.

Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively.  According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs.  With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.

Solution:  Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some.   Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important.  If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.

Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction.  Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets.  If the owner is selling real estate, an environmental study is necessary.  If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction.  These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.

Solution:  The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.

Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run.  However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.

Solution:  If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.

Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time.  The potential buyer probably will have a similar set of expectations.

Solution:  Decide ahead of the negotiation which are the very important items and which ones are not critical.  In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.

Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end.  For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time.  It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties.  What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months.  If it does, this means that the deal is dragging and is unlikely to close.  The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.

Solution:  Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost.  The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.

Copyright: Business Brokerage Press, Inc.

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Selling: What Does An Intermediary Expect From You

If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary.  You probably have wondered what you could expect from him or her.  It works both ways.  To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you.  By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:

• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second.  It takes this kind of partnering to get the job done.  You have to return all of his or her telephone calls promptly and be available to handle any other requests.  You, other key executives, and primary advisors have to be readily available to your intermediary.

• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary.  Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale.  Only they can provide the necessary information.

• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer.  An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc.  The lines of communication must be kept open.

• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers.  They will need to know just what is required, and expected, from such visits.

• You will rightfully expect the intermediary to develop a list of possible acquirers.  You can help in several ways.  First, you could offer the names of possible candidates who might be interested in acquiring your business.  Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.

• Keep your intermediary in the loop.  Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents.  Now is not the time to assume that the intermediary’s job is done.  It may just be beginning as the details of financing are completed and final deal points are resolved.  The intermediary knows the buyer, the seller, and what they really agreed on.  You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.

• Be open to all suggestions.  You may feel that you only want one type of buyer to look at your business.  For example, you may think that only a foreign company will pay you what you want for the company.  Your intermediary may have some other prospects.  Sometimes you have to be willing to change directions.

The time to call a business intermediary professional is when you are considering the sale of your company.  He or she is a major member of your team.  Selling a company can be a long-term proposition.  Make sure you are willing to be involved in the process until the job is done.  Maintain open communications with the intermediary.  And, most of all – listen. He or she is the expert.

Copyright: Business Brokerage Press, Inc.

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