Around the Web: A Month in Summary

A recently published Divestopedia article entitled “The Top 10 EBITDA Adjustments to Make Before Selling a Business” explains common practices in adjusting EBITDA before selling a business for the purpose of helping the seller get the best value from the sale. The process of normalizing a company’s financials is often done by investment bankers before a sale to help show potential buyers the best possible version of a company’s financials with the ultimate goal of getting a higher selling price. The following adjustments are some of the best:

  1. Non-Arms-Length Revenue or Expenses
  2. Revenue or Expenses Generated by Redundant Assets
  3. Owner Salaries and Bonuses
  4. Rent of Facilities at Prices Above or Below Fair Market Value
  5. Start-Up Costs
  6. Lawsuits, Arbitrations, Insurance Claim Recoveries and One-Time Disputes
  7. One-Time Professional Fees
  8. Repairs and Maintenance
  9. Inventories
  10. Other Income and Expenses

Adjustments in these factors can be crucial to getting the most out of a business sale. Follow the link to read more about how each of them can affect the sale price of a business.

Click here to read the full article.

 

A recent article published on Axial Forum entitled “Dying is Not an Exit Strategy” speaks on the importance of having an exit strategy and succession plan. There can be nothing worse than the unexpected illness or death of a business owner without a proper plan for the business in place. These unfortunate circumstances will not only burden the family of the owner, but will likely result in the liquidation of a business at a fraction of its true value.

Three important factors to consider when planning a succession strategy include:

  1. Who will run the business?
  2. Who will own the business?
  3. How will proceeds from a sale be distributed?

Whether or not you’re in a position to think about selling your business in the near future, it is still important to think about how you’d like to transition in the event of unexpected circumstances.

Click here to read the full article.

The recent article published in Divestopedia entitled “Who Will Buy My Company?” helps business owners understand the avenues for finding a buyer for their business. With options in selling internally, externally, or a combination of both, there are multiple paths and opportunities to finding the right buyer. Each of these paths can result in a unique outcome, so it is important for a seller to choose the one that best fits their needs.

The article identifies two important and useful steps in understanding who will want to purchase a business: identify best buyers and take an offensive approach. Having at least a general idea of who would even consider buying your business is a great first step, which can be refined with better and more pertinent information over time. Taking an offensive approach involves actively becoming a bigger presence in different communities related to the business or industry, giving a seller better insight into what potential buyers may be interested in.

Click here to read the full article.

 

The recent article published in Divestopedia entitled “If You’re Selling Your Company, Don’t Get Sandbagged” explains what a “sandbag clause” is and how sellers can avoid them during the transaction process. As explained by the author, sandbagging occurs when a purchaser goes through with closing a deal when they are aware of misrepresentations in a seller’s contract. This is often used as basis for an indemnity claim by the buyer after the sale.

Sellers can get sandbagged in a few different ways, with some of the more common related to the fact that the seller doesn’t know every exact detail about the daily operations of a business. Often times, a buyer can uncover some of the finer details that may have been missed in the contract, which is why it is of utmost importance for sellers to be diligent in the process. As the article suggests, having an experienced M&A lawyer may help to mitigate these risks.

Click here to read the full article.

 

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

The recently published Axial article entitled “How Customer Due Diligence Led to a 30% Reduction in Offer Price” explains how important the due diligence process is for a prospective buyer during a business transaction. The author goes in-depth into a case study that demonstrates how proper due diligence can save a bad deal from coming to fruition, while giving examples from the case to show the effect that due diligence can have on a sale.

In the author’s case, further research into a business that seemed to have a great track record and excellent position in the market turned out some interesting information:

  1. Competitors were making progress
  2. Customer service could be improved
  3. Innovation was lacking
  4. Customer loyalty was much lower than average

These things could have easily been overlooked without a proper vetting and due diligence process, but since the business was researched thoroughly, the buyer was able to bring down their offer price by a significant amount.

Click here to read the full article.

 

The recent Forbes article “When Negotiating to Buy a Business – Attitude Is Everything” illustrates how negotiations can and should be treated with care, especially in regard to the attitude of the buyer. It explains how deals can take a quick turn due to things like struggles over non-negotiable points of interest or simply a bad attitude on the part of either the buyer or seller.

Money, of course, always comes into play at some point during negotiations, which is a point of contention and heavy negotiation. Understandably, money talks can draw out a lot of emotion: sellers want to make sure they are getting what they deserve and buyers want to get a deal that will be profitable in the long-term. It is so important for both parties to have respect and to build trust in these negotiations, as a deal can fall through easily if not treated with care.

Click here to read the full article.

 

The recently published Axial article entitled “Selling? Look for a Buyer Who’s Walked a Mile in Your Shoes” explains the benefits of due diligence and patience when selling a business. The article outlines the sale process of the footwear brand Flojos, the pride and joy of the Lins, a couple that built the company into a $50 million+ business over their tenure as owners and operators.

After finding an M&A advisor with experience in the consumer products field, the Lins focused on finding a buyer that would understand and succeed in the business, as well as continue the legacy that they had created. They wanted a buyer that represented their business well, and after receiving a few offers, they were able to select a buyer that was able to do this.

Click here to read the full article.

 

A recent article in The Business Journals “3 Questions to Consider When Looking at Mergers and Acquisitions” outlines what a prospective seller should consider regarding mergers and acquisitions as a means to exit their business. The current state of the M&A market makes this option very lucrative, with record transaction numbers and valuations. But no matter the state of the market, knowing whether or not this is the best option is important. When considering a merger or acquisition, you should ask yourself:

  1. Does M&A align with your company’s strategic plan and vision?
  2. Have you conducted adequate due diligence?
  3. Do you have a post-deal integration plan?

While time and patience are very important during this process, it is also very important to understand everything about the process, why you’re undergoing it, and what it means for your business. A merger or acquisition could mean very good things for your company if you are well prepared and know what questions to ask.

Click here to read the full article.

 

The recent article in Divestopedia “What Role Does Your Brand Play in a Successful M&A?” explains how a business’ brand often takes a backseat to most other business activities during the M&A process. The author explains how crucial the brand really is within the transaction process, as it represents how the new business is both perceived and received by the public and shareholders of the acquiring entity, as well as employees and customers.

Branding in consideration of employees is very important in the transaction process, as the cultures of the now combined companies may differ drastically. This makes consideration in terms of culture and structure so important for both entities to ensure the process runs smoothly and the new entity is able to move forward seamlessly.

In consideration of the customers of both entities, the transaction process should flow and occur in a way that will least affect customers. This includes seamless integration of customer service processes as well as pricing and product availability, among others.

Other stakeholders to be considered during the M&A process include investors, partners, and others that are directly affected by the sale. A brand strategy that takes into account these members’ best interests will lead to a better rate of success.

Click here to read the full article.

 

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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Who Is Today’s Buyer?

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It has always been the American Dream to be independent and in control of one’s own destiny. Owning your own business is the best way to meet that goal.  Many people dream about owning their own business, but when it gets right down to it, they just can’t make that leap of faith that is necessary to actually own one’s own business.  Business brokers know from their experience that out of fifteen or so people who inquire about buying a business, only one will become an owner of a business.

Today’s buyer is most likely from the corporate world and well-educated, but not experienced in the business-buying process.  These buyers are very number-conscious and detail-oriented.  They require supporting documents for almost everything and will either use outside advisors or will do the verification themselves, but verify they will.  A person who is realistic and understands that he or she can’t buy a business with a profit of millions for $10 down is probably serious.  They must be able to make decisions and not depend on outside parties to do it for them.  They must also have the financial resources available, have an open mind, and understand that owning one’s own business means being the proverbial chief cook and bottle washer.

Today’s buyers are usually what might be termed “event” driven.  This means that the desire to own their own business is coupled with a need or reason.  Maybe they have been downsized out of a job, they don’t want to be transferred, they travel too much, they see no future in their current position, etc.  Many people have the desire, but not the reason.  Most people don’t have the courage to quit a job and the paycheck to venture out on their own.

There are the perennial lookers.  Those people who dream about owning their own business, are constantly looking, but will never leave the job to fulfill the dream.  In fact, perspective business buyers who have been looking for over six months would probably fit into this category.

Business brokers spend a lot of time interviewing buyers.  Here are just a few of the questions they will ask. The answers they receive will determine whether or not the prospective buyer is serious and qualified.

  • Why is the person considering buying a business?
  • Has the person ever owned their own business?
  • How long has the person been looking?
  • Is the person currently employed?
  • What kind of business is the person looking for?
  • Is he or she flexible in the kind of business?
  • What are the most important considerations?
  • How much money is available?
  • What is the person’s timeframe?
  • Does the person’s experience match the type of business under consideration?
  • Who else is involved in the purchase decision?
  • Is the person’s spouse positive about owning a business?

There are other questions and considerations, but those cited above reveal the depth of a buyer interview.  Business brokers want to work only with buyers who are serious about purchasing a business.  They don’t want to show a business to anyone who is not qualified, which is simply a waste of their time and the seller’s time.

 

Copyright: Business Brokerage Press, Inc.

 

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Why Deals Fall Apart — Loss of Momentum

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Deals fall apart for many reasons – some reasonable, others unreasonable.

For example:

• The seller doesn’t have all his financials up to date.
• The seller doesn’t have his legal/environmental/administrative affairs up to date.
• The buyer can’t come up with the necessary financing.
• The well known “surprise” surfaces causing the deal to fall apart.

The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum.

This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don’t notice the waning or missing momentum.  Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it.

Let’s say a buyer can’t get through to the seller.  The buyer leaves repeated messages, but the calls are not returned.  (The reverse can also happen, but for our example we’ll assume the seller is unresponsive.) The buyer then calls the intermediary.  The intermediary assures the buyer that he or she will call the seller and have him or her get in touch.  The intermediary calls the seller and receives the same response. Calls are not returned.  Even if calls are returned the seller may fail to provide documents, financial information, etc.

To the experienced intermediary the “red flag” goes up. Something is wrong. If not resolved immediately, the deal will lose its momentum and things can fall apart quite rapidly. What is this hidden element that causes a loss of momentum? It is generally not price or anything concrete.

It often boils down to an emotional issue. The buyer or seller gets what we call “cold feet.” Often it is the seller who has decided that he really doesn’t want to sell and doesn’t know what to do.  It may also be that the buyer has discovered something that is quite concerning and doesn’t know how to handle it. Maybe the chemistry between buyer and seller is just not there for one or the other of them. Whatever the reason, the reluctant party just tries to ignore the proceedings and lack of momentum occurs.

The sooner this loss of momentum is addressed, the better the chance for the deal to continue to closing. Because the root of the problem is often an emotional issue, it has to be faced directly. An advisor, the intermediary or someone close to the person should immediately make a personal visit. Another suggestion is to get the buyer and seller together for lunch or dinner, preferably the latter. Regardless of how it happens, the loss of momentum should be addressed if the sale has any chance of closing.

 

Copyright: Business Brokerage Press, Inc.

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The Three Ways to Negotiate

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Basically, there are three major negotiation methods.

1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”

2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.

3. This for that. Both buyer and seller have to find out what is important to each.  So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm.  The buyer may want to move the business.

There is an old adage that advises, “Never negotiate your own deal!”

The first thing both sides have to decide on is who will represent them.  Will they have their attorney, their intermediary or will they go it alone?  Intermediaries are a good choice for a seller.  They have done it before, are good advocates for their side and they understand the company and the seller.

How do the parties get together in a win-win negotiation?  The first step is for both sides to work with their advisors to settle on the price and deal structure positions.  Both sides should be able to present their side of these issues.  Which is more important – price or terms, or non-monetary items?

Information is vital to a buyer.  Buyers should keep in mind that the seller knows more about the business than he or she does.  Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal.  Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.

Bob Woolf, the famous sports agent said in his book, Friendly Persuasion: My Life as a Negotiator, “I never think of negotiating against anyone.  I work with people to come to an agreement.  Deals are put together.”

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Copyright: Business Brokerage Press, Inc.

Keys to a Successful Closing

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The closing is the formal transfer of a business. It usually also represents the successful culmination of many months of hard work, extensive negotiations, lots of give and take, and ultimately a satisfactory meeting of the minds.  The document governing the closing is the Purchase and Sale Agreement.  It generally covers the following:

• A description of the transaction – Is it a stock or asset sale?

• Terms of the agreement – This covers the price and terms and how it is to be paid.  It should also include the status of any management that will remain with the business.

• Representations and Warranties – These are usually negotiated after the Letter of Intent is agreed upon.  Both buyer and seller want protection from any misrepresentations.  The warranties provide assurances that everything is as represented.

•  Conditions and Covenants – These include non-competes and agreements to do or not to do certain things.

There are four key steps that must be undertaken before the sale of a business can close:

1. The seller must show satisfactory evidence that he or she has the legal right to act on behalf of the selling company and the legal authority to sell the business.

2. The buyer’s representatives must have completed the due diligence process, and claims and representations made by the seller must have been substantiated.

3. The necessary financing must have been secured, and the proper paperwork and appropriate liens must be in place so funds can be released.

4. All representations and warranties must be in place, with remedies made available to the buyer in case of seller’s breech.

There are two major elements of the closing that take place simultaneously:

• Corporate Closing: The actual transfer of the corporate stock or assets based on the provisions of the Purchase and Sale Agreement.  Stockholder approvals are in, litigation and environmental issues satisfied, representations and warranties signed, leases transferred, employee and board member resignations, etc. completed, and necessary covenants and conditions performed.  In other words, all of the paperwork outlined in the Purchase and Sale Agreement has been completed.

• Financial Closing: The paperwork and legal documentation necessary to provide funding has been executed. Once all of the conditions of funding have been met, titles and assets are transferred to the purchaser, and the funds delivered to the seller.

It is best if a pre-closing is held a week or so prior to the actual closing.  Documents can be reviewed and agreed upon, loose ends tied up, and any open matters closed.  By doing a pre-closing, the actual closing becomes a mere formality, rather than requiring more negotiation and discussion.

The closing is not a time to cut costs – or corners.  Since mistakes can be very expensive, both sides require expert advice.  Hopefully, both sides are in complete agreement and any disagreements were resolved at the pre-closing meeting.  A closing should be a time for celebration!

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Copyright: Business Brokerage Press, Inc.

“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.

 

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Copyright: Business Brokerage Press, Inc.

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.

 

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.

 

 

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Copyright: Business Brokerage Press, Inc.

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? 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.

 

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