Prospective buyers don’t want to hear about “what the business really makes” – they want to see the books and records that show what is down in black and white. Here  is the old story about proper accounting procedures, or lack of:

A Greek restaurant owner had his own bookkeeping system.  He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in the cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register.  When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods.  “I don’t know how you can run a business that way,” he said.  “How do you know what your profit is?”

“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back.  Today, your brother is a doctor.  Your sister is a speech therapist, and you’re a CPA.  Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement.   We have a good business and everything is paid for.  Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”

Great story and it is probably an accurate depiction of many small businesses, even in today’s world. Unfortunately, today’s buyers are not going to buy a business—not for anywhere near what the business may actually be worth in the marketplace—without checking the books and records. Buyers will not pay for what they can’t see. Some sellers want it both ways. Since they haven’t reported this income to anyone, they haven’t paid taxes on it; and now they want to sell it as a real number. They also seem to forget the most important part – “skimming” is against the law.

Joseph Bankman, a professor of tax law at Stanford University Law School said, “Nothing is as good as taking half your income off the books to start with; that’s better than any phony deduction. That’s the biggest single source of revenue loss in the tax system.” What these sellers may fail to realize is that the Internal Revenue Service (IRS) has audit guides for many different businesses. It tells them, for example, how to roughly calculate annual sales and expenses of a pizza place by tracking its purchase of cheese. Any seller who doesn’t think that the IRS can’t figure out income and expenses of most businesses is kidding herself. Too many small business owners think that they are getting away with it – but they just haven’t been caught yet. If they kept accurate financial records they probably would get a much higher price for their business, most likely making up for more than what they would have skimmed.

What happens is this: a business owner gets ready to sell, realizes that due to his or her unreported financial dealings, the business won’t sell for anywhere what he had hoped for. Now he is in the position of having to reveal to a prospective buyer how he is skimming from the sales, paying help under the table to avoid the usual employee costs, or padding expenses. Buyers do not look favorably on sellers who attempt to justify their price by revealing how they are cheating the government(s).

Here are some tips for business owners who are considering selling:

•    Plan now to maintain accurate financial records. When it comes time to sell, you will be able to show a prospective buyer where the money is and what it was used for.

•    Keep in mind that a selling price is usually based on the cash flow of the business. The dollar you hide today will most likely be worth two or three times that when it comes to selling price. Think long-term, not short-term.

•    Talk to a business broker professional. He or she can provide some education about  how businesses are priced. They can also offer suggestions on how to gather the necessary information for a prospective buyer.

By following the suggestions above and reporting all income, by taking only legal deductions and maintaining accurate financial records, when it comes time to sell and the buyer says “Show me the money” – you can!

Naturally, sellers want the highest price they can get for their business. In come cases, however, it might not be the best deal. For this reason, every offer should be scrutinized carefully. When an offer is presented, the first thing a seller looks for is the price. If it is lower than anticipated, the seller’s first reaction is to give it back, initiating the case for its being much too low. A seller should consider an offer carefully and avoid a hasty reaction.

Here are a few alternatives that might offset a lower price:

•    an offer with no or very few, and easily satisfied contingencies
•    a consulting agreement or other deferred compensation
•    a quick closing
•    all cash, if that’s important
•    employment contracts with relatives or long-time employee(s)
•    business vehicle to remain with the seller
•    buyer has a long success record indicating long-term survival
•    short-term payment period if seller financed

When a professional business broker is involved, he or she can point out those areas that may offset the price, down payment or the structure of the deal. After all, the important thing is not what a seller gets, but what he or she gets to keep!

A recent survey revealed the following percentage breakdown of last year’s business sales by business types. The information was furnished by business brokerage firms nationally and compiled by Business Brokerage Press.       

Figures rounded

Service type businesses include dry cleaners, quick print, video stores, etc.  Other businesses include coin laundries, delivery, product, and vending routes, and any that don’t fit into the other categories listed.

What does this mean to you as a business owner?  It indicates that service type businesses seem to be creating the most activity from business buyers, followed by retail and the food and drink sector.  The service sector has also been the leader in businesses sold by business brokers for the previous two years. This coincides with the growth nationally in the service sector coupled with the broad range of businesses included in it.

The food and drink sector, which includes restaurants, fast-food, taverns and the like, has always been a popular one for buyers. One reason is that most people frequent these types of businesses on a regular basis and therefore are familiar with them. Plus, there has always been a certain “celebrity” status connected with this sector.

However, statistics aside, today’s buyer has more knowledge, experience and education than ever before and is willing to consider almost any type of profitable business.

The most recent editions of BizComps, the leading resource for comparable sales data (www.bizcomps.com ) has some interesting information on small business pricing based on the three major regions of the country – Eastern states, the Central states and the Western states.  They cover thousands of actual business sales over a ten year period.  Here is the breakdown:

Location                        Average Sale Price

Western states                    $299,500

Central states                    $221,951

Eastern states                    $285,941

Using the Western states as the base, since that region of the country has the highest average price business, businesses in the Central states sell for 74 percent of the average price in the Western states; and the average price in the Eastern states is 78 percent of the Western states average.

For many owners, selling their business is a new experience, and there is always the fear of the unknown. Selling a business is a not only a major economic decision, but it can also be an emotional one. After all, many business owners have spent many years, and a lot of hard work building the business. When the decision to sell is made, there will inevitably be accompanying concerns. However, when faced head-on, these concerns can usually be addressed and resolved. Here are some of the major concerns and ideas on how to deal with them.

Getting the Highest Possible Price

Every seller wants to get the highest possible price for their business – that’s a given. Here is an old, but very accurate definition:

• The Asking Price is what the seller wants.
• The Selling Price is what the seller gets.
• The Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Today’s buyers are more educated, more sophisticated, and more demanding than ever before. They seem to be searching for a “sure thing” – yet, many are afraid to make the leap-of-faith necessary to make the final plunge. Buyers are also more numbers conscious than in prior years. Somehow they think they can buy a business and continue with business as usual.

Sellers, on the other hand, must understand that the buyer may buy with an eye to the future, but is only willing to pay for the past performance of the business. The buyers believe that the future of a business is up to them and they should reap the benefits of their efforts. The value or price, however, in their minds, is based on what the seller has done with it.

In order to obtain the highest possible price, the seller should make sure that the financial records are crystal clear. Any issues, whether, financial, operational, legal, or environmental, should be addressed and resolved prior to putting the business on the market. Hidden issues have sabotaged more sales than anything else.

This may seem a contradiction, but the seller must go to market initially with a fair price. Too many times, a seller’s first inclination is to start with a very high, and very unreasonable, price. They may feel that the business is really worth what they are asking and may be unwilling to accept the fact that the price is unreasonable. The thinking is that an interested buyer can always make an offer. Interested buyers will feel that the price is so high that a fair offer would not even be considered. A professional business broker can advise buyers on what is reasonable and what is not.

A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.

It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer’s approval of the seller’s books and records.

The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.

Here are some tips on contingencies:

• There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
• It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say – “it ain’t going to happen.”
• Contingencies should be limited to very important or critical issues – those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
• Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
• Contingencies come in all sizes and shapes. Very few offers don’t contain at least one, and usually more than one. They are an inevitable part of selling – and buying a business. A business broker knows what is reasonable and what is not.

The following is provided as a simple explanation of common leasing arrangements within a small business transaction. It is not intended to provide legal advice.

The New Lease

A new lease is created generally when the prior lease has expired or is about to and when there are going to be substantial changes to the existing lease. A new lease would be executed between the purchaser of the business and the landlord. It is a new document either drafted by an attorney or used in a standard form that is available at stationery stores and in many books. A new lease involves negotiations between the owner or purchaser of the business and the landlord.

The Sub-Lease

A sub-lease is nothing but a lease within a lease. For example, if the seller of a business is permitted to sub-lease the premises, he or she, as far as a new owner is concerned, is the landlord. In this case, the actual landlord is still dealing with the seller and has no relationship with the buyer. Obviously, the seller needs the permission of the landlord or lessor to assign or sub-lease.

The Assignment of the Existing Lease

This is the most common form of allowing a buyer the use of the premises in which the business is located. In an assignment, the seller is “assigning” all rights to the existing lease to the new buyer. Once the assignment is executed, the seller usually has no more rights in that lease. However, in most assignments, the landlord reserves “all rights” in the lease. In other words, the seller, who may be a tenant or an assignee, is still responsible to the landlord if the buyer does not perform.

The cliché is that the key to business success is: location – location – location. If you own a business in which the location is an important reason for the success of the business, and you are considering selling, then the lease is a very critical issue in the sale. The time to deal with this is not in the middle of a sale, but before you even place the business on the market.

Business brokers can recite many a story where, on contacting the landlord in the midst of a pending sale, they are told that the landlord has other plans for the space when the lease is up next month. Fortunately this is not a common occurrence, but if the lease is an issue, the time to deal with it is now.

The Steps In Dealing with the Lease

The first step is finding the lease.

The second step is to read it.

The third step is to visit the landlord and work out any lease issues.

Before placing your business on the market, you need to see where you stand on the all-important issue of the lease. After reviewing it, set up an appointment to visit the landlord. If there are only a few years left on the lease, see about getting an extension. If you have more than that left, still check into getting an option to renew the lease at the expiration of the present term. After all, if the location works, the longer the lease the better in most cases. It might also be a good time to see if the landlord has ever considered selling the premises. By owning the property, you will never have to worry about leases again.

If location is not important and the business is such that moving it is a non-issue, then obviously the lease is not important. However, if the business is one that is dependent on its existing location, then the lease issue is crucial. The time to iron out any details is before the business is placed on the market.

This is a story based on a true incident – only some of the details have been changed. The buyer and seller were ready to close on a business when the buyer asked to look at the list of fixtures and equipment that were to be included in the sale. After a few minutes reviewing the list, the buyer said that the desk lamp on the owner’s desk was not listed. The seller explained that the lamp was a gift from his parents many years ago and therefore it was not included. The buyer got very upset, stating that the lamp was just perfect for that desk and he wanted it. The seller tried to explain that the lamp had lots of sentimental value, but that he would replace it with another desk lamp. This did not satisfy the buyer, and in order to stop the sale from falling part, the seller agreed to subtract $1,000 from the purchase price to keep the lamp. That made the desk lamp a very expensive one.

The point of this is that when buyers look at a business, they assume that everything they see is included in the sale. Sellers should keep this in mind when selling their businesses. If something is not going to be included in the sale, remove it from the premises prior to any prospective buyer looking at the business. Sellers sometimes think that they can remove the painting on the office wall since their grandmother painted it. The picture really looks good on the wall never imagining that the buyer also will think it looks great on the wall – and the problems begin.

Business broker professionals have seen deals fall apart over a piece of family memorabilia that was never intended to be included in the sale, but was there when the buyer looked at the business. The word to sellers is to remove anything – and the key word is anything – that is not included in the sale. The alternative is to list everything that is not included on the listing agreement, but it is usually less complicated simply to take them home.

One other thing – if there is a piece of equipment that is inoperative, such as the computer on the back desk, or the refrigerator in the basement of the restaurant – get rid of it. Or make sure the listing agreement states that the following equipment is inoperative. Again, it’s really easier just to remove these items.

A professional business broker will see that these potential dealbreakers won’t disrupt the closing.