Many people who are selling their business think that once they find a buyer, the business is sold. Unfortunately, the real work is just beginning. Once a buyer is interested, there are the inevitable questions that must be answered. After the questions are answered and the buyer has satisfied himself or herself that the financial aspects of the business are satisfied, the buyer is probably ready to make an offer.

An offer is prepared and it generally contains contingencies or conditions on which the offer is subject to, in addition to offering the price and terms under which the buyer is prepared to pay. Assuming the price and terms are acceptable to the seller, the next step is for the seller to do what is necessary to satisfy the contingencies. These can be as varied to the buyer’s reviewing all of the seller’s financial books and records, a serious look at the lease and its terms to a requirement that the seller pave the parking lot or redo the rest rooms.

Definitions

Offer – an expression of willingness to purchase a property [business] at a specific price [and terms].

Contingency Clause — see Condition

Condition(s) – provision(s) in a contract that some or all terms of the contract will be altered or cease to exist upon a certain event.

Conditional Offer – purchase contract tendered to the seller that stipulates one or more requirements to be satisfied before the purchaser is obligated to buy.

Dictionary of Real Estate Terms, published by Barron’s Real Estate Guides

The first task for the seller is to accept the price and terms then review the contingencies to insure that they are reasonable and acceptable. If the price, terms or contingencies are not acceptable then a counter-offer is prepared and the terms that are acceptable to the seller presented to the buyer. Once the parties agree upon all of these items, then the job of satisfying the buyer’s contingencies is begun. A time period in which all of this must be done is usually specified in the offer. If such a time period was not specified, the buyer could take his or her “own sweet” time before approving – or not. The seller obviously has to furnish the materials and information necessary for the seller to satisfy himself or herself.

If the buyer is satisfied that everything is as represented, he or she signs what is termed a Contingency Removal form. If everything is not satisfactory to the buyer, then the offer can be renegotiated or the sale falls apart and the buyer’s deposit is returned and the seller is now back to square one!

Unfortunately, a lot of time can elapse between the offer and acceptance and the buyer deciding to move forward. Time is the essence of the deal and the longer it goes the more likely that serious problems can develop. If these problems are not addressed promptly, the pending sale can fall apart and then the seller must then look for another buyer and begin the process anew. The professional broker is aware of all of this and can greatly assist the seller in making sure that only serious and committed buyers begin the process.

Let’s assume that the buyer and seller are in agreement on price and terms. Now comes the task of gathering all of the information necessary for an escrow company or closing attorney to draw the necessary paperwork. The seller must also gather the lease information, insurance data, equipment lists, inventory information and everything else necessary to close the sale.

If the buyer is using outside financing, then the seller, along with the buyer, must gather all sorts of financial date to submit to the lender. There are also the various representations and warranties the must be reviewed – and approved, by the parties involved.

As one can see, the path from finding a buyer to the closing of the sale is an arduous one and fraught with problems every step of the way. Only an experienced professional business broker can guide both parties through the maze and insure that every step is addressed and covered satisfactorily.

Sellers – Here’s How Selling Your Business Can be Made Easier

If you’re considering selling your business consulting with a professional business broker is your first step. They can assist in all of the areas mentioned in this newsletter. In addition they can do the following:

• Greatly increase the number of potential buyers through their own databases and the various Web sites available to them.
• Help in pricing the business so it will be competitive in the marketplace.
• Will keep you advised on market reaction.
• Present only qualified and serious buyer prospects.
• Handle the details so you can spend your time operating your business.
• Coordinate all of the paperwork so the sale can be expedited quickly and easily.

If you’re considering selling your business, and you are employing a professional business broker or intermediary, it’s imperative to be absolutely open with him or her. This is not the time for secrecy — or even for subtlety, especially when it comes to problems. If you’ve been having trouble with your lease, one of your best customers or your fixtures and equipment, spell it out! Any one of these “sleeping dogs” is bound to wake up sometime during the process. After the first growl comes the bite. The sale will get buried deeper than last year’s bone. And the buyer, scared off by the ruckus, will have long since disappeared.

Tell your broker all there is to know prior to the beginning of the marketing effort. Your broker and the buyer are aware that there is no such thing as a perfect business, and buyers are much more likely to deal with the problems of your business during the decision-making process rather than after they have decided to buy.

And it’s not just the sale that’s at stake. Concealing a problem or defect that adversely affects the business can lead to litigation and years in court. It’s not worth it. Problems and defects don’t mean your business won’t command an attractive price. Your professional business broker is prepared to deal with these issues and give you competent advice.

Some sellers try to hide the problems of their business and hope the sleeping dog never wakes up. You’d be well-advised to get him on a good, strong leash instead of letting him “lie.”

The Lease – Buyer and Seller Beware!

The lease is an important issue in many cases, a major issue. Whether you are buying or selling a business, it’s important to understand that if the real estate is not included, the lease is a critical element of the sale process. Other than owning the real estate, there are only three ways the transfer of the business can be handled:

• A new lease – A new lease can be entered into by the lessor and the new tenant, the buyer.
• A sub-lease – This can be negotiated between the seller and the buyer. In a sub-lease, the seller of the business becomes the landlord
•  The existing landlord, who most likely is also the owner of the property, must always approve a sub-lease. In a few cases, the existing lease provides that the tenant has the right to sub-lease.
• The assignment of lease – This is the most common method of transferring the lease. The seller simply assigns the existing lease to the buyer. The buyer assumes responsibility for the lease, and in most cases, the landlord must approve the assignment. Sellers should be aware, however, that in most cases, they are still responsible for the terms of the lease.

Sellers should take a look at the lease at their business and ask themselves the following questions:

• Is the lease long enough and the rent low enough to make the business attractive to a potential buyer?
• Is the rent consistent with similar businesses in the area?
• Are there any terms or conditions of the lease that might be unfavorable in the eyes of a possible buyer?
• Most importantly, are you on good terms with the landlord – and can the lease be transferred without any hitches?
• If there could be any problems with the lease, or the landlord, it’s best to resolve them prior to selling the business. Your business broker professional is a good source to review the lease and its terms from a business sale perspective.

Buyers Want Cash Flow

The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your accountant or bookkeeper and begin to get your financial statements in order with cash flow the order of business. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, and look at owners or family compensation. They will consider any excess compensation to employees and family members. Buyers will also look at large one-time expenses such as a new computer system, or remodeling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner perquisites. These are items that a professional business broker considers when advising a selling client on a suggested selling price.

Appearances Do Count

The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will be slightly lower because you haven’t replaced it. The time to “spiff up” the business is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell occurs. Keep-in-mind that anything that increases sales also increases profits and the all-important cash flow!

Everything has Value

There are other things that add value to your business. Don’t discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customized software programs, or good employees. These are termed “off-balance sheet items,” and although not used in most pricing models, they add to value. Look at your business very carefully so you don’t overlook those items that make your business more attractive to the buyer.

Eliminate the Surprises

Long before you put your business on the market — eliminate the surprises! Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises — most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.

Professional business brokers can assist you in the planning process. They know what buyers are looking for and are familiar with current market conditions.

Do have all of your business documentation ready. Everything starts with it.

Don’t underestimate the value of your business. Owners of privately held businesses usually minimize profits to lower taxes. The financial statements may not reflect the real value of the business.

Don’t overprice your business. The right buyer who is willing to pay the right price may not even want to consider your business because the price is way out of line.

Do offer as favorable terms as you can. Buyers, even good ones, want to leverage the sale as much as possible.

Don’t use a “magic” formula to value your business. Your business is unique, different from every other business out there.

Don’t wait too long to sell. The best time to sell is when business is good.

Don’t wait until poor health or a downturn occurs – sell from strength!

Do allow at least six months to sell your business. The larger the business, the more time you should allow.

Do use a business broker. They can take the mystery out of determining the selling price, prepare a marketing plan of action to maximize the selling price, handle all of the details, and leave you to do what you do best — continue to run your business.

Some of you might remember the commercial for one of the major airlines in which a business lost a major client, because they never saw anyone from the company. The president handed out airline tickets to the entire sales staff so they could go out and visit the customers. When asked what he was going to do with the remaining ticket he replied that he was going to go see the lost client. And, a recent study revealed that customers really want contact with the business owner. In fact 83 percent of the decision makers want personal contact with salespeople.

Both of these examples point out the importance of customer contact. From the small shop owner to the CEO of a large company, meeting with the customers is still the smart way to go. With today’s technology, it may be easier to fax, telephone or e-mail a customer or client, but is it really the best way to contact that person? Remember how good you feel when the owner of a restaurant comes to your table and asks how everything is. Nothing beats owner contact!

Is your business resorting to just telemarketing and direct mail programs to contact your customers – both present and possibly future ones? Perhaps it’s time to hire a salesperson to go out and meet the people. Perhaps it’s time to go out and do it yourself. Why not go out yourself and meet or visit your important customers or clients? If you own a retail business – go out and meet the customers. Owning your own business is not a “back-room” or hide behind the business-plan business. It is a “front-room” business – go out and meet the customers!

In the day-to-day activity of making a business work, many owners overlook the importance of the buy-sell agreement. This document (also referred to as a business continuity agreement) is like a will; no one thinks about it until it’s too late. However, it may just be the most important written agreement or document you ever create.

If your business has more than one owner, either partners or stockholders, what happens if one or more of them dies or “wants out”? The same thing holds true in family-owned and operated businesses. A buy-sell agreement can dictate the transfer of business ownership under certain events as described within its specifically-written language.

The well-drafted buy-sell agreement is designed to prevent the following:

• The sale of the company because one of the partners or stockholders desires to exit the business and no one can agree on the price or the terms;
• The necessity to sell or dissolve the business due to the lack of a written agreement determining ownership/management of the business in case of a partner’s, stockholder’s, or family member’s death; (Or, what might prove even worse than a precipitous sale, an heir might decide that he or she is going to get involved in the operation of the business.)
• A lack of agreement on who should take control when an active partner, stockholder, or family member becomes disabled and can no longer run the business;
• A serious dispute on any key issue among the partners, active family members, or stockholders that cannot be resolved; and,
• Questions about business operations following a legally-complicated divorce (or other legal entanglement) involving one of the partners, family members, or stockholders.

The buy-sell agreement can help prevent these situations, as well as many other problems that can befall a business enterprise. In a small business, one of the areas frequently overlooked is the buy-out provision, in the event one of the active partners decides to exit. The buy-sell agreement normally, and properly, provides for the partner, family member, or stockholder to have the first right of refusal in this case. But at what price? If two partners are in disagreement over how to run the business, they will most likely never come to an agreement about its value. A method or formula for valuing the business should be included in the buy-sell agreement; otherwise, the first right of refusal would be no right at all.

In larger businesses, especially those that are incorporated, it is important that the buy-sell agreement specify how the stock of the business should be valued. The agreement should also specify whether the stock must be purchased by the company or its shareholders, or if it can be sold to an outsider. In many cases, life insurance coverage is used to purchase the interest or stock in the business, in the event that one of the partners or majority stock holders dies.

The buy-sell agreement is really the key to the continuation of the business. You can see that the buy-sell agreement, if executed properly, can solve problems surrounding retirement, disability, termination, divorce, bankruptcy, death, and business disputes. Given all the benefits of such an agreement, why doesn’t every business have one?

The answer is simple; most business owners are too busy trying to get the work done and the bills paid. Creating such a document means that the owners must stand back from the business and decide what should happen under a variety of serious situations. The process is time-consuming and also expensive. There are no pre-printed forms; it isn’t possible simply to fill in the blanks and come up with an instant agreement. A lawyer must do the drafting to get a document that will have legal authority in the event that it is ever challenged.

If your business already has a buy-sell agreement, perhaps it is time to review the document, checking for the need to update or amend it. If your business doesn’t have a buy-sell agreement, you should seriously consider creating one. It may be the most important business decision you ever make.

Buy-sell agreements, as well as all of the important documents pertaining to the sale of a business, should be handled by an attorney experienced in such matters. It may seem expensive in the short run, but the careful preparation of any agreement that can affect the rights of the buyer or seller will be a bargain in the long term.

Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost effective than the attorney who handles a general practice.

Business brokers–because of their knowledge and experience–are a good source of information concerning the buying and selling of businesses. They are conversant with the local marketplace, business prices, and terms. In sum, they are an excellent resource.

For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully.  What does it take for the sale of a business to close successfully?  Certainly there are reasons that a sale might not close that are beyond anyone’s control.  A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado.  There might be an environmental problem that the seller was unaware of when he or she decided to sell.  Aside from these unplanned catastrophic events, deals abort because of the people involved.  Here are a few examples of how a sale closes successfully.

The Buyer and Seller Are in Agreement From the Beginning

In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale.  If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line.  However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close.  This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made.  The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business.  Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when.  The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them.  Too many sales fall apart because of a misunderstanding on one side or the other.

The Buyer and Seller Don’t Lose Their Patience

Both sides need to understand that the closing process takes time.  There is a myriad of details that must take place for the sale to close successfully, or to close at all.  If the parties are using outside advisors, they should make sure that they are deal-oriented.  In other words, unless the deal is illegal or unethical, the parties should insist that the deal works.  The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves.  The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing.  Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule.  However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.

No One Likes Surprises

The seller has to be up front about his or her business.  Nothing is perfect and buyers understand this.  The minuses should be revealed at the outset because sooner or later they will be exposed.  For example, the seller should consult with his or her accountant about any tax implications prior to going to market.  The same is true for the buyer.  If financing is an issue it should be mentioned at the beginning.  If all of the concerns and problems are dealt with initially, the closing will be just a technicality.

The Buyer and Seller Must Both Feel Like They Got a Good Deal

If they do, the closing should be a simple matter.  If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.

There are several things to consider when buying or selling a business. The most important is to listen to the other side. There are always reasons why someone wants something – even if you don’t agree at first. Find out where the other side is coming from, then make a decision on whether you can live with it or not.

Next, whether you are the buyer or the seller, you can not have everything your way. You can’t win on every point or issue. Be prepared to give in on those areas that are not as important as those you feel most strongly about. If you are a seller, you may not be able to get a real high price and a real high down payment. You will have to decide which is more important. The same is true for the buyer. You can’t have it both ways.

Always enter the purchase or sale of a business with a spirit of cooperation rather than one of confrontation. The buyer or the seller, as the case may be, is not the enemy. If the seller wasn’t interested in selling, the business would not be for sale. If the buyer did not like the business there would be no negotiation or eventual sale.

The secret of a successful negotiation is laying out all the points on the table for discussion. It is key to understand where everyone is coming from and to understand what is and what is not important to each party. When there is a sense of cooperation among all of the players, a successful deal will usually result.

The buyer and seller have both agreed on the sale price and the terms of the transaction. Everyone appears satisfied. As the day of closing approaches, the seller seems less cooperative and more apprehensive about selling the business. Ultimately, the sale falls apart. Who’s to blame? The buyer was ready, willing and able to buy the business, and the seller appeared ready to sell.

The decision to sell one’s business is a serious step – a milestone in one’s life, both personally and professionally. Selling represents the end of ownership. It means, for many sellers, heading into uncharted waters. For others, it is the end of a dream — they built the business, or perhaps even started it. A part of them will always be in the business. So, to the seller, selling the business, represents the end of something and the beginning of something else – pretty dramatic stuff. Often, selling the business means parting with one’s biggest asset – the bulk of one’s wealth. The business can be a very personal thing, like a child is a part of the family.

Some sellers, in the middle of the selling process, suddenly realize just how important the business is in their life. Others realize that after the sale they will have nothing to get up for on a daily basis. This sounds good at first, but upon reflection it really doesn’t sound good at all. These are some of the reasons sales of privately-held businesses may not close. Sellers won’t admit their reason, so they masquerade the real reason behind another.

Perhaps, one of the most critical elements necessary for the successful sale of a privately-held business is the willingness of the seller to sell and move on. In some cases, the owner and the business have grown into one – the business becoming his or her alter ego. Before sellers decide to sell, they should make sure they can separate themselves from the business and are prepared to leave it. Sellers should not attempt to sell before they are ready!