Selling & Buying A Business

The decision to sell a business is often a difficult one because of the profound personal and financial impact to the business owner.

Many different influences bring business owners to this decision, including:

Exposure to financial risks:

Many owners face high commercial risks, even more so if they have taken out loans.

Lack of motivation:

The daily routine can generate tiredness or boredom, diminishing interest in the business.

Health problems:

Serious illness or disability of the owners can lead to the business going bankrupt.

Change of lifestyle:

Some owners decide to sell when they retire or simply to seek a better quality of life.

Personal or commercial conflicts:

Divorces or the dissolution of companies can force the sale of the business.

New commercial interests:

Some owners prefer to explore more profitable or less stressful opportunities.

Lack of working capital:

Not having sufficient liquidity can limit the growth and sustainability of the business.

How much is a business worth?

A business enterprise, like any asset, is worth what a buyer is willing to pay. Buyers ask countless questions, but they are primarily concerned with a fair return on their total investment. In addition, prospective buyers make many judgments about market position, proprietary know-how, competitive strengths, quality of the assets, growth potential, and risks of the business.

A professional business broker helps the business owner determine the true value of the business, and, more importantly, can help prospective buyers understand the reasons for such value and structure a sale that maximized the benefits to buyers and sellers.

Is Confidentiality important?

Sound working relations with employees, customers, suppliers and bankers are important factors to a company. Any premature indication of a possible change in ownership could disrupt these relationships and weaken the company’s competitive position. For these reasons, and many others, confidentiality is critically important at all stages. With the proper procedures, it is possible to minimize the risk of an untimely disclosure.

In every transaction, there is an appropriate time to reveal that a sale may be imminent. Proper timing of these sensitive announcements can contribute to a smooth transaction and reinforce the buyer’s willingness to proceed to a closing.

A professional business broker helps to insure that all information about the business is kept confidential throughout the entire selling process until it is appropriate to reveal that a sale is forthcoming.

What types of business formats can I consider for having my own business?

On-going businesses

Companies that are already operating and have a financial history, clients and established processes. They offer less risk and generate income from day one.

Franchises

Structured models with corporate backing. There are four types: Individual, Multiple, Regional and International Master, each with different levels of control and expansion.

Business Opportunities

They do not require payment of royalties, but they do offer initial support in equipment, branding or systems. They are usually applied in distribution models and commercial licenses.

Business Sellers

What are the benefits of using a broker to sell my business?

Confidentiality

A business broker will protect the identity of the company and contact only owner approved buyers through a blind profile – a document describing the company without revealing its identity.

Business Continuity

Selling a business is time-consuming for an owner, and with a business broker, the owner can maintain a focus on running the business when a broker is working on the sale.

Reaching potential buyers

Business brokers have the tools and resources to reach the largest possible base of buyers.

Marketing

A business broker can help present your company in the best light to maximize the sale price. He or she has an understanding of the key values that buyers are looking for and can assist in identifying changes that can lead to a better selling price.

Closing a Deal

Since the business broker’s sole function is to sell the business, there’s a much better chance that a deal will be closed in less time. The faster the sale, the lower the risk of employee problems, customer defection and predatory competition.

Balance of Experience

Most corporate buyers have acquired multiple businesses while sellers usually have only one sale. An experienced business broker can level the playing field for a business owner making his one-and-only business sale.

Valuing your Business

Putting a value on a business is far more difficult and complex than valuing a house. Every business is different, with hundreds of variables that have an impact on the value. Business brokers have access to business transaction databases that can be used as guidelines or reference points. But the best way for a business owner to truly feel comfortable that he got the best deal is to have several financially viable parties bidding for his business, which is much more likely using the resources of a professional business broker.

How can I maximize the fair market value of the intangible assets of my business?

Develop key employees

Delegating responsibilities and training key employees prevents the success of the business from depending on you alone. A solid and autonomous team makes your company more attractive to buyers.

Document what you do

Keeping detailed records of roles, strategies and operations gives buyers confidence. This also facilitates obtaining financing and a smoother transition.

Build relationships

Reputation, customer loyalty and brand recognition add value. Diversifying suppliers and customers helps to strengthen the stability of the business and reduce future risks.

Improve cash flows

A buyer looks for clear and consistent income. Make sure that all earnings are recorded correctly and optimize the profitability of the business.

Review your assets

Eliminate obsolete inventories and sell unproductive assets. Remove or acquire those that are for personal use to keep finances organized.

Find and build your niche

It is not necessary to cover the entire market. A business with competitive entry barriers is more attractive and can be sold at a better price.

Remodel, clean, and organize

Like a house for sale, a business should look tidy. A clean and well-organized space generates trust and improves its perceived value.

What is a Balance Sheet Value?

There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.

The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets to gain prior tax advantages.

The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.

What is the Income Approach to valuing a business?

The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company’s value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.

What is the Market Approach to valuing a business?

The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.

Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. And don’t be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.

What are common business sales myths?

The typical business owner will only sell a business once. Understanding the complex process involved will help produce the best results, but don’t fall prey to the myths that can derail or seriously affect a potential sale.

Myth #1 – I Can Sell It Myself

Myth #2 – I’ll Sell When I’m Ready

Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business.

Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.

Myth #3 – I Know What it is Worth

Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.”

A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.

Myth #4 – It’s Like Selling a House

Selling a company is much more complex than selling a house. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.

The average house will sell in less than four months, while the average business sale is nine months to a year.

Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success.

Business Buyers

What are the key steps to a successful business search process?

Buying a business is a process that takes time. It can sometimes take years to find the right opportunity. There are some key steps to follow in the business search process:

Start with a self assessment

Ask yourself why you want to buy a business. What types of work activities do you like and what kind of lifestyle do you want to pursue? It’s important to understand that there may be more work and longer hours for an owner in some industries. Be sure to include your family in the assessment.

Establish financial expectations

Determine how much money you need and want to earn. Make sure your expectations are in line with the types of businesses you are targeting and the return they can produce.

Put together a personal financial statement

Outline your assets and liabilities. Identify what you can use for your initial investment. The personal financial statement serves as proof of your financial wherewithal, so be prepared to share this document with a seller’s intermediary.

Update your résumé

Sellers want to be sure that their business will continue to be a success. They’re looking for someone with the experience necessary to continue their legacy and take care of the staff. Ultimately, you’re selling yourself to the current owner(s), the lender, and the professionals representing them.

Outline your acquisition criteria

Define the parameters of your search. Ideally it should include your targeted industries, geographic area, and transaction size. Your motivation, lifestyle, expectations, financial statement and résumé will help you develop your acquisition criteria.

Search multiple sources and enlist help

Let your professional advisors (e.g. attorney, accountant, financial planner) know you are looking for a business. Most importantly, contact business intermediaries who represent businesses within your targeted market. They will notify you of available companies that meet your criteria and qualifications. Most business brokers or intermediaries work for the seller and are paid by the seller. That means you can enjoy the luxury of their services at no cost. The intermediary is looking out for the seller’s best interests, so you should have experienced council to represent you in any transaction.

What is the due diligence process?

Merriam-Webster Dictionary defines due diligence as “research and analysis of a company or organization done in preparation for a business transaction.” Ultimately, due diligence is the process of being sure that things are as they appear before a deal is sealed. For someone considering a merger or the purchase of an existing business, the review of documentation and the answers to your due diligence questions are critical. There’s no doubt it is a complex process that can be time-consuming, but with so much on the line with any merger or acquisition, you don’t want to make a decision without all of the information. You want to be sure everything is reviewed and all questions are answered to your satisfaction.

During the due diligence process, an often lengthy list of documents should be provided. The list of documents should cover a range of areas, including:

Today more than ever, buyers are putting more emphasis on the due diligence process, and while the financial aspect is a key component, the due diligence process should also consider organizational items. Be sure to seek documentation and ask important questions about the company’s culture, strategy, leadership and competencies.

Although the due diligence process may take considerable time, it’s a critical part of any transaction and should be considered the foundation of the entire deal.

What are some creative financing options?

The evaporation of small business capital markets and other economic factors have made creative financing the norm for today’s business buyer. There are a number of creative financing options that you can consider.

Seller Financing

Increasingly, buyers and lenders are looking to the seller for financing as they try to put a transaction together. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term or amortization – generally ranging from five to 10 years. The terms of the sale may include a balloon payment three to five years after the purchase date. It’s a way of giving the buyer time to get up and running and to establish a successful track record with the business. Seller financing makes the bank more comfortable with the transaction. Lenders know they have a seller who has a vested interest in the success of the business rather than one who will take their money and run. There are a number of benefits for business owners who are considering seller financing:

Fast sale
Flexibility
Tax Breaks
Protections

SBA Loans

In business sales, conventional bank loans may not be available, so a buyer may want to consider going to a Small Business Administration (SBA) lender, which has a number of loan options. The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows him or her to get funding for a loan the bank couldn’t do conventionally. If an SBA guaranteed loan goes into default, the SBA will pay the lending institution up to 75 percent of any deficit left after liquidating the collateral. There have been several changes to the Small Business Administration’s lending guidelines and standard operating procedures. You will want to speak with an advisor who is familiar with these recent changes.

Earnouts

Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed. Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as a company’s revenues, gross profits or net income. Earnout financing is often used for companies that are in a turnaround situation or when buyers are purchasing on potential, rather than on historical cash flow.

Mezzanine Financing

In mergers and acquisitions, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include interest rates of 20 to 30 percent. The lenders in this situation are typically high net worth individuals who are expecting a larger return on their investment. They are lending in a junior lien or a position behind the bank and seller financing. The loans are typically made with limited sources of collateral, thus the request for higher interest rates. Again, this financing is often used in funding goodwill or reputation in an acquisition.

Funding Scenario

In a million dollar transaction, the buyer would be expected to have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in seller financing, and the lending institution would offer a combination of conventional or SBA financing to cover the difference, depending on collateral available. A buyer and the lending institution must evaluate a company’s cash flow and determine if it is adequate to cover their debt service and provide a reasonable return on their investment. Lending institutions will also be examining whether a buyer’s coverage ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.

What are the benefits of buying a business instead of starting one?

So you want to be your own boss. There are certainly pros and cons to both buying and starting a business. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit. There are a number of reasons to consider the purchase of an existing business rather that starting one:

Proven Concept

Buying a business is less risky, as it has a proven model and track record. This makes it easier to obtain financing compared to a new company.

Brand

Acquiring a business includes brand recognition and reputation. This makes it easier to attract customers and take advantage of existing marketing strategies.

Relationships

The purchase includes a customer and supplier base that took years to build. Often, the seller will collaborate in the transition to facilitate continuity.

Trained team:

An established business already has experienced employees. This makes it possible to delegate functions, maintain efficient operations and focus on growth.

Immediate focus:

Instead of starting from scratch, they can focus on improving the business. The seller has already completed the initial and structural phase of the company.

Flow of funds:

The sales structure usually allows them to cover debts, generate salaries and reinvest. On the other hand, many startups do not generate profits in their first years.

Lower risk:

An established business with proven income is less risky than investing in a new concept with no guarantee of success.

Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.