Buying and Selling a Business or Franchise

A recent national survey confirmed what business brokers have noted for years: making money is not the primary reason buyers are interested in owning their own business.

When asked to rank 12 factors in order of importance, the majority of buyers did not place potential earnings in the first half of the list. Freedom, flexibility and control of one’s destiny are the main reasons buyers are attracted to independent businesses. Interaction with customers and clients also was consistently ranked higher in importance than personal income.

Keeping these motivating factors in mind during the business transfer process helps buyers and sellers. Qualified buyers generally possess the entrepreneurial spirit necessary to take risks and make decisions. As business brokers, we facilitate this process by interviewing prospective buyers to learn more about their educational and occupational backgrounds and why they are looking to acquire a company. Understanding a buyer’s motivation helps a good business broker suggest listings that may be of interest to the buyer and provide a good fit with the buyer’s needs.

Internet Searches are Key for Business Buyers

Recently, I’ve noticed several articles in various publications regarding changes in residential real estate marketing strategies. It seems that open houses (except those hosted for other real estate agents) are no longer a preferred way to reach potential home buyers. Today’s tech-savvy buyers prefer to research listings on the Internet, taking virtual tours when and where it is most convenient to them. Most buyers, these articles note, make a decision whether or not to contact the listing agent based on these virtual home tours.

This got me thinking about buyers looking for a business to purchase and the similarities of utilizing the Internet for research. The majority of advertising and marketing for business brokers is handled through web sites that feature businesses for sale. While a few of these sites are available to entrepreneurs looking to sell their companies themselves, the majority are available only to business brokers through professional subscriptions.
As we’ve discussed, maintaining confidentiality of the business is a key factor for a successful business transfer. After all, a small business owner does not want to announce to his customers or competitors that he is thinking of retiring or leaving the industry.

The larger sites available to business brokers offer more space for describing key points about the companies for sale, while still maintaining complete confidentiality. Business brokers are experienced in wording listing descriptions that grab attention and highlight the factors most buyers will find attractive.

You only get one chance to market your business. Most buyers will find your company’s listing by searching online. Make sure to maximize your marketing strategy when the time is right for you to sell.

Top Tips for Selling Your Business

Most entrepreneurs readily embrace new tasks and roles and are used to being in charge of everything relating to their companies.
However, before rushing in to market and sell their small businesses, business owners will want to keep the following tips in mind. The dance between buyer and seller is a delicate one, and it is very easy for one small misstep to ruin the entire deal.

Prepare in advance – General housekeeping should be scheduled well in advance of marketing the business. This includes a physical clean-up of the premises, making needed repairs on equipment and perhaps enhancing the curb appeal of the company with a new coat of paint or adding plants and shrubs to welcome guests through the front door. Housekeeping also includes getting files — particularly those relating to accounting — in order. Buyers will expect to review financials dating back at least a few years during due diligence.

Plan for due diligence – In addition to reviewing recent financials, buyers typically will want to see the lease agreement, customer lists, an accounting of inventory, information on FF&E and other similar items. Anticipating what the buyer may request and planning ahead saves time and helps make the seller appear organized.

Be realistic in pricing – You may wish to engage the services of a business broker to determine a reasonable selling price for your company. Businesses that are not priced correctly (particularly those priced too high) will not interest most buyers initially and generally do not sell at all.

Ensure confidentiality is maintained – Business owners must avoid a breach of confidentiality at all costs. Buyers should be qualified in advance and be willing to sign a non-disclosure agreement. A business broker is experienced in how to handle this situation while keeping the process moving along.

Don’t neglect the daily routines – The business transfer process rarely happens overnight, so it is important that the seller continue to focus on his business, keeping it running smoothly and successfully.

Stay flexible – Negotiation involves give-and-take. Realize the buyer is probably also an entrepreneur and may be used to being in charge of situations as well. The willingness for both parties to compromise on some issues will keep the process moving to the closing table.
These suggestions are the top recommendations from experienced business brokers around the country.

How to Sell Your Business, but Keep it a Secret

“Loose lips sink ships.” It’s a familiar phrase to Americans, originally written by the War Advertising Council during World War II as “Loose lips might sink ships.” The British also used variations of the phrase that encouraged citizens and military personnel to avoid careless talk that might serve the enemy.
The phrase is still used today to caution against thoughtless chatter in general.

When selling a company, it is vitally important that confidentiality is maintained throughout the business transfer process. A breach of confidentiality may not only kill the deal, it can cause further repercussions to the seller as employees and customers may leave, creditors may begin to scrutinize more intently and competitors may capitalize on the perceived opportunity.

If a business owner is unable to disclose information, how is he supposed to sell his company?

Business brokers are professionals in this arena and have the experience and tools in place to manage the business transfer process discreetly, helping sellers maintain the utmost confidentiality until the transaction has been completed. This is accomplished by:

  • Marketing effectively
  • Qualifying buyers
  • Using documents that require confidentiality
  • Managing the information flow

 

A business broker should prepare a customized marketing approach for each company he lists for sale. This includes describing the business in a generic fashion — one that will appeal to prospective buyers without jeopardizing the seller’s identity.

Approximately 90% of prospects who initially reply to advertisements are usually not a fit at all, generally because they lack the necessary experience or cash investment for the transaction. There are also a lot of “lookers” or “tire kickers” who can easily drain a seller’s time and tax his emotional energy. Business brokers have the skills to help qualify buyers immediately before the seller is ever involved.

Business brokers use confidentiality agreements, with wording prospective buyers must agree to, in writing, before additional information is released.
Business brokers also manage the flow of information, holding the most sensitive records secure until a formal offer to purchase (with escrow deposit) has been accepted by the seller.

The business transfer process is somewhat unique in that the details of the entity being sold are not shared initially, but rather peeled away as the buyer becomes more interested and continues to offer proof of his sincerity and qualifications.

Entrepreneurs: Trim the Fat and Boost your Profits!

Now more than ever, individuals are looking for ways to cut costs — personally and professionally. This is especially true for entrepreneurs preparing to sell their businesses. Higher profit margins naturally make a company much more attractive to potential buyers, and increased seller’s discretionary earnings generally equate to reaching the closing table faster and with a better selling price.

Most business owners today are using tried-and-true cost-cutting methods, as well as employing more creative techniques in order to reach their goals sooner.

Here are some suggestions you may wish to consider in the continuing quest to lower expenses:

Enjoy the electronic age
Try a voice mail system for your office and use email whenever possible. This may help reduce the hours needed for a receptionist or secretarial staff and could allow these employees to contribute in other areas. There is a variety of affordable software for businesses, which can help increase productivity within the office. Don’t forget to take advantage of the sales and marketing opportunities the Internet provides at little or no cost.

Deal directly with the source
Establish relationships with the manufacturer of products you frequently use. This may help avoid surplus charges added by third parties.

Makes vendors competitive
Sometimes business relationships can become too complacent. Check out current pricing by requesting multiple bids – especially on larger projects. Remember that sometimes the lowest-price offer may actually cost more in the long run, so be sure to examine the fine print and associated details.

Be rewarded for loyalty
For those vendors you patronize, ask about any loyalty programs they may offer. Even if none are publicly promoted, you may find a vendor will express thanks with special savings.

Outsource when appropriate
Both in terms of employees and leasing space, this is an attractive option for business owners. Outsourcing continues to grow in popularity on many levels. Temporary employees or contract workers make sense for seasonal jobs and short-term projects. Try renting or subletting space when it is needed only occasionally (such as a conference room or large space for presentations).

These are only a few of the many ways savvy business owners are making a direct, and positive, impact on their bottom lines. We’d love to hear what suggestions you might have for other entrepreneurs!

Why Business Deals Fall Apart

It is an all-too-common event for buyers and sellers of a business: the deal falls apart. After both parties have reached a tentative agreement on the sale of a business, it is emotionally and financially frustrating to watch a deal disintegrate before everyone reaches the closing table.

Why does this occur, and what can be done in advance to help prevent such a scenario? Business brokers across the country generally agree the following are the three top reasons businesses don’t sell.

Issues with pricing
Business brokers consistently encourage sellers to be realistic about the asking price of their company. A business is fairly priced when its financial records support the value perceived. During due diligence, the buyer has the opportunity to review the company’s financial data prior to closing. It is best not to give a buyer any reason to feel the original asking price was inflated.

A troublesome issue is not disclosed
Sometimes sellers feel a challenge with their business is best not disclosed initially. This represents the potential for a deal falling apart quickly down the line. Most problems will eventually surface; we all know they don’t simply disappear overnight. Once a potential buyer (either before or after an offer is made) learns about the problematic situation, what could have been handled easily becomes an off-putting surprise. The buyer feels misled – and who can blame him?

Time can easily kill a deal
This is a common observation among business brokers. Part of the value of using a business broker comes from his experience in managing the business transfer process and keeping all parties focused on the same goal. This is an emotional time for both buyer and seller, and it’s understandable that one or both can become irritated, defensive or critical when time drags on with no resolution. The closing process does take time – and certainly some deals are more complex than others. Using knowledgeable and experienced professionals will help ensure the process moves forward seamlessly and to everyone’s satisfaction.

Selling Your Business? Guidance from a Commercial Lender

In our third installment of “tips from the experts,” we discuss a topic of great importance to both buyer and seller: how will this transaction be financed?

When a buyer or seller contacts me to inquire about the business brokerage process, it has been my experience that financing is not always at the top of everyone’s mind – but it should be! Many companies listed for sale never reach the closing table, and lack of financing is almost always the reason these businesses do not sell.

While it would be a much easier process if all buyers brought 100% of the contract price and associated costs in cash to the closing table, this rarely happens.

Typically, seller financing and/or SBA loans are used for financing a sale. SBA loans are guaranteed by the Small Business Administration and are provided to small companies.

Christopher J. Kneer is vice president of commercial lending for Community Bank and specializes in both conventional and SBA loans. He explains, “Banks view business acquisitions as risky transactions for two primary reasons: change of ownership and financing of goodwill. For that reason, we utilize the SBA.”

Kneer provides these tips for potential sellers:

The time to begin preparing for the sale of your business is three years out. To get the highest price for your business, you need to have multiple and consistent years of earnings. Banks and many buyers are suspicious of one great year and dramatically different results in previous years.

Accounting quality is very important. An arm’s length CPA should be working with your company. Accounting issues and statements that do not match up from year to year are a major red flag. If there are significant line items or particular issues on your financials, be upfront and point them out. Spend the money on good accounting and it will come back twofold.

Show earnings. The time to strategically limit profits for income tax purposes is not while you are preparing to sell your business. No bank wants to see a company that loses money every year and bases its sales price on “add-backs.”

Have buyers pre-qualified. Banks want to see buyers with industry experience, proper equity injections, and liquidity. It does no good to show your businesses to those that cannot qualify for financing unless they are cash buyers.

Plan to have a seller note involved in the transaction. Due to changes in SBA financing, it is often necessary, and it also shows good faith in that you are willing to stand behind the business for sale.

Plan to stay on for a period of time. This also shows good faith that you are willing to help the new owner be successful.

Solid and sound advice.

Help! How do I create a strategic business plan?

Twenty-something years ago, I received my Bachelor of Arts degree in Business Administration from a recognized state university. But how much practical or "real world" knowledge did I gain with this diploma?

Recently, The Wall Street Journal printed a reader's question concerning business plan strategy — something that was not covered in his academic studies.

The reader began by stating he had a college degree in business, but his formal education did not include learning the specific components that make a business plan successful. He asked if there was someone who could review his business plan and give the necessary feedback to ensure its success before the plan was formally submitted to lenders and other outside parties.

Barbara Haislip responded by suggesting a free and knowledgeable resource: the Small Business Development Center (SBDC). The Office of Small Business Development Centers provides man agement assistance, information and guidance to new and established small business owners through a cooperative effort of the private sector, educational community and federal, state and local governments. The best news? This assistance is available in all 50 states and U.S. territories at no cost to the small business owner.

Haislip suggested that prior to approaching the SBDC, an entrepreneur should include the following items in his business plan:

  • discussion of customers
  • review of present and potential competition
  • presentation of marketing strategy
  • list of all resources necessary to the business

Haislip further explained most entrepreneurs will also need a financial plan (generally showing two or three years of projected income and cash-flow statements and balance sheets).

Check out www.sba.gov for more information and to find the SBDC branch closest to your business.

Maximizing Value for Your Company

by Gokul Padmanabhan – Orlando, Florida Franchisee

Sooner or later many companies end up with more than they need for a successful operation. Being a business owner myself, I confess we love to dream big and perhaps overestimate when preparing for the future. We might obtain more office space than we presently need or buy more equipment “just in case.” We often mistakenly rationalize these decisions by declaring that if business increases significantly, we will need that extra room or additional piece of equipment.

The truth is, if and when you need the added space or that new printer (which does everything but make your morning coffee), you can always purchase it at the time you most need it for practically the same price you are going to pay for it today. So, why spend the money ahead of time?

As professionals in valuing businesses, we know that a profitable organization is valued based on its earnings — not its assets. It makes sense, then, that having a smaller office or passing on the latest technological gadget does not diminish the value of your business at all. Indeed, running your business frugally and showing a healthy bottom line is a surefire way to increase the value of your business.

Business Valuation – What Is a Business Worth?

Determining the value of a business is the first step in the process of buying or selling a business. The value of a business is related to the risk involved, the ability to generate an income stream, and the value of the tangible assets.

An expert business valuation report will be based on standard valuation methodology combined with the experience and knowledge of the valuation expert. The specific purpose of the business valuation and the size of the company will determine the depth of analysis and research required.

Basic factors that influence value are:

  • Value of hard assets
  • Recast cash flow analysis: normalize earnings
  • Review factors that can impact future earnings
  • Calculate and apply external factor discounts
  • Analyze intangible values

 

The final step of a business valuation report is to make sure that the suggested price for the business passes the sanity test:

  • Will the income cover the debt service?
  • Will the cash flow provide the owner or manager with a reasonable salary?
  • Can the cash flow provide for future capital equipment requirements?
  • Will the cash flow provide a cushion to allow for fluctuations in the business cycle?