Small Business Seller’s Wish List

In the spirit of the season, we offer a wish list for a typical buyer and seller of a small business. Entrepreneurs who are selling their companies, as well as those looking to purchase, generally agree on what would make the process more seamless overall.

Today’s blog focuses on what the seller wants:

  • A qualified buyer – This not only means someone with the financial resources to meet a down payment and secure financing, it also describes someone with experience owning or managing a business — perhaps with some knowledge of the industry itself. A qualified buyer more than likely has established ties to the geographical area and if married or in a domestic relationship, has the support of his partner.

 

  • An appropriate offer – A seller appreciates an offer that is solid, reasonable and timely. Sellers expect contingencies to be a part of the offer, but also anticipate these to be realistic. One of the most common contingencies is a lease transfer with equitable terms for the buyer.

 

  • A practical due diligence phase – Sellers are pleased to answer questions and share pertinent data during the due diligence phase; however, buyers should take care not to pose queries or make statements that may be perceived as an insult to the seller. Common sense should dictate how the buyer should best introduce discussions on past decisions the seller made or how the business is run on a daily basis. Buyers should prepare their due diligence requests in writing and as soon as possible after the offer has been accepted.

 

  • A smooth closing – The closing should be a time of celebration for both parties, not a time for second-guessing, bickering or hesitation. Hiring a closing attorney experienced in the business transfer process helps immensely. By the time everyone is seated at the closing table, all questions should have been answered, all pre-closing paperwork completed and the buyer and seller should be confident this is a win-win situation for everyone involved.

 

  • An efficient transition – Most sellers, particularly those who created the business from the ground up, truly want to see the business continue to grow and prosper. Sellers want their buyers to be successful, and most will work hard to ensure the buyer is completely comfortable with all facets of the business during the training period that begins after the closing. This transition phase often involves introducing the new owner to suppliers and customers and showing the buyer everything related to running the business, from how to operate office equipment to the best way to manage employees’ schedules.

 

As a business broker, I have most enjoyed working with buyers and sellers who are forthright, reasonable and agreeable. Having realistic expectations on both sides and keeping a professional and positive attitude throughout the business transfer process goes a long way toward reaching a successful closing.

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.

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.

Developing an Exit Strategy Plan for Business Owners

It is important to for small business owners to develop an Exit Strategy early on. A three-year plan is optimal; a three-week plan is distressing!

The following is a list of important items to include in your strategy. Identify and gather all appropriate documents:

  • Tax returns for the last three years
  • P & L and Balance Sheets for the last three years, plus the most current on you have available.
  • Develop a year-end projection for the current year of sales and expenses. An explanation of any additional capital purchases needed, or recruitment of additional personnel required.
  • A list of your top 10 accounts and the annual sales generated by each for the most recent year (if applicable).
  • A list of assets that are owned by the company. The year purchased, make and model, and fair market value. Items like office furniture can be grouped together and listed as a group.
  • A list of your key employees, their compensation and benefits, and how long they have worked for you.
  • A description of your office space owned or leased, the terms if leased and options that are currently in place.
  • A brief description of how you market your business and what areas generate the majority of your sales. Give percentages and breakdown of sales by specific sectors. Please also provide copies of any printed marketing materials you may have.
  • Are there any pending law suit, employee or supplier issues a buyer should be aware of?

 

Upon your decision to exit, a business broker or intermediary, can help you value, market and sell your business, developing a current value for your business using the market approach, the income approach or the asset approach.

Buy A Franchise – Dryer Vent Cleaning and Service

Imagine a scene in a household when a dryer stops working. A consumer’s first inclination is to believe that the dryer is broken. In many situations a repair person is called only to find out that it is not a malfunctioning dryer, but the dryer vent needs cleaning. Dryer vent lint build-up causes dryers to work inefficiently or not at all. Because repair center personnel do no clean, repair or replace dryer vents, they refer customers to the Yellow Pages.

Here’s the market niche…there has been no organized company providing this service in the Yellow Pages. When the home is in disarray because there are no dry clothes, the search to find someone to help is an urgent call! This is where we come in. Through networking with local repair centers and property managers, our franchisees receives referrals that put them in touch with consumers who need our service and need it now!

A competitive advantage: An important aspect of our service is safety. Dryer vent lint build-up is the leading cause of fires in homes. Also dryer vents in older homes do not meet current building codes. In addition to the safety hazard and building code problems, a clean dryer vent helps to safeguard homes from the dangers of mold and mildew. With a lifetime warranty, our consumers are assured that we will be out on an annual basis to clean, repair or replace their dryer vent.

A Proven Concept: Our closing ratio is 94%. Our average ticket is $358.00. We have perfected the cleaning, repairing and replacement of dryer vents, so our franchisees don’t have to reinvent the wheel.

Key Business Model: This is an Owner Operated OR Executive Model franchise opportunity. With low overhead, few employees and family friendly hours this may be the right opportunity for you!

Hiring A Professional Business Broker to Sell Your Business

There are four different ways that business owners typically use to Exit their businesses:

  • Close the Business
  • Accident, Illness, or Death
  • Succession
  • Sale of the Business

 

The obvious choice for many is Sale of the Business. Statistics show that approximately one out of every five businesses in the U.S. change ownership every year. Selling a business requires dedicated professional attention. Marketing and facilitating a business transfer is a full-time job. The goal of the seller is to maximize the after-tax profit on the sale of the business while maintaining strict confidentiality. The following steps must be taken in order to achieve the seller’s goals:

PRICING AND VALUATION. Sellers want the best possible price for their business. To determine the best price, a professional broker will use the industry-tested valuation techniques, including ratios based on sales of similar businesses and historical data of the types of business for sales. A critical factor in pricing a business is the terms offered, and the type of deal structure. The broker will work with the seller’s financial advisors to achieve the highest amount of “net proceeds” after the sale. While the selling price is important, the amount that the seller “keeps at the end of the day” is what is really important.

PREPARING THE BUSINESS FOR SALE. To make an informed decision, a buyer will require information on the business activity, history, customers, sales and earnings, marketing strategy, employees, assets included, facilities, location and the reason for sale. A complete Offering Memorandum will enable a buyer to make an informed decision and obtain the required financing to proceed with the deal. Generally, buyers are more educated on the process of buying a business than sellers are in the process of selling.

MARKETING AND ADVERTISING. Designing a marketing plan specifically targeted to the types of buyers that would be interested in the business is a key factor. Business brokers use databases of buyer’s prospects, professional associations, and investment groups. Target marketing through trade publications, direct mail and Internet sites specifically for business transactions may be used to reach buyers. Advertising in newspapers both local and national, as well as in industry trade journals will produce qualified buyer prospects.

QUALIFYING BUYERS. The business broker will focus on those prospects who are financially qualified and who are genuinely interested and have the skills needed to run this type of business. Finding a “real, qualified buyer” is a skill that is developed by years of experience in doing business transactions.

PRESENTING THE BUSINESS. The professional business broker is experienced in handling negotiations. The broker also offers the seller convenience of continuing to manage the business while the selling process is under way. Information is disclosed to buyers in stages, as needed, while the deal progresses through the due diligence process.

MAINTAINING PRIVACY AND CONFIDENTIALITY. Business owners are extremely concerned about confidentiality. A professional broker is skilled at protecting the confidentiality from the employees, suppliers, creditors and customers of the business.

NEGOTIATING THE BUSINES SALE TRANSACTION. The business broker will be a vital advisor during the sale transaction. Knowledgeable about negotiating price, terms and other key aspects of the sale, the broker will guide the seller each step of the way. Proper deal structure will greatly affect the net amount that the seller will end up keeping after selling the business. The Broker will help coordinate the Legal, Accounting, and Financial Professionals that are required to complete the transaction.

Ten Steps to the Successful Sale of a Business

1. Make sure you have a valid reason for selling your business. The first thing a prospective buyer will want to know is the reason you are selling. The more valid the reason you offer, the more serious the buyer will be.

2. Don't wait until you have to sell, for either economic or emotional reasons. You don't want anxiety to force you into accepting a deal that's not good for you or for the buyer.

3. Once you have made the decision to sell–and before talking to your business broker–you should gather the information needed to market and subsequently sell your business. Here's the list of key items:

  • Three years profit and loss statements
  • Federal income tax returns for the business
  • List of fixtures and equipment
  • The lease and any lease-related documents
  • Copy of the franchise agreements (if applicable)
  • List of loans against the business with amounts and payment schedule
  • Copies of any equipment leases
  • An approximate amount of the inventory on hand
  • Names of outside advisors

 

4. Remember that you are part of the marketing team. Your business broker can't do it all–and might even ask you to come to an office meeting to tell the rest of the staff about your business. Follow your broker's advice about dealing with prospective buyers–there's a right and a wrong time to meet them.

5. Confidentiality works both ways. The broker will constantly stress confidentiality to the customers to whom he or she shows your business. However, as the seller, you must maintain confidentiality about a pending sale in your day-to-day business activities.

6. You, as the seller, should put yourself in a prospective buyer's position. The next time you go to your place of business, pretend you are a buyer looking at it for the first time. How impressed are you?

7. Just because you are selling, now is not the time to let the business slip. It's important that prospective buyers see your business at its best; bustling, and showing no signs of neglect.

8. Engage an outside professional who understands the sales process. If you are going to use a lawyer, use one who is seasoned in the business sale process.

9. Be flexible! You need to keep the ball rolling once an offer has been presented. Study it closely. Just because you didn't get your asking price, the offer may have other points that will offset it, such as higher payments or interest, a consulting agreement, more cash than you anticipated or a buyer that you are comfortable with.

10. Remember that most successful transactions are successful because they create a win-win situation for everyone involved.

How Do I Sell My Business?

By: Art Lennig, CBI, BCI Murphy Business & Financial Corporation – Georgia, Inc.

Part I: The Advisory Team

How do I sell my business? This is a question that many business owners ask themselves. What do I do? Where do I start? What do I need? What is my business worth? How do I compete against the many businesses for sale? Great questions, but where do I get the answers? I wish I could say there are simple solutions but there are none. Selling a business is an art, not an exact science. It takes time and patience. Pricing is critical – too high and nobody will look at it, too low and everyone will wonder – “What’s wrong?”. The goal is to maximize the value of the business yet sell the business for a fair price that works for both the seller and the buyer.

There are many things that a business owner should be concerned with when they have a business to sell:

  • Confidentiality
  • Tax liability
  • Sharing of information
  • Liabilities
  • and on and on.

 

How do we protect ourselves against these concerns?
Whenever a business owner wants to sell their business, they should assemble an advisory team. This team should consist of: The Owner, The Spouse, Business Broker, CPA, Attorney, Financial Planner. Let’s take and discuss each one and the purpose and experience each needs to bring.

The Owner, Spouse, and other family members – These should be obvious, however many times the owner does not include the spouse and family members in the decision-making process until the end only to find out that not all are agreeable to the sale.

Business Broker – This is the most critical member of the advisory team. The business broker is the quarterback, the general contractor, the facilitator, etc. Their role is multifaceted: Consistently communicate with the owner and spouse as to what is happening with the listing and also what is happening in the market. The Broker should gather all the documents that will be presented to the Buyer. These documents will vary by each business but in most cases will include; Tax Returns, Financial Statements, Lease, List of Assets included in the business sale, List of Assets NOT included in the Business Sale, and more. A professional Broker will want all the information at the beginning of the conversation to make an assessment of your business.

Many Brokers recommend or require a third party business valuation. This is done to determine the fair market value of the business, give you a planning tool to discuss with your CPA and Financial Planner, and also a tool for the Broker to use with those Buyers who want to buy a business during the negotiations. The Broker will (or should) put together a “Package” about the business which at some point will be presented to the Buyer. Professional Brokers prepare these packages and include all the information the Buyer will need to know. Unfortunately the less than professional Brokers do not prepare much more than a cover sheet (with little information) and a tax return. There are two different approaches here: The professional approach is to thoroughly educate the Buyer before bringing the Buyer to the business. The less than Professional Broker uses the “spaghetti theory” – keep parading people through the business in the hope that something will happen. The Professional Broker only brings qualified serious buyers to the business. They do not want to waste the owner’s time with buyers that are not ready to buy. Yes, the better Brokers do require some money before listing the business. This money is usually required to cover the costs of the valuations and other expenses the Broker incurs upfront.

The CPA – This person is critical to the advisory team. This is not always the owner’s CPA as they must be knowledgeable in Business Sales. You want someone that understands the business transfer process, can look at your financial information and provide you with the necessary advice in order to accomplish the sale. Many times the CPA will advise against the sale because it is the “safest” advice he can give. You must use a CPA that has experience in Business Transfers. Once you have the Business Valuation done, you will want to discuss it with the CPA. You want to know where you will be (How much money you will receive) after taxes.

The Attorney – Similar to the CPA, this advisor must have experience in Business Transfers. You do not want the attorney that drew up your will or handled your divorce. An experienced business attorney will protect you through the closing process yet get the deal done.

Financial Planner – This is your Financial Planner. After you have discussed the tax liability with the CPA, you now want to meet with your Financial Planner to discuss the possibility of your being able to live the life style you desire after the business sale. It is most critical that you know this before you ever list your business for sale.

If you would like us to contact you about selling your business, click here: http://www.murphybusiness.com/georgia/contact-us