Selling A Business

  Are You Ready to Sell Your Business? Make sure you are ready, both financially and emotionally. Think about what life will be like after the sale. What will you do with your time? Will you have the financial resources necessary for your next stage of life? What net proceeds amount will work for you after giving consideration to all of the costs of selling your business? Will that amount be sufficient to allow you to accomplish your business sale objective? Engaging a tax professional to help you  with the analysis is extremely valuable.

Click these links to jump down to each of the steps in selling your business:

Understanding Your Value Proposition Preparing Your Business for Sale Utilizing a Business Broker/Intermediary Business Valuation Adjusted Asset Method Marketing Plan Qualifying Buyers Site Visit Negotiating The Deal

Understanding Your Value Proposition

Many elements of a business make it attractive and build value in the eyes of the buyer. For example, does it have a solid history of profitability, a large, diversified, and loyal base of customers, a competitive advantage (product or service superiority), barriers to entry (intellectual property rights, long-term contracts with clients, exclusive distributorships), opportunities for growth, a desirable location and a skilled work force? Have you built a team capable of success once you’ve left the business? Will the business run successfully without you present? Back To Top    

Preparing Your Business for Sale

Get your books in order. You will need the following before you go to market:

• Last three years’ profit-and-loss statements.
• Year-to-date profit-and-loss statement.
• Current balance sheet.
• Last three years’ full tax returns.
• List of furniture, fixtures and equipment.
• List of inventories.
• Copy of your lease agreement (or appraisal if selling real estate).
• Backlog (if manufacturer), contracts of future business, etc.

Be ready to furnish other documentation during the due diligence phase when you will probably be asked to produce insurance policies, employment agreements, customer and vendor contracts, lists of patents issued, equipment leases and bank statements. You will also want to clean up your business to make it attractive to buyers. Make any needed improvements to the premises, get rid of outdated inventory and make sure that equipment is in good working order. Back To Top

Utilizing a Business Broker/Intermediary

Now that you’re prepared to sell your business, your next decision is whether to use a business broker/intermediary or go it alone. In nearly all areas of life, unless you personally are an expert, it is a wise choice to work with highly skilled and trained professionals to attain desired results. Here are a few questions to ask when deciding upon which firm to choose to handle this important assignment on your behalf:

• How will my business be valued?
• Please tell me about you and your firm?
• How will my company be marketed?
• Does your firm cooperate with other business brokers/intermediaries?
• If appropriate, will my business be confidentially displayed on business brokerage Internet sites?
• Do you have the education and wide-ranging capabilities (finance, marketing, negotiation, communication mastery, network) necessary to do an excellent job on my behalf?
• Do you have a history of success? Most business owners come to firms through referrals.
• May I have a sample copy of your representation agreement?
• Is your firm affiliated with respected business brokerage/intermediary/M&A associations or trade groups?

Business brokers/intermediaries should be able to bring you prospective buyers that you would never be able to find on your own. Most brokers will ask for at least a one-year exclusive listing agreement. Many criteria are involved in determining the representation term: the extensive upfront time required, the time of year, the specific strategy needed and then will wisely utilize their judgment to determine what term works best for your business. This means that any disposition of the business will entitle the brokerage firm to their success fee. Commission rates will normally vary and are, by law, negotiable. Nearly all firms have a minimum fee to represent small businesses. The best brokerage firms, with highly skilled professionals, will request a retainer to cover the time intensive upfront work necessary to prepare your business for sale. The firm will also request that assorted upfront fees and advertising costs are covered to ensure that your marketing campaign is comprehensive to achieve the best outcome on your behalf. Usually, the smaller the transaction, the larger the commission. “Main Street” businesses, those with enterprise value between $100,000 and $1,000,000 can expect the highest commission rates. Commissions, the reward for success, are determined between the client (seller or buyer) and their broker and are normally paid at closing. The larger mid-market transactions utilize various versions of the Lehman formula. There is no single rule of thumb in this arena. It varies on a case by case basis depending upon numerous factors and the complexities of the transaction. Our firm has the essential skills to cover both small opportunities and mid-market transactions. An excellent business broker/intermediary will assist you throughout the remainder of the process outlined below. Back To Top

Business Valuation

Selling a business is both art and science, and in no other area is this more evident than the business valuation. While every seller wants to achieve maximum value, setting an asking price that is too high might signal to buyers that you may not be serious about selling. While there are a number of methods used to value a business, the most common formula for smaller transactions is a multiple of Seller’s Discretionary Earnings (S.D.E.). This type of market-based valuation involves recasting profit-and-loss statements by adding back  interest, taxes, depreciation and amortization to arrive at Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).Now add back discretionary items such as owner’s salary, perks, and nonrecurring expenses resulting in  the S.D.E. of the business. Now it is time to arrive at an appropriate multiple. A number of variables play into arriving at an appropriate multiple including:

• Continued earnings risk
• Company history and stability
• Growth projections
• Past earnings momentum
• Competition
• Cost of business expansion
• Barriers to entry
• Customer concentrations
• Management and key employee retention
• Location desirability and continuation
• Facility operational efficiencies
• Capital expenditures
• Financing availability
• Industry strength
• Environmental risk
• Alternative investment returns
• Economic conditions

This is where a professional business broker/intermediary can provide assistance to assessing your business in these terms and providing an appropriate multiple. For larger and more complex businesses, other methods including the Adjusted Asset Method (asset approach), Discounted Future Earnings Method (income approach), and the Direct Market Data Method (Market Approach). Back To Top

Adjusted Asset Method

Methods from the Asset Approach are often appropriate in the following situations:

• The company is considering liquidating or going out of business;
• The company has no earnings history;
• The company’s earnings cannot be reliably estimated.
• The company depends heavily on competitive contracts and there is not consistent, predictable customer base (e.g., construction companies);
• The company derives little or no value from labor or intangible assets (e.g., real estate or holding companies);
• A significant portion of the company’s assets are composed of liquid assets or other investments (e.g., marketable securities, real estate, mineral rights).

The asset approach is typically only used when the value of the business is heavily concentrated in its tangible assets or the business is not generating a high enough return on its assets to warrant “excess earnings” or “goodwill.” Back To Top

Discounted Future Earnings Method

The discounting of future benefits to a present value is a theoretically correct method of value when investors are seeing a return on their investment. This method is dependent upon two inputs, the projection of the future benefits and the determination of a suitable discount rate. This method is often used when projected cash flows are expected to be uneven because of irregular growth or other factors. The forecasting of earnings or cash flow and then discounting it to a present value is a valuation method appropriate when it appears that a Company’s current and historical operations do not indicate an expectation for stable earnings and a constant growth rate. This method provides for the recognition of a varying pattern of financial benefits and an annually changing rate of growth. The application of this method requires the following critical decisions:

• The selection of a type of financial return to be forecast;
• A decision as to whether to use that return applicable to equity or invested capital (since we are using EBITDA, invested capital is applicable);
• The number of years to forecast (we’ve forecasted 5 years);
• The selection of a discount and capitalization rate to be applied to the return selected (modified build-up rate on EBITDA).

In essence, we are simply forecasting future cash flows, discounting the returns to their present value based on a discount rate specific to the risk of the investment. We then calculate a terminal value with the assumption the business will have value at the end of the forecast period. This “value” is also discounted and added to the sum of the present value of the future cash flows. Back To Top

Comparable Transaction Method

The Direct Market Data Method, DMDM, develops a value based on the transaction values for which similar privately held businesses have been sold. The method assumes that if you take a large group of transactions of similarly structured businesses, the central tendency of the value ratios in such groups represents the value determined in a free and open market or Fair Market Value. For additional methodologies on valuation please contact us directly. Back To Top

Prepare Your Marketing Package

There are two primary marketing materials that are used to describe your business to potential buyers. The first is a one-page document that offers highlights of the business without revealing its identity and is sometimes referred to as a “blind ad.” These “blind ads” are used to generate interest without creating any possible negative consequences with employees, suppliers, customers, or competitors. The second is a comprehensive selling prospectus or business profile to be sent to serious buyers who have signed a confidentiality agreement. It is important to include photos (a picture is worth 1,000 words) of major assets, buildings, products, etc. The business profile should provide a comprehensive overview of the business including structure of the business, opportunities for growth, competitive advantages, personnel summaries, requirements for licensing,  financial results, an equipment list, licensing requirements, reasons for selling, terms and conditions of the sale, seller financing, and potential buyer profiles. Back To Top

Marketing Plan

After your marketing package is complete, you and your broker should set up a process to target and qualify buyer prospects. Buyers are said to come in two distinct types; Financial Buyers and Strategic Buyers. Your marketing plan should reflect a strategy for both types of buyers. Financial buyers as the name implies are very focused on the numbers. Their focus is on return on investment, return on equity, and risk/reward. The higher the perceived risk, the lower the price they will be willing to pay. They are looking for a business that they believe they can buy at a good price, improve with their skills and knowledge, and generate higher returns. They are willing to invest capital if they see the opportunity for significant future growth. Financial buyers rarely have the industry knowledge necessary to step in and run the business. As a result, they will rely heavily on your management team and other employees as they familiarize themselves with the business. It’s not uncommon for them to ask sellers to stay on for a period of time in a consulting capacity. Financial buyers will view the purchase of a small business as an investment. They will compare the returns they will receive from your business against the returns they can receive from other investments (stocks, bonds, etc.). They will likely look for opportunities near their place of residence. Financial buyers present themselves many ways, but tend to fall into two distinct categories; job buyers and high net worth investors. Job buyers often come from Corporate America where they’ve recently retired or have been laid off. Their primary objective is to generate a livable income while doing something they may enjoy doing. They’ve often accumulated a small nest egg for the purchase or a down payment. They will likely rely upon financing some portion of the acquisition with a small business administration loan and/or seller financing. High net worth investors often have previous leadership experience from corporations and/or experience with previous small business ownership. They want to have an active leadership role in the company and leverage their past business experiences. They typically have a large nest egg to invest. They’ll often have an exit strategy for the long term. Marketing to financial buyers is best achieved by advertising on business brokerage websites. Fewer than 5% of the general population are prospective business buyers, so focus only on the established ‘business for sale’ advertising venues that this 5% is following. There are a number of websites that cater to these buyers. Don’t expect your broker to run a massive ad campaign. It isn’t required or effective. Ads should be tested carefully and slowly. They should be “blind ads” where the identity of the company is protected. Strategic buyers typically already own a business in your industry, or in a similar industry. They are looking to find synergies between their company and yours. These may include increased sales and market share, a larger customer base, diversified service offerings, larger geographic coverage, and additional product lines. By combining their operations with yours, they can often significantly reduce costs, by combining operational departments that overlap both organizations. Examples include finance, human resources, marketing, and customer service. Additionally, strategic buyers should benefit from larger economies of scale within their supply chains. The result will be a more streamlined and efficient organization with higher profit margins. The company culture, reputation, and remaining management team are very important qualitative measures for the acquiring strategic buyer.  Should these qualities exist within your company, strategic buyers are frequently willing to pay a premium price. Some common types of strategic buyers include: Competitors looking to grow through acquisition. They may be looking to expand their geographic footprint, , expand their products and services, acquire key employees or customers, or simply eliminate you as competition. Complementary companies can include key customers, suppliers, or industries similar but slightly different from yours (e.g. HVAC and plumbing) that utilize similar operational models to service their customer base. Managers and employees are often strategic buyers of businesses. Management Buy Outs (MBO) and Employee Stock Ownership Plans (ESOP) are ways to transition ownership and control of your business over a period of time. Private Equity Groups (also known as a private equity funds) pool money for the purpose of investing in and/or acquiring businesses. PE groups raise money from limited partners which often include endowments, pensions, trusts, and high net worth individuals. PE groups are managed by general partners, typically for an annual fee of 2 to 3 percent of the money under management. In exchange for these fees, the general partners run the operations of the firms they acquire. PE groups often look to buy a company as a platform business upon which they can add additional companies, or they will look to “bolt on” companies to a platform business they’ve already acquired. The acquisitions they make become part of the groups’ portfolio. Their goals vary across geography, industry segments, etc.,  however, their key focus is to maximize the financial returns for their investors. The long term strategy for PE groups is to grow the companies they acquire and sell them at a sizeable profit. When the sale of portfolio companies occur, the PE group’s commission is typically 20 percent to the general partners, while the limited partners recover their original investment plus the remaining 80 percent. Marketing to strategic buyers is best achieved by doing targeted campaigns. Developing a “target list,” then launching a direct mail, email, or telemarketing campaign targeting these business owners/leaders can be an effective method to “get the word out. ” Again, be careful to use “blind ads” to protect  the identity of the company until a confidentiality agreement is in place. The upfront costs of these targeted campaigns are most often paid for by the seller when the listing agreement is “success based.” Back To Top

Qualifying Buyers

If you don’t have a process to qualify prospects, you may find yourself dealing with tire-kickers, wasting lots of time and resources trying to sell them your business. There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction. In addition, you should require buyers to submit some basic information:•

• Name and all contact information.
• Previous employment and business ownership.
• Educational background.
• Funds available to invest and sources of financing.
• Minimum monthly income requirement.
• Intended timeframe for completing a transaction.
• Reason for interest in your business.

Your business broker should have a process in place for qualifying buyers. Back To Top

Site Visit

Once a buyer has been qualified, signed a confidentiality agreement, reviewed your business profile, and shows continued interest; the next step is typically a site visit. We suggest that these visits be scheduled after hours for confidentiality and to allow you to focus on the buyer. This is your one chance to “sell your business” so it is imperative that you be on top of your game. A tour is usually the best way to start the site visit as it will generate a lot of good questions and give you an opportunity to present your business in a favorable light. It is highly recommended that your business broker be there to document disclosures made between seller and buyer and to answer any questions relating to terms and conditions and the process should it continue. Back To Top

Negotiating the Deal

After you’ve found a qualified buyer, provided a business profile and had an initial site visit, it is time to stop the flow of information and ask that an offer be presented. This can take the form of a nonbinding letter of intent or a written offer. It should spell out the terms of the deal so that all parties can move forward in good faith. All sellers hope to get a full-price cash offer for their business. But in the real world this rarely happens. More often buyers will make a down payment and pay the remainder in installments to either you or a lender. We recommend that seller’s get pre-approval letters from banks using the Small Business Administration (SBA) whenever possible, to facilitate the loan process and expand the potential buyer pool. Don’t be disappointed by an offer that doesn’t meet your expectations. It is not uncommon to counter-offer the original offer. A willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Your business broker/intermediary can be the creative “glue” that holds the deal together. Also, be sure to enlist your accountant to help you assess the tax consequences of the terms you accept. Once the terms have been agreed upon by both parties (offer and acceptance) it is time to open an escrow account. Your business broker/intermediary can walk you through the escrow process, costs, and timeline. Depending on the complexities of the deal, plan on allowing approximately 30 to 60 days to close escrow. Now that escrow has been established, be prepared to furnish other documentation during the due diligence phase. This is where the buyer will likely ask you to produce insurance policies, employment agreements, customer and vendor contracts, customer lists, lists of patents issued, facility leases, equipment leases and bank statements, just to name a few. Navigating the escrow closing process takes careful attention and daily follow up.  This is where a skilled business intermediary or broker can really help.  As the saying goes: ‘Nothing happens until the sale is final.”  Business sale transactions can easily fall apart during the escrow period unless momentum to close the transaction is sustained by careful attention to detail. Back To Top