10 Most Asked Questions About Selling A Business

Nearly four million small businesses will change hands this year and every year. These frequently asked questions and answers will be of great value if you’re considering exiting your business, or even buying or investing in a business. You will also want to look at Selling A Business: The Exit/Transition Process.

WHAT WILL BUYERS LOOK FOR IN YOUR BUSINESS?
HOW SHOULD YOU DETERMINE THE PRICE OF YOUR BUSINESS?
HOW DO I DETERMINE THE VALUE OF MY BUSINESS?
WHY WOULD I NEED A BUSINESS VALUATION?
WHAT OPTIONS DO I HAVE TO MARKET MY BUSINESS?
IS NOW THE RIGHT TIME TO SELL MY BUSINESS?
HOW LONG DOES IT TAKE TO SELL A BUSINESS?
WHAT STEPS WILL YOU GO THROUGH IN THE SELLING PROCESS?
IS CONFIDENTIALITY IMPORTANT AND HOW IS IT MAINTAINED?
WHY SHOULD I MAKE AN INVESTMENT BEFORE THE SALE VS ONLY PAYING A COMMISSION AFTERWARDS?

WHAT WILL BUYERS LOOK FOR IN YOUR BUSINESS?

A diligent buyer, once they have decided whether they have a serious interest in your business, will seek to substantiate and confirm every phase of your business through a thorough examination known in the industry as due diligence. This may include a review of your marketing and operations -- product lines and services mix, management structure, customer and market base, and compatibility of operations. They will want to know how your company or business is classified -- manufacturer, retail store, wholesale distributor, service company, etc. They will review your financial condition including financial statements, tax returns, depreciation schedules, payroll records, etc. They will want to see your company's earnings (profit before taxes) for the past three to five years, as well as your net worth. They will review the assets of your business -- facilities, equipment/vehicles, inventories and leasehold improvements. And they will examine your legal status -- pending or potential litigation, title or lien searches, and lease agreements. They will want to know about employment contracts. If they are buying your stock, they will want to review your corporate minutes and corporate paperwork. If necessary for the business, they will want to know about your patents, licenses, permits and franchise agreements. That’s why having professional help in preparing for the sale of the business is so important in dramatically increasing the likelihood of surviving due diligence, closing the transaction, and getting the most value the market will support.

HOW SHOULD YOU DETERMINE THE PRICE OF YOUR BUSINESS?

Determining the "asking" price of your business is an important step in the process of marketing your business for sale and is at the discretion of the business owner. However, there are some key factors to consider in determining the asking price. First, if it is too low, a business owner could be leaving tens of thousands, even hundreds of thousands of dollars or more on the table. If is too high, there will be fewer interested buyers, if any, and a very reduced chance of any buyer obtaining financing to acquire the business. So it needs to be "in the right ballpark" so to speak. A professional business valuation is essential to understanding the "truth" about the value of the business. Don't spend thousands of dollars fixing up the business and fail to adequately prepare a "true" financial picture. Most small or closely held businesses show losses or little if any profit on their financial statements and tax returns, but in many cases these businesses can sell for 50 to 80 percent more than their books show they are worth, provided the business owners have had their financials recast to show what is real and have professional documentation to defend their asking price. It is important to have a business valuation prepared by a certified, independent valuation company to show your financial picture in its best light and get the full fair market value you deserve. This is done by honestly recasting the financials of the company including making adjustments to the operating statements -- removing owner and spousal compensation, personal perks, non-recurring one-time expenses, etc. A manager's salary comparable with industry standards for the area is substituted if owner compensation is inordinately high. Excessive interest burden is removed. Other adjustment possibilities include: pricing fixed assets at replacement value instead of book value, making inventory adjustments where necessary, and substituting straight-line depreciation where it has been accelerated. A professional valuation will enable you to establish the true value of your business rationally, objectively, and best of all, defensibly.

HOW DO I DETERMINE THE VALUE OF MY BUSINESS?

While a business owner can "ask" any amount they want for their business, the "value" of a business is best determined through a professional, independent, objective, third-party valuation. Much like a bank wants an independent appraisal of real estate to consider financing and buyers won’t look at houses that appear to be grossly over-priced, the value of a business needs to be determined with these realities in mind. Certified valuation companies, rather than family, friends, the local CPA, are the best resources. They will look at recast financials, the nature of the industry, the business’ performance relative to what is standard in that industry, the economics of both the business and the economy, the financial history and the future prospects for the particular business and the industry, the cash flow, the assets, the market share, the customer base, and many other factors. They will apply different valuation approaches, determining which is most likely to reflect Fair Market Value for the business.

WHY WOULD I NEED A BUSINESS VALUATION?

(See "The 5 Myths of Valuing a Private Business" by Dr. Stanley J. Feldman, Assoc. Prof. of Finance, Bentley College) A business valuation is important for many reasons, the most common is to determine the Fair Market Value of a business. If a business is priced too high, it will not attract any buyer interest and is highly unlikely to sell at all. If a business is priced too low, it may well attract considerable interest and offers, but the owner will have left tens or hundreds of thousands of dollars, perhaps millions, on the table. According to the SBA, 4 out of 5 businesses that actually sell do, in fact, leave 30% to 70% of their value on the table. Warren Buffet is often quoted as saying "if a seller doesn’t know the value of their business, it is both legal and ethical to steal it for less". Clearly, a professional, independent valuation is essential to know the truth of a business’ value, and for more reasons than just its pending sale.

Business valuations are needed for selling, of course, but also for mergers, divorce, obtaining financing or venture capital, as a value management tool, for exit strategy and planning, capitalization, gift, estate or inheritance tax considerations, tax related litigation, estate planning, selling stock to key employees or an ESOP, partnership dissolution, minority shareholder disputes and litigation, bankruptcy proceedings, equitable distribution, to leave business to heirs, and upon the death of an owner or key person.

And the valuation needs to be from an independent, accredited valuation company who has no stake in the proceeds of a sale or capitalization. A professional business valuation provides the business owner a solid estimation as to the value of a small to mid-sized company. This is documentation the business owner requires, knowledge that is essential for them to possess, and justification for transaction acquisition or financing.

WHAT OPTIONS DO I HAVE TO MARKET MY BUSINESS?

There are, in fact, a limited number of options available for marketing a business for sale. They are to advertise oneself, use a realtor or broker, liquidate, or use a professional marketing firm. In addition to the actual advertising and marketing of the business, when considering these few options, there are certain critical issues to evaluate with each when trying to determine the best option for your business:

  1. Maintaining confidentiality
  2. Keeping the business sale from employees, customers, competitors, vendors, and bankers
  3. Maintain the business’ stability and growth during the interim
  4. Getting Fair Market Value or even a premium
  5. Screening and qualifying prospective buyers to eliminate time-wasters, competitors, and the unqualified
  6. The cost of the process, including the initial investment and the final costs upon closing the transaction
  7. The ability to justify and defend the asking price and portray the financial future
  8. The availability and expertise of the person representing your business.

IAG will do an on-site business consultation and assist you in analyzing your specific business and all options to help you determine which option is best for you and which meets your goals.

IS NOW THE RIGHT TIME TO SELL MY BUSINESS?

(See "Why Now Might Be The Best Time To Exit") While this is not a simple question and takes some analysis of your individual circumstances, in general the answer is to sell your business, start the process, when the following factors are in place:

  1. External economic factors are helpful, rather than harmful, to your prospects. That means when interest rates are lower rather than higher, alternative investment options (real estate, stock market, bank instruments, etc.) are slower rather than hot commodities, demand is high relative to supply (more buyers and fewer business on the market), your industry is steady or growing, not declining or uninviting, to name but a few.
  2. Your business is viable (profitable or can become profitable) and can be reasonably predicted to have growth potential rather than declining prospects.
  3. Your back is not against the wall and you have time – it is a process that takes time – to search for multiple buyer prospects and to negotiate from strength, not desperation. It is never too early to start developing a professional exit strategy. It is rarely too early to start the exit process, but often too late.
  4. When you are committed to the process and are emotionally prepared, over the emotional decision.
  5. Wh

HOW LONG DOES IT TAKE TO SELL A BUSINESS?

There is no single answer. Obviously, the more demand for a type of business coupled with a lower than average asking price will typically speed up the process and the reverse is true, low demand and high asking price will dramatically slow the process. According to the Small Business Administration, it averages 6 to 9 months to actually be speaking with a qualified, interested buyer prospect and another 6 to 9 months to have the transaction close, so most professionals would answer it takes, on average, 12 to 18 months. It certainly can happen more quickly, but that is not the norm. It can also take much longer or not happen at all, depending on such factors as:

  1. Owner’s preparation;
  2. Owner’s commitment to the process;
  3. Asking price;
  4. Terms and conditions;
  5. Cash flow and profitability considerations;
  6. Sufficiency of national, even international, advertising and marketing
  7. Owner willingness to take back some of the financing;
  8. Ability of buyer to obtain financing;
  9. Availability and credibility of business financials
  10. Competition of similar businesses in the market;
  11. Location of the business;
  12. Whether the business can be relocated;
  13. External economic factors outside the owner’s control.

WHAT STEPS WILL YOU GO THROUGH IN THE SELLING PROCESS?

The time required to sell a business, from the decision phase and preparation phase until the completion of the transaction, may be months, even years. The first step is to analyze or diagnose the business to determine value, realities, opportunities, etc. Then the preparation of all significant documents should be accomplished. This includes recasting financials, getting a professional valuation and a forward-looking review of the likely future business performance. It may also include such items as tax analysis and planning, research into the current state of the industry of the business as well as current or short-term future market conditions, and to prepare a professional exit strategy. At this point, if the decision has not already been reached, it is time to decide whether to exit – GO – or build value before exiting – GROW. If the decision is to start the selling process, then it is time to go to market and develop buyer prospects, which takes confidential advertising, likely nationally and internationally if the desire is to gather as many buyers as possible – to create an auction – and to increase the likelihood of receiving the most the market will support. This will include distributing profiles and/or executive summaries and pre-qualifying buyers to separate the time-wasters from those who are serious and capable. There will be preliminary discussions with potential buyers after initial contacts. If preliminary contacts lead to more in-depth communication, start the negotiations and deal structuring, perhaps present an offering memorandum. At this time you can discuss price and terms. After all material issues have been resolved and a general agreement has been reached on price and terms, the buyer will present a Letter of Intent To Purchase and an earnest money check, subject to a reasonable period for due diligence. If the prospective buyer’s due diligence satisfies them, the seller and buyer will sign a Purchase Agreement. Financing will be obtained, if needed, and a date set for closing.

IS CONFIDENTIALITY IMPORTANT AND HOW IS IT MAINTAINED?

For all of the reasons above, confidentiality is critical. In addition, buyers want the transaction to be confidential. After all, they are purchasing the business because it is a viable, ongoing concern with good will, cash flow, employees in place, a customer base, established vendors, and a positive reputation. Signs that read "Under New Management" usually mean the previous ownership was poor. Buyers want continuity, not having to rebuild the business because of losses in customers or employees or revenue due to the absence of confidentiality. The best way to maintain confidentiality is to engage a professional intermediary (IAG) who will screen potential buyers to eliminate competitors or time-wasters, handle the preparation of documentation and the confidential advertising and marketing of the business, require potential buyers to sign confidentiality and non-disclosure agreements, and leave your time to maintain or grow your business to maintain or enhance its value.

WHY SHOULD I MAKE AN INVESTMENT BEFORE THE SALE VS ONLY PAYING A COMMISSION AFTERWARDS?

This is a common question. It is always tempting, as the old Wimpy cliché goes, "to pay on Tuesday for a hamburger today". The facts are every business owner will pay -- now or later -- to market their business. It takes an investment of time, money, resources and effort to start a business and maintain it successfully; it takes an investment of time, money, resources and effort to exit a business successfully. The typical sale, if no investment is made initially in properly preparing the business for market (recast financials, accredited valuation, pro-forma portrayal of future performance, strategic enhancement opportunities, tax and deal structure analysis, maximum exposure marketing, go-between to protect confidentiality, etc.), is less successful, takes longer, and generally always brings in lower offers, reduces financing possibilities, and often ends up with higher commissions at closing. Perhaps a simple example will illustrate the point. If there are two houses, the same size, same floor plan, in the same neighborhood, by the same builder, they ought to be worth the same. However, if one owner invests initially to clean, paint or fix up the house and the landscape to make it most attractive to potential buyers (called by realtors "staging") and the other decides he or she will simply give potential buyers an "allowance" to do that themselves, what is the result? The owner who invested in properly preparing the house for sale got more realtors to bring buyers, got better and faster offers, higher appraisals, and ended up making more money because of their initial investment to advance the process. The other owner’s house had fewer visits, much lower if any offers, lower appraisals, and ended up losing significantly more value than the cost of investing initially would have been. Most professional and successful companies assisting owners in marketing their business do expect the owner to make an initial investment in professional preparation and documentation or extensive advertising, and charge a smaller commission at the back end because they know the likelihood of success is far greater. Those who ask for no investment to properly prepare the business for market charge much higher commissions at the back end, but have to because they have fewer successful closings and they are typically at lower values. To repeat, every business owner must make that decision for themselves, whether to invest some now to maximize results or invest nothing initially but pay more or receive less later.

About Us

IAG, LLC is a business intermediary consulting firm, facilitating the buying and selling of businesses. For more than 25 years the Management Team has been a leader in the industry and has helped the owners of privately-held companies "cash in" on all their hard work and get the best payoff possible.

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