Nearly four million 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?

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 it 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, like IAG, 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. When you are willing to be well prepared with documentation and a realistic asking price and have a professional exit strategy in place.

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 competent, 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.

WHAT ARE THE MAJOR REASONS FOR SELLING A BUSINESS?

The reasons for selling a business will vary from one extreme to the other.  Most buyers will ask at the initial meeting your motivation for selling.  There can be several good reasons for selling a successful or even an unsuccessful one that can become profitable.  For example, you may have a more attractive (financial or emotional) opportunity in a new venture.  You may be simply ready to retire.  There could be health or personal reasons.  You may feel unprepared or unready to continue an ownership/management role, especially if the business needs to grow.  You may be undercapitalized to take the business to the next level.  You may have other investments you wish to pursue.  Maybe there’s a personal tax or debt situation that has to be resolved. 
Whatever the reason, be ready with a good (reasonable) answer for the buyer that makes sense.  No one wants to buy a "lemon".  You know your own reason for exiting the business.  The best advice is don’t show desperation, don’t give reasons that suggest the business is bad, but be prepared with a brief and reasonable response. 

DO I NEED A REALTOR/BROKER?  WHO IS BEST PERSON TO SELL A BUSINESS?

Also see "What Options Do I Have To Market My Business?" Brokers are one of several options and if this option is the best for you and your business, IAG can assist in getting "national business brokerage representation" as local commercial realtors/brokers, in most cases, either know very little about selling businesses (vs. property) or have limited staff, narrow experience, inadequate advertising capacity or do not have existing buyer databases.

While it makes sense to have professional assistance to properly prepare your business for sale or to seek capital, only one person really knows what you business is all about, and that’s you, the owner.  You have all the personal knowledge about your company that a buyer (or an investor) requires and sophisticated buyers always want to speak directly with the owner, rather than solely a go-between.  You know the strengths, weaknesses and opportunities for growth of the business and are intimately familiar with its operations and you know your customers and your competition. 
With the right professional preparation – documentation, valuation, recast financials, tax planning, deal structure analysis, confidential and extensive advertising and marketing, along with counsel from your attorney and/or CPA when finalizing the sale, you can sell your business.  With expert assistance to prepare your business and to be available as a resource throughout the process, not necessarily as the "exclusive" sales agent, business owners can negotiate with buyers themselves, maintaining control over the selling process.  Selling the business yourself, but in the "professional" way instead of the "amateur" way -- with proper professional preparation, an exit strategy in place, sufficient time to accomplish sales goals and find multiple buyers, confidential but broad marketing, having support documentation, knowing the true value of the business, having access to capital resources to finance a buyer, and maintaining the business in the interim – is often in your best and most profitable interest.  It may certainly be a more cost effective approach and should be considered before turning everything over in a potentially more expensive method.  IAG can help analyze your specific situation to help you understand all options and choose the most effective and efficient one for your business.  Also See Selling A Business: The Exit/Transition Process.

WHAT DOES A SELLER NEED TO KNOW ABOUT BUYERS?

Recognize that the principal reason buyers purchase is for a Return On Investment (ROI).  All buyers ultimately are seeking to profit from their purchase by getting a suitable (to them) ROI so it is critical to a successful exit plan to think like a buyer, not like someone parting with a precious heirloom that they are reluctant to let go.  These emotional indecisions will kill more potential sales than any other single factor.  The fact is that a buyer is rarely buying for the same reason a seller is selling.  The buyer is likely not buying for where the business has been, or even where it is today, but rather where he or she can take it in the future.  Understanding that buyers have a different mindset than sellers, and will do their due diligence before making the decision to tender an offer to buy the business, it is important to be professionally composed, not emotional.  And you will not want to waste valuable time with tire-kickers and window shoppers.
Once you’ve been introduced to a buyer, who appears to be competent and who has signed the proper confidentiality and non-disclosure agreements, you can have conversations and exchanges of information.  Before you reveal your business financials, we would recommend you should establish the qualifications of the prospective buyer more precisely.  You will need to know the amount of cash available, the amount of their open credit line, and their timetable for buying. You will need their banking references, business references and personal references.   If they are serious, this is normal business.

WHAT IS THE PURPOSE OF A PORTFOLIO OR AN EXECUTIVE SUMMARY?

The purpose of the portfolio or executive summary is to provide brief -- a page or two -- but sufficient, accurate information to help potential buyers gain a general understanding of the business – it’s type, location, revenues, profits &/or cash flows, and pertinent data to understand the opportunity.
The portfolio provides information to facilitate the prospective buyer's review and to initiate more serious interest and due diligence into the possibility of acquiring the business.  Information contained in the portfolio must be accurate and complete to the extent they are summaries.  Misstatements of fact or leaving out essential material in a portfolio could jeopardize completion of the deal, and may also lead to litigation.
The portfolio or executive summary should disclose the name of the business, as well as give a general description that you think would be of interest to potential buyers.  Included will be the type of business, location of business, summary statement of business, equipment, and contact information.  It is important to keep the portfolio short and concise. At this point, it is neither needed nor prudent to include financial statements, asking price or any negative information.  It show "stimulate" further interest, not answer every question so that it might end interest before further communication.

WHAT TYPES OF BUYERS WILL BE ENCOUNTERED IN SELLING A BUSINESS?

Potential buyers of businesses vary from private entrepreneurs to large publicly owned companies. The ideal buyer candidate for a business depends upon the various characteristics of the company being sold. The different types of buyers will include:
(1) individuals pursuing the American Dream of owning their own business who have personal reasons as well as the need for earning a living;
(2) employees wishing to buy out a company;
(3) families passing the torch from one generation to another;
(4) corporations with strategic reasons for buying a business beyond mere financial considerations;
(5) foreign investors seeking legal entry into the country as well as economic support once here; and
(6) silent investors seeking higher financial returns than are available in alternative investment options. 
Buyers are motivated to purchase for two major reasons -- synergy or economy.  A synergistically motivated buyer is one who believes that the sum value of combined firms is greater than the sum of the firms separately. Through an acquisition or merger, the synergistic buyer can greatly improve their position in many possible ways: having greater market share, reducing competition through acquisition, or adding product lines or management skill, etc.  The economically motivated buyer, on the other hand, does not expect to realize any advantage from a unique fit between an existing business and the acquired firm. They evaluate a transaction strictly on the economic benefit to them from owning the firm, typically thought of as return on investment.

WHAT FORMS OF FINANCING ARE AVAILABLE IN THE SALE OF A BUSINESS?

Financing a business acquisition is different than financing real estate purchases.  Banks typically want assets that can be liquidated as collateral, which is why loans for houses are so much more available and at higher percentages of LTV (loan to value) than for business purchases.  Many banks will not finance "good will" and just consider assets in their finance formulas.  However, financing is possible, especially if you are associated with professionals with many strategic capital resource connections. 
The usual considerations, whether an SBA loan or other financing resource, include the business’ cash flow being sufficient to pay any debt service, provide the buyer with a reasonable living, and have a cushion or pad beyond that for the bank or financing resource to feel comfortable in assuming the risk.  In addition, they want the buyer to have reasonable credit, to have management experience in the industry or have someone with that knowledge as part of the venture, and they want a professional valuation to support their decision.  In fact, the SBA requires lender institutions to have such independent valuations these days. 
Finally, lenders in business acquisitions also want the seller to have some stake in the transaction; to carry some of the risk themselves, as a risk mitigation and as evidence the seller is asking a reasonable price that will allow the buyer to succeed.  In general, the greater the amount of risk the seller is willing to assume, the greater the price the buyer will be willing to pay and the more likely financing will be available to the buyer. In an all cash deal, the buyer assumes all the risk while the seller assumes none. At the other extreme, when the buyer puts no cash down and you accept the full payment in the form of an earn-out or through unsecured notes, the seller assumes all the risk and the buyer none. Other methods of payment include stock, secured notes, unsecured notes, and earn-out. Each of these alternatives will have varying tax implications that should be carefully reviewed with your financial advisor and/or tax consultant.

WHAT OTHER TIPS SHOULD YOU KNOW TO HELP SELL YOUR BUSINESS?

Selling a business is not a simple process. It may take longer that you expect.

  1. Change the way you think and learn to think like a buyer;
  2. Retain professional help to analyze the business, recast the financials, obtain an accredited 3rd party professional valuation to get a baseline of what is true about your enterprise value;
  3. Be able to show (and understand) the "real"" past and present of the business with independent documentation prepared by experts (See "Why Would I Need A Business Valuation");
  4. Have a professionally prepared Confidential Business Review that can assess strengths and weakness, show enhancement opportunities, and portray the future of the business so that prospective buyers can see it and get motivated;
  5. Realize that transition is inevitable and be prepared with a Professional Exit Strategy;
  6. Do all of this with a critical concern to keep it all confidential;
  7. Be prepared to make full disclosure of your business liabilities;
  8. Know before negotiations how much you want for your business and why and your "bottom line" number;
  9. Price your company fairly.  It has to be seen as a "win-win" if a competent buyer is to purchase the business;
  10. Be willing to remain with the business for a while or be a consultant;
  11. Stay flexible.  Selling is a two-way street;
  12. Be creative.  There is a solution to most problems if both parties are committed to succeeding;
  13. Pursue each buyer prospect with energy and stay positive;
  14. Don’t let negotiations drag on.  Deals can atrophy with age;
  15. Keep your options open until you achieve your goals;
  16. It isn’t enough to ask intelligent questions.  You have to listen intelligently to the answers;
  17. Listen to your advisors, but make your own decisions – objectively, not emotionally;
  18. Know that it is a process – a series of actions and initiatives that take place over time – and not a single event;
  19. "Commit" to the process the time, resources and attention it requires for you to implement the plan, get over any emotional roadblocks, and be prepared to play to win so you can be empowered to taste success!

DO YOU TELL EMPLOYEES THAT YOU ARE CONSIDERING SELLING?

Almost every professional consultant for exiting a business encourages business owners not to tell their employees.  Key employees could begin looking for work and your competitors are the most likely alternative.  This could only have negative consequences for the business: customers following employees, competitors bad-mouthing you because they know you are considering exiting, vendors shortening terms, banks calling in notes, and likely a loss in the value of the business as a result.  Furthermore, especially in the beginning of the exit/transition process, the actual sale is likely up to a year or two from occurring and that is a long time for bad things to happen if confidentiality is not maintained.

WHAT IS AN EXIT STRATEGY?

An exit strategy is a professional plan for leaving the business and obtaining Fair Market Value (FMV) or the highest value the market can support.  Any business -- because business owners are not immortal – will eventually undergo one of the following changes: it will close altogether, it will pass to heirs, or it will be sold.  This last alternative is almost always the most profitable, especially if it properly planned.  A business is usually the single greatest asset an owner has acquired, with the biggest investment, if not in dollars, certainly in time and effort, yet typically, unlike almost any other kind of investment, business owners rarely pre-plan their exit strategy at the start of their business.  In fact, they often wait too long, typically well into retirement or health issues or other demanding circumstances make selling an emergency, when they can neither plan a proper exit nor have the time to execute a strategic plan. 
Without a plan for the future exit from the business -- the future "harvesting of your most precious asset" so to speak – business owners will likely take less than the company’s worth, leaving tens, hundreds or even millions of dollars on the table, if they can be sold at all.  It is never too early to plan an exit strategy; it is often too late. 
Change is inevitable.  It just makes good sense -- and dollars – to determine what you want your future to be by taking control and planning ahead with an effective, professional exit strategy.

WHAT IS "FAIR MARKET VALUE" (FMV)?

Fair Market Value (FMV) is what the Internal Revenue Services Regulation 20:2031.1-1(b) defines as: "Fair Market Value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts." It is the value that professional valuation companies, looking at the market, and considering many factors about the particular business and the industry as well as the economy, expect a reasonable prospective buyer or an investor to pay.  It is the price that the business should expect to bring, if it were sufficiently and effectively exposed for sale in the marketplace for a reasonable amount of time.  Many business owners receive far less than Fair Market Value (according to the SBA, 4 out of 5 who sell their businesses leave 30% to 70% of their Fair Market Value on the table) because they did not know how to get a proper business valuation prepared and they did not develop an effective exit strategy in a timely manner.

WHAT IS "GOODWILL"?

Goodwill is used in many different ways: as a general term to discuss the value of a business beyond the discounted current value of its assets; as an accounting or tax term referring to very specific criteria; or as other than physical assets of a business. 
The most important thing to remember about goodwill is that it is a value that is a matter of perception.  It is the buyer’s perception of the business and its possibilities and opportunities for them.  A prudent seller must do what is necessary to expand the buyer’s perception by having a professional exit strategy in place that takes this into account. 

Goodwill is intangible assets and non-physical resources, such as a company’s reputation, its customer relationships, its customer base, its industry contacts and relationships, its management and employee relationships, its operational systems and controls, its management skill and structure, its longevity and profitability in the industry and the market, its percentage of market share, to name a few – in short, the buyer’s "perception" of what they are buying and its value.  Perhaps the best definition of goodwill is that it is nothing more than those elements of a business that tend to cause customers to return.

WHAT FACTORS ARE CONSIDERED IN A FORMAL BUSINESS VALUATION?

A professional business valuation is not a guess, what the owner needs to pay off obligations, what some other business may have received, or what a business owner "feels" they want.  It is based on many factors, some internal and related to the specific business, some external and related to the market and the economy.

An in depth analysis of all pertinent factors is the reason an independent, professional, formal business valuation is so necessary and valuable to determine an accurate opinion of value.  Some of the internal factors that are considered are:
(1) historical performance;
(2) longevity and stability of the business;
(3) financial strength;
(4) profitability and earnings;
(5) discretionary cash flow;
(6) owner compensation realities;
(7) ownership and management strength and structure;
(8) operational structure and controls;
(9) size of operation, market share, and customer base;
(10) forecast and future projections;
(11) budget realities;
(12) condition of the operation;
(13) duplicative nature of the business; and
(13) barriers to entry. 

A few of the external factors considered are:
(1) the performance of the company compared to standard performance within the industry; (2) size of operation relative to the industry;
(3) its rank or position within the industry;
(4) its position within its market;
(5) industry trends;
(6) competition;
(7) environmental factors;
(8) economic factors, locally, regionally and nationally;
(9) legal protection of products and/or services; and
(10) government regulations to name but a few. 

The point is there are numerous components that must be analyzed when producing a formal valuation document.  Because it must be objective (and perceived as fair and objective by buyers or financial institutions), the use of an independent, qualified third-party valuation resource is essential.

WHAT ARE THE TAX CONSIDERATIONS IF I SELL MY COMPANY?

The simple answer is there are many factors that determine a business owner’s level of post sale tax liability.  "Asset sales" are typical because of important buyer tax benefits, whereas "stock sales" can benefit the seller but not the buyer from a tax perspective, not to mention the potential liabilities that accompany a stock purchase. 
In structuring asset sales, certain legal questions come up, each of which has tax consequences.  What is being bought, what is being sold?  There can be tangible assets, goodwill, booked business, a non-compete agreement, and ongoing consulting by the seller.  Each transaction has tax implications and requires careful structuring for both the seller and the buyer. 
Contrary to common opinion, accountants, in almost all cases, are not expert in the merger/acquisition tax liability and avoidance issues.  They are trained typically in structuring the company to avoid tax or simply to calculate taxes owed, but not to structure a purchase for maximum tax advantages to either seller or buyer.  That’s why a professional business tax analyst in the area of business mergers or acquisitions is so valuable and generally worth far more than their fees because of their knowledge and creativity in structuring the deal legally to help avoid paying unnecessary tax.   IAG can help in this regard.

HOW IS A CAPITALIZATION RATE CALCULATED?

A "cap rate" or capitalization rate is a number or percentage that is used as a multiplier of the company’s earnings to determine value.  It is essentially an income approach to value.  Cap rates vary among particular businesses and from one period to another.  Expressed as a percentage, the more speculative or the lower the expected growth rate in the business’ income stream -- that is the greater the risk -- the higher the cap rate and the lower the multiple.  The less speculative or the higher the expected growth rate -- that is the risk is perceived as lower -- the lower the capitalization rate and the higher the multiple.

SHOULD I SELL OR LEASE MY PROPERTY WHEN SELLING MY BUSINESS?

This is a question that occurs frequently and answers vary with the circumstances.  In general, if the cash flow is very small and the real estate is very high in value compared to the cash flow, it is usually better to market the business only and make the real estate an option.  Why?  Because the low cash flow usually will make the ability of a buyer to pay for both the business (as repayment of a loan and/or as return on investment for their own cash up front) and the property (mortgage principal and interest plus taxes) impossible.  That scenario will usually reduce potential buyers and likely invite much lower offers, if any at all.
If, on the other hand, the cash flow from the business can easily handle any debt service for both the purchase of the business and the property, then the business owner can choose to sell the property with the business or still make it an option.  One of the advantages of property sold with a business is that it can provide collateral for buyer financing, provided the cash flow is sufficient to handle the debt service.  One of the advantages of not including the property with the business is that the real estate can be "insurance" for the seller in the case payments are not made as promised.
Sometimes, it is easier to sell a property after the business has been sold and the property now has a tenant.  Each deal structure needs to be carefully considered to make the best decision.

SHOULD I STAY ON AFTER THE BUSINESS IS SOLD?

Generally every purchaser of a business wants the seller to stay on for some reasonable, short-term period, typically from a week to a month, as one of the terms of the sale.  Staying on longer, whether as manager or as consultant, is generally a mutually beneficial arrangement that requires separate compensation, whether in the form of salary or commission, on the one hand, or as an additional purchase price premium.  Ultimately this decision, to stay on longer than some preliminary starting period, is one that some buyers or sellers will want because it is mutually advantageous, and others will not.

WHAT ABOUT UNRECORDED CASH INCOME NOT REFLECTED IN THE FINANCIALS?

This is a touchy issue.  Many professional, certified valuation companies, and certainly banks, will not accept or include unrecorded or unreported income, not reflected in financials, in their valuations or appraisals.  This is both a conservative and prudent position for these companies.  Their posture is you can’t take from the business twice, by taking income without paying taxes and then getting it added on to the sale as well.  On the other hand, there are certain businesses that are, by their very nature, known as "cash businesses" and buyers for these types of businesses understand that reality.  Examples might be nightclubs that take in cover charges, etc. 
There are, of course, business owners who report all credit card sales and checks received but don’t always declare cash paid.  There are legal ramifications with the IRS in that event.  This matter is one for individual business owners to decide on their own: whether to declare to potential buyers the "phantom income" or not.  If the decision is to add to the asking price because of this additional income, it will be necessary to demonstrate to the potential buyer the truth of this reality.  This can be done by showing a proper set of books reflecting what is real, by having the prospective purchaser visit the business for some period of time to actually see what is real, or by showing receipts or assets from such revenue.
No responsible company advocates any business owner to hide income and, in fact, if that has historically been true, would recommend to the business owner from that point forward to show what is real on the books so that potential buyers can see it and so can banking sources who might provide financing.

WILL I HAVE TO SIGN A NON-COMPETE & IF SO, FOR HOW LONG OR HOW FAR?

In most business sales, it is common practice to have the seller sign a non-compete agreement that limits them either in years or in distance from the existing business.  It is reasonable that a buyer of a business doesn’t want the seller to open nearby and take the very customers he or she is buying the business to get.  A non-compete needs to be reasonable both in terms of distance from the existing business and the number of years to be enforceable.  Every circumstance is unique, so the non-compete is a negotiated item between seller and buyer.  It is generally not a problem and if it is, the sale is likely not going to close.

DO COMPANIES LIKE YOURS HAVE BUYERS SPECIFICALLY FOR MY BUSINESS?

Companies like IAG, who have been advertising for buyers and investors for decades, do have a pool or database of registered buyers and investors, typically numbering in the thousands.  One or more of them may, in fact, be interested in your business because it is in the right industry, the right area of the country, has the requisite revenue or cash flow, and is priced in the range they are seeking.  Most realtors or brokers, especially those who are not national in scope, do not have a pool, even a very small pool, of buyers.  However, no one can honestly say that they have a buyer specifically for your business without knowing exactly what your business is selling for, what its revenue and cash flow are, what its future prospects are, etc.  However, having a database of buyers and a daily influx of buyer inquiries means that companies like IAG who spend a great deal of time and money collecting and qualifying buyers or investors to see what they seek will have a higher likelihood of matching more buyers in a shorter time period, which generally is a huge advantage and more likely to bring about a successful sale at a higher value.

WHY SHOULD I CONSIDER FINANCING SOME OF THE SALE VS CASHING OUT?

The short answer is you will get more buyer interest – most "cash only" offers either have very limited buyer attention or only the "sharks" who search for "deals" make offers as they sense desperation.  With greater buyer interest, it follows that the seller is going to receive higher offers, have a greater chance of closing, and increase the chance the buyer will be able to obtain financing.  Buyers want to feel comfortable that the seller has a stake in their success and lenders in business acquisitions also want the seller to have some stake in the transaction; to carry some of the risk themselves, as a risk mitigation and as evidence the seller is asking a reasonable price that will allow the buyer to succeed.  In general, the greater the amount of risk the seller is willing to assume, the greater the price the buyer will be willing to pay and the more likely financing will be available to the buyer. In an all cash deal, the buyer assumes all the risk while the seller assumes none. At the other extreme, when the buyer puts no cash down and you accept the full payment in the form of an earn-out or through unsecured notes, the seller assumes all the risk and the buyer none.  Finally, in cashing out -- that is, in an all cash deal – the selling price is always lower than in a transaction with financing, especially if the seller is carrying some of the paper, however minimal.  Often, by taking some finance position with the buyer, the seller may end up getting more cash down than they would have received in an all cash purchase.

SHOULD I WAIT UNTIL MY COMPANY IS MORE PROFITABLE BEFORE SELLING?

This is always a reasonable and prudent question.  Is it better to GO (exit the business now) or wait and GROW the business so it has more profitability?  The answer is not simple, however.  Sometimes exiting when the market timing is right may bring higher value to a business than exiting later at a less desirable time period, even though the business is generating more revenue and more profits.  That is why it is such a good idea to have a professional assist in analyzing (some might call it diagnosing) the strengths, weaknesses, opportunities and threats to a business before making the decision to "go" or to "grow".  The owner of the Dallas Mavericks professional basketball franchise, Mark Cuban, was once asked why he sold his business when it still had so much upside potential.  He looked with disdain at the questioner and answered something to the effect "why would someone want to buy a business if it didn’t have upside potential left?"  Clearly it is not an easy question to answer.  It requires careful analysis and awareness of the market within the industry, the economic factors outside the industry, the future opportunities (such as more money at lower interest rates) or threats (such as $10 trillion dollars in business assets being poured into the market in the near future by 78 million retiring Baby Boomers), and the realities of the business itself.  IAG’s professionals can help with that analysis.

WHY SHOULD I START THE EXIT PROCESS NOW VS WAITING UNTIL I NEED TO?

This is a very common response -- do nothing and retain the status quo -- and usually reflects an inability to make a decision for an assortment of reasons: lack of clarity in how to proceed, insufficient information to make a comfortable and informed decision, lack of trust in the option or the company presenting the option, or emotional indecision as to what the business owner really wants, to sell or to stay.  With all due respect, it is often "easier" to do nothing, to procrastinate on making a decision until we are forced by circumstances to make a choice than to make a decision to change the status quo.  However, doing nothing usually doesn't bring about "planned change" so change happens nonetheless and it may not be what we want.  Proactive management is called "strategic" thinking while reactive, crisis management is simply a "tactical" response.  The realities of successfully exiting a business require "strategic" planning to be properly prepared, have documentation in place, continue profitable management of the ongoing business, and get confidential exposure, etc.  All of this takes time.  It could be as little as 3 to 6 months or as long as 2 to 3 years.  The average is statistically somewhere from 9 to 18 months.  "Waiting until I need to" usually means when circumstances require exiting the business.  Without a professional plan in place to understand and navigate the exit process, the business owner is usually ill-prepared and short on time, so if they can sell the business at all, it is typically for much less than fair market value.  According to the SBA, 4 out of 5 who do sell leave 30% to 70% of their fair market value on the table, usually because they start too late or haven’t implemented a professional exit strategy and the associated documentation.  Having an exit strategy in place is like having a will or trust in place for your biggest asset – your business – and waiting until we absolutely have to exit is like passing with no will or trust in place.  Frankly, the choice is yours of whether to start now or wait.  It’s your business, your asset and your life.

 

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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