Considering Selling? Some Things to Consider

Know what your business is worth. Don’t even think about selling until you know what your business should sell for. Are you prepared to lower your price if necessary? Prepare now. There is an often-quoted statement in the business world: “The time to prepare your business to sell is the day you buy it or start it.” Easy to say, but very seldom adhered to. Now really is the time to think about the day you will sell and to prepare for that day. Sell when business is good. The old quote: “The time to sell your business is when it is doing well” should also be adhered to. It very seldom is – most sellers wait until things are not going well. Know the tax implications. Ask your accountant about the tax impact of selling your business. Do this on an annual basis just in case. However, the tax impact is only one area to consider and a sale should not be predicated on this issue alone. Keep up the business. Continuing to manage the business is a full-time job. Retaining the best … [Read more...]

Can You Really Afford to Sell?

In many cases, the sale of a small company is “event” driven. That is, the reason for sale is often an event such as a health decline or illness, divorce, partnership issues, or even a decline in business. A much more difficult reason for selling is one in which the owners simply want to retire and live happily ever after. Here is the problem: Suppose the owners have a very prosperous distribution business. They each draw about $200,000 annually from the business plus cars and other benefits. If the company sold for $2 million, let’s say after debt, taxes and closing expenses, the net proceeds would be $1.5 million. Sounds good, until you realize that the net proceeds only represent about 3 1/2 years of income for each (and that doesn’t include the cars, health insurance, etc.). Then what? The above scenario is not atypical, especially in small companies. These are solid companies that provide a very comfortable living for two owners. In the above example, the owners obviously … [Read more...]

Surprises CEOs Face When Selling Their Companies

Surprise #1: Substantial Time Commitment In the real estate business, once the owner engages the broker there is very little for the owner to do until the broker presents the various offers from the potential buyers.  In the M&A business, there is a substantial time commitment required of the CEO/Owner in order to complete the sale properly, professionally and thoroughly. The following examples are worth noting: Offering Memorandum: This 30 + page document is the cornerstone of the selling process because most business intermediaries expect the potential acquirers to submit their initial price range based on the information presented in this memorandum.  The intermediary will heavily depend on the CEO/Owner to supply him or her with all the necessary facts. Suggestions of Potential Acquirers: Chances are that the sales manager is the only person who knows the best companies to contact and those not to contact (competitors).  Arguably, this information should be … [Read more...]

Company Weaknesses

Take two seemingly identical companies with very similar financials, but one of the companies was worth substantially more than the other company.  One company will sell for $10 million “as is” or some changes can be made and the same company can be sold for $15 million. Following is a partial list of potential company weaknesses to consider in order to assess a company’s vulnerability. Customer Concentration:  First, one has to analyze the situation.  The U.S. Government might be considered one customer but from ten different purchasing agents.  Or, GM might have one purchasing agent but be directed to ten different plants.  One office product manufacturer with $20 million in sales had 75% of its business with one customer…Staples.  They had three choices: 1. Cross their fingers and remain the same; 2. Acquire another company with a different customer base; or 3. Sell out to another company.  They selected the third choice and took their chips off the table.  The acquirer was a … [Read more...]

Buying or Selling a Business: The External View

There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history. The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times? The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.” Both owners … [Read more...]

How Long Does It Take to Sell a Business?

Recent studies indicate that it now takes, on average, about eight to ten months to sell a small business. This figure seems to increase yearly. Why does it take so long to sell a business? Price and terms are the biggest reasons!  It is very important not to overprice the business at the beginning of the sales process. A business will also sell more quickly if there is a reasonable down payment with the seller carrying the balance.  Having all of the necessary information right from the beginning can also greatly reduce the time period.  Finally, being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is another key. Here is the basic information a prospective acquirer will want to review and a seller should have prepared to help facilitate a quicker sale: Copies of the financials for the past three years. A copy of the lease and any assignments of the lease from previous sales. A list of … [Read more...]

When to Create an Exit Strategy

There is the old saying that the time to develop an exit strategy is the day you open for business. Sounds good, but it’s not very realistic. Further, it also isn’t very optimistic. On the day you open for business, thoughts about how you get out of it aren’t pleasant, or helpful, thoughts. However, as you get the business to a place where you have a bit of extra time to plan, you will find that the things you need to do to improve your business are some of the very things you will need to work on to plan an exit strategy. You can’t predict misfortune, but you can plan for it. One never knows when an accident or illness will force one to sell. When the drive to your business becomes filled with dread, maybe it’s time to consider selling. The following ideas will improve your business, even if you’re not currently considering selling. Dealing with these areas will also supply the information a buyer will most likely be looking at when the time does come to sell. Buyers want cash … [Read more...]

Five Kinds of Buyers

Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one. The Individual Buyer This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time. The Strategic Buyer This buyer is almost always a company with a specific goal in mind -- entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition. The Synergistic Buyer The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts. The Industry Buyer Sometimes known as “the buyer of last resort,” this type is … [Read more...]

Seller Financing: The Basics

Seller financing has always been a mainstay of business brokerage.  Buyers don’t have the capital necessary to pay cash, are unable to borrow the money, or are reluctant to use all of their capital.  Buyers also feel that a business should pay for itself and are wary of a seller who wants all cash or who wants the carry-back note secured by additional collateral. What sellers seem to be saying, at least as perceived by the buyer, is that they don’t have a lot of confidence in the business or in the buyer or perhaps both.  However, if you look at statistics, it’s apparent that sellers usually receive a much higher purchase price if they accept terms. Studies reveal that, on average, a seller who sells for all cash receives only about 80 percent of the asking price.  Sellers who are willing to accept terms receive, on average, 86 percent of the asking price. The seller who asks for all cash receives, on average, a purchase price of 36 percent of annual sales while the seller who will … [Read more...]

Rating Today’s Business Buyers

Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today's most active categories of business buyers: Family Members Members of the seller's own family form a traditional category of business buyer: tried but not always "true." The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the "heir to the throne." If this has been done, the family member may be the best type of buyer. Too often, however, the difficulty … [Read more...]