Considering All of Your Business Real Estate Options

In a recent December 2018 article in Divestopedia entitled, “Options for Business Real Estate When Selling a Company,” the topic of business real estate was explored at length.

One of the key points of the article was that understanding one’s business real estate options would ultimately help in achieving “the goals desired in a transaction.”  The article is correct to point out that many, or even arguably most, business owners simply don’t know what real estate options are available to them when it comes time to sell the company.

In particular, there are two big options:

  1. Sell everything including the real estate.
  2. Hold onto the real estate for the rental income.

In the Divestopedia article, the authors correctly point out that if you, as the business owner, personally own the real estate in a separate entity, then you are good to go.  You should have a “clear path to valuation.”

However, if your company owns the real estate, then things get a little more complicated.  If this is the situation you’ll want to have a third-party appraisal of the real estate so that its value is clear.  The article also points out that if your business is a C-Corp and your business also owns the real estate, then it’s a good idea to talk to your accountant as there will be differences in taxation.

Every situation is different.  Many buyers will prefer to acquire the real estate along with the business.  On the other hand, many buyers may prefer a lease, as they don’t want everything that comes along with owning real estate.  Communicating with the buyer regarding his or her preference is a savvy move.

Now, as Divestopedia points out, if you do plan to retain the building, then you’ll want to be certain that a strong lease is in place.  Ask any business broker about the importance of having a strong lease, and you’ll get some pretty clear-cut feedback.  Namely, you always want to have a strong lease.

Issues such as who repairs what and why should all be spelled out in the lease.  It should leave nothing to chance.  One of the best points made in the Divestopedia article is that you will want a strong lease for another key reason.  When the time comes to sell the property, you want to show you have a lease that is generating good income.

Real estate and the sale of your business are not one-dimensional topics.  There are many variables that go into selling when real estate is involved.  It is important to consider all of the variables and work with a business broker who can help guide you through this potentially complex topic.

Copyright: Business Brokerage Press, Inc.

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Four Significant Issues You Need to Consider When Selling Your Business

The process of selling a business can be very complex. Whether you’ve sold a business in the past or are selling a business for the very first time, it is imperative that you work with an expert. A seasoned business broker can help you navigate through what can be some pretty rough waters. Let’s take a closer look at four issues any seller needs to keep in mind why selling a business.

Number One – Overreaching

If you are both simultaneously the founder, owner and operator of a business, then there is a good chance that you are involved in every single decision. And that can be a significant mistake. Business owners typically want to be involved in every aspect of selling their business, but handling the sale of your business while operating can lead to problems or even disaster.

The bottom line is that you can’t handle it all. You’ll need to delegate the day-to-day operation of your business to a sales manager. Additionally, you’ll want to consider bringing on an experienced business broker to assist with the sale of your business. Simultaneously, running a business and trying to sell has gone awry for even the most seasoned multitaskers.

Number Two – Money Related Issues

It is quite common that once a seller has decided on a price, he or she has trouble settling for anything less. The emotional ties that business owners have to their businesses are understandable, but they can also be irrational and serve as an impediment to a sale. A business broker is an essential intermediary that can keep deals on track and emotions at a minimum.

Number Three – Time

When you are selling a business, the last thing you want is to waste time. Working with a business broker ensures that you avoid “window shoppers” and instead only deal with real, vetted prospects who are serious about buying. Your time is precious, and most sellers are unaware of just how much time selling a business can entail.

Number Four – Don’t Forget the Stockholders

Stockholders simply must be included in the process whatever their shares may be. A business owner needs to obtain the approval of stock holders. Two of the best ways to achieve this is to get an attractive sales price and secondly, to achieve the best terms possible. Once again, a business broker serves as an invaluable ally in both regards.

Selling a business isn’t just complicated; it can also be stressful, confusing and overwhelming. This is especially true if you have never sold a business before. Business brokers “know the ropes” and they know what it takes to both get a deal on the table and then push that deal to the finish line.

Copyright: Business Brokerage Press, Inc.

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The Importance of Understanding Leases

Leases should never be overlooked when it comes to buying or selling a business.  After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business.  It is easy to get lost with “larger” issues when buying or selling a business.  But in terms of stability, few factors rank as high as that of a lease.  Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.

The Different Kinds of Leases

In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease.  These leases clearly differ from one another, and each will impact a business in different ways.

A sub-lease is a lease within a lease.  If you have a sub-lease then another party holds the original lease.  It is very important to remember that in this situation the seller is the landlord.  In general, sub-leasing will require that permission is granted by the original landlord.  With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord.  Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.

The third lease option is the assignment of lease.  Assignment of lease is the most common type of lease when it comes to selling a business.  Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating.  In short, the seller assigns to the buyer the rights of the lease.  It is important to note that the seller does not act as the landlord in this situation.

Understand All Lease Issues to Avoid Surprises

Early on in the buying process, buyers should work to understand all aspects of a business’s lease.  No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.

Summed up, don’t ignore the critical importance of a business’s leasing situation.  Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation.  Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.

Copyright: Business Brokerage Press, Inc.

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Is Now The Time to Sell Your Signs and Graphics Business?

I often get asked by signs and graphics shop owners “How is the market for selling my business?” which is then followed by brief references to the economy and whether the business transaction market place has recovered to pre-recession levels.  I’ll get to the answer, but first a little background.

Signs and graphics shops, like most businesses, are typically sold based on a “multiple of earnings”.  “Earnings” can be assessed in slightly different ways depending on the size of the business, and the “multiple” is a factor that varies based on industry and size of company.  The higher the “earnings” are, typically the higher the “multiple” may be.  As an example, if a business has “earnings” of $100K, and the typical “multiple” for that industry and size has been established at “2.5”, then the value of the business is calculated as 2.5 x 100K = $250K.  However, if a business in the same industry generates earnings of $350K, then the “multiple” may be “3 or greater”, generating a value in excess of $1,050,000 (3 x $350K).

Obviously, market timing can have an impact on the selling process, particularly if one is comparing the statistics during the lowest depth of a recessionary period versus the highest peak of a period of an economic boom.  And, in general, “multiples” do tend to increase slightly as the economy improves, especially if finance lending loosens accordingly.  However, these variations are minimal except at the ends of the spectrum, and the biggest cause of the statistical decline is often more directly related to the overall “earnings” within the group rather than the actual multiple a buyer may pay for the same earnings amount at a different point in time.

Pratt’s Stats, a leading private company transaction database, provides transactional detail history on over 22,000 private company transactions.  The statistics are gathered from a variety of sources, including business brokers, mergers & acquisitions specialists and investment bankers.  While statistics can be manipulated to make almost any case, and are only as reliable as the reporting received, let’s look specifically at the sign industry over the last decade – before the great recession (2004 -2008) versus the period of 2009 to date as the economy has improved.

The “ earnings multiple” factor for sign business transactions was slightly higher in the “prior to 2009” group than the later group, however the difference is minimal, and when taking into consideration the average value of assets included in the transactions, there is literally no difference.  The notable period where there was a difference, and a significant one, was in 2010 and a portion of 2011.  The “multiple” factor dropped by greater than 16%, and the total number of transactions for the industry was minimal.  As you may recall, this period was the most difficult time for anyone to get a bank loan, forcing sellers to finance many of the transactions that occurred.

It is important to note that even during 2010, there were several transactions that attained the typical or standard value one may expect.  A couple of examples are noted below:

  • Sign and graphics shop with annual revenue of $2.15M, and earnings of $274K, sold for $850K, a multiple of 3.10.
  • Sign and graphics shop with annual revenue of $2.24M, and earnings of $404K, sold for $1.3M, a multiple of 3.22.

Another statistic of note during the post recession period is that there were fewer sales of signs and graphics shops that performed below the industry standards or were marginally profitable if at all.  Poor performing businesses have been much harder to sell in the post recession period than during the pre-recession period.

Please keep in mind that most buyers will not just focus on the most recent financial year, but will likely use an average of the last two to three years. Also keep in mind that these statistics are not meant to suggest an exact valuation formula, as there are variances from deal to deal and there are many factors involved in each deal.  With that said, the statistics do provide guidelines that one should consider in their planning process.

As for overall business transaction activity, BizBuySell, the Internet’s largest business-for-sale marketplace, has reported that second quarter 2014 small business transactions reached the highest levels reported since before the recession hit in mid-2008.

So, back to the initial question of market timing for selling a sign business – the answer is “GOOD”, but the real question one should be asking is “Is your business ready to go to market?”  While financial performance is the single most important element affecting the value of a sign business, there are many other factors to be considered as well.

  • Recent trends in revenue and profits – are these increasing each year?
  • Are the financial records “clean” and properly representative of the performance of the business? This is not only critically important to the buyer, but also for the bank that may be financing the transaction.
  • Are all tax returns and other government filings up to date?
  • Is production equipment considered current technology or is it obsolete?
  • Is your customer base diversified across a variety of industries?
  • Is your customer base diversified across a number of customers? In the eyes of a buyer, a single customer that accounts for more than 15% – 20% is viewed as a risk.
  • Is your business automated, using current technology to maximize efficiencies?
  • Do you have historical records of customer transactions (a computerized customer database)?
  • Are past customer graphic files stored electronically and accessible?
  • Do you have a website? Is e-commerce an active part of your business?
  • Staff status – do you have tenured people in place? Do you have a competent second in command on staff?
  • Have you delegated to the point to where the business does not rely on you for survival?
  • Physical location – is your business in a desirable location? Is the facility relatively clean, neat and organized?
  • Lease status – do you have additional years remaining on a lease and is it transferrable to a buyer?

These are a few of the items you should consider when assessing your business – the more you are able to answer the above questions in the affirmative, the better your signs and graphics business should be positioned to sell, and more importantly to maximize the sales price!

Why is seller financing so important to the sale of my business?

Surveys have shown that a seller who asks for all cash, receives on average only 70 percent of his or her asking price, while sellers who accept terms receive on average 86 percent of their asking price. That’s a difference of 16 percent! In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What happens when there is a buyer for my business?

When a buyer is sufficiently interested in your business, he or she will, or should, submit an offer in writing. This offer or proposal may have one or more contingencies. Usually, the contingencies concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one), or other pertinent details of the business. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time. At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider. There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer — just that all offers should be looked at carefully.

Once you and the buyer are in agreement, both of you should work to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business.

What can I do to help sell my business?

A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure they are familiar with the business closing process and the laws of your particular state. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks, unless there is an alcohol or other license involved that might delay things, you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.

What can business brokers do – and, what can’t they do?

Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do — as well as what they can’t. They can help you decide how to price your business and how to structure the sale so it makes sense for everyone — you and the buyer. They can find the right buyer for your business, work with you and the buyer in negotiating and along every other step of the way until the transaction is successfully closed. They can also help the buyer in all the details of the business buying process.

A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.

How long does it take to sell my business?

It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often “backfires,” because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.