Considerations When Selling…Or Buying

/in /by

Important questions to ask when looking at a business…or preparing to have your business looked at by prospective buyers.

• What’s for sale? What’s not for sale? Does it include real estate? Are some of the machines leased instead of owned?

• What assets are not earning money? Perhaps these assets should be sold off.

• What is proprietary? Formulations, patents, software, etc.?

• What is their competitive advantage? A certain niche, superior marketing or better manufacturing.

• What is the barrier of entry? Capital, low labor, tight relationships.

• What about employment agreements/non-competes? Has the seller failed to secure these agreements from key employees?

• How does one grow the business? Maybe it can’t be grown.

• How much working capital does one need to run the business?

• What is the depth of management and how dependent is the business on the owner/manager?

• How is the financial reporting undertaken and recorded and how does management adjust the business accordingly?

www.BillionPhotos.com/BigStock.com

Copyright: Business Brokerage Press, Inc.

A Buyer’s Quandary

/in /by

Statistics reveal that out of about 15 would-be business buyers, only one will actually buy a business. It is important that potential sellers be knowledgeable on what buyers go through to actually become business owners. This is especially true for those who have started their own business or have forgotten what they went thorough prior to buying their business.

If a prospective business buyer is employed, he or she has to make the decision to leave that job and go into business for and by himself. There is also the financial commitment necessary to actually invest in a business and any subsequent loans that are a result of the purchase. The new owner will likely need to execute a lease or assume an existing one, which is another financial commitment. These financial obligations are almost always guaranteed personally by the new owner.

The prospective business owner must also be willing to make that “leap of faith” that is so necessary to becoming a business owner. There is also the matter of family and personal responsibilities. Business ownership, aside from being a large financial consideration, is very time consuming, especially for the new business owner.

All of these factors have to be weighed very carefully by anyone that is considering business ownership. Buyers should think carefully about the risks – and the rewards. Sellers should also put themselves in a buyer’s position. The services of a professional business broker or intermediary can help determine the relative pros and cons of the transaction.

The Confidentiality Agreement

/in /by

When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don’t want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.

The following are some of the questions that a seller should expect a confidentiality agreement to cover:

  • What type of information can and can not be disclosed?
  • Are the negotiations open or secret?
  • What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
  • What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
  • Which state’s laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
  • What recourse do you have if the agreement is breached?

Obviously, executing an agreement does not mean a violation can’t occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.

While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.

A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes “common ground” between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: pippalou via morgueFile

The Devil May Be in the Details

/in /by

When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.

In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.

One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:

  • Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
  • Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
  • Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
  • Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
  • Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
  • Sellers who have unrealistic expectations for the sale price.
  • Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
  • Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
  • Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
  • Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.

Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jppi via morgueFile

Family Businesses

/in /by

A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering
selling the business:

  • You may have to consider a lower price if maintaining jobs for family members is important.
  • Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy.
  • Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
  • All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
  • Confidentiality in the sale of a family business is a must.
  • Meetings should be held off-site and selling documentation kept off-site, if possible.
  • Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.

Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisers. They can also move the sales process along as quickly as possible and assist in negotiations.

Keeping it in the Family

It’s hard to transfer a family business to a younger kin. Below are some statistics regarding family businesses.

  • 30% of family businesses pass to a second generation.
  • 10% of family businesses reach a third generation.
  • 40% to 60% of owners want to keep firms in their family.
  • 28% of family businesses have developed a succession plan.
  • 80% to 95% of all businesses are family owned.
Source: Ted Clark, Northeastern University Center for Family Business

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: naomickellogg via morgueFile

Two Similar Companies ~ Big Difference in Value

/in /by

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?

One can look at the usual checklist for the answer, such as:

  • The Market
  • Management/Employees
  • Uniqueness/Proprietary
  • Systems/Controls
  • Revenue Size
  • Profitability
  • Regional/Global Distribution
  • Capital Equipment Requirements
  • Intangibles (brand/patents/etc.)
  • Growth Rate

There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:

  • Are the company’s projections believable?
  • Where is the growth coming from?
  • What services/products are creating the growth?
  • Where are the customers coming from to support the projected growth – and why?
  • Are there long-term contracts in place?
  • How reliable are the contracts/orders?

The difference in value usually lies somewhere in the company’s growth rate!

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jeltovski via morgueFile

What Are Buyers Looking for in a Company?

/in /by

It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price. Quality of the Earnings Some accountants and intermediaries are very aggressive…

A Reasonable Price for Private Companies

/in /by

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.

Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value:

  1. A value placed on the company by an outside appraiser or expert. This can be either formal or informal.
  2. The seller’s “wish price.” This is the price the seller would really like to receive – best case scenario.
  3. The “go-to-market price” or the actual asking price.
  4. And, last but not least, the “won’t accept less than this price” set by the seller.

The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy.

What can a buyer review in assessing the price he or she is willing to pay? The seller should have answers available for all of the pertinent items on the following checklist. The more favorable each item is, the higher the price.

  •  Stability of Market
  • Stability of Historical Earnings
  •  Cost Savings Post-Purchase
  •  Minimal Capital Expenditures Required
  •  Minimal Competitive Threats
  •  Minimal Alternative Technologies
  •  Reasonable Market
  •  Large Market Potential
  •  Reasonable Existing Market Position
  •  Solid Distribution Network
  •  Buyer/Seller Synergy
  •  Owner or Top Management Willing to Remain
  •  Product Diversity
  •  Broad Customer Base
  •  Non-dependency on Few Suppliers

There may be some additional factors to consider, but this is the type of analysis a buyer should perform. The better the answers to the above benchmarks, the more likely it is that a seller will receive a price between the market value and the “wish” price.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: cohdra via morgueFile

Who Is the Buyer?

/in /by

Buyers buy a business for many of the same reasons that sellers sell businesses. It is important that the buyer is as serious as the seller when it comes time to purchase a business. If the buyer is not serious, the sale will never close. Here are just a few of the reasons that buyers buy businesses:

  • Laid-off, fired, being transferred (or about to be any of them)
  • Early retirement (forced or not)
  • Job dissatisfaction
  • Desire for more control over their lives
  • Desire to do their own thing

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The buyer will never have owned a business before, and most likely will buy a business he or she had never considered until being introduced to it.

Their primary reason for going into business is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective buyers want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one’s own business, buyers must be able to make that “leap of faith” necessary to take the risk of purchasing and operating their own business.

Buyers who want to go into business strictly for the money usually are not realistic buyers for small businesses. Keep in mind the following traits of a willing buyer:

  • The desire to buy a business
  • The need and urgency to buy a business
  • The financial resources
  • The ability to make his or her own decisions
  • Reasonable expectations of what business ownership can do for him or her

What Do Buyers Want to Know?

This may be a bit premature since you may not have decided to sell, but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your business. Here are some questions that you might be asked and should be prepared to answer:

  • How much money is required to buy the business?
  • What is the annual increase in sales?
  • How much is the inventory?
  • What is the debt?
  • Will the seller train and stay on for awhile?
  • What makes the business different/special/unique?
  • What further defines the product or service? Bid work? Repeat business?
  • What can be done to grow the business?
  • What can the buyer do to add value?
  • What is the profit picture in bad times as well as good?

Buying (or Selling) a Business

/in /by

The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.

His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyers now want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one’s own business, the buyer must be able to make that “leap of faith” necessary to take the plunge. Once that has been made, the buyer should review the following tips.

Importance of Information

Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don’t overlook a “gem” of a business because you don’t or won’t take the time it takes to find the information you need to make an informed decision. Try to get an understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his “story” may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can’t expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don’t try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure–don’t obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. The seller will be teaching you the business and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer. Don’t depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the “leap of faith” necessary to achieve business ownership. Outside professionals normally won’t tell you that you should buy the business, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: “no.” You will want to get your own answers–an important step for anyone serious about entering the world of independent business ownership.