Archive for category: Must Knows About Business Sales

One of our brokers was recently asked to be part of a panel at a conference. The panel topic was about experiences in selling a business and in preparatory slides she saw a focus on the stress, emotion, and anxiety that came with a business sale.

Being a rather no-nonsense type herself, she thought it was too focused on the emotional side of the transaction, until a timely email from her to the buyer and seller (and the responses) reminded her this is indeed something that both buyers and sellers deal with during a transaction. Rather than run away from it, it’s important to discuss it openly.

Delayed Closing

While the two attorneys involved in this deal seemed dedicated to trading punches regarding deal points, both buyer and seller remained amiable and engaged with each other. They took the delay in closing with stride, but even the delayed date seemed optimistic. To add to the regular challenges of taking over a business, the new owners would be moving to Kansas City from out of state.

In response to our broker’s asking about how both parties were feeling, the seller noted that there were still many unknowns. But they were continuing to take one step at a time and were excited to get to the closing date. They were looking forward to introducing the buyer to their whole team.

The buyer responded similarly, noting that a great part of his peace of mind in the transaction lay in the team he had surrounded himself to shepherd this deal to closing. His accountant, his attorney (who we had introduced him to), and other mentors were making sure that all the relevant questions were being asked and we, as the broker, were ensuring that those questions got answered.

Stay Calm and Carry On

During diligence, a lot of “why” questions can come up: “Why did you spend on this?” “What possessed you to do that?”

It’s important not to get emotional or assume the worst. Realize that diligence isn’t a “necessary evil” but rather a “necessary good” (even though many days it doesn’t feel that way!)

Often, the questions answered during this period of diligence lead to long and interesting discussions about the business and operations. The overall philosophy about the company (and life) could not have come up over a perusal of income statements and tax returns. Indeed, this is going to be a significant event in your life, so you should take the time to enjoy the journey and feel all the feelings. But don’t get lost in those feelings to the detriment of the transaction. Assume the best, have a constant and diligent attitude about the questions you ask (and that are posed to you) and move towards a successful transaction.

Almost every week here at Apex, we meet to discuss new businesses that we will be listing soon or which have just been listed. Instead of getting into the nitty-gritty of each business, we go through key information which isn’t just important for brokers to know to share with their clients who are looking to buy, but is a fast and simple way for any potential buyer to understand a business that’s for sale. While every brokerage may have its own way of creating an offering memo, there are some key components that should always appear.

Key Business Activities

This is pretty straightforward. What are the products and/or services offered by your company? What’s your target market? Where are you located?

The Reason for Selling

This is one of the very first questions we ask our clients whenever we begin a discussion about a sale. We ask because we want more context to understand who we are working with and what his/her motivations are, but of course every single buyer will want to know as well, which is why it’s explicitly listed in the memo.

Key Highlights of the Business

This is not a SWOT analysis. It’s more of a highlight reel. We’ll highlight positives like a loyal customer base, growth potential, longevity of key staff, good margins, etc.  We will mention the risk profile of the business, but the entire section is obviously and understandably positively focused.

Financials

Sometimes employees don’t even get to see full financials, so you won’t see them here either. We’ll have put together some key numbers so that buyers can see trends without knowing your precise business mechanics. It’s also important to be oblique here because we want to keep the sale confidential and giving away too much information here (or anywhere else in the memo) may cause the information to leak out into the public and muddy the waters – whether it be with competitors or with employees.  Confidentiality is key.

Price and Expected Sale Terms

Of course somewhere in the document we’ll need to mention the price, and also mention any specific sale terms. We will discuss whether the seller is firm on cash up front or if he/she open to some portion of seller financing (remember that some fractional seller financing is often part of SBA loans). We also discuss the sale timeline and how long the seller is willing to stay on to be part of the transition (if at all) and his/her willingness to sign a non-compete agreement.

We’ve prepared thousands of these memos over the years which have gone on to be the first step in a successful sale.  Let us know if we can start putting one together for you!

Seller financing is simply a particular portion of the sale of a business that is financed by the seller. This can sometimes include 100% of the sale price, but very often it’s a much smaller fraction of that, and is a frequent component of SBA loans.

In this article we’ll discuss the benefits of seller financing to both buyers and sellers.

It’s a Bridge

Not all buyers can qualify for the entire amount necessary to close a sale, and not all sellers need the entire amount for them to do what they have planned next in their lives. Seller financing can help to be one part of financing that can include ROBS funding, an SBA loan, or personal/family savings. Very often it can be that small bit of financing that helps to close a sale instead of having it fall through.

It’s a Hedge

A seller who lacks confidence in the ability of the business to carry on after the sale may have difficulty committing to seller financing, as that money would then be at risk of being completely lost. Buyers know this, and it’s a solid psychological help to know that the seller is willing to defer some portion of the proceeds of the sale into the future, when the company will be much more reflective of the management skills of the buyer than of the systems put in place by the seller.

It’s a Deal Point

Remember that in a transaction there are many horses that can be traded. Perhaps the buyer wants a different percentage of the sale to be classified as intellectual property, which can lead to higher taxes for the seller. In response, perhaps the seller asks for a lower amount of seller financing or different terms. Seller financing is just one of many options to help move a transaction forward to a successful conclusion.

It’s about Money

We’ve discussed alternative financing for small businesses before. Unlike these algorithmic driven companies, seller financing remains “alternative financing” that almost always will cost less than those options, somewhere between Prime + 1-3%, though sometimes for less. Terms are usually more favorable as well, as the outgoing seller knows exactly what cash flow is available and what is reasonable to siphon off to service a note.

What we do best (and have done for many years) is bring together eligible buyers and worthy sellers to complete transactions with many kinds of financing.  Give us a call to see if we can help you!

In previous articles we’ve discussed different certifications that brokers can possess, and we’ve also offered many profiles of our team here at Apex.  But sometimes sellers can forget that there’s a “good fit” process to our work here as well.  We’re looking for the right type of sellers, not just anyone with a business and desire to cash out.  Below are a few things we look for when meeting sellers we consider representing.

Reasonable Chance of Sale

There are many factors that influence whether a business will sell.  The first, and most important, is proper pricing, which often comes through a professional valuation.  Many times we find that a business is overpriced, not just because of unrealistic ideas from sellers about what they are “entitled” to, but because the financial statements feature too many owner benefits that need to be accounted for in a different manner.

There are also other factors, like market conditions and the availability of financing that corresponds with those conditions.  But suffice to say that it’s very rare that we find a business with a reasonable chance of sale that doesn’t sell in a reasonable time.

Realistic and Committed Seller

Part of being a successful seller means knowing how much your business will sell for and how long it might take.  But another part of being successful is being committed to the work. There are so many things that go into pulling off a successful sale, but at the heart of it all is communication.  Successful sellers don’t disappear for days at a time, or leave emails with a lot of “to-dos” sitting in their inbox.

Sellers know that businesses don’t sell themselves and that even mildly interested parties will want a fair bit of information.  They don’t assume that a broker is working “for” them as an employee, but rather “with” them as a very experienced colleague who has been to this dance many times before. Perhaps most importantly, they have the humility to say “I don’t know” or communicate fears and challenges that they have.  We can’t help or fix what we don’t know about.

General or Specific Fit

As we’ve said before, we have literally decades of experience selling hundreds of businesses in our office.  While we may not have sold your specific type of business before (though that’s pretty unlikely), we’ve certainly sold the same size in revenue, or dealt with that industry, or have a list of qualified buyers who have told us to contact them the next time such-and-such a type of business in a certain price range comes up.

We have the right brokers to fit your every need. We as brokers are looking for these good fits ourselves, as we know that will make a sale not only easier, but more enjoyable.

If you’re committed to selling your business and have a realistic sense of what it can go for (or would like to find out), give us a call.  We’d love to help.