Archive for category: Must Knows About Business Sales

Inevitably, in discussions with sellers, we hear the phrase, “If the buyer does X,” in which X increases the value of the business. In fact, we’ve shared before the major benefits of one small tweak which buyers made to significantly increase profitability. But that’s the point, that’s a benefit that accrues to the buyer, because he/she did the work. So, when can “potential” additional revenue be factored into a selling price, to the benefit of the seller?

Possibility in the Future

Let’s say your business is B2C and is in a heavily-trafficked shopping center. But, there is a development going up across the street. It’s an apartment complex with 250 units. For purposes of this example, we will assume that the permitting process has completed and approval has been issued, but construction has not yet started.

It is, of course, certain that your business will profit from the increased presence of the inhabitants of the new apartment complex. But how can you factor that into your selling price?  

Firstly, you’ll need to zero in on construction start/finish dates. You can’t just accept those dates at face value: you’ll need to look at the history of the municipality in regard to major projects as well as the contractor(s).  How often are projects completed on time? If they are not completed on time, how far off are the estimates?

Secondly, you’ll need to investigate the actual numbers behind the new traffic. As part of the permitting process municipalities have to issue future traffic estimates. Obviously, those numbers are going to be phased in over time as not all the apartments will fill up the day the complex opens. Don’t only ask the municipality for their data. If your business has a professional association, that association will often have studies done that can tell you precisely the economic impact of a new development in proximity to your location.

Thirdly, you’ll need to deal with the real estate in relation to your business.  If you own the real estate and have it as a separate transaction (best practice), then not only will the value of the business go up, but so will the value of the property. If you don’t own the real estate, you’ll need to get written commitments from the lessor as to what the new rents will be, as the buyer will certainly argue that any potential profits due to the new development could be eaten up by major rent increases, also due to the new development.

With all this information, you’ll be in a much stronger position to build “potential” into your selling price and make a case to a buyer for an increase in the price of your business over what the current financials demonstrate.

Certainty in the Near Future

But that scenario is entirely different from one in which the seller has done something that has not yet shown up in the financials, and may not for some time. Let’s say you’ve signed a contract with a client for which work will begin in a year or two, or with a type of vendor that tends to have long and laborious payment cycles (like the government). How can you build this soon-to-be actual income into a selling price?

We’ve seen this go a number of ways. It’s rare that a buyer and seller will agree on some simple formula immediately. Often we see that a buyer might agree to a percentage of that revenue significantly less than what the seller hoped for. Or, we might see the seller so certain of the strength of this new revenue stream that he/she will ask for a percentage of that new income to be baked into the deal.

Unlike the apartment scenario, in which a shovel has yet to hit dirt, in this scenario, the seller has done all the digging and building and is just waiting for the payback. Rather than an estimate based on an estimate, a seller is now talking about percentages based on a certainty. Hence that “potential” will seem much more immediate to both the buyer and seller.  

Are you facing some developments that you think will spell great potential for your business and want to discuss how it might affect your selling price? We’d love to chat with you about it!

We’ve often talked about the paperwork that you need to put in order for a business sale.  But something often underestimated is the storytelling behind selling a business.  Just as there was a narrative for how you started the business, there’s a story for why you’re selling, and that’s something you need to take some time to capture.

The Easy Questions

The questions you should tackle first all lie in the past:

• Why did you start the business in the first place?  If you didn’t start it, why did you buy it?
• What challenges have you overcome along the way?
• What goals have you achieved?

The Big Question

In between the past and the future is the present, and that most present-tense of questions in this process is always the first one a buyer asks us when we share a business, namely, Why are you selling the business?  Now, there are hundreds of “correct” answers to this question, but only a couple very wrong ones, for example:

• I think revenue has topped out (this means there’s no chance for growth which puts a damper on the profit needs of the buyer)
• I’m working too much (this could imply you don’t have processes or key team members in place)

The Hard Questions

The previous questions you knew the answers to intuitively and could answer them just as quickly as they were asked.  These next questions are also in your past, but they are in the buyer’s future.  They also are unlikely to be easily answerable on the spot.  They include:

• What have you not done, and why?  While it might be unpleasant to revisit failures or missed opportunities, remember that buyers are  coming in with fresh eyes and energy, and with your experience to guide them, they might be able to revisit some of those opportunities and convert them into successes.  We’ve seen it plenty of times.
• If you were continuing in the business, what would you do first?  What would be your focus?  This gives buyers a road map.  They may have their own (sometimes not good) ideas, but most times they will really value your advice.
• Why would you be interested in this business if you were a buyer?  This is a chance to speak about the industry and its growth, the fact that it’s a lifestyle business, or how much you enjoy working with the employees.

If you want to explore these hard questions in more depth, we’ve talked about some of them before in an exit interview for sellers.

Remember that your answers to these questions don’t need to be lengthy and detailed, but no potential buyer is going to complain if you do decide to share a lot.  Even better, if you are willing to be vulnerable and share some of your own personal challenges along the way it can put a human face on the business and allow buyers to understand your journey better (and consider how good of a fit it might be for them).  Writing these answers down allows buyers to get to know you even better before a first meeting.  As such, you might even save a few anecdotes or points to share in person to underline some key ideas.

But most importantly, taking the time to answer these questions will help you stay calm and focused on the WHY of selling your business, which will be important on those days when you might be frustrated about due diligence or feel like the buyer’s questions never end.  Selling a business is emotional, though the level of emotion varies for each individual.  A helpful counterweight to that emotion are the cold hard facts of your entrepreneurial journey.

Do you feel like you’ve got a compelling WHY for selling your business?  We’d love to hear about it.  Give us a call!

There are many reasons deals can fall apart, some of which are too crazy to be believed. But we do see some that occur regularly, and in the hopes of educating our readers so that they don’t fall into these same traps, we want to discuss three of them. 

1. Attitude

It’s not important that the buyer and seller become best friends. But we do think they should meet. And they do need to have healthy professional and personal attitudes before, during, and after the transaction.

Professional Attitude

This process takes time. A lot of it. It will really feel like a job, at times. You will need to keep in mind that this is just how business transactions happen. Boxes have to be checked. Diligence has to be done. Leases have to be negotiated and handed over. Banks need to look at spreadsheets. Sometimes the SBA is involved. It’s not personal. It’s just business.

This attitude also means that a buyer doesn’t have an ego-driven notion of what the business is worth. A business’ price is subject to two things, primarily. A valuation, and market conditions at the time the seller goes to market. A buyer can object to these realities, but the ones who get to a successful transaction are the ones who are willing to undergo an attitude adjustment and get away from what they think the business is worth and focus on what the market thinks it’s worth.

Personal Attitude

At times, negotiations and diligence items can feel personal. While those feelings are understandable, the reality is that none of it’s personal. Buyers are looking under the hood, trying to make sure they understand everything they can to make a successful go as a new owner. You’re not used to being scrutinized as an owner, after all, you run the place. When you are feeling discouraged or want to lash out, stop typing that emotional email and give us a call. What’s great about being a broker is that we’ve seen both sides of transactions so many times that we’ve probably come across your particular flavor of discontent (and we know how to help you deal with it).  

2. Failure to Disclose

There are many things that can come up before and during a transaction. People can have personal problems that directly affect their ability to sell a business. For example, a business partner can end up refusing to cooperate or a spouse may not be willing to wait until after a transaction to file for divorce. Sometimes leases or liens (or even court cases) get “forgotten” about.  

There are many remedies we have to deal with challenges, but we can’t help fix what we don’t know about. There are a number of times that we’ve been in the weeks, days, and even hours leading up to closing when we find out something that puts a screeching halt on everything. The retort of, “I didn’t think it was that big of a deal” is usually heard. Anything you can think of that you might disclose, mention to us. You’re never going to hear a broker respond, “Why did you waste your time telling me that?” More information means we’re better equipped to help you.

3. Business Neglect

As we mentioned above, due diligence and preparation for a sale can (and often does) feel like a job on top of running your business.  The more prepared you are (clean books, timely tax payments, coherent financial statements), the less time you are going to have to spend getting those in order for a buyer. Your business and your employees need you to continue to function at your best not only for your own financial well-being (you don’t want the business to stop performing well) but for the incoming buyer (you want them to have the best start possible).

In the worst cases, businesses get neglected enough by the seller to cause a material change in the value of the business, which can lead to a renegotiation of the price. Don’t let that happen to you. Keep your eye on the deal and your business, knowing that patience and a good attitude will bring you to a successful conclusion.

We want to make sure your business deals get to the finish line, not fall apart. Contact us today to see how we can help you!

Another article about selling a business? Well, we’re business brokers, so we believe in stressing the fundamentals. A business sale is often the most significant transaction an individual participates in during his/her lifetime. And those who master the fundamentals have the most successful transactions.

Step One: Assemble Your Team

There are four key team members you should have assisting you in your transaction:

• Accountant – This should preferably be the accountant that you have always had working on your company’s finances. But in case he/she doesn’t have the bandwidth/desire to assist you with this task, you might bring in someone else with experience in business sales and tax strategies.
• Financial Planner – This person should work hand-in-hand with your accountant to figure out what to do with your free-and-clear proceeds that result from the sale. They can often offer you strategies to maximize value and lessen tax exposure.
• Attorney – Someone to represent your legal interests in the transaction. If you don’t have a trusted resource in this department, we have trusted partners we can refer you to that we work with often.
• Business Broker – We’re going to help make sure this team is pulling in the right direction. Most of all, we’re going to help you stay focused and on track towards the closing date.

This team is what you’ll need for most Main Street (less than $5M annual revenues) transactions, but it can definitely expand as the transaction size increases, to help cover the increased diligence issues.

Step Two: Prepare Your Paperwork

Before selling your business, you can get ahead of the game by asking your broker to get you a diligence checklist for a business that is in your industry or comparable in revenues. The longer you have to work on this list, the less it will seem like term papers of long ago and more like a simple marathon with milestones you keep hitting.

Step Three: Think About Deal Points

There’s no way for you to anticipate what a person buying a business will have as his/her “must haves”. But you can certainly make your own list, as well as your own “red lines” that you won’t cross. Keep in mind that this needs to be a discussion you have with your broker. In your own mind, “must haves” can be very serious, and red lines can be very red indeed. But that might be simply because we’re lacking context or don’t have information about alternative ways to proceed.

There are thousands of ways to get a deal done (we’ve seen most of them!) so if you’re proactive, your mind will be in “deal” mode when you start dealing with a buyer. That means you’re flexible. Flexibility often wins in transactions of all kinds, not just in business sales.

Step Four: Look at Comps

Your business may be worth a certain number in your mind. We always remind our clients that their business is only worth what someone will pay for it during the particular time period your business goes to market. Start with a professional valuation, then talk to your broker about current supply and demand in the market for comparable businesses.

What kind of deals are getting done right now and how does that relate to me and my business?

Step Five: Stay the Course

The deal is not done until the paperwork is completed and the check clears. Period.

Make sure that you have operational support as you’re going through this process. Working on a business sale is a part-time job. You want to make sure that your company doesn’t suffer as a result of doing all the things we’ve discussed above to move towards a successful transaction. If you need help, ask. If you’re struggling, tell your broker. But you don’t have to do this alone, and it’s okay to admit you need help.

Do you feel like it might be time to sell your business? Let’s talk about it!