Anxiety before Closing is Normal

AnxietyOne 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.

Should the Buyer and Seller meet in person?

While we do a fair number of transactions locally between buyers and sellers, quite often neither buyer nor seller lives in the same state. Often, they don’t meet until closing, and sometimes even then they don’t meet. In-person meetings can sometimes close a deal, but other times they can break one. It all depends on the level of communication and what was said prior to that meeting.

The Whole Truth

Buyer and Seller Meeting in PersonA seller who worked in home improvement had a lot of his team out in the field, but he worked out of his home, mostly dealing with customer-facing issues. He had represented to the buyer that he worked roughly 50 hours a week. The buyer was coming from corporate America and didn’t mind “buying a job” that he could systematize over time so this seemed reasonable to him.

He came over one day to see the setup of the home office and walk through some routines with the seller. When chatting with the seller’s wife about the work, they were surprised to hear her say, “Oh he’s down there all the time!” The seller remarked that 50 hours a week wasn’t really that much time, which she corrected by saying, “It’s way more than that!”

The buyer, as you might guess, walked away from the deal. Not because the seller’s wife was candid — she had every right to be — but because the deal had been misrepresented. Fifty hours a week is an entirely different commitment than eighty.

And Nothing but the Truth

But if there’s been honesty and transparency before an in-person meeting, a face-to-face can go a great way towards alleviating concerns.

One of our clients was buying from a husband and wife team out of state. The husband ran the customer-facing side of the business and the wife managed the back office. The buyer began to get anxious about some delays during the due diligence period. In this particular instance, we thought it best for him to meet with the seller and work through some of those issues together. They ended up meeting for several hours and everyone walked away delighted.

The buyer was more comfortable: he now had context for the delays he had been experiencing.

The seller was more comfortable: he got to know the buyer even better and felt more comfortable selling the business to him.

The process accelerated, including a segment of having the titles for 24 vehicles included in the sale. The improved buyer/seller relationship made that go even smoother. When the deal closed, the buyer flew in and they all went to happy hour together to celebrate.

We think that, overall, a face-to-face meeting, if it can be easily arranged, is a major plus in a transaction. It gives faces and voices to emails and contracts, and can help to give personal context that may smooth deal points later in the process. The only time it might undermine you is if you weren’t transparent in the first place. In that case, whether a spouse is present or not, you might unintentionally reveal what you should have shared in the first place, and (understandably) have a buyer walk away as a result.

Cautionary Tale #5: “I’m an Owner – You’re an Operator”

One of the key pieces of advice we give to all our new owners is: “Don’t change too much too quickly.” In fact, you should guard against any kind of changes in those early days. You should be soaking up everything you can about the business, learning why it’s gotten so successful such that a person like you has come along to buy it in the first place. But as you might guess, not everyone takes our advice.

A recent cautionary tale came in the form of a business that was open for sixty years. It only took eighteen months for the new owners to put it out of business.

Attitude

CautionAs brokers, we can dispense business advice but often we have to give life advice as well. We could see that the two incoming owners had a “know-it-all attitude”. You can gently try to offer some correctives, but at the end of the day, it’s their life and their business to do with as they wish. But from the get-go, the outgoing owners and the entire company saw that attitude on display.

It started in the morning. The owners would be in at around 7:30 each morning, usually slightly before any other staff arrived. This allowed them some quiet time to do work before the office got busy, but it also allowed them to demonstrate to their team that they took this at least as seriously as everyone else did.

Not so with the new owners. They made sure to get to the gym — not an early morning session — but one that allowed them to roll into the office around 10 or 11. When they did arrive, they didn’t ask for training or orientation, they were just happy to assume the title of management without earning the mantle of leadership.

A perfect example happened when the new owner called out to a staff member to come into their office. When the employee came in, he was handed a sheet of paper: “Please fax this to so-and-so.” After the employee left, the old owner leaned over and said, “We usually do those sorts of things, no need to bother the staff.” Without skipping a beat, the new (and soon to be former) owner replied, “That’s the difference between you and me.  I’m an owner – you’re an operator.”

Departures and Decline

As I’m sure you can guess, that sort of attitude wasn’t confined to private remarks in an office, but leaked out to how the staff was treated, and before long, people started leaving. The front line staff were the first to go, almost all of them left within 90 days. Some months after that, the management team followed suit. As the cash flow dried up, the new owners couldn’t take a salary and worse, had to take high interest loans (without their bank’s knowledge or permission) to stay afloat. From that point forward the death spiral accelerated and before long they had crashed, largely because of their own hubris.

Perhaps being an operator so that you could learn how to be an owner of that business might have been in order?

Whether you consider yourself an owner or an operator, you’d be wise to pay attention in those early days at the helm of a new business. Continue to write down and note exciting ideas you may have for change and growth, but wait until you have a real sense of the business, instead of relying on perhaps your (too healthy) sense of self, before making any changes at all.

You bought the business for a reason. Give yourself time to understand the business completely.

Sometimes Liquidation is the Best Option

LiquidationWe’ve shared before various reasons that businesses don’t sell, but sometimes the advice we give to sellers after we’ve looked at everything is not to sell, but to liquidate and close. This isn’t because we’re excited about possibly missing a commission, but because what might be a short-term gain for us, it probably won’t give the seller enough or work out to be a long-term win for the buyer.

An example we’ve seen before is when a family owns the real estate that a business operates on, and another family member owns the business that is located on that property. Very often the party that is operating the business is getting preferential rent treatment. Sometimes the rent might be delivered late, but more importantly, often the rent is below market rates.

This creates an imbalance – a business can then seem to be far more profitable on paper because one of its key operating costs is artificially kept low. Higher profitability leads to a higher valuation and higher listing price. But in this case, the profitability is simply inaccurate. If the party that holds the real estate is perfectly happy to accept below market rates (we’ve seen as low as 50% of market value – sometimes more) for whatever reason, they aren’t trying to harm the business – but it functions as a de facto rent control. By not forcing the business to compete in market conditions, it has given it an artificial environment to thrive. While this may work out for both parties, sometimes for decades, it often dooms the business when it comes time to sell, for two reasons.

Fake Pricing

Again, as mentioned above, the value of the business will have to be adjusted to take into account actual market pricing. This is the only way to discover whether the business can actually be run once that’s taken into account, or if the business is even profitable.

Inability to Resell

Part of the reason any buyer buys a business is because he/she too wants to, in time, sell on as well. A business that has this sort of risk attached – what happens if there’s a conflict with your landlord? Everything could be at risk – is less attractive to buy and even more difficult to resell once you are one owner removed from the original arrangement. Sure, perhaps the party that has the real estate is happy to keep taking checks from you, but perhaps the reason they were okay with the lower rent was because the other party was family…and you’re not.

In cases like these, when we do a recalculation and see that there’s not enough meat on the bone to entice a buyer, we encourage a managed liquidation of the business. This allows the party to at least cash out those assets that can be sold, and also frees up the party holding the real estate to either rent at market rates or to sell the real estate and perhaps get into the same arrangement with the business operating party somewhere else or into a new business/real estate holding entirely. Whatever happens, we’ve done our role as brokers, which is not always to sell businesses – sometimes our job involves telling someone the hard truth that they can’t sell a business. While that’s never easy, it does ensure we’re always doing right by every party to our transactions.

Want to know if your business can pass muster to be listed? Give us a call today!

How to Create an Offering Memo

Offering MemoAlmost 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’s Remorse

Seller's RemorseGiven the thousands of transactions we’ve been part of over the years, we’ve seen it all. One thing that we see more often than some might expect is seller’s remorse. This is totally normal, and can occur in a pronounced way even before the sale closes… sometimes derailing a transaction.

In this article we’ll examine some things to consider to mitigate seller’s remorse at any phase in a transaction.

Why does it occur?

A large part of the owner’s identity, perhaps even the largest part, is the role he/she plays at work. It governs social interactions (who you are having lunches with, who you spend the majority of your day with) as well as roles in the community (an owner may, because of his/her business, sit on various boards or play a role in the Chamber of Commerce).

If an owner doesn’t have other identities (perhaps a passionate hobby or a side business), seller remorse in the guise of “What do I do now?” can hit hard.

Before the sale closes.

Part of getting to know our clients here at Apex is asking in the very first meetings what the seller would do after a sale. We are interested in knowing motivations and know that strong motivations lead to cooperative and engaged sellers.

If we start to get calls and emails from the seller asking to slow things down or asking if this is truly the right thing to do, this is sometimes due to seller remorse. One of the first things we’ll go back to is that first conversation to remind him/her of what’s next. Then we’ll remind the seller of why.

Often there’s a health situation, or burnout, or simply the desire to do something else. By discussing the why (the past and present) and what’s next (the future) we can often make sure that sellers stay on track and engaged, which is key to a successful transaction.

After the sale closes.

A broker’s job is never done. Not only do clients come back to list new businesses with us, sometimes they go on to turn buyer after having sold.

We also get phone calls from clients suffering from seller’s remorse. We listen to the regret: “Why did I sell?” or “What should I do now?”  These sellers stayed focused throughout the transaction and the remorse hit later.

Just as we do with sellers struggling before the transaction closes, we ask some key questions:

  • Have you given yourself and your family some time? People can often be restless, dying to get “back into action,” but it’s important to take some time, not just to celebrate, but to also let your mind relax. Crops grow better when they are rotated in fields, so too even the best business owners need time to enjoy a liquidity event.
  • Have you considered going back into the same industry? Sometimes people rediscover a passion once the burden is no longer on their shoulders, or they see a new opportunity in a particular segment of the industry. If non-competes aren’t a barrier, why not leverage what you know and continue to succeed in an identity you have no wish to discard? Sometimes sellers get hubristic, imagining themselves to have the Midas touch. Building and selling a company in one industry does not endow you with the ability to do it in a completely different one. Just because it was your “old” identity doesn’t mean it can’t be part of the new one.

We are always looking for a few good brokers to join our team, and a business owner with a fresh sale under his/her belt is a great candidate.
If that describes you… give us a call today.

Seller Financing and Why it Matters

Seller FinancingSeller 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!

Negotiating a Business Sale: Tools and Mindsets

MindsetWhether you are on the buyer or seller side of a business sale, negotiating matters. The desired outcome for everyone is a successful transaction, so awareness of what you want and what the counter-party to the transaction wants is key, but it’s only a starting point. That starting point will help build a proper mindset for the negotiations.

Mindset

  • Stay positive. Do not approach this as a one-off. Assume that you will have to be in contact after the transaction occurs. Assume the best and don’t read tone into text messages or emails. Always ask your broker for advice before reacting or escalating. We can’t tell you how many deals have been threatened or simply lost due to an inability to remain positive in negotiation.
  • Price isn’t everything. Yes, at the end of the day there is a price that is being dealt with, but other deal points are just as important, even if the buyer or seller don’t yet know/realize it. Don’t fixate on the money as the defining deal point.
  • Time is (usually) the enemy. Be momentum-minded. Very rarely, if ever, do we see that more time leads to a deal closing. Time is of the essence. Stay focused, work on the tasks given to you and keep the ball moving forward with your broker and the counter-party. The transaction needs your active participation to close.

Tools

  • Know your must-haves. To be clear, in the beginning, you might have a long list of “must haves.” But if you take the time to carefully examine the list, you’ll cross off many that you aren’t willing to lose the deal over. A must-have means you are willing to walk away from a deal if it isn’t conceded. If you’re a seller, be true to the blood, sweat, and tears that you have spent building this business. If you’re a buyer, be realistic about what you can get.
  • Do your research. This will be one of the biggest decisions of your life, and certainly the biggest decision of your short to mid term future. Get to know the business and research the industry and trends. Need help with your diligence? Ask your broker for a recommendation to a local professional.
  • Give a concession, get a concession. As we said above, stay positive. You can use the items you ended up crossing off your must-haves as horses you can trade.  It’s often very easy to get a concession when you lead with an attractive concession of your own.

We know a business transaction can be intimidating.  That’s why we are here to help. We have done hundreds of deals in our time. Let us help you with yours!

Why a Broker Will Take Your Listing

AcceptedIn 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.

With Delays, Deals Die.

delayEvery business sale is a minor miracle.  Just as the skydiver gently times his pirouettes and turns in his parachute to land precisely within the giant X of his landing zone, so too do all parties aim at completing what needs to be done from the time an LOI is signed to the date a deal is set to close. Think about all the people involved.

Buyer/Seller

The seller has been given a great deal of paperwork to complete for the buyer’s due diligence.  If he/she has been preparing well to sell a business, this may simply be a matter of looking things up and filling in blanks.  

But, if those systems aren’t in place, there’s going to be a lot to do.  The seller has to form a company and work out contracts with new employees and/or investors.  He has to line up the money, which may involve both the SBA and a bank.  Speaking of which…

Bank

Loan committees don’t meet every day.  They meet every couple weeks – sometimes more frequently, sometimes less, but at those meetings, the banker representing you needs to have a substantial amount of paperwork in order to represent you well.  And who is going to get all that paperwork done?  You, the buyer.

Attorneys

The seller and the buyer will both be working with attorneys in order to make sure deal points are handled in a thoughtful and diplomatic way so as to preserve amity and keep the process moving forward.  These meetings may be contingent on items mentioned above.  Did we mention paperwork?

This is all to say that if everyone is aiming towards a date, and then there’s suddenly a delay, it’s a lot like a sudden stop in traffic when you’re driving a car.  Your muscles tighten up and your senses are on high alert.  In the case of a closing sale delay, the question immediately posed is: Why is there a delay?  If you don’t have a good answer to this question, a deal could go away.  Why?

For the seller, the concern might be, “Hang on, this person wants to buy my business, and he/she can’t get the paperwork done?  Is this deal even real?

For the buyer, the concern might be, “Whoa, is this person hiding something from me?  Can I trust the documentation I’ve gotten so far?

Honesty

The best course, as always in this business, is disclosure.  Be upfront about why there is a delay, explain what you are doing to correct it, and then hit the target.  The minor miracle of hitting a business closing date?  That miracle is enclosed in a bubble of trust.  The bubble might be able to take a hit – even two – but, you know what they say about third strikes…

Here at Apex we always ask you to keep your lines of communication open with us.  Whatever is on your mind throughout the process feel free to share.  We want to cross that closing date finish line with you, so you can move on to what’s next!