NetWorth Business Brokers Blog

Strategies for a Successful Business Transfer in a Down Market

Addressing the inevitable exit from their business can be chilling for most business owners. Selling the business that you have spent years nurturing and feeding to a third party can be an emotional and trying experience. It is estimated that less than 15% of business owners have developed an exit plan from their business, despite the reality that it is a certain outcome for every business owner. For most owners of closely held companies their business assets account for the majority of their net worth, yet few business owners have a quantifiable value for their business or an understanding of what drives value.

I have recently observed that some business owners are standing on the sidelines waiting for better economic times to plan for or exit their businesses. They seem to believe that better economic times will lead to a higher value for the business when sold. This strategy is worth consideration, but for many business owners it leads to unnecessary delays in their lifestyle plans without any measurable increase in the value of their business at a later time.

In fact, for many, the business value declines during this delay because the business owner has lost interest or energy to keep the business growing and competitive. In the end the business owner can lose several years off of their retirement experience and fail to add any additional value to their net worth.

We have been experiencing variable economic conditions in the last few fiscal quarters which seem certain to continue for the immediate future. Selling your business in what would be considered a weak economic time, however, can produce outstanding results based upon two realities:

1. The value of closely held companies is most often determined by internal attributes of the business and less from external economic factors.
2. QUALITY sells in any economic market.

Any "down market" is categorized by an increase of inventory (in this case, businesses for sale) and a decrease in the number of buyers looking to buy the inventory. Economics 101 and the theory of supply and demand has taught us this situation creates a buyer’s market characterized by lower prices, longer lead times to sell, and terms more favorable to buyers. In the case of the business for sale market place that is true for all the businesses at the bottom of the value and quality range. The businesses that are properly positioned in the higher value and quality range retain their value in any market conditions. 

The correct strategy for many business owners to enhance their wealth upon exiting their business is to improve value and not wait on the side lines for better economic times. In my consulting work with small businesses I find that there are some elements that are common to every business that enhance value when marketing a business. Some are quite easy to implement and amount to the "low lying fruit" that can be picked with little effort or expense. In preparing your business for sale to be considered a QUALITY opportunity for buyers and therefore maximizing value I recommend the following:

1. Eliminate the things that detract from value. Clean out the "clutter" in your business to get the highest value. This can included divesting underutilized or obsolete inventory, assets and employees. Minimize the business dependency on you the owner. Delegate more and spend more time managing the business rather than running the business. Replace your tired logo and other image materials to show a fresh and successful image. Get your books and records organized and defensible for a buyer evaluation. All of these kinds of improvements can allow a buyer a clearer vision of the strategic value of your business that is not obscured by the "clutter" that has accumulated over time.
2. Accentuate the things that add to value. This can include documenting client/customer/supplier contracts or securing employment agreements with key employees. Shine a light on positive attributes and achievements of your business. This can include visual signs of quality and achievement like productivity measures displayed in the workplace, industry awards displayed in the lobby or testimonials framed and hung on walls. Document procedures, process, and know how which is often a strong contributor to success. Create a positive working environment and enlist key managers’ support of the business transfer process. Buyers know that happy and committed employees are essential to success
3. Polish your apple. Literally clean out the closets, pick up the shop, paint the flag pole, and do the small things that makes the workplace look clean, crisp, and productive. Dirty means a discount. Don’t stop at the workplace; give your web site, marketing materials, and other image materials a face lift. Step up some public relations to get your name into the community and industry to show the potential buyers how successful and progressive you really are.
4. Get the best help possible and have a plan. Selling a business leads to many complicated tax and legal issues resulting from the transaction and you will need a committed and talented accountant and attorney. Identify a business intermediary/broker who will help you to determine the true value of your business and what type of buyer will bring you the most value and with the terms that you seek. Finally, you will need to work with a wealth planner to ensure that once you convert your business assets into cash you have sufficient assets to create a pay check for you through retirement and that your other goals and risks are properly addressed. Very few companies have all these skills under one roof so you will most likely need to assemble a multi-disciplinary team. Avoid blindly hiring your neighbor the broker or the advisor who has done your taxes for years. These people may not have the specialized skills and experience to help you achieve maximum value. You only get to do this once so make sure your have a qualified and committed team.
5. Conduct a pre-due diligence scan of your business. The part or the sales process called due diligence is when the buyer is allowed to access detailed information about the company, employees, products, customers vendors, finances, etc. This is a thorough look under the hood and the process can be very intensive and exhausting for a business owner. It is also the point in the transfer process where value can be lost or the transfer fails due to skeletons in the closet. Your team will be able to lead you through a pre due diligence scan of all of the strategic, financial, operation, and legal items a buyer will examine. This gives you the ability to head off problems that may derail or redirect the transfer. 
6. Expose your Business to the broadest number of qualified target buyers. Many business owners make the mistake of selling their business to the buyer who approaches them with what appears to be a reasonable deal. You can leave tremendous value on the table without allowing various types of buyers to bid on your business based upon the strategic and synergistic value. The larger the business the more this applies. If your business has unique competitive advantages or resources like people, products, process, and technologies these may be very valuable to one buyer and not valuable to another. Generally speaking for companies with gross sales over $10MM a controlled auction process without setting a price works best at achieving maximum value. Smaller companies are generally better marketed with a realistic market value using a negotiated sales process. Your business intermediary/broker can help you determine the best strategy.

In summary, don’t stand on the sidelines in a down market believing that you will achieve higher values later. If now is your time to move on with the next phase of your life, make a plan, assemble a team and focus on making your business for sale a QUALITY offering that will sell in any market condition.

Contact us at NetWorth Business Advisory M&A for an objective valuation of your business and goals.

Here are a few suggestions to reduce the risk of confidentiality being breached:

• The seller’s employees should be conditioned to seeing strangers walking through inspecting the business—have suppliers, customers or advisors tour the facility prior to marketing the business.

• Sellers should inform a key employee of his or her decision to sell. The employee should be told that he will receive a bonus if and when it sells; give him or her a raise and a commitment that the new owner will be told that the employee is a valuable asset to the business and should be retained.
  

• Every attempt should be made to shorten the time between going to market and an actual sale. This requires a lot of up front work prior to going to market—putting the paperwork together, preparing the marketing program, gathering necessary information for the buyer’s due diligence, including solving any problems prior to offering the business for sale (legal or contractual issues, environmental problems, governmental requirements being resolved, etc.)
  

• Confidentiality leaks can occur by the simplest of sources. An errant email or fax. Deliveries by FedEx or UPS given to the wrong person. How communications are handled should be resolved prior to going to market.
  

• The best way to deal with confidentiality and still try to get the highest price possible is to use an intermediary/business broker. They deal with the issue constantly and have a lot of experience in preventing it—and handling the damage control if it happens.
  

Tom West is the founder of Business Brokerage Press and past president and former executive director of the International Business Brokers Association (IBBA). West holds the Certified Business Intermediary and Fellow of the IBBA designations from the association and is nationally recognized as an expert in the field of business brokerage.

Ten Mistakes Sellers Make

1. Not knowing what the business should sell for. One of the most costly errors a business owner can make is not knowing the approximate price of his or her business prior to entering the selling process. Although the marketplace ultimately determines the final price, an owner needs to know what the approximate price his or her business is prior to placing the business on the market. Before making the decision to sell, owners should work with someone qualified to place a price on their company.
   
   An experienced business broker has both the technical ability and the market experience to produce the most realistic pricing option. The business broker will also be the only alternative for supporting his or her option by selling the business.
   
2. Not preparing the business for sale. Determining the starting price point is only the first step. Prior to exposing the business to the marketplace, preparation is necessary. A business is certainly not a house, but the same attention to appearance prior to sale is necessary. Financial and legal affairs should be current. Anything a potential purchaser might want to see should be up-to-date, accurate and available for review.
   
   Momentum is very important in business transactions and can make or break a deal. The constant need to develop information for a serious prospect will destroy momentum and with it, possibly, the deal.
   
   Demonstrating preparedness places the business in a favorable light and prospective buyers will feel comfortable that everything is in order. Being unprepared can delay a closing, create costly expenditures to play catch-up, and cause prospective purchasers to lose confidence in the deal itself. Too much time almost always works against the deal happening.
   
3. Not being able to see their business through the eyes of a buyer. This can be very difficult for any seller. It is only natural to see one’s own business in a most favorable light and overlook the blemishes or problems inherent in any business. Sellers have to approach their business realistically, knowing that a potential buyer will be doing the same. By recognizing the deficiencies of their business, sellers are in a much better position to deal with the concerns of the buyer. In fact, the best way to handle any potential problem areas is to bring them up in the very beginning.
   
4. Not really knowing the buyer. The better you know the buyer, the smoother the transaction. By knowing the buyers, their motives, their interests and their backgrounds, the better equipped a seller is to make informed decisions about whether they are the right people to operate the business. When the final negotiations begin, knowing the buyers can help resolve some of the issues that will arise. Are their interests the same as yours? If you, as the seller, are financing the deal, do you feel confident that they can make the payments? The more you know about why the buyer wants to buy your business, the better position you are in to know when to be firm in the negotiation and when to be flexible.
   
5. Trying to sell the company to a buyer who doesn’t want to buy. There are many more potential buyers than there are businesses for sale. The question is –how serious are they? A buyer may indicate a great deal of interest but when it gets down to the wire, he or she may back out of the deal. Some buyers want to buy only on their terms and conditions, some may have too many decisions-makers to please, and others only want to buy the “perfect” business. Wasting time on those who aren’t serious about purchasing a business takes away valuable time from those buyers who really want to buy.
   
6. Being your own worst enemy. Many business owners feel that no one knows their business like they do. They think they can do a deal by themselves. They don’t need, or want, any help. They think they are lawyers, accountants, business brokers and outsider advisors all rolled up into one person. Then, when the going gets tough, they become impatient and inflexible. They then blame others, usually the buyer, when the deal blows up. As the old saying goes: “The attorney who represents himself has a fool for a client.” The same could be said for the business owner who thinks he can sell his or her own business. Not using outside advisors, such as a professional business broker, is a serious mistake.
   
7. Not understanding the structure of the deal. Regardless of the size of the deal this could be the scenario: an offer is presented, the seller takes one look at the price, immediately says “no” and refuses to look any further. The price, within reason, is immaterial. The real crux of the deal is how it is structured. Consider the negotiating axiom “You can name the price if I can name the terms.” The terms and conditions are important. A seller may be ecstatic about price only to find that the devil is in the details.
   
8. Not being able to walk away from a deal. Too many sellers get so involved in trying to put a deal together that they don’t see the big picture. They don’t realize that the deal isn’t a good one. In other words, its time to walk away from the deal and go on to the next one. Many sellers don’t want to let the deal get away. Since they have invested a lot of time and effort, and probably expenses, it’s often difficult to just end it. However, in some cases that’s exactly what must be done. If the deal isn’t right, and can’t be fixed, there is no other choice. It’s much better not to do the deal than to do a bad one!
   
9. Waiting too long to sell. Too many owners wait until last minute to decide to sell their business. They wait until business is down, or they are completely burned-out, or their business partnership has soured completely. The time to sell is when business is good. The time to sell is prior to when exasperation hits.
   
   The old adage is that a business owner should think about and plan the eventual sale of the business the day after it is started or purchased.
   
10. Changing your mind. The sale is progressing nicely, the buyer is happy and the seller-well, the seller is contemplating life without the business. He or she realizes that when the business is gone, they will have nothing to do. The business has been a major part of their life for many years. Just before the closing, the seller decides that he or she can’t live without the business and the deal starts to unravel. Sometimes, seller’s remorse arises because a business acquaintance says the price was too low, or there isn’t enough cash involved or offers some other uninformed reason. If it was a good deal in the beginning, don’t let well-meaning outsiders influence the sale.

NetWorth Business Advisory can assist you in avoiding these common mistakes.  Call us for a free confidential consulation.

Why Buy an Existing Business?
An existing business or franchise will have a history from which you will be able to make certain decisions

With so many options available to you, the question will become which vein of the business ownership arena should you pursue? Between franchises, existing businesses, start-ups, home based businesses and MLM's, it does become a bit overwhelming. When reviewing all of the possibilities you have to decide what will work best for you however, your chances of success are clearly best when you buy an existing business or franchise resale for many of reasons. With any new business you have two challenges: developing the product or service and then seeing what if anything, people are willing to pay you for it.

Regardless of a company's past performance, an existing business or franchise will, at the very least, have a history from which you will be able to make certain decisions. Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture. Furthermore, you have the ability to verify what the company did in the past that resulted in the current status of the operation.

Ease of Investigation
In order to buy the right business or franchise, you will be required to do a thorough investigation of its past activities, its operations, its current status, the competition, the industry and its future potential. You will accumulate this information and then you will have to determine how it measures up with you at the helm. Clearly, this information gathering will be substantially more accurate and easier to obtain when dealing with an existing business or franchise, as you will have the resources available from which to get the details.

Infrastructure
You will have the benefit of purchasing a company that has an infrastructure including customers, suppliers, employees, equipment and systems. This will allow you to focus on building the business as opposed to a start up or new franchise where everything begins at ground zero.

Purchase Price Differences
Buying an existing business or franchise does not mean that it will cost you more. In fact, many times it's less expensive than building a new franchised location or launching a start-up. Even in those cases where it may require a premium, at least you know what you are getting if you investigate it properly. With a new franchise, a good Master Franchiser will do demographic studies on population, drive by traffic, potential customer base and a whole series of studies that will indicate that "theoretically' the business should do well. However, the only thing they cannot guarantee either by law or in reality is whether or not you will be successful. Also, new locations can take a year or more to build. You can avoid all of this when buying a resale.

Flexibility in Negotiating
You will have far more flexibility when negotiating the purchase of an existing business or franchise versus any other options available; it's not even close! Everything from the purchase price to financing is open to negotiation. Doesn't it more sense to put yourself into an environment where you have the greatest number of options available?

Laws of the Buying and Selling Jungle
From past experience, twelve simple rules to live by

I've worked with many business sellers and many more potential business buyers over the years and let me tell you; it's never easy getting a deal accomplished! I strongly believe and firmly advocate that the absolutely best way for an entrepreneur to successfully get into business, or expand what they already have, is buy an existing profitable company. But there are many obstacles and pitfalls along the way that must be overcome. It really is a jungle out there!

To help those who are considering buying or selling a business, I offer the following overview of what I think are the twelve most important Laws of the Business Buying and Selling Jungle. These have been excerpted in part from my book, Strategies for Successfully Buying or Selling a Business, in which each Law is examined and discussed in much greater detail.

Jungle Law #1: Lawyers Are Deal Killers!
There certainly is an important role for a competent commercial law attorney to advise and prepare the legal structure of a business purchase and sale transaction. The problems arise when lawyers see themselves as business negotiators whose mission is to get the "best deal" for their clients. They frequently forget that the "best deal" has to involve both parties, the buyer and the seller, and that compromise is usually the best solution. Lawyers generally have a very difficult time with compromise in this type of situation because they often see their role as advising their clients on how to get the better deal. Usually, an attempt at a lopsided deal for either party will result in "no deal" at all.

Jungle Law #2: Caveat Businessus Emptor; (Let The Business Buyer Beware!)
As a matter of basic principle (and law in most States), all business brokers dealing with the public are bound to be honest and forthright in their conduct concerning the businesses that they represent for sale. But they also have a fiduciary relationship (position of trust) to uphold between themselves and their clients (the business seller, in most cases). They must present a business for sale in its "best light" without misrepresenting any significant facts but at the same time not pointing out all of the potential business pitfalls. This usually establishes an adversarial relationship between the buyer and the broker as well as between the buyer and the seller. The best course of action for a buyer is to trust only what they can verify during a rigorous due diligence process and the best approach on the part of the seller/broker is full disclosure of all pertinent information.

Jungle Law #3: A Business Is Worth Only Whatever Someone Is Willing To Pay For It At A Particular Point In Time!
Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible. The broker is intensely interested too, because the commission amount is usually based on a percentage of the total selling price. So, what process should you use to value a business? Forget about putting a value on the assets based on resale value. Forget about comparing the business to the one in the next town that sold for a particular amount. Forget about all the "rules of thumb" like X times earnings or Y times gross income or some dollar amount per account or any other shortcut formula. A business value, and therefore its selling price, only makes sense when it's based on the capitalized earnings stream. Capitalization is simply the process used to determine today's value of a stream of future earnings. In the case of valuing a business, "today's value" is the value of the business, and the "stream of future earnings" is the expected future years' profit of the business based on current earnings. Most small businesses sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted.

Jungle Law #4: A Business Buyer Is Really Buying A Stream Of Earnings!
The assets of the business are just the tools of the trade that enable an earnings stream to be realized. Without the earnings stream, the business essentially has no value. You should note that in using this method, a business may actually be worth less than its fair market asset value or in many cases worth substantially more. A seller will be able to get the most they can for a business by showing a buyer the true investment value in the business based on provable earnings.

Jungle Law #5: Ignore All Claims Of Unreported Income!
This is a very sensitive subject known as unreported (to the IRS) cash sales. Some business sellers may try to get you to accept their claim that they had significant amounts of cash income that did not show up on their IRS Tax Return and accordingly want you to include this phantom income in your valuation of their business. I highly recommend that you totally ignore these claims and deal only with the business's reported income. Who is to say if the business owner's claims are true? If the business owner will lie to Uncle Sam might they not also lie to you?

Jungle Law #6: Most Sellers Are Fibbers! (Or They At Least Stretch The Truth)
Of course, this is not a completely true law of the jungle. Most sellers are honest people trying to get by in life like everyone else. However, a buyer should approach all information provided in the sale with some skepticism. Buyers are making a major financial decision and should carefully consider all information presented during a detailed due diligence process. If a buyer approaches the purchase of a business with a good healthy dose of "prove it to me," then it will be difficult for them to get burned.

Jungle Law #7: If A Seller Really Wants To Sell, You Probably Shouldn't Buy!
Whenever you look at any business for sale, you should approach the situation with a great deal of caution. You should make it your business to verify all of the facts possible about the business, including determining the reason for sale. There are some very good motivations for sellers to sell and other ones that are not so good. Usually, the best reason for a sale from the buyer's perspective is the planned retirement of the owner or a sale necessitated by illness. By far, the best potential purchase is a long-standing single-owner profitable business where the owner is approaching (or at) retirement age and is generally reluctant to sell but realizes that he eventually has to.

Jungle Law #8: 99% Of Potential Business Buyers Never Buy A Business!
This alone may be reason enough for a seller to retain a business broker to represent him in selling the business. A professional broker knows how to sort through the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy a business. Once the unqualified potential buyers have been culled out, still only somewhere around 50% of these folks eventually buy a business. For this and many other reasons, I strongly recommend that sellers use a professional business broker to represent them in selling their business.

Jungle Law #9: Always Assume There Are Skeletons In The Closet!
Most businesses have some negative feature(s) that the seller will be reluctant to talk about. You can be sure that any problems will come out later as buyers begin analyzing the business (due diligence), and it could kill the sale if the problems are perceived as cover-ups. This is because buyers will ask themselves (logically) "if they hid this fact from me, what else are they hiding?" If the negative aspect(s) is clearly presented and discussed with the buyer, it may not be a serious problem because the buyer may feel that it can be overcome, avoided, or changed. The seller should strongly consider this and determine all of the possible negative factors that could affect the sale of the business. If the problems are very serious and non-correctable, the business may not be salable.

Jungle Law #10: Someone Will Always Get Cold Feet Just Before The Closing!
Closing the deal is always difficult, but usually the shortest part of buying or selling an operating business. After all, the valuations, investigations, and negotiations are complete and now it's a matter of getting everything into writing in a form that satisfies everyone so that the transfer of ownership of the business can take place. However, you can definitely count on someone getting cold feet just before the closing. Be prepared for this! The seller and buyer may both start to wonder if they are really getting a fair deal. The best way to get ready for this is to anticipate it happening and then to deal logically, reasonably and unemotionally with it at the time.

Jungle Law #11: Negotiations Must Stop At The Signing Of The Purchase And Sale Agreement!
Once the Purchase and Sale Agreement has been signed by both the seller and buyer, there is an excellent chance that the sale will actually take place. But, there must be an end to the negotiation process or things will begin to unravel. The deal at this point is like a house of cards with many parts of the negotiated deal contingent on another part. Trying to reopen negotiations after a Purchase and Sale Agreement has been signed will most likely lead to a collapse of the entire deal.

Jungle Law #12: After Buying A Business, Do Not Change Anything (At First)!
Of course, this doesn't hold true if you're buying a turnaround situation; but in general, if the business you are buying is profitable, leave it alone while you learn how to manage it in accordance with the status quo. One of the experiences I have had that best illustrates this point is as follows: One buyer of a fast food chicken franchise soon after the closing changed meat suppliers because he found that he could get the chicken at 10? a pound cheaper. What the new owner did not realize was that these chicken pieces were 25% larger than those provided by the original supplier. The problem with this is; the franchise doesn't sell chicken by the pound; it sells it by the piece. The new franchise owner completely wiped out his profit margin by paying a smaller price per pound but delivering to the customer 25% more chicken at the same retail price!