Seller Frequently Asked Questions
For some, their business is their largest asset. Selling your business is a big decision.
Information is power, feel free to contact us.
1. Industry experts indicate less than 20 percent of all businesses listed for sale actual sell. Unrealistic expectations from the seller is the biggest mistake when trying to sell their business overriding declining sales, burn out, poor financial record keeping and emotional attachment. Typically business values center around two main factors cash flow and assets. At Murphy Business we have tools and methods of presenting your business that shows buyers the true value of a business. If you sell your business yourself and present tax returns to potential buyers, it will be difficult for the buyer to see the true cash flow they can expect to generate when they acquire your business. Business brokers have the tools and resources to present your business to buyers giving them the clear picture of the cash flow which will have a dramatic impact of the business value. Presentation and a systematic methods of supplying buyers with information brings value to the transaction.
2. The International Business Brokers Association (IBBA) indicates that 55% of buyers in today’s market are first time buyers. Our job is to sell your business and that requires brokers to assist the buyers throughout their process. Assisting buyers in obtaining financing, supplying the necessary paperwork, putting buyers in contact with proper professional in varies industries, assisting in lease negotiation and property transactions, facilitating the due diligence of the buyer are a select few examples of how we help the buyer ultimately increasing the chances of your business of selling. Bottom line – buyers normally do not have experience in purchasing a business. Our job as a broker is to help buyers through this new found territory which ultimately gets your business sold.
3. The national average time a business is on the market, from list to close is 9 months. Some business sell much quicker and some never sell. Obtaining financing through SBA can take 3 to 4 months. Success with lenders takes true dedication and communication to make sure these lenders have all the needed documentation to process the loan. Selling a business takes a lot of man hours and can become consuming. Preparing a detailed offering package, preparing a business valuation, developing a marketing plan, implementing the plan and contacting potential buyers, qualifying buyers, presenting the comprehensive portfolio, negotiating the sale, conducting due diligence, arranging the necessary closing documents and finalizing the close can take hundreds of man hours. A broker can do all of this while keeping the sale of your business confidential. Yes it is possible for you as a business owner to take on these responsibilities but it will take your focus away from other priorities which could ultimately reflect in the performance of your business impacting the value of your business.
4. ”The buffer” – Negotiations 101 – It’s always good to have a third party relaying communication between buyer and seller. Brokers become the conduit to help deliver the message. Who knows, you may end up selling your business to a long time competitor. Direct communication between two parties with different agendas can escalate quickly. There may be instances where you have to retract or modify an offer and certainly times where you’ll need to adopt an aggressive negotiating position. Most business sales include a training period from the seller after the purchase. Let the business broker be the bad guy or deliver the bad news. Were pretty good at softening the blow.
The completion of a sale can take over a year, so keep that in mind as you plan your exit strategy. Here are several basic steps you should take to ensure that your business is ready:
1. Get a business valuation. One of the first things you should do is obtain a realistic idea of what your business is worth from an objective, outside source. A professional valuation will give you a basis for gauging buyer offers and will give you an idea of what you can expect to net from the sale. It will also tell you the business’s market position, financial situation, strengths and weaknesses (which you can hopefully correct prior to putting it on the market). Murphy offers several levels of business valuations. A Brokers Opinion of Value (BOV) is the most basic valuation.
Valuations can be obtained from a number of sources, ranging from local accounting firms to regional business brokers and investment banking firms. Murphy offers 5 levels of business valuations to choose from depending on your circumstances and the size of the business. As a rule, you should make sure the company performing your valuation has access to the most current national data regarding privately held transactions in your industry. Experience in selling firms of your type is obviously helpful as well.
2. Get your books in order. Buyers and bankers evaluating your business generally require at least three years’ worth of financial information. The more formal your statements (accountant-reviewed or -prepared vs. internally generated statements), the better the impression you’ll make-and the easier the due diligence for a buyer. The information you provide to the potential buyer will also be used to obtain a loan. When you are selling your business, it helps to think like a buyer and a banker. In most cases sellers supply the broker with 3 years of tax returns. The broker will recast your financial according to SBA’s guidelines, making a great presentation to commercial lenders which helps the buyer acquire a business loan.
3. Understand the true profitability of your business. Most privately held businesses claim a variety of nonoperational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal automobile lease. The financial recast that is performed by your business broker will show any potential buyer the true cash flow they can expect as a new owner.
In addition, there may be infrequent expenses you have incurred during the past three years that should be excluded in a buyer’s analysis of recurring cash flow. There may be moving expenses if you’ve moved to a larger facility or unusual legal expenses. Your broker will know how to handle these situations in the financial recast which can make a substantial impact on the business value.
4. Consult your financial adviser. It’s wise to speak to your tax adviser for help planning your financial future. Understanding your personal and corporate tax situation may also help you determine your options with regard to deal structure. If you are selling a sizable business the tax implications can be substantial. There are a number of ways to minimize your tax liability which requires the knowledge of a professional that stays on top of the constant tax changes that occur over time. Some of these strategies require certain actions prior to the sale. Murphy Business Advisers has consultants that can provide you with different sales scenarios and show you how each scenario will impact your net proceeds from the sale after taxes. We suggest taking a proactive approach so you and your broker can navigate through the negotiation process knowing the impact on your bottom after the tax liability. These consulting reports not only help the seller but also show a buyer how structuring the sale may bring benefits to them as well.
5. Make a good first impression. Will a buyer visiting your business for the first time see order or chaos? Make a great first impression. Buyers want to own companies that show well. How the business appears to operate at first glance is often a key indication of the management team, the records and the overall business operations.
6. Organize your paperwork. Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, equipment lists, maintenance agreements and other pertinent information for the continued success of the business. Buyers and their bankers need to know that the business will continue and there is no hidden skeletons in the closet. Make sure you have everything readily available, current and in order. Being proactive and a quick to response to a buyer’s request with information gives a sense of confidence. On the other hand, a delay in responding to a buyers request for information can create uncertainty and doubt.
7. Consider management succession. If you’re absolutely vital to your business, who is going to run the business for the new owner when you exit? Many small business owners ARE the business. Systems, controls, procedures and especially key personnel make it easier for a new operator to take over your business. You should have a succession plan in place before going to market. A business that can operate without the presence of the business owner normally commands a higher value and attracts a greater scope of buyers.
8. Know your reason for selling. Buyers are always curious as to why a seller wants to exit a business. Any savvy buyer will think “If this business is so great, why are you leaving?” Be prepared to articulate your reasons. “I am so tired of dealing with my demanding customers and vendors” would not be the best reason to give for selling. Most buyer purchase a business with plans for improving the business. Your business does not have to be absolutely perfect. What has been a burden to you as an owner over the years may be an opportunity in the eyes of a new buyer.
9. Get your advisory team in place. Do you have an attorney and an accountant who are proficient in mergers and acquisitions? Your broker will have a list of qualified individuals who they can suggest. When you sell or buy a business there is a lot of very detailed legal work that goes in to the final closing. These agreements normally include the final contract, non-compete, inventory adjustments, promissory note, bill of sale, warranties and other critical documents. A UCC search will be performed by the broker just prior to the closing to insure there are no liens filed against the assets being transferred.
Murphy Business Advisers has been selling businesses since 1994 and has created a process with experienced business transaction attorneys who produces these final documents on behalf of the buyer and seller. Unless negotiated differently, the buyer and seller each pay half of these fees. Basic business closing documents can be created for a $1500 fee (buyer pays $750 and seller pays $750). These documents are drafted from a neutral perspective which creates agreements that are fair to both parties. Once these documents are created the buyer and seller are encouraged to have their legal counsel review them. Structuring the legal documents using this method gives protection to both buyer and seller. This approach can save both parties money in legal fees.
10. Keep your eye on the ball. Don’t let your business performance decline because you’re too focused on the sale of your business. This will only give buyers additional negotiating power to lower their offers. Using a broker allows you to stay focuses and insure confidentiality of the sale.
If you talk with people that have a pulse on the small business resale environment, you will hear that the current market has improved much over the last two years. I contribute these positive market conditions to several factors including:
1. Better economic conditions – Overall, business performance has improved. Many business owners, including the growing segment of baby boomers have postponed their retirement and the sale of their business due to poor business performance. In years 2008 through 2011 we saw very few businesses exchange ownership. Businesses are now seeing growth and owners feel better about cashing out. There has traditionally been more buyers than sellers but analyst predict the market to move more in favor of the buyer as more baby boomers exit their business.
2. More buyers – Nationally and locally Murphy Business and Financial maintains a data base of individuals that have shown an interest in owning their own business. These potential buyers have requested that we contact them when any new listing comes available before it is posted on the national websites. We keep in close contact with the top buyers that have been financially qualified and that have shown a more aggressive desire to own their own business. This environment is good for selling and creates a sense of urgency for potential buyers.
3. Average valuation SDE multiples have improved – Each business industry has a “rule of thumb multiple” which is one method to value a business. In most industries this multiple is used as a factor of the net owner benefit. Simply contact our office and we can give you information about your specific industry. This information can be tailored to like kind businesses with similar sales volumes and profitability.
4. Banks are more aggressive for lending – Prior to listing a business, owners will receive a comprehensive valuation or Brokers Opinion of Value which is a very useful tool for sellers and potential buyers. Unlike other brokerage firms, this is included in our services. It’s one of many reasons Murphy has great success rates. This valuation is a 20 page professional document including much of the needed information to sell your business including:
- A recast of your businesses financials according to SBA’s guidelines.
- The calculation of four different and well accepted business valuation methods including Multiple of Earnings, Market Multiples, Buyers Test and finally, a combination of these three methods using a weighted approach. After listing a business, we send this valuation to 3 or 4 commercial banks for their lending qualifications. These banks will give general loan requirements for the buyer and basically pre-approve the business for a loan. Unlike years in the past, banks are actually competing for loans. This is good for both buyers and sellers and it also shortens the sales cycle.
Industry statistics show 55% of all small businesses being sold are to first time business owners. I spend much of my time during a business transaction assisting the buyer with – financing, real estate & lease negotiations, licensing & government regulations and putting these buyers in contact with the proper professionals during the due diligence period of the purchase. Many buyers are treading in new found territory and need a guiding hand. I was surprised when I found that SBA rejects 68% of loan applications because they are incomplete or do not have the proper information. A sure sign that buyers need assistance.
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. A broker will qualify each buyer so you know when you meet a potential buyer, you’re not wasting your time. 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 your life
- Desire to do your 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 (55%), 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 is probably 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:
- Desire to buy a business
- Urgency to buy a business
- Financial resources
- Ability to make his or her own decisions
- Reasonable expectations of what business ownership can do for him or her
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 customer base? Any customer that produces over 10% of sales?
- What is the debt?
- Will the seller train and stay on for a period of time?
- 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?