Selling Your Business
If your business has been
a success, you've probably
had to pour most of your
time, energy, and money into
it for what may seem like
forever. You may see your
company as an extension of
yourself, and it may be hard
to even imagine life without
it. In some cases your entire
family may have depended
on the business, discussed
it endlessly around the dinner
table, used it as an education
and a proving ground for
the children, and practically
made it into another family
member!
On the other hand, your
business may have been only
marginally successful, and
something you can't wait
to get rid of. Or, perhaps
you entered into the business
with the idea that it would
be a short-term opportunity
and that you'd sell out whenever
you got a decent offer.
Whatever your situation,
selling your business will
be one of the most important
things you'll ever do, because
unlike virtually every other
business decision you've
made over the years, you'll
only do this once. You'll
come out way ahead, both
financially and personally,
if you make an effort to
understand the steps in selling,
formulate your plan carefully
with the help of your business
broker, and, when the time
comes, take the time to negotiate
a price and terms that satisfy
your reasons for getting
out of the business.
Even if you think you're
many years away from selling
out, you should consider
what your heirs or successors
would have to do if you died
unexpectedly. If you don't
have a workable exit strategy
in place, you (or your heirs)
may have no choice but to
liquidate the business and
sell off the assets piecemeal;
getting nothing for the goodwill
you've built up over the
course of the years.
Very often a business owner
wishes to sell their business
because they are no longer
excited about it or it doesn't
challenge them anymore. Some
people want to sell to free
up the time and capital to
start a new venture that
has greater growth potential
going forward vs. the current
business. Selling a business
almost always opens up new
doors and allows the owner
new challenges for a greater
payout. This is clearly the
case for sellers under age
55 who are not ready to retire.
10 Steps to a Successful
Business Sale
Selling your business is
not an every day occurrence
and most owners may only do it once in their
lifetimes. Make the sales process easier
by considering the following
steps:
1. Price your business
realistically
There's no simple formula
for pricing a business,
but if you don't keep the price tag realistic
you won't sell it. Typically sellers are
caught up emotionally in
the business and think
that their business is
worth more than it is.
Determining the value of
a business can be complex
and it's wise to seek a
professional business broker
or appraiser to help you in the process.
2. Have your books current
and in order
You never know when a prospective
buyer is going to turn
up and express interest
in your business. Make
sure that all your financials
are up to date and that everything is in
order. Be prepared. Poor
bookkeeping has hindered
many potential sales.
3. Keep your premises ship-shape
and clean
Selling real estate and
selling a business have
a lot in common. First
impressions count. Give
your business 'curb appeal'.
Clear away any clutter
that has accumulated and
get rid of the dust. Tidy
up the office and storage
areas and make the place look fresh and clean.
A coat of paint is inexpensive and does wonders.
Make repairs to the building indoors and
out. Don't let a shabby
appearance discourage a
sale.
4. Sell when times are
good
The best time to sell is
when the economy is humming
along, your particular
industry is in demand and
when your business is turning
a healthy profit. In this kind of economic
climate buyers are motivated to buy. If you
know you are going to sell at some point,
keep an eye on favorable
economic conditions and
pick your time wisely.
5. Hire a good broker
A good broker will more than make up their
fee in a better price for your business.
Selling a business is a once in a lifetime
event for most sellers. Brokers do it
all the time. They have all the skills
and know-how to find qualified buyers and
to help you make the right decisions. It
is best to chose a broker with great "national" reach
for buyers. This will always give you the
greatest exposure and the highest offers,
especially if you live in a desirable state.
6.
Perform a calculation of
your net pay or "cash
flow"
At the end of the year
when you add up all the
money your business brings
in and deduct all the money
you have to pay out in
expenses to run the business,
what's left over is your
net profit or pay for tax purposes. Buyers
are very interested in this bottom line.
This included you salary,
depreciation, debt payments
and personal perks you get.
7 . Before you close
Before you close
on
the sale enlist the services of an attorney
and a tax accountant to structure the best
deal for you.
8. Get to know your buyer
Knowledge is power. The more you can find out
about the buyer the better chance you
have of discovering what 'buttons' to push.
Knowing what's important to a potential
buyer means that you can focus and highlight
those aspects of your business in an attractive
light that appeals to the buyer's agenda.
9 . Offer to provide buyer training
Buying a business is a big step, and
all buyers want as much assurance as
possible that the business has the
potential to succeed. Offering a buyer
training and support after the sale
closes can give the buyer just the confidence
he needs to move forward. This kind of
'hand holding' can mean the difference
between selling or not.
10. Confidentiality
Make sure that you minimize
the chance that employees,
vendors, and customers will
know you are selling. Choose
a broker that can protect
for this.
Time the
sale
Many business owners are unaware that "buyer
activity" and local and national market
conditions have more to do with your sale
price than any other factor. Sell when
buyer activity is high and buyers are calling
on you type of business or your industry
type. For example after 9/11 demand most
all industries fell off sharply. In late
2004 and all of 2005 buyer activity and
the overall demand for solid businesses
is very strong and the prospects are looking
good going forward. This environment is
better to sell in vs. 2002 and 2003. You
will get a higher price and better terms.
Also, banks and other lending institutions
are more willing to get behind deals
today than they were 2-3 years ago.
It's all in the eye (or
the pocket) of the beholder
When it comes right down
to it, what a buyer is
prepared to pay is the
only value that matters.
Cash flow is very important to buyers so
you need a broker that
can really bring out the
true owner benefits of the business. Also,
you need a broker that can build promising
and realistic growth projections and pro
forma documents so the
buyer can gain confidence
in the growth prospects of the business after
they buy it.
One
way of sprucing things up
is referred to as "recasting
financials". In order
to minimize paying taxes,
you've probably used strategies
like putting family members
on the payroll and/or used
profits to undertake capital
improvements just to name
a couple. Because of this,
your bottom line may look
less attractive than it
really is.
To show prospective buyers what they can realistically
expect in terms of income, a broker can adjust
your income statements to reflect what your
income would look like without your 'tax minimizing'
strategies. As stated above, your broker can
use these adjusted figures to project how future
income will look for the next five years, (making
reasonable assumptions about future income,
expenses etc.).
Be sure that if you do recast
your financials, that you
are upfront and reveal to
the potential buyer that
your account history is altered
and why. The last thing you
want is to lose a sale because
a buyer thinks you are trying
to cover something up.
Keep it to yourself until
the time is right
When you divulge more than
is necessary to a potential
buyer you put your business
in jeopardy. A good broker
can guide you here. First,
be sure that potential
buyers are qualified before
releasing proprietary information
to them. Then, make sure
that the timing is right.
Divulging information regarding your clients
or your staff prematurely, can end in the
so-called buyer backing
out of the sale, stealing
your accounts or your employees
or both, and leaving you
with a less attractive
business to sell...something
to think about.
Seller financing can make
$ense
Taking back a mortgage
for all or part of the
sale price of your business
can be a win-win situation
for both you and the buyer.
The buyer is happy because
it's often difficult for
him or her to get traditional
financing from banks due
to stringent lending criteria.
You're happy because your
business is suddenly more
attractive and easier to
sell. Another bonus is
that you may get a tax
break by reporting some
of your capital gains using
the installment method.
This method lets you defer some of the taxes
due on the sale until you get paid in the
course of future years.
Selling a Business - Nine
Steps for Maximizing Sale
Value
You started your company
20 years ago "in your garage",
worked many 80 hour weeks,
bootstrapped your growth,
view your company with the
pride of an entrepreneur,
and are now considering your
exit. The purpose of this
article is to help you evaluate
your company as a strategic
acquirer might. From that
perspective we will ask you
to focus on ten critical
areas of value creation.
The benefit to you is that
the better your performance
in these areas, the greater
the selling price of your
business. The most likely
result is that you will sell
at the high range of the
multiples normally associated
with your industry. For example,
during the last 18 months
similar companies have sold
at an EBITDA multiple of
between 4.8 and 5.7 times.
Moving your company from
the low end to the high end
of that range can result
in a significant swing in
transaction value. If your
EBITDA were $2 million, the
low price is $9.6 million
and the high price is $11.4
million. The Holy Grail in
selling your company is when
an acquirer throws out the
traditional multiples and
acquires your company based
on Strategic Post Acquisition
Performance. This is how
a good broker will try to
position your business in
the market. Again, this is
to ensure the greatest sale
price. Below is our list
of STRATEGIC VALUE DRIVERS:
1)
Explain the appropriateness
of your location to the
business's future growth.
2)
Explain the appropriateness
of your lease with
regard to the cost, term & options,
parking, exclusivity
or non, space and
expansion.
3)
How important is your
location to your customers?
4)
If you were to remain and
money was not an issue,
what would you change about
your location? The business?
Growth Potential
1)
Describe how changes in the following
scenarios might affect your business's
growth potential.
2)
Customer needs & tastes.
3)
Acquisition of a competitor.
4)
New equipment or concepts
on the horizon.
5)
New products or services
on the horizon.
6)
Competing franchise
that is not in your service
area at present?
7)
How much does your
average customer
spend with you per purchase?
8)
What is the quality and
quantity of the items purchased?
9)
If possible, assess how
much time per dollar purchased,
you or your staff spends
with each customer.
10)
What is the ratio of
inventory on hand to
gross sales? Where
could it be improved for
more profit?
Business owners don't often
have direct control over
interest charged on loans
and other types of credit. But interest
rates become excessive when you have borrowed
more than you can handle, or have bills
from suppliers that are overdue.
Many businesses have adopted a 'just
in time' approach to inventory control
by purchasing only what they need when
they need it, rather than stockpiling
inventory. Inventory costs money. Why
have it sitting around if you aren't
using it?
In order to compete effectively, you
need to keep up with technology and adopt
labor saving devices that allow you to
keep pace with the market place. As the
years go buy new technology and equipment
brings opportunities to work smarter.
This doesn't mean you should buy every
'new fangled' thing that's offered, but
if a new piece of equipment or technology
means that you can compete on the same
level as your competitors, you should
carefully consider the implications and
act accordingly.
The old saying "don't put all your
eggs in one basket" may be a cliché,
but truer words were never spoken when
it comes to business. Experts suggest
that no more than a third of your business
should come from one customer. The
wise business owner devotes time and
attention regularly to attract new
clients. It might even be worth it
to hire a marketing consultant part
time who can work to expand your client
list. If you rely on one big client
and that client cuts back, retires, or
sells out, then you're in trouble.
Smart business owners know that employees
are the key to a successful operation.
Your strength is in your people. If the
mood is somber and the complaints are
frequent, you have a morale problem.
If suddenly people are leaving and
turnover is high, it will be reflected
in the quality of the work or services
you provide. It won't take long before
your customers notice. Find out why
your employees are unhappy. It likely
has something to do with the workplace
environment.
