Business owners looking to sell their businesses often make some common errors when communicating with potential buyers, which can be a significant hindrance in successfully closing a deal. If you're ready to put your business on the market, knowing what buyers want and need will help you to make the most of your business sale and attract the best offers. In these trying economic times, this knowledge is essential. Many seller difficulties result from not being sufficiently aware of the following tricks of the trade:
Get Your Business in Shape
Potential buyers want to know that your business has good characteristics, such as location, a pleasing office space, high revenue stream, strong management, loyal client base, and a growing market base. Likewise, if you can convince your potential buyer that there are few risks incurred by buying your business, you're on the right track. That said, make sure your accounting books and financial statements are in order. If you're organized enough to present them with all the required information upfront, your potential buyer will feel more secure in knowing the business is well-kept and offers great potential.
Make sure that you run your business in a steady manner well before considering a sale, without making any drastic changes that could result in revenue surprises. Nothing will make a buyer more hesitant than seeing an unexpected earnings reversal or irregular profitability that aligns with your for-sale listing date.
Knowledgeable buyers will conduct due diligence before making a business purchase, so don't hide any problems that your business has had, or currently faces. The buyer will eventually find out, I guarantee you. And when they uncover problems that you did not reveal upfront, they'll likely think you're hiding other things from them. And don't assume that you're in the clear if the sale has already been secured. If such problems are discovered after the purchase, you can be sued for fraud. So, be honest about the businesses risks and liabilities, as well as the real reason you're selling.
Don't Be Greedy
Price is usually the first factor a buyer uses to decide how interested they are in a business, much more so when access to credit is tight. If they deem the price too high, they'll typically dismiss your listing rather quickly, and focus on other businesses with more realistic prices. Buyers know negotiation is always an option, but initial price makes a big impression. Online valuation reports are a cost-effective alternative to a professional on-site valuation, and comparable businesses will give you a good idea about a suitable price point for your services and market area. BizBuySell.com has a Valuation Report that starts at $19.95, priced by number of local comparables available in our database.
If you're adamant about an all-cash sale, buyers will likely shy away. All-cash sales are very rarely to your benefit, mainly because they can put you in the position of having to pay unnecessarily high taxes for collecting all sale proceeds as income in a single year. It's in your best interest to accept a loan or deferred payments.
Establish a Business Transition Plan
Make sure the potential buyer can clearly visualize owning the business. If they think clients, day-to-day functions and even the business location prove unstable, they'll assume it's too much of a risk. Make sure that transferable agreements commit clients to the business, and non-compete agreements are recognized for key managers. It also doesn't hurt to present your business and marketing plan, were you to continue the business. While you should never promise the buyer a certain level of prospective sales or profit, presenting a plan can assure them you have the interests of the business in mind and are willing to offer your best prediction.
It is important, especially for those who own a retail business, that you have a lease that extends for a minimum of five years. If not, buyers will be hesitant to buy and financial institutions will think twice before giving out loans. A short lease signals that the business may prove unstable, so it is essential that you try to secure a transferable lease and lengthen the term, if possible.
Also, at the appropriate time, it's important to notify key management and employees that you will be selling the business. Being honest with them upfront will help to encourage them to stick around with a new owner. In turn, you can ensure the buyer that they will continue to have strong and experienced leadership on-board right from the start.
Make Sure the Buyer Qualifies
Don't wait forever to qualify a buyer. Giving out business details without doing so will sometimes make the buyer think you are too eager for the sale, and not adequately making sure the business is transferred to a competent owner. Screen and request a confidentiality agreement and financial background info as soon as possible. The only buyers who will balk at buyer-qualification requests will be the ones who aren't qualified buyers.
Communicate With Buyers Early & Often
In an age where instant gratification is widespread — in everything from e-mail to fast food — buyers expect immediate replies to their questions. In fact, 90 percent of initial sales inquiries are derived from online searches. If they can send a quick inquiry, they expect a quick response. Make sure you don't disappoint, as delaying will often kill deals, even if it's just a quick note to say: "I'll get back to you with that information next Tuesday." Postponing your response often gives buyers the impression that you're stalling to come up with a satisfactory answer to hide a business inadequacy, even though that may not be the case. They want assurance that you can answer any of their questions honestly and succinctly.
Make sure to give buyers what they need to fully assess their purchase decision. If the potential buyer becomes frustrated with you, they'll likely think it's an early indication of how they'll become frustrated with the business itself. Individuals new to buying a business often do not know how or when to buy, what the business is worth, and have fear over making a mistake. Open communication and honesty will help put them at ease. Answer any questions, and build a relationship of trust.
Realize Negotiation is Necessary
According to our database of more than 30,000 small business transactions nationwide, sale prices end up at around 80 percent of the asking price, so know that you will be expected to negotiate. While some potential buyers will give you a low-ball offer of 50 percent of the asking price, don't be alarmed. Make a counterproposal. Offering seller financing will also help to entice them into the purchase. This way, you assume some of the responsibility for the buyer's investment.
While the current economy may suggest that now isn't the right time to sell, those that prepare adequately and act carefully can still get a deal done at a good price. Preparation, communication, and flexibility are increasingly important in tough economic times.
Many recently laid off individuals are deciding to become small-business entrepreneurs to gain more control over their future, and buying an existing business is top of mind for most of them. In a time of great economic uncertainty, however, many of these aspiring entrepreneurs are now dealing with a difficult decision: Should I buy a business now or wait until the economy turns around?
Without question, the recent economic downturn is making many entrepreneurs hesitant to enter into a marketplace filled with higher risk and lower profit margins. Many prospective business buyers are heading to the sidelines, deciding to hold off until we make it through this recession, and, to a certain extent, that's completely understandable.
After all, buyers have so far taken significant hits to traditional sources of financing, such as their home equity and mutual fund investment accounts. This, combined with a general lack of accessible credit, would suggest that it's a tough time to pull together a deal to buy a company.
Common wisdom fails in one critical dimension -- it's dead wrong. In my mind, it's actually a great time to buy a business.
Here are four reasons why now is not the time to be gun-shy about buying a business:
1. Prices are low
While many of the indicators that are used to track business valuations suggest that sellers can command a premium for good businesses in this market, there is at the same time strong evidence that there are quite a few distressed sellers out there who are willing to sell at a lower price than they might otherwise get in a booming economy.
For many businesses that are selling now, there is a need to sell. Those businesses that have decided not to sell can wait until the economy turns around, but a significant number of businesses for sale that are available right now have a higher sense of urgency.
For would-be buyers, this means there are deals out there. If you wait until the economy improves and credit eases, you will miss this window of opportunity. Prices will rise during economic recovery and more buyers enter the market.
2. Seller financing is available
I know what you are thinking: "I'd love to buy a business, but it doesn't seem like I can borrow the money to do it." The answer to this conundrum is seller financing. As you might know, seller financing is when a seller, rather than a professional lender, assumes responsibility for a percentage of the buyer's investment.
Historically, seller financing typically comes into play when a buyer is unable to secure financing at the owner's asking price. The business owner then has two options: he can either lower the asking price, or work with the buyer and provide seller financing to overcome a potential deal-breaker.
These days, many sellers are offering seller financing before they even meet a buyer. Sellers know that banks are not lending, so many are willing to finance the deal themselves. This means you can buy a business right now even if you cannot get bank financing. So why wait until the economy turns around?
Believe it or not, you can usually get a better rate from a seller than you can from a bank. You have considerably more leeway to negotiate the right down payment, the length of the loan, monthly payments and interest rates. Plus, if you pay the loan off early, many sellers also often accept a discounted balance.
One of the most productive avenues for finding a seller-financed company is through online resources like BizBuySell.com. Business listings often contain information about the possibility of owner financing. You should get professional legal and financial advice, however, to ensure that your financing agreement is airtight.
3. SBA loans are coming back
We all know the Small Business Administration backs loans available for start-ups. It's also been widely reported that the SBA loan program has stagnated over the last few months. That's because, unfortunately, SBA lending has become unprofitable for many lenders.
What you may not know is that the agency recently took steps to make SBA loans more profitable for banks, and they have eliminated a variety of other obstacles to government-backed lending. In theory, this should mean that your local banker will now be more willing to sit down and discuss the SBA's 7(a) loan program with you. So, credit may quickly become more available than it has been recently. That's one more reason I think buyers should be actively looking for businesses to buy.
4. There is no time like the present
Finally, I recommend that buyers not wait for the economy to turn around simply because the best entrepreneurs don't wait for perfect market timing. Firms like Microsoft and Apple were started in the midst of the recession in the 1970s.
In fact, there are many reasons that businesses that start in a down economy do better than those that don't. Market share is up for grabs because buyers of products and services are scrutinizing expenses. That gives new business owners a big opportunity. Furthermore, suppliers may be willing to offer great prices because, in this downturn, they are hungry for business. It's also a great time to bring on employees. There are many talented individuals looking for work now, and they may be available at more reasonable rates. That's not going to be the case after the economy turns around. Buyers who learn how to focus on revenue growth and to closely manage expenses during tough economic times can leverage those skills for greater business success as conditions improve.
Remember, when shopping for a business to buy, you are under no obligation to make an offer. So there's really no harm in browsing. And, with a little luck, you may find your dream business at a great price.
With the presidential election rapidly approaching and the recent turmoil in the stock market, it's safe to say that thousands of business owners are wondering how these events will affect the valuation of their businesses and their ability to sell.
While it's true that some business owners are holding on to the business until conditions improve, you would think there would still be legions of baby boomers and other owners who want to sell -- and want to do it soon. That may not be the case, however.
Last month, BizBuySell.com conducted a survey of 288 business brokers, and the results indicate the majority of brokers haven't seen an increase in the number of businesses for sale. In fact, 42 percent said they have been seeing fewer listings than one year ago, and 26 percent said listings have stalled.
"Our listing base is down 50 percent from normal," said one broker. "Business owners are not sure they want to sell in this down market."
In addition to the overall finding of decreased listings, brokers weighed in on the availability of small business loans and the presidential candidates. Nearly 90 percent of business brokers who responded to the survey said they have been finding it difficult for client business owners and buyers to get access to business loans, accounting for much of the challenging conditions in the business-for-sale space. Sixty-eight percent of surveyed brokers said they began to notice access to loans decreasing in early-to-mid 2008.
In late September, the majority of business brokers polled felt that Republican candidate John McCain is much more likely than Democrat Barack Obama to provide relief to the small business economy. In fact, 56 percent favored McCain, 24 percent chose Obama, and the remainder had no opinion or believed neither was an ideal option for the small business community.
Another September survey, this one by online payroll service SurePayroll, indicates how small-business owners likewise favor McCain. That survey found that 64 percent of small-business owners believed McCain is better suited to benefit small business.
It seems McCain's messaging, which has focused on protecting the earnings of small-business owners -- made even more prominent by this month's spotlight on "Joe the Plumber" -- is resonating within the small business community.
While the current state of the economy might indicate a bleak outlook for small-business owners looking to sell, third quarter 2008 BizBuySell.com listing and sales data points toward good news for sellers. The data, based on a representative sampling of more than 50,000 business-for-sale listings on the site and 1,400 closed transactions reported by business brokers across the country, suggests that business valuations are actually on the rise. This means a seller can get more money today for each dollar of revenue or cash flow than they could one year ago.
One reason why this is the case is that weaker businesses are waiting for a change in the economy to sell, while strong businesses are being put up for sale in greater numbers because they still command good prices. In addition, as unemployment numbers grow, more people are looking to buy businesses and control their own destiny.
"Even though it is more challenging for businesses in most sectors to maintain an increasing, or at least stable positive cash flow, those that do are positioning and differentiating themselves much easier," said one broker. "With such businesses that we are representing, we are also seeing a stronger field of qualified buyers than we have seen in a long time."
It's not uncommon to hear about the adverse impact the current down economy is having on business exit strategies. Don't believe everything you hear. Data we recently collected at BizBuySell.com, based on business-for-sale listings and transactions in the second quarter of 2008, tells a different story.
According to our data, small-business valuations are actually on the rise nationally. The median asking price for small businesses in the U.S. has jumped to $255,000, a $5,000 increase from the same time last year. Revenue and cash flow multiples for sold businesses are also up from last year, suggesting that it is indeed a seller's market.
So what does this mean for a small-business owner setting out to sell independently?
Many people who have recently been laid-off are looking to become entrepreneurs, and are the very people who are helping keep businesses-for-sale in high demand. This means for-sale-by-owner, or FSBO, sellers have more leverage than you might think. Although many sellers are initially intimidated by the apparent complexity of listing a business without the professional guidance of a business broker, FSBO listings certainly have a niche in the market that is not going away any time soon.
It's not that there's widespread dissatisfaction with traditional brokerage. Business brokers play an invaluable role in assisting would-be sellers, and that's never going to change. However, we are seeing that more and more sellers want to handle their business sales themselves. The trend is similar to what has happened in the real estate market where many intrepid sellers have opted to go it alone.
Sure, there are often added unanticipated hurdles with a FSBO listing, but those who choose to go the independent route have more resources than ever before.
Selling a business through a professional broker is still a valued and effective method, but for businesses that want to take a DIY approach, here are a few tips for achieving the greatest results:
With today's technology, individuals are now able to market their companies like never before. Online business-for-sale Web sites allow business owners a chance to get that "hands-on" connection to their business sale. It serves as a preexisting conduit that links sellers with potential buyers, thus helping to eliminate the need for some of the services provided by a broker. Of course, a broker comes equipped with additional marketing and negotiation expertise, but DIY-friendly Internet resources offer multiple listing options, valuation resources and advanced search features that enable a FSBO seller to obtain many necessary real-time tools.
Recognize Your Limitations
FSBO sales are perfect for sellers who feel they best know the strengths and limitations of their company and can effectively facilitate its sale. Plus, these sellers avoid having to pay a broker's commission. Still, it's important not to feel too sure of your expertise, as a business sale is a specialized transaction that demands a certain level of know-how. It may be helpful to consult with a lawyer and an accountant to enhance your strategies and ultimately arrive at the best deal for your business.
Keep Your Emotions in Check
FSBO selling can also come with emotional risk. Some business owners are apt to become so emotionally involved in the deal in that they cannot offer an objective perspective when negotiations escalate. If managing your emotions isn't possible, it might be time to bring in a qualified broker to act as a buffer between you and the buyer.
What does the future hold for independent sellers? It's difficult to say, but one thing is for sure: Greater numbers of buyers and sellers alike will turn to the Internet as a valuable resource in facilitating business sales. FSBO sellers must realize the potential of new technology and utilize the Internet to its full potential in order to succeed on their own.
It's also a safe bet that business brokers will maintain an active role in small business sales, as not all business owners are ready, or willing, to handle the process on their own.
Properly making or evaluating an offer to buy a business starts with understanding the basic components involved. From there, negotiations can begin.
An offer to purchase a business can come in many forms, from simple oral offers, to presentations, term sheets or letters of intent. To effectively negotiate an offer, owners and buyers must first understand the various forms it can take, the general processes and procedures that usually follow, and other basic components.
The most common method for presenting and documenting a proposed deal is by using a Letter of Intent (LOI) or Term Sheet. A Term Sheet is typically a bullet list of terms and is often written in the third person. A Letter of Intent is usually written from the buyer to the seller. Often, an LOI is more detailed than a Term Sheet, but this is not always the case. A good example of where a Term Sheet is more appropriate than an LOI is where the principal deal terms have already been agreed upon by the parties, and the purpose is to document those terms. Often, an M&A advisor or other third-party representative drafts the Term Sheet as a memorial of the terms that have already been discussed and agreed upon. By contrast, an LOI is often used as a proposal, usually from the buyer to the seller, which is meant to start negotiations.
Other methods of making an initial offer include oral offers and strawman offers. A strawman offer, whether oral or written, is a simple list of a few items that are often used to determine if the parties are in the same ballpark with regard to valuation. A Letter of Interest is also used on occasion to precede a Letter of Intent, and is simply a more formal version of a strawman offer.
What Should be Covered?The Letter of Intent or Term Sheet is the basis for negotiating a definitive agreement and, therefore, certain things will remain "to be determined" during the due diligence period, and covered in the definitive agreement. What follows are some of the major sections of a good LOI or Term Sheet, in addition to many customary boilerplate sections.
Purchase Consideration and Equity Participation: This section should include not only a "price," but the structure of the price. Is it all cash? Is the seller going to hold a note? Is a portion contingent on future events (an earnout)? Will there be a holdback? Will existing owners or management get stock in the buying company or hold stock in the company being acquired? The fine details can be covered in the definitive agreements, but all of these questions should be answered by this section of the LOI or Term Sheet.
Closing Adjustments and Balance Sheet Treatment: This section should outline all known adjustments that are expected to be made at closing. There will certainly be other things that come up in due diligence, but a reasonable outline of how to treat the Balance Sheet and items that fluctuate, such as inventory, liabilities, pre-payments, accounts receivable, and so forth, should be covered.
Stock, Assets and/or Liabilities being Transferred: The opening paragraph will most often state whether the transaction is proposed to be the purchase of stock, membership interests, or assets. However, a section should be dedicated to exactly what is being purchased and note any excluded assets or liabilities.
Consulting or Employment of Owners: In most transactions, even an exiting owner will stay on board for some period of time, whether as a consultant or employee. The details are sometimes better left to negotiate after the LOI or Term Sheet is signed, however important expectations should be set in the LOI or Term Sheet to ensure the deal does not fall apart later because expectations were misaligned in this area.
Restrictive Covenants and Reps and Warranties: Many pages will be dedicated to such topics as non-compete, non-disclosure, and representations and warranties in the definitive agreements. These provisions do not have to be completely hashed out in the LOI or Term Sheet, however, a framework should be included to make sure, for example, that the buyer isn't thinking of a 5 year non-compete when the seller is thinking one year.
Representations and warranties will cover many things and often make up a large portion of the agreements. They are often statements one party makes to the other, such as a representation that all financial information provided is true and correct, which are then backed up by such things as indemnifications and hold backs. The Letter of Intent or Term Sheet usually simply notes that customary representations and warranties will be included in the definitive agreements.
Conditions and Due Diligence Provisions: Since the LOI or Term Sheet is a framework from which to negotiate, it should contain detailed provision for due diligence, conditions that affect the LOI or Term Sheet and any known conditions to close the final transaction. The due diligence provision should set forth the items to be reviewed by the buyer, the time frame, and any special provisions such as when contact with employees and customers will occur. Likewise, any known contingencies, such as the buyer obtaining financing should be stated.
Closing Details and Costs: Closing dates are like baby due dates. Closings happen early and late, but rarely on the date planned. However, it is still important to select a target time frame in the LOI or Term Sheet and outline any known provisions such as whether it will happen over time (a progressive close), whether there will be a escrow period, or if everything is expected to happen on a single day (a sign and close). In addition, the LOI or Term Sheet should clearly set forth who pays what costs associated with due diligence, closing, and so forth. Usually, each party bears their own expenses.
Exclusive Negotiations: More often than not, a buyer will require that once a LOI or Term Sheet is signed, that the seller negotiate exclusively with them and no other buyer. These provisions should be spelled out clearly and in detailed fashion, including upon what provision or dates the exclusivity no longer applies.
Binding and Non-binding Sections: In most transactions, a Letter of Intent or Term Sheet is a non-binding document, which means that it sets for the parties understanding to enter into more formal negotiations, due diligence and ultimately the definitive agreements, but does not legally bind or force the parties to move forward with the transaction. It is important, however, that the LOI or Term Sheet be written in a very specific way. Some sections, such as due diligence provisions, confidentiality, and exclusive negotiations may be binding, while others such as purchase price may not. The LOI or Term Sheet must state which sections are binding and which are non-binding.
If a legally binding contract is desired, then a full blown stock or asset purchase agreement should be used and drafted by an attorney.
Whether drafting a Letter of Intent or evaluating a Term Sheet, part of the art is balancing the needed details that should be covered at this stage and not getting bogged down with those details that should be left for the definitive agreements. In any event, if you are sure to address the items listed above, you'll be off to a good start.
- Getting Your Small Business Sold
- Is Now the Right Time to Buy a Business?
- Selling in Uncertain Times
- For Sale By Owner
- Making and Sizing Up an Offer
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