It takes more than setting the right price to acquire the ideal match for buying your business.
You want a big payoff by selling your business. But you don't want just any buyer for the business, you want the most qualified buyer. Easily, you could end up getting multiple offers from buyers that aren't offering the most money. Matching the right buyer with the right business is a painstaking process and the transfer of business ownership is time consuming. However, the more prepared you are the more successful the outcome is likely to be.
Before seeking a buyer there are some important questions that sellers should ask themselves. First off, can your business be sold? Several elements of a business make it an attractive buy. It has a solid history of profitability, for instance; a competitive advantage; a large and loyal customer base or long-term contracts with clients; and, growth opportunities. Other considerations are brand loyalty, intellectual property rights, licenses, or issued patents.
For both seller and buyer the bottom line is what's your business worth? This is evident in the valuation. You of course want maximum value for your business but setting an asking price too high could raise a red flag, scaring away potential buyers. But if you price it too low, you'll lose out.
According to the International Business Brokers Association, a company's value is determined by a compilation of factors such as sales, earnings, performance, market outlook, personnel, net book value, and the fair market replacement value of equivalent operating assets. Value is also influenced by intangible assets such as a company's brand image, industry reputation, and good will.
'It basically comes down to what the buyer is going to value and how much the buyer is going to make in future earnings,' says Andrew R. Cagnetta, president and CEO of Transworld Business Brokers in Fort Lauderdale, Florida. 'Future earnings are everything.' Cagnetta notes that some businesses earn more money after they have been acquired. 'The way that buyers value future earnings is to look at past earnings.'
Businesses are typically sold for a multiple of the earnings or cash flow, says Ken Oppeltz, managing principal at VR-Vanguard Resource Group in San Diego, California. 'Things that affect that multiple could be the type of industry; manufacturing tends to get a higher multiple than retail. Anytime you own the product or patent that is much more desirable.' Other factors are whether the business is trending up, down or flat. 'If a business is losing 20 percent share or 20 percent of its revenue over the last couple of years, then it isn't going to get the same multiple as a company with revenues that are flat or trending up,' says Oppeltz.
To get a fair and reasonable price for your business, you need good negotiating power working on your behalf. Consider hiring an intermediary, which depending on the size of the deal could be a broker (usually $10 million or less), mergers and acquisitions professional (more than $15 million), or an investment banker (a large or public company). The intermediary's job is to determine the appropriate value for your business and to find the perfect buyer to purchase it at the asking price.
Finding the right buyer is the key to a smooth transaction; it also will contribute to the continued success and growth of the business. Even if you work with an intermediary, it still behooves you to understand the process. Here are a few guidelines to help you navigate through the murky waters.
1. Who Are Your Potential Buyers?
Anyone could be a prospect. A buyer can come from your employees, customers, suppliers or competitors, says Cagnetta. People buy businesses for different reasons, and this will affect how you pitch your business to them. But generally buyers are divided into two groups: strategic and financial buyers. Strategic buyers will look at how well your business fits into their own company's long range plans. 'This could be one of your competitors or a large business that wants to enter a new market or offer a new product. If you have what they want, strategic buyers will generally pay you more than other types of buyers,' adds Cagnetta. Financial buyers are more interested in your company's profitability and stability. They could be companies or individuals with money to invest. Some will want a solid, well-managed company that requires little oversight while others may specialize in turnaround situations and will look to buy a business that they can tweak to turn a profit.
Dig Deeper: 4 Traps to Avoid When Selling Your Company
2. Where Can You Reach Potential Buyers?
If your business is well known then word that it's for sale may be enough. But more than likely you will need to cast a wider net. You could put out feelers to people you know or use such outlets as trade publications or newspaper advertising. There are websites such as BizBuySell.com and BizQuest.com. But a broker, M&A advisor or investment banker has access to deal flow and can sift out and approach potential buyers confidentially. You don't want to risk loosing valuable clients, vendors or employees because of negative connotations that might come from putting your business on the block for sale.
3. Why Should You Qualify Potential Buyers?
Documents like confidentially agreements and financial background information are standard documents for prospective buyers. A broker or investment banker can pre-screen buyers to make sure they are financially qualified to purchase the business. This includes reviewing ownership, available funds to invest, sources of financing, and any judgments or bankruptcies filed. You also want someone who has the business knowledge, management experience and complementary skills to take the company to the next level.
Find out the primary reason for that individual's or company's interest in buying your business. If the buyer is another company, make sure there will be a synergistic fit. If it is a private equity group, look at their past experience in acquisitions. 'I tend to look at whether the company has long term employees; people who have been there 20 years or more,' says Oppeltz. This signifies the CEO is probably a good boss to have that kind of loyalty. Oppeltz also does Google searches on individual buyers to make sure there aren't any scandals or arrest records. 'I also like to see someone who is actively involved in their community and does charitable work. And that they have a track record of success in their other ventures and jobs.'
Dig Deeper: How to Squeeze the Best Valuation Out of a Buyer
4. How to Look Good for Potential Buyers?
Selling a house is not the same as selling a business. But just as sellers stage a home to make it more appealing you need to get your business in good shape before you approach potential buyers. Your books should be in order for inquiring eyes to review. Have in hand before you go to market both current and three years' of profit and loss statements, balance sheets, and full tax returns. In addition to listing assets and financial information, include projections for future earnings. Create a selling memorandum which starts with an executive summary that tells potential buyers the key elements of your business; provides a list of your products or services and an overview of the industry; and, explains why you are selling the business, which should have a positive spin on it. In addition, you want to get the physical business cleaned up and ready to show, says William Bruce, president of the American Business Brokers Association. 'It's not just about the numbers; first impressions count. Make sure the business had good curb appeal.' This includes disposing of unproductive assets or unsalable items (e.g., a broke down truck sitting in the warehouse).
Dig Deeper: 8 Questions You'll Get When Selling Your Business
5. What to Expect Out of The Deal?
There are some basic decisions you must make like will you offer seller financing; will you sell the entire business entity or just assets; will you keep any assets; will the buyer likely retain or replace staff; will you maintain a minority stake of the ownership; will you be expected to put in a year of transition time after the business is sold. Don't make the mistake of waiting until after the deal is done to remove assets that are your personal property. 'I see people argue over antique mirrors in their office,' says Cagnetta. Unless specified, 'When a buyer walks in the facility, he wants to own everything he sees.'
Dig Deeper: How to Protect Company Secrets During Merger Talks
6. When Are You Ready to Close The Deal?
The average house will sell in four months. It may take nine months to a year to sell your business.
Once a buyer presents an offer of purchase, you may accept the offer, counter, or reject it entirely. The agreement becomes a binding purchase offer and sale once all parties agree to the terms and conditions; the buyer does due diligence inspecting all aspects of the business operation; and all contingencies are removed. Sound sales strategies will bring you the optimum price for your business, says Bruce.