- Your reason(s) for selling your business and your future goals need to be clear and well thought out before you try to market your business. A prospective buyer will want to know why you are selling and may be curious about what you intend to do after the sale.
- A poor economic climate and/or a peronal emotional dilemma can cause you to accept a deal that is not in best interest for you or for a buyer. It is important to market your business for sale at a time when you are not under pressure to sell.
- As soon as you have a firm objective to sell, gather key information to facilitate the marketing and divestiture process:
- Three years of profit and loss statements.
- Three years of Federal income tax returns for the business.
- A complete list of business assets (fixtures and equipment).
- All lease agreements and related documentation (property and equipment).
- List of loan amounts and payment schedules.
- Copy of franchise agreement (if applicable).
- Total worth of the assets.
- Names of outside advisors (accountant, attorney etc.).
- When you decide to engage a professional to help guide you through the process of marketing and selling your business, you agree to become part of a team effort to make it happen.
- Confidentiality will ebe emphasized by the professional as he works on your behalf to find a buyer just as you will maintain confidentiality about a pending Sale as you go about your day-to-day business operations.
- It is very important that you look at your business as if you are a potential buyer. What do you see? This may help you determine what you need to work on or what you can do to improve a first impression.
- As you navigate through the process of divestiture, keep the following in your focus:
- Keep normal operating hours.
- Keep your facility and your equipment in top condition.
- Remove any superfluous items or items not included in the sale.
- Spruce up the exterior and the interior of your property.
- Engage a seasoned professional for the best possible results. To parphrase David Gumpert, former Harvard Business Review associate editor, experienced lawyers know the necessity for some risk in negotiations, whereas inexperienced professionals are often reluctant to advise their clients to take any risk.
- Flexibility and patience will pay off in the long run in getting the best deal. The right buyer may be better than a higher price. You have probably spent years building your business and yoiu certainly will want it to continue to be successful.
- A successful deal is created when the transaction represents a win-win where all parties walk away happy.
Increasing the price of your products or services is, in most cases, the most difficult decision a business owner has to make. Looking at the negatives is easy.
• Our business is too competitive to increase prices.
• Our customers/clients are used to our pricing.
• Customers are too price-conscious.
• We won’t be able to get new customers/clients.
• We are known for low prices.
• We have a lot of repeat customers, they won’t pay more.
The list of reasons why prices shouldn’t increase could go on and on. The fear is always that people won’t pay the increase and profits will suffer.
Before considering a price increase, one must look at their current pricing method. Do you work on a cost plus a certain mark-up? If you use a mark-up percentage, are all items marked up by the same percentage? Do you try to maintain a price comparable to the competition? If you work on an hourly rate, for example consulting, when was your last increase? Have costs increased and have you increased prices to compensate for them?
Looking at the positives is also easy. Profits will increase; and the price of the business will increase based on the increase in sales and profits. Funds will be generated to do that advertising or promotion you have always wanted to do. With increased profits you can hire that extra salesperson you know will increase business; you can install the technology you know will increase service and lower costs.
As Ravi Mohammed said in his book, The Art of Pricing, “Let me ask you, will a 1% price increase really cause your customers to stop purchasing from you?” A 1% increase on a business doing $5,000,000 a year is $50,000 to the bottom line. On a business with sales of just $500,000, a price increase of only 2% would bring in $10,000 to the bottom line.
One does not need to increase prices across the board. On fast-selling items, increase the price more than on slow-moving items. By doing so, you can test the waters on increasing prices. As Ravi Mohammed also points out, “McDonald’s profit on hamburgers is marginal, but it has substantial profits on French fries and soft-drinks.”
You many decide not to increase your prices, but at least you have taken a look at your pricing policies.
When is the last time you reviewed the lease on your business premises? When you signed it years ago? There are some important reasons that should prompt a business owner to revisit the terms of his lease. If you can’t assign your lease to a new owner, you may not be able to sell your business. A similar concern is that if you can’t assign the lease, it may cost you a lot of money. This means that the landlord may want what could be termed as a “transfer” fee; or the seller may have to reduce the price accordingly. Whether you are thinking of selling or not, it is a good idea to review your lease and the transfer of lease provisions.
It’s also a good idea to check what happens at the end of the lease. Is there an option to renew and if so, how soon before the termination of the lease do you have to notify the landlord? And, just as important, do you want to stay, or is it time to move on?
A recent article in the New York Times titled “Thinking Past Location in Finding Space” said: “With rent typically the second largest expense after salaries for small business, and with office occupancy costs up sharply in many markets, a simple miscalculation can cost an entrepreneur her business.” An existing lease may make it difficult to negotiate a lower rent with the landlord, but it may be worth a try. If the rent is benchmarked with similar businesses, a landlord may be convinced to make some adjustments. Landlords don’t like late rental payments and they especially don’t like going through the eviction process.
If you are just now looking for space for a new business or if it’s time to move into new space, here are a couple of things to keep in mind when reviewing a new lease.
- The first thing to do is to find an attorney who is experienced in leases—this will be an excellent investment.
- If the business requires a lot of space or if location is critical, engaging a commercial real estate broker who represents tenants is also an excellent investment.
- Keep in mind that landlords want to pass on as many of the costs of leasing property as they can. Taxes, landscape upkeep, parking lot maintenance, shopping center advertising and promotion—the list is endless. The good news is that if they are looking for tenants they may negotiate on some of the items.
- Always ask the landlord for enough free rent to pay for the move into the new facilities or ask to have the premises remodeled for your particular usage.
- Make sure the space works for your business requirements. Is the parking sufficient? If the premises are inside a building, do the hours it is open work for your business? Do the premises have the necessary hook-ups for your needs? And, most important, does the space under consideration allow you to expand, grow – meet new requirements, etc?
By following the points outlined above, your new business or your new space should allow you to build or grow your business. If you’re in an existing space, some of these strategies may allow you to renegotiate your existing lease, or make some beneficial changes when you renew it.
The obvious answer is probably that most people are looking to buy a business that makes a lot of money. But the real answers may surprise you. Here is a list of just a few that buyers have mentioned:
• Pride of ownership
• A business that looks like fun to own and operate
• Happy employees
• Financial records that make sense
• Good growth prospects
• A well-known or popular business
• A good track record
• A great location
• A seller who is willing to finance the sale
• A reasonable price
Certainly, a buyer wants to make money when buying a business, but there is more involved, as the list above indicates. If you’re even thinking about selling, a visit with a business brokerage professional will pay big dividends by finding out what local business buyers are really looking for.
A recent survey asked leading business brokers and intermediaries: What is the seller’s biggest obstacle to selling the business? In other words, why do business owners who are considering selling fail to follow through?
Seller’s Biggest Obstacle to Selling
The answers to this question were revealing, fascinating and important for prospective sellers to understand and consider prior to placing their business on the market.
The biggest reason was one that most people would guess—price. Here are a few explanations that sellers offered concerning price:
• Price—net amount after tax proceeds
• Never enough dollar value in the deal, after taxes, lawyers, accountants, brokers
• Price justification
• Price versus offer
• They don’t want to accept the market price of the business
• Price does not meet owner’s retirement needs
• Understanding that valuation is based on historical cash flow rather than “potential” cash flow
• Perception of value of their business in the marketplace based on reliance of an ill-informed source
Price was the area most mentioned (by far) as the reason sellers don’t sell or, not to mince words, why businesses don’t sell. A professional business broker is aware of local market conditions, has comparable sales data available and is knowledgeable in pricing businesses. Keep in mind that the ultimate decision-maker in determining a selling price is the marketplace. If you are not willing to accept what the market is willing to pay, then you should reconsider your reasons for selling—and read on.
The Next Biggest Obstacle
Two obstacles other than price were mentioned more frequently than any others. One of these had to do with books and records—or the lack of; and the other was a fairly new obstacle—seller’s remorse. You read that right: not buyer’s remorse, but seller’s. Here are some examples:
• Money/letting go
• Giving up business
• Price and emotional ties
• What are they going to do after selling?
• No more income stream
• Being ready to really let the baby go
• Motivation to actually sell when the offer comes
• Can’t afford to retire
• Pricing, indecisiveness (family/friends advise)
The point here is that sellers really shouldn’t put their business on the market unless they are totally convinced that they want to sell. Check with your business advisors, family members, and most important of all, ask yourself if this is really what you want to do.
Although inadequate books and records, etc., probably cause more difficulty than seller’s remorse, this subject is far less emotional than whether you really want to sell your business. Although it deals with straightforward numbers rather than emotions, it still takes its toll. Too many sellers wait until they have made the decision to sell and are ready to put their business on the market before they realize that their books and records don’t measure up to a buyer’s expectations. Today’s buyer wants to see everything in black and white; they are not willing to accept a seller’s version of sales and profits. If you are even considering selling your business, now is the time to go to your financial advisor, accountant, or CPA and have your financial records put in order in such a way that the information can be verified and a buyer or his or her financial advisor can easily access them. Contact your business brokerage professional, who can advise you about what buyers are really looking for when examining a seller’s business financial records.
Needless to add, but worth adding anyway: proper record-keeping should be done on an ongoing basis rather than on the eve of the decision to sell.
You’re considering selling your business. Your accountant or financial advisor has reviewed your profit and loss statement, and told you what he or she thinks your business is worth. Is this a valid figure? Do the numbers reflect the real value of your business? Below are some other factors to consider regarding the true value of your business. These factors may not have a specific dollar amount attached to them, but they certainly influence value and the price a business may sell for.
• Are you serious about selling, and is it the right time? (Use this only if selling is the reason for the valuing.)
• What are the two or three biggest obstacles to growing the business?
• Why is your business different than the competition?
• If you don’t own the real estate, what is the status of your lease?
• What is the short-term and long-term trend of your business and the industry?
• Does, or can, international competition impact your business?
• Why do customers patronize your business, or why do clients use your services?
• Have you increased prices recently, and if not, why not?
• How much will you need to invest in your business over the next three to five years to maintain your customer/client base? How much to increase it? How will you spend it?
• Are there any legal or governmental issues facing the business?
• If you got hit by the proverbial truck, is there someone who could run the business?
• Can the business be relocated? Should it be relocated?
• What are the secrets to the current success of the business?
• What prevents the business from growing?
• If the business is based on your personal goodwill with customers, knowledge of the product or services, etc., are you willing to stay for a fairly long period of time to assist in transferring this personal goodwill?
• If you were given an additional $100,000, and you were much younger, what would you do to grow the business?
An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”
Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”
It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.
Sellers should understand that both what they hope to accomplish in the sell of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.
Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.
These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price. During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.
Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.
• Buyer Qualifications
• Full Price
• Amount of Cash Involved
• Commission/Selling Fees
• Closing Costs
• Exclusive Listing
• How the Business is Shown
• How a New Owner Continues the Business
By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.
Thinking About Selling?
Here are some tasks business owners should consider completing before going to market to help their businesses sell.
- Remove any items not included in the sale. That family heirloom portrait behind the counter of Grandfather William, founder of the business, should be removed.
- Remove or repair any non-functioning equipment.
- Prepare an operations manual to show a new owner all the functions of the business, how things are done, the major customers and suppliers, samples of advertising, and any other information that would help a new owner manage and operate the business.
- Take care of any outstanding bills and resolve any legal, tax, or governmental issues.
- Bring your financial statements up to date, and have your accounting professional prepare them for a buyer’s inspection.
- Clean up the business inside and out. Fill the shelves, clean up the inventory, and paint the interior if necessary.
Many business owners probably have asked themselves this question. There are many unique and different types of business. Some fill very small niches while others have carved out a unique product or service while still others require a unique or very specialized talent, knowledge or experience. An owner of a “unique” or at least unusual business may feel that there is no one out there who would buy it.
Almost all businesses are saleable, but the big question is: Is the seller willing to sell? Because of Internet marketing and other new technologies, business brokerage professionals know how to reach potential buyers world-wide. Somewhere there is a buyer for almost every business. Locating the right buyer is the job of the business broker professional, who recognizes that the seller’s willingness to sell is the key. Why is a seller selling; what is important and what is not. If a business owner just wants to see what the market might pay for the business; or hopes to “make a killing” on a sale – it most likely won’t sell.
Gauging what is most important in the selling process is very important. Following are some critical factors that every seller or would-be seller should assess:
- Full price
- Down payment
- Keeping existing employees
- New owner’s plans for the business
- Selling costs
- Buyer qualifications
- Keeping the business locally
- Providing jobs for children/relatives
- Structure of the sale
There may be other factors that are important. Keep in mind that every one comes with a string attached. What are the most important ones? Will you bend on them? Will you lose a sale over it? Businesses with a broad appeal and a successful track record are in a much better position to stand firm on the important factors. The unique or niche businesses or those with a less stellar track record may have to be willing to bend on any or all.
Sellers should tell their business broker professional what is really important – and take note of the one or two factors that could be “deal-breakers.” Remember: almost all business can be sold, but every sale requires a willing buyer – and a willing seller.
This is often a prospective buyer’s first response when given the price of a seller’s business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price as “blue sky.” Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an “arm and a leg” for the business. Goodwill has been called many things – very few of them good.
However, today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think “Google,” which by now may have achieved the same name recognition as Kleenex. If another search engine company could use that name, the business could be worth millions – even billions. The technology behind the name has a lot of value, but it’s important to remember that the name recognition or brand name, which is known all over the world, is also where the big bucks lie.
How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (What is the value of the secret recipe for Coke?), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included.
Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald’s just mentioned, it may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of “for sale” stainless steel equipment. The real value is the name and what it represents to the dining public.
For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected, product and specific service names should be trademarked, inventions patented. There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.
Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.
For those who are considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is still hung up on buying the stainless steel equipment, we have a warehouse full of it for sale!