Ask The Expert

Absolutely. Who is more in touch with the marketplace and process for the buying and selling of small businesses than a business broker who is out there doing it every day. A good broker can help you find a deal, evaluate candidates, develop a sensible offer, find financing, negotiate price and terms, navigate through due diligence and the legal process, and plan for transition at closing. No other advisor can offer this breadth of services. You still need an accountant and attorney, but the broker can solve problems and maximize the chances of getting to a successful closing and getting the best deal. Buying a business is no time to learn as you go. Hire a broker that has been through the process many times.

When a seller provides financing to a buyer, there is definitely a risk that the seller may never see that money. But insisting on all cash can have two consequences: 1) lower selling prices and 2) a reduced probability of selling at all. Price is related to terms and perceived risk. If a buyer takes all the risk, they will pay less for the business. Buyers use leverage to maximize returns, and the financing options available (including seller financing) will dictate what they can pay and still earn an acceptable return. Suppose the discount for all cash is 25%. What if you could finance 10% and get 20% more for the business? By being willing to consider some financing, you have increased cash at closing by 10% and given yourself a chance to get another 10% plus interest.

Prior to the 2008 financial crisis, industry statistics suggested 6 to 7 months on average. In the 2008- 10 time frame, a lot of companies’ numbers got weaker, financing got more difficult, buyers got more cautious, and selling times increased. Since 2011 selling times have slowly decreased but probably not back to pre-2008 levels. The biggest determinants of how long it takes to sell a business are: 1) recent business performance (last 3 years), 2) how clean the numbers are for financing and buyer confidence (fewer add-backs to cash flow), 3) how aggressively the business is priced (premium deals take longer), and 4) the size of the market in terms of number of buyers for your specific type of business (more buyers, shorter cycle).

Declining sales – the buyer automatically thinks you are selling a sinking ship. Undocumented cash flow (not on tax return) – buyers can’t get comfortable with your profitability claims and banks won’t finance. Poor documentation of systems and processes – buyers think everything is in the owners head and worry that it cannot be transferred. Customer concentration – higher risk because if you lose that customer, a significant percentage of the business goes away. Supplier concentration – same issue. No discernible competitive advantage – because then you are like a commodity where the lowest price wins. No intellectual property protection – the most common objection on Shark Tank because competitors can copy what you do and steal your business.

Focus on the most important things but be prepared to give up on some issues. A business sale can’t be all one-sided and has to be a win-win situation for both buyer and seller. Be cognizant of the fact that the buyer is taking a huge risk. He/she never really knows how dependent the business is on the seller’s personal relationships, knowledge and skills. The seller doesn’t want employees, customers, or suppliers to know anything about the sale until after it closes. Will any of these key players leave when the seller exits resulting in decreased sales, profitability, and the ability of the buyer to service transaction debt or earn a return. Don’t dominate and kill the deal.

Focus on the most important things but be prepared to give up on some issues. A business sale can’t be all one-sided and has to be a win-win situation for both buyer and seller. Be cognizant of the fact that the buyer is taking a huge risk. He/she never really knows how dependent the business is on the seller’s personal relationships, knowledge and skills. The seller doesn’t want employees, customers, or suppliers to know anything about the sale until after it closes. Will any of these key players leave when the seller exits resulting in decreased sales, profitability, and the ability of the buyer to service transaction debt or earn a return. Don’t dominate and kill the deal.

Sell the business to the child at fair market value. The child finances the acquisition with an SBA loan just like any other buyer. This can be done with as little as 10% down from the child (and maybe less). The child has to prove his/her mettle and run the business as opposed to being gifted the business and having an entitlement mentality. The business owner gets the full value of the business now to fund his/ her lifestyle. When the parent passes, all the children (including the one that bought the business) inherit equal shares of what is left. If the child that bought the business failed, he/she still inherits his/her pro rata share. Everyone was treated equally.

You won’t get a premium price by selling for the industry multiple or rule of thumb to one buyer with no competition. Prices derived from multiples are averages from good and bad transactions. To get a premium price you need an advisor that knows how to identify the maximum cash flow (may be different for different buyers), identify specific characteristics such as working capital requirements, financing structure, and future capital expenditure requirements, and then tie all this information together to show the buyer that at your premium price, they can earn a great return on investment. And then you need to confidentially expose that information to multiple buyers in competition with each other and negotiate the premium price you deserve.

Having future sales under contract is certainly more reassuring to a buyer than wondering if past customers will continue to buy. But, there is a hitch. Most small business sales are asset sales where the buyer forms a new entity and purchases assets from the seller. Unless contracts have a right to assignment provision, the asset purchase agreement will likely require the seller to get approval from customers to assign the contracts to the buyer. This mean contacting customers before closing, disclosing that the sale is going to occur, and asking them to assign the seller’s rights under the contract to the buyer. When planning to sell, try to get a right of assignment into contracts to avoid having to deal with this delicate situation.

1. The broker can identify buyers without anybody knowing the identity of the seller.
2. Business values are nebulous and the sale process is unique. It takes knowledge of valuation, taxes, law, psychology, and
experience to maximize the value of what is being sold.
3. A one-on-one negotiation favors the buyer. The seller benefits from having multiple buyers.
4. The process is very time consuming. A seller’s business will suffer while he tries to sell it.
5. The broker is likely the only advisor compensated based on producing a result. A business owner can run up substantial fees (lawyer and accountant) and have a sale attempt(s) fail.
6. You only get one chance. An experienced broker will make you money, not cost you money.

They can be problematic if outdated or have incorrect information. Example 1 – a seller’s business name was Fast Xxxx Inc. The buyer’s counsel checked the DOS database and could not find the name. When the business name was registered, the DOS thought “Fast” was “East” and registered the name as East Xxxx Inc. The business was 10+ years old and did not have the rights to its name. Example 2 – a seller’s business filing listed an officer that had sold his interest in the company and the address was never updated despite several moves. This confused the buyer and the DOS requires that the name transfer filing paperwork be with the address in their database. Take away – check your filings and clean things up before selling your business.

Typical terms regardless of who finances are 1/3 down and 2/3 financed. Suppose a business has an SDE cash flow of $200K and is selling for 3 X cash flow or $600K. A typical buyer would look to put down 1/3 of the price or $200K. If the buyer had $600K to invest, he/she would look to buy a business with a cash flow of $600K and a price of $1.8 mil. To maximize returns, most buyers are looking to leverage their investment and buy the biggest stream of cash flow possible. Now if a seller’s financials support SBA financing, the buyer can get in with 25% down, the buyer’s leverage and returns are maximized, the lender gets the government guarantee to address collateral issues, and the seller can be rewarded with an all cash deal. That’s why terms matter.