Cashing Out-Important Things to Consider Before Selling Your Business

Usually the tough decision to sell a business is based upon any number of reasons, including retirement, personal situations (such as divorce, death, illness, or relocation) or simply a desire to do something different. Here are a few important points to consider if you are ready to put your business up for sale.

Confidentiality. Before you make any move, remember confidentiality is generally necessary, and in everyone's best interest, in the transfer of business ownership. A lack of confidentiality can have a negative effect in many areas, such as employees may suddenly feel a lack of job security causing the seller to lose some, or all, of valuable employees. Or the employees’ work ethic and attitude may change if the potential sale is disclosed to them before there is a sales agreement. This can directly affect the sale of the business since the potential buyers may want to keep the existing seasoned, trained staff.

Other problems may be caused with customers and vendors. Customers may look elsewhere for a different source of products and services for fear the business is closing or may not maintain the same level of service they have come to expect. Since a strong customer following is important to the buyer-and often part of the businesses' "goodwill" that makes the company attractive- the seller should make every effort to continue managing the business efficiently (and profitably!) especially while the business is being marketed.

Suppliers, too, may become cautious about credit lines, or may discontinue existing payment terms, insisting on C.O.D. for purchases. This could be doubly detrimental since the new owner will usually want to continue the established credit relationships the business had with its suppliers.

For these reasons, and many more, confidentiality is of utmost importance in the release of information during the sale of a business. Obtaining services of a good business broker who knows the appropriate process and time frame to convey lease terms, location, and day to day operational procedures can help you maintain the essential confidentiality. The careful selection of a professional broker who understands this concept is of utmost importance.

Common Mistakes made by Seller's in the sale of their small business. Some of the more common mistakes made by sellers in the sale of their businesses are because they do not completely understand what gives value to their company. Most closely-held business owners have purposefully suppressed their profits to reduce tax exposure; therefore the company's financial statements and tax returns do not begin to reflect the true earnings of the business. A professionally trained business broker will prepare documentation from these records reflecting the true cash flow," seller's discretionary earnings," or in simple terms, the spendable income on a free and clear basis.

In addition, some sellers have an unrealistic expectation in their minds of their asking price. What they would "like" to sell the business for may not be its true worth or realistic value. Frequently, they are unwilling to offer seller-financing, and with the tax saving strategies they have been using, bank financing is usually not an option. Even in good economic times this is so. Although many businesses will not qualify for institutional financing, they are still excellent opportunities for buyers. A seller's willingness to offer terms gives more buyers the opportunity to purchase the company. Further, the attitude of some buyers is if the seller is not willing to offer some financing, it may be an indication the seller is not sufficiently confident in the business, or the continued success of the buyer. This attitude is likely to scare off a good prospect.

Some of the advantages a seller gains by offering financing are that they in most cases, will receive more proceeds when adding in the interest payments on the note. It is like an annuity stream for the seller, a desired money management tool for many. There are often tax advantages for the seller (see your CPA) by deferring income. In many cases, it creates a full security and collateral for the seller. It can avoid subordinated financing. Typically, all cash transactions are discounted greatly. Often these discounts are up to 50-60% when the seller demands all cash. Sellers have the ability to sell these notes later on the secondary market, if desired. The length of time to facilitate a sale is many times shortened when there is one less hurdle (third party) involved. Seller financing also shows agents and brokers who the motivated and realistic sellers are. Offering terms can make a border line or distressed business or company saleable. This is more than ever prevalent with today's economic challenges most small business owners are facing daily.

Another seller mistake is often the buyer's motivation is not considered or understood. Too much emphasis is placed on past performance rather than present and future growth potential. A major problem is when a seller fails to reveal problems. When a seller in not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. When these hidden "surprises" occur, and they will...it will in most cases drastically change the agreement or worst case scenario, kill the potential sale. Sellers must be as open and honest about the minuses of their business as they are the pluses.

What does a professional Business Broker and more importantly, a Certified Business Intermediary (C.B.I.) offer? A professional Business Broker or Certified Business Intermediary (C.B.I.) will take the burden of negative aspects off the seller's shoulders and will know how to handle them more effectively. A lack of professional counsel often leads to disaster. Many times a seller is more concerned about saving attorneys and brokerage fees than surrounding themselves with proper counsel. Most Business owners who have sold, or tried to sell their own business, on their own later wish they had used an intermediary to handle all the complexities.

Frequently, the sellers have not thought about what they will do - or what their real financial needs will be - after the sale of their business.

When it comes time to sell - to make the seller's job easier and more effective - the right business broker will assist to determine the right buyer for a particular business. An experienced, professional broker will prepare and submit items such as wages, products, special licenses or talents required, fringe benefits, etc. and she'll present a mental picture of the business to a buyer, taking into consideration the buyer's financial needs.

For locating and qualifying prospective buyers, a good business broker uses computerized databases to access comprehensive lists of local, national and international buyers - all to increase the chances of selling a business at peak value.

Further, the broker can help the seller to understand that the selling price is dictated by the marketplace. Using essential marketing tools, the broker can then prepare a marketing strategy and offer advice. In fact, the broker will help the seller in all key aspects of presenting the business as effectively as possible and be a vital advisor during most stages of the negotiation - bringing to "the table" objectivity as well as negotiation skills developed through years of experience in the buying and selling of businesses.

A buyer also reaps the benefits of expert guidance dealing with a reputable business broker. No matter how large or small a business purchase is, the more information available to a buyer, at the appropriate time; the more intelligent all decisions will be made. Prospective buyers are interested in current and historical financial information, competition, and product information - and brokers can be an invaluable source of such information. Business Brokers prefer to talk to potential buyers in person. During a preliminary meeting in the brokerage office, the broker will typically ask the prospective buyer questions such as these:

1. Do you have the necessary funds to buy a business?

2. Is the cash readily available?

3. What is your time-frame for buying a business?

4. What are your expectations about the purchase of a business?

And so forth....

After this fact-finding meeting, the broker can then show the buyer businesses that are both feasible and that fit the buyer's requirements. Further steps the broker will lead the buyer through are as follows:

1. Since sellers are rightly concerned about confidentiality, the broker will ask for the prospective buyer to sign a non-disclosure or confidentiality agreement.

2. The broker will provide the prospective buyer with preliminary information about one or more businesses that potentially meet their needs.

3. The broker will arrange for the buyer to see the business at a time acceptable to the seller.

4. Once the buyer has indicated strong interest in a particular business, the broker can then schedule further on-site appointments.

5. When the buyer is ready, the broker will be the best source for answering questions, addressing concerns, resolving loose ends and offering their professional expertise in the business sale transaction.
Closing the Sale

Why do business sales fall apart? In many cases, the buyer and the seller reach a tentative agreement on the sale of the business, only to have it fall apart. There are reasons this happens, and once understood, many of the worst "deal-crashers" can be avoided.

Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves – such awareness should include facing potential problems before they swell into floodwaters and “sink” the sale.

What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of casualty began to emerge. The following is a compilation of situations and factors affecting the sale of a business.

1. The seller is not up-front concerning problems in the business.

2. The buyer has second thoughts about the price. In some cases, the buyer agrees on a price, only to discover that the business will not, in his opinion, support the price. Whether this “discovery” is based on gut- reaction or a second look at the figures, it impacts seriously on the transaction at hand. It is of prime importance that the business be fairly priced right from the beginning. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts for themselves.

3. Both the buyer and seller become impatient. During the course of the selling process, it is easy – in the case of both parties- for impatience to set in. Buyers continue to want increasing varieties of information, and sellers begin to grow weary of it all. Both sides need to understand that the closing process takes time. However, it should not take so much time that the agreement is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process.

4. Sometimes the buyer and the seller are not (or never were) in agreement. How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along – they just thought they were. Cases of communication failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the agreement entails – and can reduce the chance that such misunderstandings will occur.

5. In all too many instances, the seller does not really want to sell the business! Selling a business has many emotional ramifications because the business often represents the seller’s life work. Therefore, it is important that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should be overcome or resolved. Some sellers enter the marketplace just to "test the waters" – to see if they could get their “price” – should they ever get really serious. This type of seller is the misfortune of brokers and buyers alike. Brokers generally can tell when they encounter the “casual” category (as opposed to “serious”) seller. However, an inexperienced buyer may not recognize the difference until it is too late and after much expense. A willing seller is a good seller.

6. The buyer really does not want to buy! What is true for the mixed-emotion seller can be true for a buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to get second thoughts as the closing draws nearer. This is especially true today, with many displaced corporate executives and employment layoffs, many buyers are entering the market. Buying an owning a business is still the American dream- and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

7. And none of the above. While the situations listed are the main reasons why many transactions fall apart, there can still be unforeseen problems beyond anyone’s control – such as “Acts of God” that can drastically change the situation, or even environmental problems. Nonetheless, many potential “deal-breakers” can be handled, or dealt with prior to the marketing of the business, to help insure that the sale will close successfully.

Finally, remember these components in working toward the success of the business sale: good chemistry between all parties involved; a mutual understanding of the agreement; a mutual understanding of the emotions of both the buyer and seller; and the belief – on the part of both parties – that they are involved in a good transaction. Add to this equation a good ethical business broker, who can provide vital services for both parties, and who can act as the “glue” for holding together the pieces and often “the hands,” throughout this sometimes trying, but extremely rewarding process.

Cashing Out-Important Things to Consider Before Selling Your Business

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