TheBizSeller Blog

Survey Of Business Buyers Indicates Now May Be A Good Time To Sell Your Restaurant Or Retail Business

2010-11-09T07:42:00.000-08:00

A recent world wide survey of business buyers, sellers and brokers reveal some positive information about the market for small businesses for sale. You can read the results HERE

There is some good news for business sellers - especially if you are in the retail or food sectors. The survey shows that there is more demand for these types of businesses among buyers than there is supply.

Click Here for the summary of the survey - you'll find three different pdf files at the bottom of that page that analyze the results.

I would be curious to know if your views match those of the sellers that were surveyed. Especially if you are in the food or retail sector - have you found a solid group of buyer out there for your business?

Selling A Business - Common Mistakes

2010-11-08T13:24:00.000-08:00

Here is an interesting article about 3 common mistakes business owners make when they sell their company.

I think every seller needs to pay particular attention to mistake #2. " set an asking price that's too high in relation to documented income and then claim the price is right because actual income is higher than reported"

I have to agree with the author that any buyer who is naive enough to believe the seller when the brag about how much extra profit they make "off the books" is likely to be a failure once they buy the business. More likely though is teh chance they have no money to buy a business in the first place.

The lesson here is that you asking price must be justified with facts not promises.

Here's the article, let me know what you think:

Selling A Business - Common Mistakes

How To Sell Your Business - Questions & Answers

2010-05-15T07:23:00.000-07:00

I've started a new section on my site that allows business sellers to submit a question specifically about their situation. Then we answer it online. The Q&A format is a great way to learn from other's experience. Here is a recent question one business owner sent in.

What Multiple Do I Use For A Hotel/Resort w/ Conference Center, Golf Course & Restaurant

Our business is a golf and beach resort with about $72 M in gross rev. includes condo resort rental pool, restaurants, golf courses, conference center, tennis and other amenities. EBIT is about $4.7M. What multiple of EBIT are typically used for a business like ours?

The Answer

I don't think multiplying EBIT times a multiple is the best thing to do in your case. There are two reasons for this.

1.) With a resort/hotel, the real estate accounts for a seizable share of the business' value and a multiplier would not be helpful for determining it's value.

2.) Your business is made up of several different operations - hotel, conference center, golf course, restaurant etc. A single multiplier will not apply equally to all of them.

Placing a value on this type of multifaceted operation is more complicated than most other businesses, but I will give you some guidelines to help you get started.

In other industries, you may be able to value a business with multiple revenue generating units by valuing each unit separately and then added them together, But with your business, all the secondary revenue generators probably feed off the resort/ hotel, so it is with the hotel that any valuation must begin.

Fortunately, hotel industry groups constantly compile and update detailed statistics on a host of operational metrics. Therefore, comparative analysis is a good method to start with when valuing a hotel or resort. Using comparative analysis at the start will give you a much more accurate price range to begin your valuation with than the "EBIT X Multiplier" method.

I say "at the start" because the industry standard for valuations of this type of business is to use the discounted earnings method. But to get a general idea of the price range for this business the comparative analysis approach is quicker, easier and cheaper.

A few examples of the the type of data that is collected by the industry are:

*occupancy rates *room expense ratios *restaurant and banquet revenue-to-expense ratios *average room rate

"Average Room Rate" is a key calculation that goes into valuing a hotel. The formula for calculating it is standard in the industry and recommended by the "Uniform System Of Accounting For The Lodging Industry", published by the American Hotel and Motel Association: www.AHLA.com

The formula for average room rate is:

Net Room Revenue/Number Of paid Rooms Occupied = Average Room Rate

Also important is the "Room Expense Ratio" which is total room expense/total room revenue. In most cases you want to see room expenses equal to no more than 25% of room revenue.

These ratios will give you a good idea of how profitable the hotel can be and are an easy way to make comparisons to other similar hotels that have been sold in your region.

The "Uniform System Of Accounting For The Lodging Industry" provides additional revenue information on hotels like yours that include food and banquet facilities.

Go here to read more questions and answers about How To Sell Your Business

Business Buyers - Telling The Good From The Not So Good

2010-05-07T08:36:00.000-07:00

The other day I talked about the fact that 90% of the people who say they want to buy a business never do.

So how can you tell up front if someone is part of the 90% or the 10%?

Well, there is no way to know exactly but here are a few behavioral traits that distinguish the two.

** They ninety-percenters focus almost exclusively on money while the ten-percenters focus on money AND the dream/idea/challenge of being in business for themselves.

** The ninety-percenters want a "turnkey" business that they can put on cruise control while the ten-percenters want a business they can improve, build and make their own. Ten-percenters are looking for a good business they can make better and are willing to work hard to accomplish that.

** Ninety-percenters think they should be paid handsomely from day one while the ten-percenters are willing (and prepared) to cut back on their lifestyle and expenses for as long as it takes to pay for the business.

The good news is that even if just 10% of prospects are good prospects, that's still enough prospects for you to sell your business.

The important point here is that you don't want to waste all your time trying to please the 90% who aren't going to buy.

And you don't want to waste your time trying to turn a ninety-percenter into a ten-percenter.

Too many sellers make the mistake of trying to please everybody. They try their hardest to paint a rosy picture of easy money for little work. They brag about how their business is a "turnkey" operation. And all for a bargain basement price.

To the 90% of non-buyers, this is just what they are looking for. To the 10% that are educated, prepared and qualified, it sounds too good to be true.

The best way to ferret out the real buyers from the 90% who can't or won't buy, is to treat everyone like they are part of the 10%. Here's how:

1.) Describe your business in the best possible light without going overboard .

2.) If there are opportunities for growth explain them to the buyer in detail so he understands. Don't settle for generalities about how easy it will be for the new owner to "explode profits".

3.) If, along with these opportunities are challenges and the need for hard work and sacrifice, say so.

4.) If you have made mistakes that have hurt growth and earnings admit to those mistakes.

If your prospect responds by showing real interest in the inner workings of your business and the opportunities it presents then you probably have a good buyer. If their only response is to ask for a price discount along with 100% financing then you know you don't have a buyer.

The bottom line is that even though only about 10% of the prospects out there are good ones that is still enough good prospects - after all, you only need to find one. But you can't afford to waste time with bad prospects.

So stop trying to please the 90% who aren't going to buy anyway. It's amazing how quickly these prospects lose interest once you are honest about what it takes to run a business successfully.

The high quality prospects however, know that there is no free lunch and are not going to be impressed when you present a situation that is too good to believe. So don't even try.

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Small Business Buyers - The Few That Actually Buy

2010-05-04T08:42:00.000-07:00

A few weeks back I wrote about what really motivates someone to want to buy a business.

If you recall, the biggest reasons where not money. They where psychological reasons like wanting to control one's own fate and to experience more freedom.

Yet it seems like most of the material out there on how to buy a business focuses on money (I'm probably as guilty as anyone so I'm not pointing fingers).

So, to maximize our chances of successfully selling a business we need to have a better understanding of buyers and why they are interested in owning a business in the first place.

The 90% Rules

Here are some facts about business buyers that one study after another has shown to be true for a long time:

** 90% of people who respond to business-for-sale ads never buy anything

** Of the 10% that actually do buy a business, 90% of them are first time buyers.

** 90% of buyers don't know what kind of business they want (or they are at least open-minded about considering several different kinds of businesses).

** 90% of buyers are looking to replace a job. They will not be passive investors. Instead, they will be showing up every day to run the business.

** 90% of buyers don't have enough money to pay cash for the business so their purchase will be financed. And 90% of those buyers get the financing from the seller. So, about 81% of sales are financed by the seller.

Since 9 out of 10 people who respond to an ad do nothing, it means the 10% who do actually buy are part of a special minority.

To this special minority, the idea of owning a business is more important than the specific type of business.

More than how much money they can make, it is all those other benefits that you must sell to the buyer. After all, if all they want is money they can stay in their present job.

It's the things that they can't get at a job - the chance to control their own destiny, the pride of ownership, the opportunity to create something that is uniquely theirs - that will motivate them to take that leap of faith necessary to go into business for themselves.

(And remember, 90% of buyers have never been in business for themselves before so you have to keep reminding them of the fun and satisfaction they will get from being their own boss. Just because you, as a business owner, know the benefits don't assume the buyer does)

The 90% who never buy anything either don't have any money or they have the money but they don't have the guts. While I would say more than half of the do-nothings don't have the money, a surprising number do have it. But they are scared off by the reality that owning your own business is hard work.... and risky.

That's why you never want to whitewash how hard you work, or the difficulties you deal with as part of running your business. The do-nothings will be turned off by it, but the real buyers won't care - they want and need the benefits of business ownership more than they want or need a cushy work schedule or a guaranteed paycheck.

If you try to paint a rosy picture of quick money for little effort, the buyer isn't going going to believe you anyway.

If you work 60 hours a week, including most weekends, tell the buyer the truth. If that is what it takes to make your business work, the buyer needs to know that.

Otherwise, you will be selling your business to someone who will be unprepared to succeed. And if you are in that 80% of sellers who finance the sale, you will be lending your money to someone who is going to fail.

The Buyer's First Visit To Your Business - Part

2010-05-03T08:32:00.000-07:00

Warm up

When you and your prospect first meet do not jump right into business talk.

Spend a few minutes getting to know each other. Attempt to build a little rapport.

A few personal questions (but not too personal) such as, Where are you from? Where did you go to school? Do you have any kids? These are a good way to get people talking about themselves.

If the prospect wants to go into some detail about his children or his hobby – let him. It’s a good way for him to relax and get comfortable in new surroundings.

Sometimes the best topic of conversation early on is to talk about his career and what type of work he is doing now. If he is perfectly happy with were he is in his job and career, he wouldn't’ be sitting in your office. What does he dislike about his current job/business? Why is he looking to make a change? What benefits does he want his new business to provide?

These questions can give you insight into what he wants – his hot buttons. Try to tailor your presentation of your business to his likes, dislikes, hopes and dreams. Try to show him, if it’s true, how owning your business can fulfill those hopes and dreams. (On a side note: it's a good idea to use words like "own" and "owning" instead of "buy" and "buying" whenever possible)

Though buying a business involves a lot of cold hard numbers it is still a very emotional event to the buyer. This may be something he has dreamed of doing his entire life. Think back to the time you first went into business for yourself. That mix of excitement and fear is the same thing your buyer is feeling. If you can get the prospect emotionally involved in the business, your job of selling will be much easier.

If you are in a manufacturing or wholesaling business you may want to set up a display of some of your most popular products and demonstrate their use for the buyer.

During this early "warm up" process you may want to share some information about yourself. Talk a little bit about your family. Why did you get in this business? If you’re retiring, what are looking forward to doing the most once you have the time? People like buying from people they like.

Studies have shown that as little as 5 minutes of schmoozing/small talk at the start, can have a dramatic effect on the success rate of a sales presentation or negotiation.

If your prospect isn’t very talkative or seems uncomfortable at the start of this warm-up process you obviously don’t want to force the issue. Use your best judgment about how long this warm up process should go.

Some Key Points To Remember

1.) Have a room set aside were you and the prospect can talk in private. If your facility is so small that there isn't any place you can have complete privacy, you may want to consider moving to an off-site location once you have toured the facilities.

2.) In order to raise as few questions as possible with your employees, try to minimize open discussions during the tour itself. Instead preview for your guest just what you are going to show him and then review it afterwards. It is in the private room, or off-site location, where the buyer can ask more detailed question about what you have shown him.

3.) Try to customize each tour to suit the interests or hot buttons of the individual buyer. If it is a manufacturing facility, the buyer with the engineering background is going to be looking for different things than the buyer with a sales & marketing background. What's right up the engineers alley might be Greek to the salesman. Don't try to make one tour fit all buyers.

4.) Accept the fact that that you can't touch on every single aspect of your business in one meeting. It's likely that the minute the buyer leaves your premises you will remember some positive feature or fact you wanted to share with him.

You can always follow up immediately after the meeting with a "Thank You" e-mail to thank them for coming in and to see if they have any new questions. And then you can drop in one or two of those positive points you forgot about during the meeting.

The buyer is likely to be overwhelmed with new information anyway. So resist the temptation to throw in the kitchen sink.

Is Now A Good Time To Negotiate?

This first face to face meeting with the buyer is certainly an appropriate time begin to discuss/negotiate the details of an actual deal.

However, while your are actually taking the prospect on a tour of your facilities, you want to keep the discussion limited to the business itself: products, manufacturing processes etc. The last thing you want to deal with on the tour is questions like, "What is the minimum down payment you will accept"?

Let the buyer know you will be happy to discuss these issues in private. But while on the tour, and immediately after, make sure that discussions are focused solely on that. When all his questions and concerns related to the tour have been answered and you are in private, then you can move on to discussing the terms of the deal.

In most cases the buyer will not be prepared to get into detailed negotiations with you at this point - they have learned a lot of new information about your business that they will want to review.

But now would be a good time to discuss with the buyer a timeline for when you would like to receive LOI from buyers, how much time you believe is reasonable for the buyer to conduct Due Diligence, and your target date for the closing.

Lastly, you want to discuss what will happen next.

I suggest you let the buyer know you will be calling in 2-3 days to see if he has any further questions. This gives him some time to review and consider all that he has learned while visiting the business. I would also send ateh "Thank You" e-mail mentioned above immediately after the meeting or that night and include one or two additional positive features that weren't covered in the actual meeting.

Business Buyers - Their First Visit To Your Location

2010-04-29T07:56:00.000-07:00

Eventually, you will want your best prospects to visit your business in person so they can tour the facilities.

A good site visit can go a long way in creating enthusiasm in the buyer and it can help to distinguish your business from all the other businesses that the buyer is considering.

You want to make sure that you do all the necessary preparation to make the visit as productive as possible.

You also want to make sure that you only conduct a tour of your site for the very best prospects.

Too many sellers make the mistake of hosting visits from buyers at the very beginning - before the buyer has even read their selling memorandum.

The proper time for the buyer to visit your business in person is after they have received your selling memorandum, had some time to digest it and ask you some follow up questions.

Not only will you save time and protect your confidentiality, but the in-person meetings you do hold will be much more productive because the buyer will be properly prepared when he arrives.

Preparation

Take some time to spruce up the appearance of your location. Even small things like discarding useless office equipment and cleaning up the reception area can have a big effect on the overall impression you make on the buyer

From the time the buyer first hears about your business, they will try to picture in their mind what it actually looks like. This image is likely to be an idealized one - it will look in their mind's eye exactly how the wish it to look.

Obviously, you can't make everything about your facilities perfect, but you don't want that moment when they first lay eyes on your location to be a let down. So do everything you reasonably can to make the physical location as attractive as possible.

Pride of ownership is a big factor in the buyer's decision making process. While you are undoubtedly proud of your business, it's also possible that over the years you have let things slip a little when it comes to organization and cleanliness. If so, admit it and take steps to improve things.

Scheduling The Meeting

In most cases you will want to meet with your prospect for the first time after-hours or on the weekend. You want to be able to devote your undivided attention to them. The fewer interruptions the better.

However, it may be to your advantage to have the prospect see the business while it’s open - in the case of a busy restaurant or retail store for example.

If this is the case you can have the prospect come by just for a look. You can schedule a more detailed sit-down meeting later.

If the buyer insists on seeing the business while it is open (and he is a really strong prospect) you may be forced to conduct the complete tour during business hours. Just be sure he knows you are concerned about confidentiality and that he should not speak with any employees or customers about why he is there.

Make sure that when you sit down with the prospect for the first in-depth meeting that you will not be disturbed and that you have set aside plenty of time.

Nothing is more destructive than to have a meeting that is going well be cut short because either of you has another appointment. Sometimes you can’t get that level of enthusiasm back that you had been able to achieve in a previous meeting.

Tomorrow I will discuss what to do when the buyer actually arrives at your business.

(Click Here For More Info About Selling Your Business Tips)

How To Sell Your Small Business - Managing Contact With The Buyer - Part 2

2010-04-27T08:28:00.000-07:00

Continuing on from yesterday's post about supplying information to the buyer while protecting your confidentiality.

Sometimes you will get requests for information from a very good buying prospect that you just can't fulfill. For example, after he receives your Selling Memorandum, the buyer may request to see a list of your customers or suppliers.

You must determine why the buyer wants this very specific information. Does he want to steal your customers from you? Or perhaps (and more likely) the buyer wants to see if you are overly dependent on one customer. If 80% of your revenues come from just one or two clients, that is a legitimate red flag that would concern any buyer.

But your prospect doesn't need a complete list of you customers along with contact information to find this out. Instead, you can prepare a report that shows what percentage of your revenues comes from each customer (or the top 10 or 20 customers if that's more appropriate).

So, whenever a buyer makes a request for an entire category of information, don't flatly refuse. Instead, try to figure out the buyer's specific need or concern and then provide just enough information to satisfy that need.

In addition to the names and contact information of your customers and suppliers, information that should be off limits until a buyer signs a Letter Of Intent should include all proprietary information regarding your manufacturing processes, blueprints, recipes, product diagrams.

Remember: Only one of your prospects will end up buying your business. But all the other prospects will still posses whatever information you give them after they drop out.

So a good question to ask yourself when deciding whether or not to provide certain information to a prospect is:

If this person does not buy my business, could they use this information to harm my company's value or the success of the new owner?

If a buyer absolutely insists that you provide a certain piece of information that you are uncomfortable providing, you have three choices:

1.) You can flatly say "no" and risk losing him as a prospect.

2.) You can give him the exact information he asked for

3.) You can prepare a report that provides just the information you are comfortable revealing and hope that it will satisfy the buyer's need.

Exactly how you handle a situation like this will depend on the quality of the prospect who makes the request.

You should rank all your prospects according to their qualifications and desirability - Which prospect do you want to take over your business? You may decide to give that prospect much more detailed information than the buyer at the bottom of your list.

But whatever you decide, make sure that the buyer understands you are not trying to hide anything. There is certain information that you are uncomfortable releasing now, but that once the buyer has submitted a Letter Of Intent he will have complete access to your business.

Moving Forward

Gradually some buyers will eliminate themselves from consideration. Others, you will eliminate due to a lack of agreement on the issues surrounding the sale.

But if a well-qualified prospect is interested after reading your selling memorandum and have had their questions answered, you will want to set aside an hour at night or on the weekend and talk to your prospect over the phone about the specifics of the possible deal. In addition to the price you may want to discuss:

•Down payment and other financing terms.

•Your future employment with the company

•The future of key employees with the company

•Any assets that will be removed from the company by you at the close such as a company car

•A non-complete clause

The next step is for the prospect to visit and tour your facility.

You should reserve the privilege of an on-site visit for only the most qualified and interested of prospects.

Site visits are time consuming to prepare for, may be difficult to schedule and have the potential to unnerve your employees.

Buyers will often want to see the business immediately. Buy you will want to do as much as possible with the buyer via e-mail, phone and through your well prepared Selling Memorandum before the prospects visits.

If the buyer isn't enthusiastic at this point there is no need to go through with a site visit.

(Click Here For More Info About Selling Your Business Tips)

Business Valuation Questions - Rules of Thumb & The Balance Sheet

2010-04-21T09:37:00.000-07:00

I received quite a bit of feedback about last weeks posts on valuation. Much of it was about the definition of different term and also a lot of questions about how the balance sheet affects the selling price. So today I though I'd address the most common valuation questions I've gotten.

What is the difference between what you call "Owner's Benefit" and EBITDA?

EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) is an earnings figure used to value larger companies. The Owners Benefit figure is used to value small, owner-managed companies. The main difference between EBITDA and Owner's Benefit is that the earnings in the EBITDA figure does not include the salary paid to the manager of the business. The "Owner's Benefit" does include the salary paid to the manager because the owner (or business buyer) also manages the company so that salary is a benefit enjoyed by the owner.

What is the difference between "Owner's Benefit" and "Seller's Discretionary Income"

Nothing. I use the term "Owner's Benefit" instead because I feel it more accurately describes what we are talking about, namely, what is the business worth to it's owner. Also, it's better from a salesmanship perspective when dealing with the buyer. After all, the buyer wants to be an "Owner" not a "Seller".

How does the value of items on the balance sheet - inventory, equipment, cash, accounts etc. - affect the valuation if you are using a multiple of earnings?

Some of the items on the balance sheet such as machinery, vehicles and equipment are required in order for the business to produce its earnings. So the value of those assets is already reflected in the earnings figure you are multiplying. The cash and receivables are usually kept by the owner after the sale so they wouldn’t affect the price.

If the buyer is going to take over the receiveables than you and the buyer will have to agree on a fair value for them. Your receiveables represent money you have already earned so the buyer would have to pay extra for them. Exactly what your receiveables are worth today and just how collectible each account is may be something you and the buyer don’t agree on. That’s why it’s simpler for the seller to just retain the receiveables.

In most cases, the inventory is valued at its replacement cost. Not at what the seller paid for it or what it can be retailed for, but what it would cost the new owner to go out and replace the inventory.

Where do "Rules Of Thumb" come from?

Most are derived from survey's that industries do with their members. Other information comes from surveys of business brokers about deals they have closed. It's important to note that these rule of thumb calculations are based on the actual selling price, not the asking price. These same surveys show that most businesses sell for an average of 75-80% of the original asking price. So no matter how you arrive at your asking price, make sure that it includes a cushion of about 20% above what you actually hope to sell for.

So don't make the mistake of advertising a rock bottom price hoping it will attract more buyers. No matter how low you set your initial asking price, buyers will always test it by asking for a lower price. If you don't a budge at all off your initial asking price buyer's will not feel like they are getting a good deal and it will be much harder for you to sell. So always begin with an asking price at the very top of the price range.

Business Valuation - How To Do An Asset Based Valuations

2010-04-16T09:18:00.000-07:00

So far this week we have covered some basics facts about business valuation and I explained why using a multiple of Owner's Benefit is the best way to value a small business for sale. We also talked about the possibility using a multiple of sales as well using a rule of thumb.

Unfortunately, there are a lot of business that can't use an earnings based valuation because they don't have any. So today I want to talk about the "Asset Based Valuation" method.

If you are selling a new business that doesn't have a track record, a business that has been losing money or a business where the owner has recently died this is the method you should use to value the company.

Using this method will probably result in the lowest valuation of your business- what is often referred to as the liquidation value.

Even if you own a successful, highly profitable business, you should still conduct an asset based valuation as a way of establishing a baseline to compare with other valuation methods you will use.

Conducting An Asset Based Valuation

The first thing you must do is make a complete list of the tangible assets owned by your business.

Examples of tangible assets include: accounts receivable, furniture and fixtures, equipment, inventory, customer contracts, vehicles, leasehold improvements, prepaid expenses( paid insurance premiums for example), franchise agreements.

If you own the real estate that your business occupies you may be better off selling it separately from the business, which means it won't be part of this valuation. But if the business is dependent on the current location, than add the value of the real estate in this step.

Next assign a price to each tangible asset based on it's fair market value.

Fair market value is what the item can be sold for on the open market. It may take some research to determine this.

Unless prices have changed drastically, inventory should be valued at your cost.

Sometimes an owner will attempt to value the company's assets based on book value ( the non-depreciated value of the item as it is currently valued on your balance sheet). It is the rare buyer who will pay you book value - they can buy brand new equipment and vehicles for nearly the same price as the book value.

So do your best to assign a value to each item based on what it can realistically be sold for on the open market. And make sure to note next to the price why it is worth that amount.

Finally, make a comprehensive list of the intangible assets owned by the company.

Examples of intangible assets: Customer lists, proprietary information and software, trained and experienced employees and patents, copyrights trademarks etc.

Come up with what you consider to be a fair value for each item. Next, clearly describe the item and explain why you believe it is worth the amount you're asking.

An intangible asset that gets a lot of attention is "goodwill". But Goodwill, in actuality, is just the sum total of all of your intangible assets.

Adding the total of your tangible assets plus the total for your intangible assets will give you a good idea of what your asking price will be.

How To Negotiate The Sale When Using An Asset Based Valuation

The reality is that you may not find a buyer who is willing to pay for all your tangible and intangible assets. She likely will want to pick and choose between them. Also, it is unlikely that that a buyer will agree to all of the prices you've assigned to your assets - no matter how conservative you are.

You should be prepared to negotiate, not just the selling price of certain assets, but which assets will actually be part of the sale

This is why it is so important to take the time to describe your intangible assets and provide an explanation on all your pricing. It allows you to set the highest justifiable asking price you can.

Then, when the buyer wants to negotiate - and no matter how low you set your asking price the buyer will want to negotiate - you will have room to maneuver.

Your business is worth only what someone will pay for it. The asset based valuation method is just a way to arrive a reasonable starting point - once you have a living, breathing buyer in front of you some negotiating on price will always need to be done.

By following the process I've described here, you will set yourself up to sell your business for the best possible price - even if that turns out to be less than the amount you arrived at in your original calculations.

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Business Valuation - Rules Of Thumb

2010-04-15T08:02:00.000-07:00

So far this week we have covered some basics facts about business valuation and I explained why using a multiple of Owner's Benefit is the best way to value a small business for sale. Also, we have talked about the factors that affect the actual multiple that you should use.

That's a lot of detail about just one valuation method.

I get a lot of questions from sellers about two other common methods - applying a "Rule Of Thumb" and using a multiple of sales - so let me address them now.

Industry Rules Of Thumb

A "Rule Of Thumb" is the most general way to ball park the price of a business. They are so general in fact that the may be of no help at all in your particular case.

Add to that the fact that most industries have more than one rule of thumb that is used. In the hair salon industry for instance, I came across 4 different rules of thumb on just one industry web site:

• 1 times annual adjusted earnings. • 4 times monthly gross sales PLUS inventory. • 25-35% of annual gross revenues PLUS fixtures, equipment & inventory. • 10-25% of annual adjusted earnings PLUS $2000 per station.

If you own a salon and apply all 4 of these rules to your business you may come up with 4 wildly different values for your business.

If your industry has one widely accepted rule of thumb you may want to use it as a starting point. But as you can see, none of the hair salon examples take into account any of the factors that are unique to a business - such as the lease, the quality of the employees or recent trends in earnings.

So the rule of thumb is just a starting point and you will have to adjust the price up or down based on your unique circumstances and how you compare to other hair salons.

Knowing your industry's rules of thumb can be helpful though. Applying them to your business will at least let you know how realistic you are being in your pricing.

Also, they can be helpful in instructing unreasonable (or uneducated) buyers who make unrealistically low offers on your business. If you can show them how your pricing is in line with industry standards it can help them to move off of their low-ball offer.

Tomorrow I will address another method - The Asset Based Method. This method is good for very new businesses or businesses that are not profitable. It's also a good first step in the valuation process for very successful businesses because it will tell you just how much your stuff ( vehicles, equipment, accounts receivable, inventory etc.) is worth.

Business Valuation - Choosing A Valuation Multiple

2010-04-14T07:57:00.000-07:00

In the previous two posts I covered some basics facts about business valuation and I explained why using a multiple of Owner's Benefit is the best way to value a small business for sale.

Now comes the most interesting question of all:

By what number do you multiply your owner's benefit figure?

Much of what has been written on this subject states that most businesses are sold with a multiple that ranges from 1-5.

But in truth, businesses that sell for 4 or 5 time their owner's benefit are rare - at lease when it comes to owner-managed businesses.

In smaller businesses with an owner's benefit of $50,000 to about $250,000, the owner will usually also manage the business on a day to day basis. The buyer is in truth "buying a job". Their return on investment is much lower because they are investing not just there money but there time.

In larger businesses, where there is enough cash flow to hire a full time, professional manager the owner can make a return on his investment without a full time commitment - so that business will be valued at a much higher level.

That's not to say you can't sell your business for a multiple of 4 or 5, but in my experience the vast majority of smaller businesses sell for a figure much closer to 1 to 3.

In keeping with our theme of finding a range of prices, I suggest determining a range of multiples. Start with 2.0 And use the list of factors below to adjust the multiple up and down based on your specific situation.

This is just a partial list, there are bound to be unique factors that affect your business that are not listed here.

Positive Factors That Can Increase the Multiple ...

Sales And profits have risen consistently each year for at least 3 years.

A significant amount of sales come from repeat customers. Even better is revenue that comes from automatically recurring charges. Web hosting, alarm monitoring And self storage are few examples of business that may have reliable repeat revenue each month.

Proprietary products, patents And/or trademarks.

Exclusive rights to a territory.

Less warranty exposure than is typical in your industry.

Management And /or employees will stay on after the sale. The more experienced or uniquely talented these people are, the better.

The business is a franchise of a well established - And well known - company. For many buyers, the support And training they get from the franchisor is a major plus - one they are willing to pay for.

Your industry is growing And the future appears bright.

Important ratios such as profit margin And cost of sales are above average for you industry.

You are offering above average financing terms

For these last two items you should check with any trade associations that serve your industry. They may be able to provide you with facts and statistics that can help you show the buyer that your business is part of a growing industry or trend.

Negative Factors That Can Decrease The Multiple

Sales and profits have been trending down recently.

Sale and profits have been inconsistent or unpredictable in the recent past.

Sales from your most important product has been down or stagnant.

One customer accounts for a large portion of your sales - more than 20%.

There are many businesses similar to yours that are also for sale. Or your products are widely available at many places - a "Me To" product a line.

The business relies heavily on location for its success but the lease is not transferable or is about to expire. If this applies to your business, try to get an extension on your lease before you start to sell.

Pending legal or government issues such as law suits or environmental concerns.

Important ratios such as profit margin and cost of sales are below average for you industry.

A large amount of obsolete inventory.

The business is part of a weak franchise or one with a bad reputation.

Too many old and uncollectible accounts receivable.

You are not offering any financing

Neutral Factors That May Not Affect The Multiple

These are features of your business that may be positive but are not special. In other words, these are things you would expect to find in the average business similar to yours. It’s likely that other businesses that are for sale will have many of these same features, so they may not allow you to gain a premium multiple. But they can definitely help you present your business in a positive light and should not be ignored.

The business is not overly dependent on you for its success and none of your customers buy simply because of their personal relationship with you.

The business is not overly dependent on one customer - no one customer should account for more than 10% - 15% of your sales.

The business is not overly dependent on one single product.

The facilities - warehouse, factory or retail location - are in good shape and will allow the company to grow without a major investment.

No pending legal issues.

It is not a seasonal business and sales are fairly consistent throughout the year.

How Do These Factors Affect The Price

Sellers tend to focus mainly on the positive factors when talking to buyers.

Buyers, however, tend to zero in on the negatives - or what they perceive to be negative. They are averse to risk and so they will always be on the lookout for problems.

If any of the negative factors listed above exist in your business you are not alone. Almost every business has some problems and they should not stop you from successfully selling.

That these problems exist isn’t the issue, how you deal with them is.

You have several choices when it comes to the weak points of your business.

You can lower your price accordingly and show the buyer how and why you have discounted your price by lowering the multiple, you can ignore the issues and wait for the buyer to point them out, and you can fix the things that are fixable.

Or you can do a combination of all the above.

If you have old or obsolete inventory, get rid of it and take the lose. The same holds true for uncollectible receivables. The buyer will not pay you any money for these things and they will only help to create a negative overall impression of the health of your business.

Other factors - such as a decline in sales in recent years or one customer accounting for much of your revenue - can’t be fixed so easily in the short term. If you don’t have the option of holding on to the business for another year or two so you can improve these things than you will have to adjust the price accordingly.

Finally, there are those items that you don’t control such as the fact that there are many similar businesses on the market or you are part of a franchise that is struggling.

I would suggest that you not lower your original asking price because of these items. But be aware that the buyer will probably bring them up at some point so be prepared to deal with them.

Before lowering your price, try first to offset any of these negatives with some of the positives features of your business. Maybe there are many businesses similar to yours on the market, but if your profits have steadily increased over the last few years or if you have a favorable lease in place that is transferable, you can show the buyer how your business is worth the price you are asking.

Tommorrow: I talk abut some other common ways businesses are valued such as industry "Rules Of Thumb" and using a multiple of sales.

Business Valuation - Defining Profits & Earnings

2010-04-13T08:41:00.000-07:00

Yesterday we talked about simplifying the valuation process. I suggested that using a multiple of profits it the best way to come up with a value for your business and a range for your asking price.

But even with this simple method, there are endless ways to vary the outcome: do you use past profits or projected future profits? Before or after taxes?

Come to think of it, how do you even define the word "profits"?

Does it mean the same thing as cash flow?

(In a lot of industries a multiple of sales is used and I will address that approach on Thursday)

Let's discuss all of these questions.

But first, let me repeat that the valuation methods described here are best for smaller businesses (less than a million in sales) where the owner also manages the business. Also, most of this won't apply for very new businesses or ones that have no profits. For those types of businesses you should use an "asset based valuation" and I'll discuss that on Friday.

Which Earnings Do You Use?

If you are going to convince a buyer to choose your business over all the other businesses on the market that they can buy, you have to appeal to her motives. Setting your price range based on your actual proven profits (as opposed to speculating about future profits) makes the most sense to buyers . It directly addresses their main concern - how much money the business actually makes!

Now for the key question: How do we define "profits"? Do we use cash flow? Or do we use something called EBIT(earnings before interest and taxes)?

The best, most logical number to base your valuation on is "Owner's Benefit". Accountant types like to call this "Seller's Discretionary Income".

The formula for determining the owner's benefit is:

Annual Pretax Profit + Owner's Salary + Owner's Perks/Benefits + Interest + Depreciation.

This number will tell the buyer how much money the business actually has been generating for you as it's owner. Since the buyer's interest and tax payments will be different than yours, you want to include tax and interest payments in the total owner's benefit number.

From there the buyer can make their own estimates of what their interest and tax payments will be.

"Perks and Benefits" can include things such as automobile leases, travel expenses, salaries for family members that are over and above the marker rate for the work they perform. Any of the good stuff that you get in addition to your salary that the business pays for should be included in the "Owner's Benefit".

But the key concept here is that the Owner's Benefit is the amount of money + other benefits the business generates for the owner. And since the prospect is buying the business in order to get that money and benefits, that is where any valuation must start.

I suggest you use an average of your last 3 years owner's benefit as the basis of your valuation.

If last year was a really good one, you may be tempted to use just the owner's benefit from the most recent year instead of the last three. I recommend you use three years because that creates more credibility with the buyer. Especially if your most recent year has been significantly better than any previous year, the buyer may regard it as a fluke or even worse - they may suspect you have manipulated the numbers.

If your profits have been trending up for each of the last three years you should consider weighting the more recent years more heavily. For instance, instead of adding up your owner's benefit from the last 3 years and dividing by three, you can take 70% of you most recent year plus 20% of the prior year plus 10% of the year before that.

“In the business world, the rearview mirror is always clearer than the windshield.” .......... Warren Buffett

What About Using A Multiple Of Future Earnings?

Buyers are paying for the opportunity to benefit from your company's future profits, so basing your valuation of projected future earnings can make sense.

Of course, the future is impossible to predict perfectly so buyers are hesitant to pay based on unproved future earnings.

If your profits have been trending up for the past 3-5 years, projecting that same rate of growth into the future and then applying a multiple to that projected profit may seem like a valid way to go.

Here's the problem: Once you have your owner's benefit number you are going to apply a multiple (which we will talk about tomorrow) to come up with your asking price. Impressive growth the past few years will definitely allow you to justify a higher than average multiple.

So your recent growth will be reflected in your asking price through a higher multiple.

If you project your growth rate into the future and then also apply an above average multiple to those projected profits because of an above average growth rate you have given yourself credit twice for the same positive feature.

Expect a lot of resistance from the buyer.

Also, the best negotiating strategy is to be aggressive when setting your multiple and be more conservative with determining your profits. (And by "conservative " I simply mean using historical, proven profits instead of projected future profits). The buyer can't argue with you over the facts, but they can And will when it comes to future projections.

Increasing your multiple just slightly can have a dramatic effect on the overall selling price.

If you can justify to the buyer a multiple of 4 instead of 3 it will mean a 33% increase in your selling price. That's a lot easier than proving that profits will increase in the future by 33%.

Tomorrow, we will look at "Multiples" And the factors that going into determining what yours should be.

I'd love to hear your feedback so feel free to post a comment or question below.

Business Valuation For Smaller Businesses

2010-04-12T14:34:00.000-07:00

"There seems to be some perverse human characteristic that likes to make easy things difficult.” Warren Buffett

I have a pretty radical idea about small business valuation. And that idea is:

Small Business Valuation Is Not As Hard As Everyone Makes It Sound.

At least not when it come to smaller (under $1 million in sales) businesses that are owner-managed.

Each day this week I'm going to make a small post here on my blog covering the most basic things you need to know about valuing your business for sale.

If you have been intimidated by the words "business valuation", don't worry - by the end of the week you should have enough knowledge to confidently move forward with pricing and selling your business.

I'll admit, I didn't always feel that placing a value on a business was so achievable.

In fact, when I first started to learn about selling a company, it was the business valuation that I found to be the most difficult, even intimidating, aspect of the whole process.

Then I started TheBizSeller.com in 1999 and I quickly realized I was not alone.

What makes business valuation seem so complicated is that there is no universally accepted formula for determining value.

It's often been said that business valuation is an art not a science. Well, it might be easier if it was a science, at lest with science there are laws that can be proven to be correct.

For example, Einstein's Theory of relativity, (E=mc2) provides a framework for understanding an extremely complicated subject with one short equation. And every scientist in that field agrees it is true.

And if you read some of the stuff on the Internet by the so called valuation "Experts", you will think that you have to be Einstein to value a business correctly. :)

Since there is no equivalent in business valuation to E=mc2, we are left with dozens of options, techniques, formulas, theories and opinions.

Sorting through the options and understanding all the jargon can be a full time job. In fact, some people - business appraisers, college professors and other experts with initials after their names - do make a career doing just that.

The other problem with all the theoretical material on the Internet about business valuation is that they never mention the buyer! Since the buyer is the person who has your money (or at least it will be your money once you give him your business!) it might be a good idea to factor in their impact on the value of your business.

2 Basic Truths About The Value Of Your Business

So, here are 2 facts, that if you keep them in mind, will help to simplify things and make the entire process easier.

Fact #1 - The purpose of doing a business valuation (assuming the valuation is being done because you are going to sell the business) is to develop an appropriate price range for your business.

You then advertise your business (and begin your negotiations) at the high end of that range. Ultimately, the prospects who are interested in your business will decide what the business is worth to them, they will make you an offer based on that and you will sell to the highest bidder.

Valuing your business for sale is not like taking a math test in school where there is one correct answer and your professor is going to will penalize you if you don't get it exactly right.

It's really not all that complicated or intimidating when you realize that you don't have to perfectly calculate the value of your business - because that perfect calculation doesn't exist. All you have to do is determine a reasonable ( and aggressive!!) price range, get your business out on the market and let the buyers decide what it is is worth. (Of course, what they determine your business to be worth will be greatly influenced by you and your ability to demonstrate the real value of the business to it's owner.)

Fact #2 - The person who will be giving you money for your business is doing so for only one reason - they want to enjoy the income and other benefits the business will provide for it's owner in the future.

The "income and other benefits" are all derived from the earnings the business produces, so the earnings should be the basis of any valuation that will be used to establish a price range. (Basing the price on sales or on a "rule of thumb' is common and in some cases may be useful as a way of making comparisons so I will discuss that later in the week).

The "Multiple Of Earnings" method is one of the simpler ways to value a business - you take a company's profits times a certain multiple and arrive at a value. It's also the best place to start a valuation because it takes into account the single most import thing - your company's profits.

So, this is the method I recommend and will discuss in more detail in the days to come. Tomorrow we will talk about exactly how to define "earnings". And then later in the week we will go into multiples and the factors that affect it.

Sell My Business - Questions & Answers

2010-04-07T07:47:00.000-07:00

Here are 3 more "Sell My Business" questions I have received recently from business sellers.

Question #1 - Can I Sell My Business For $150,000?

Hello:

I have a small document storage business that I started in 2005. My company has grown at a 14.8% rate per year since 2005. Gross dollars this year will be approximately $75,000. Most of my customers are in medical, insurance and accounting businesses. They are very happy with my service and rate structure. I bill every month. I have never had a customer who hasn't paid me for the service I provide. This year I foresee at least three new customers which will increase my revenue at least 10% or more.

My question to you is: Do you think that I will be able to sell my company and get out of it what I want?? I am looking for anything over $150,000. I'd like to sell within the next year.

Thank you for your help

Harold

Hi Harold: Thanks for your question.

I think there are a few key questions that will determine the price you can sell for.

First, of the $75,000 you will gross this year, how much of that is profit? Since you have been consistently growing at a nice rate of 14.8% and because your customer base is so stable I definitely think a multiple of 3x your annual earnings is reasonable.

More specifically than earnings I would use a multiple of your "Owner's Benefit". The formula for determining the owner's benefit is: Annual Pretax Profit + Owner's Salary + Owner's Perks/Benefits + Interest + Depreciation. This number will give the buyer an idea of how much cash the business generates for you, the owner.

Here are two questions to think about.

First, is the facility where you store the documents leased? If so, when is it due to expire? If it is due to expire with in two years of when you sell, I would consider talking to the landlord about extending the lease now. Any less time on the lease and the buyer will worry about what will happen next year: .................Will I have to move? ..... Will my rent skyrocket?

So if possible, try to avoid that issue now by working out a long term lease.

The second question is, are you the only employee? In a lot of single-person businesses the customers are doing business based on their relationship with the owner. Buyers worry that when the owner leaves, so will the customers. If you have long term contracts with your customers that's best, but if they are paying month to month and can cancel at any time that will be a concern to buyers.

Since you are not looking to sell until next year, that gives you some time work on this. Give your customers the opportunity to "lock in" an attractive rate for your services for the next 2, 3 or 5 years. If you give a discount for a longer agreement (i.e. 5 years) you will be reducing your immediate revenue, but in the eyes of a business buyer you will be much more attractive (and valuable) because their risk is reduced.

Let me know if you have any further questions. Good luck,

Pat

Sell Your Business - Tips, Hints & Techniques: Enter your name & e-mail address below and each week I'll send you tips, advice & ideas you can use right away to help sell your business faster and for more money.

Key Features That Attract The Business Buyer

2010-04-05T13:18:00.000-07:00

It is understandable that you may have an emotional attachment to your company.

Factors such as how much you enjoy running the place, your relationship with your employees or the prestige you have in the community may be some of the things you value the most about your business.

But it's important to realize buyers are going to judge your business based on facts - things that they can see in writing. A business buyer will have no history with your business and no sentimental feelings towards it.

The strongest emotion they will feel is fear. They will fear making a mistake such as buying a weak business or paying too much. They will fear getting taken by a dishonest seller.

No business is perfect, but if you can show a buyer that your business can provide most to the items listed below you will have a good chance of selling your business at a good price.

Item #1.) Sales & Profits That Can Be Proven - Above all else, buyers want to see how much cash your business generates. Ultimately, the buyer is interested in how much cash the business will make in the future - but that's impossible to predict exactly, so buyers will value your business on it's historical financial performance. You should prepare financial statements for the last three years.

Ideally, you will be able to show that sales and profits have been trending up in recent years. If the trend has been downward you can expect the buyer to value your business accordingly.

While the historical financial statements are the primary information used to value the business, you can still provide projected financial statements that show how the business can be expected to perform in the future.

Item #2.) The Price Is Right - Whether you offer seller financing or not, most buyers will have to borrow money from somewhere to buy the business. So when the buyer looks at your business and your asking price he wants to know:

"At this asking price, can I service the debt I will need to take on, plus pay myself a reasonable salary, plus have some money leftover to put back into growing the business?"

Whatever price and terms you and the buyer agree to, the buyer will need to be able to answer "yes" to all of these questions or the deal won't work.

What is a "reasonable salary" for one person may be completely inadequate for another who has a different lifestyle and financial obligations. So the issue is not just: "Is the business priced correctly?", but "Is this price workable for this particular buyer with their needs and financial situation?"

Item #3.) The Future Is Bright - Also, when it comes to price, the buyer wants to know that the business can continue to perform at a level that justifies the price. Your business' past performance may look great on paper but how will it do in the future with a new owner? Buyers fear that things may change once they take over and they will be looking for red flags that indicate the business may be headed for trouble.

Some things a buyer will look for are:

• An unusually large percentage of sales come from just one customer - A buyer will worry about what will happen if this customer goes out of business or starts buying from a competitor.

• The business is overly dependent on you, the seller, for it's success - If your customers buy from you because of your long term personal relationship with them, a buyer will view this a negative. If your name is on the sign out front and everyone in your industry associates your business with you personally, you will need to show the buyer that an entire organization is in place and can operate independently of you.

• The business is part of a trend that has come and gone - Video rental stores used to be a hot item for the small business owner, today Block Buster and Netflix have made them almost obsolete. If you started your business to cash in a hot trend that has run it's course you may still be able to sell the business but you will need to price it accordingly.

The selling price of a small business is based on it's historical performance, but a buyer will choose which business to buy based on their assessment of it's future performance.

Item #4.) A Desirable Location That Can Be Taken Over By The Buyer - If your business is operated out of a leased facility, and the location is part of it's value and appeal, buyers will be interested in the details of your lease. In addition to reasonable rent, buyers will want to see how much time is left until the lease expires and if there are any options to extend.

Equally important is determining if the lease is transferable.

It's common for landlords to include a clause in the lease that prevents you from assigning it to a new owner without the landlord's approval.

The better the terms of your current lease, the more likely a landlord will want to negotiate a new lease with your buyer. If your lease does require the landlord's approval to transfer, you may want to negotiate a new lease now with updated terms that your buyer can automatically assume.

Many small business sales have fallen through at the last minute because the landlord refused to give the buyer the same lease terms that the seller had enjoyed.

Item #5.) The Assets Have Real World Value - Are the tools, machinery and vehicles in good working condition or are they past due for repairs or replacement? Is the inventory at the same level as when you last valued it or will the owner need to make an immediate investment to get the inventory up to adequate levels? Does the current inventory match the current market demand or is it's value over-inflated by lots of obsolete and un-sellable merchandise.

That these hard assets exist is one thing, but the buyer wants to see that they have actual value.

Item #6.) Limited Competition - This doesn't mean no competition or only weak competition. If the business is in a growing industry it will always have some type of competition.

In fact, a lack of competition could be viewed as a negative: If you have been doing a certain amount of sales with no competition, the buyer will wonder what will happen if a new competitor comes along - and if you are in a growing field or a good neighborhood, competition of some sort will come along.

Better to show that you have been successful all these years in spite of the competition.

Sell Your Business Tips, Hints & Techniques: Enter your name & e-mail address below and each week I'll send you detailed tips, facts, resources & ideas you can use right away to help sell your business faster and for more money.

5 Facts You Need To Know About Business Buyers

2010-04-02T12:55:00.000-07:00

If you're going to influence someone, you've got to know what already influences them. - Tony Robbins

Sometimes, as business sellers, we get so focused on the details of our business and what it's worth that we forget the most important element in the buying process - The Business Buyer.

So lets look at the buyer herself and how she thinks: her fears, concerns and priorities. Knowing some things about the buyer's psychology will help us to communicate with and motivate the buyer. (Then, next week will talk about how the buyer sees your company and the most important things they look for in a business that they buy.)

Truth #1 - Money is not the #1 reason people want to own their own business

Many surveys of entrepreneurs have shown that money is normally 4th or 5th on their list of priorities.

The ability to control one's own destiny, freedom from a boss or corporate structure and the opportunity to be creative are always at the top of the list of motives. Status, recognition and the ability to work directly with employees and customers are also equally or more important to a business buyer than just making a lot of money. When presenting your business to prospects, show them how buying your company can provide them with these benefits.

Along these same lines, don't forget to tell the prospect about the fun part of owning your business.

Will the new owner get to travel to exotic locations or meet exciting new people? Are there any perks like regular golf outings with clients? If owning your business has brought you a lot of enjoyment and excitement, make sure the buyer knows it. You never know what aspect of your business may just be the thing that makes a buyer want your business over all the others that are for sale.

Most of the information out there about selling a business focuses on numbers - valuations, financial statements, financing terms etc. But you can never forget that the human element is the most important part of any sale.

Truth #2 - Business Buyers Hate Risk.

While sellers focus mainly on trying to show the buyer how bright the future can be if everything goes right, the buyer will be looking for all the things that can go wrong. Some things a buyer will view as increasing their risk include:

** financial statements that are sloppy, incomplete or nonexistent

** sales and profits that have been going down without explanation

** a sales price based on a best-case-scenario future

** Old machinery and vehicles that will likely need to be replaced or repaired in the immediate future

Qualified business buyers will be looking at - and comparing your company to - other businesses that are for sale. The more you can do to limit risks like the ones mentioned above, the better you will look compared to these other businesses.

Truth #3 - Buyers don't always have a specific type of business in mind at first.

Most small business buyers are first-timers. They may have decided they definitely want to own their own business, but don't know yet what type of business. Many first time buyers are career changers or retirees with tremendous abilities and experience. That they are currently exploring several industries should in no way make you doubt their seriousness.

However, the prospect should already have done a significant amount of research into your industry and the should be able to explain why he is interested in your type of business. If he hasn't, then he is using you to do his research and you may be wasting your time.

Truth #4 - You willingness to help finance part of the transaction will increase the buyer's willingness to pay your asking price.

When a seller is willing to finance a part of the sale, it goes a long way toward building the business buyer's confidence in the business.

Down payment, interest rate and length of financing are all variables that can effect the attractiveness of your asking price. If you can be a little flexible on all of these terms it will make closing the deal at your desired price a lot easier.

Truth #5 - Your willingness to stay on for a training period will be viewed as a big positive.

Even the promise of just 30 days of on-the-job training will go a long way in building your buyer's confidence in the deal. Especially if they are new to the industry.

How Can I Serve You Better?

I try my best to make these weekly tips as useful as possible but I need your help. I need to know the challenges you are experiencing and the questions that you have. What I really want to know from you is:

What's the one piece of information you have been looking for on the Internet but haven't been able to find?

Feel free to e-mail me at pat@thebizseller.com . Tell me a little about yourself and your business and what questions you have - I'll get back to you ASAP and, with your permission, may even include your question in a future edition of the Tips Newsletter.

Sell Your Business Tip - Price Negotiations

2010-03-31T08:03:00.000-07:00

T oday we are going to answer a question that - when handled correctly - can help you to maximize the selling price you get for your business.

And that question is:

Who should begin the price negotiations, the buyer or the seller?

Fortunately, the answer to this question is very simple:

Always have the buyer make the first offer in the price negotiations

Here’s why.

If you have done things correctly up to this point, the buyer should already know what your asking price is because you’ve included it all the business-for-sale-ads that you’ve run.

Also, you should have included your asking price and financing terms in any of the written information you’ve provided to the buyer such as your selling memorandum.

The price you stated in your advertisements IS your opening price offer.

If you allow the price negotiations to begin with you making a second (and lower) price offering before the buyer has even made his first, then you will put yourself in a weakened negotiating position.

You are basically negotiating against yourself.

And worse yet, you are sending the message that you don’t really know what your business is worth, that your willing to take what you can get.

This will ruin for your credibility and that buyer will then continually try and nickel and dime the price down until there is nothing left.

So, if the buyer wants a price below your original asking price - let them make a counter offer.

I recommend that you always add a cushion of about 10% to your asking price - over and above your desired selling price - so that you always have room to negotiate.

No matter how low you start, business buyers will always try to negotiate a lower price - it’s their way of testing to see if they are getting the best deal.

If the buyer says something like,

“How much can you take off that price”

“What are you really looking to get for the business?”

Remind him of the price and terms you stated in your ads and Selling Memorandum and briefly re-explain how you came to that number.

If he wants a better price than you have offered, then let him begin the negotiations by making his counteroffer.

And always ask the buyer to explain how they determined their price offer

Their answer - if they can come up with one - will tell you a lot about how prepared they are and just how realistic they are being

So remember these 4 key points

1.) The asking price you state in your advertisements is your opening price offer

2.) That price should include a cushion of about 10% above what you hope to actually sell for

3.) Expect that you will have to do some price negations no matter what

4.) Whenever the buyer makes a counter offer - make them justify it

Ask them how they arrived at that figure and why they think it’s fair

9 Ways To Protect Yourself When You Finance The Sale Of Your Business

2010-03-11T08:13:00.000-08:00

Two days ago I discussed 3 basic guidelines to apply when you offer the buyer your own financing.

I got a lot of feedback from sellers who are hesitant to finance any part of the sale out of fear they won't get paid back.

And while we would love to get an all cash deal, the fact remains that over 80% of small business sales include some type of seller financing. So if you can find a buyer who can pay you all cash, great!

But if not, here are 9 different things you can do to protect your interests and make sure you actually get paid everything the buyer owes you.

1.) Check The Buyer's Background - It may sound obvious, but when it comes to getting paid the money the buyer owes you, the most important thing you can do is verify that the buyer is qualified.

Too many sellers - in their rush to sell ASAP - ignore warning signs the buyer send throughout the selling process.

In the next section we will discuss Due Diligence. While most people associate due diligence with the buyer investigating the seller, in the next section we will talk about what you can do to investigate the buyer's financial qualifications as well.

But, in addition to checking the credit reports, personal assets, work experience and personal references of the buyer you should also be assessing the buyer on a personal and professional level.

Don't be afraid to interview the prospect early on in the selling process just as you would a job candidate.

Usually, the more qualified and prepared the buyer is, the more understanding they are of you concerns. Conversely, the buyer who is lying about past businesses successes or their financial capabilities will balk at any attempt to get to facts.

Here are some warning signs that buyers often give when they are looking at your business. If more than 2 or 3 of these apply to your buyer he may not be the type of person you want to lend money to:

* They delay or avoid any discussion of their financial qualifications.

*They seem more interested in how much money you will take off your asking price than they are in the actual operations of the business.

*They expect/demand all sorts of financial information from you up front without providing any proof they can actually afford the business. In other words, they want the flow of information to be all one way.

*They are very forthcoming with financial information about themselves and it is bad (or inadequate to buy your business)

*They have bought or started more than one business in the past that failed.

*They are undercapitalized. As we stated previously, buyers tend to underestimate how much money they will need. If they have just enough cash to cover the down payment then they are undercapitalized.

*Lack of experience. If they never ask any insightful questions and never raise any concerns/objections it's probably not because your business is perfect but because they don't know what to ask.

2.) Don't Give The Buyer A Legal Excuse To Not Pay You - Some short sighted sellers try to hide certain negative aspects about their business thinking that once the business is sold they are off the hook. From a legal standpoint that may not be the case.

Always be forthright with the buyer.

The Sales Contract will includes a section for Representations and Warranties - statements of fact about the business such as:

*All the financial information provided to the buyer is correct

*The seller owns the assets listed in the sales agreement

*All tax returns have been filed and there are no taxes owed unless specifically listed

*All liens and encumbrances have been listed

These and many others statements can be part of the sales agreement. Of course your lawyer will help you with this. Always be honest with your lawyer about any problems with the business - they can't protect you from legal problems if the don't know the true state of the business.

Avoid making any promises or guarantees about the business' future performance or the health of the industry. Once you sell you can't control these things anyway.

3.) Make Sure The Payment Terms Are Realistic - In previous tips I have discussed the need to limit the length of the repayment period. It may be tempting to try to squeeze every last dime out of the buyer and then shorten the repayment period to 12-18 months. But if the result is that the buyer can't meet his monthly payment obligations then you haven't done yourself any favors.

Remember, the buyer will be paying himself and you out of the cash the business generates. The financing plan has to be based on realistic expectations about the business' performance in the near future.

Just as buyers tend to underestimate how much cash it will take to get into the business, they tend to overestimate how quickly they can increase profits. In truth most businesses experience lower sales and profits immediately after the new owner takes over.

You know your business better than anyone, so don't let an overly optimistic buyer tempt you into a unrealistically short payoff period - better to wait 5 years to receive all you money and actually receive it than to set up a plan where the buyer starts missing payments almost immediately.

4.)Life insurance - You can have the buyer take out a life insurance policy with yourself as beneficiary.

5.) Acceleration Clause - An acceleration clause states that if a buyer fails to make a payment on time, the entire balance becomes due immediately.

6.)Additional Collateral - If the buyer has a personal residence with significant equity, commercial real estate or other investments, you should ask him to put them up as collateral.

7.)Personal Guarantee - Just like a bank, you can require the buyer to personally guarantee the loan when you sell your business. You should also get a personal guarantee from the buyer's spouse. This prevents the seller from transferring all their assets the spouse in order to avoid paying you.

8.)Sales Contract - Depending on the circumstances when you sell, you may want to restrict the new owner's acquisitions, expansions and sale of assets until you are paid in full.

9.) Escrow - If you are selling a corporation or LLC, you and the buyer may agree that your corporate stock of LLC certificates will be held by a third party - such as an escrow agent - until the buyer has paid you in full. If the buyer doesn't make good on his payments the escrow agent would then return the stock certificates to you.

Selling A Business - 3 Guidelines For Offering Seller Financing

2010-03-09T08:42:00.000-08:00

While every seller dreams of getting that one big payday, the reality is that most small business sales (about 80% according to most estimates) involve some type of seller financing.

Yet, in a review of all the businesses we listed for sale at TheBizSeller.com, only 25% of sellers initially offered some type of seller financing.

As odd as it may sound, there are actually some benefits to providing seller financing instead of an all cash deal.

First, by spreading out payments over time you will usually lower your tax rate.

Second, and most importantly, you will exponentially increase the size of the pool of qualified buyers. Most buyers don't have the cash to cover the full price and contrary to popular belief, banks are not lined up waiting to give money to new business owners.

Here are some guidelines when it comes to seller financing:

1.) Get a down payment of at least 30% but shoot for 50% - 60%

The first reason you want as big a down payment as possible is obvious: the more the buyer puts down, the more they have at risk in the purchase and the harder they will work to make it a success.

The buyer will be making monthly payments to you out of the cash flow the business generates. So the payments must be low enough that the buyer can pay himself a decent wage and have enough left over to pay you. The down payment, therefore must be big enough to lower the monthly payments into this affordable range.

Even if you do not need a lot of money up front to live on and want to spread the payments out to lower your taxes, you will still want a sizable down payment to cover your expenses related to the sale itself. Consider these expenses that you will face after selling: Taxes - sales tax, stock transfer tax, real estate stamp tax, and other taxes due at the time of the transaction. Loans - you'll need enough after tax cash to payoff those business loans not assumed by your buyer. Fees - appraiser, attorney and accountant's fees, and in some cases broker's commissions.

Word Of Warning: Most buyers overestimate how much they can afford to pay down.

Many buyers will look at how much money they have in the bank and think this is what they have available for a down payment.

But just as you will have legal and accounting expenses associated with the sale, so will the buyer. Then there are the living and operating expenses the buyer will need in reserve when they first take over the business. It's common for a business to experience reduced sales and profits in the months immediately after a new owner takes over.

An over anxious buyer may very easily underestimate how much money they will need in those first few months.

While this is technically "their problem", it can have serious consequences for you when it comes to receiving timely payments each month.

So make sure that the down payment is big enough to put the remaining payments in a range the business can support but not so big that the buyer is cash strapped the day they take over.

Along these same lines: you should know where the buyer is getting their down payment from. You may feel secure in the knowledge that the buyer has paid you 60% down, leaving only 40% to be covered by future payments.

But if they borrowed that 60% down payment from their rich uncle they have actually financed 100% and the chances they can meet monthly payments on both loans in unlikely.

2.) Limit the repayment term to 3-5 years

Your goal in setting up the financing should be to lower your risk as much as possible. The longer you stretch out the repayment period, the greater the chance that something will go wrong and you won't get fully paid. Obliviously, the greatest threat to your payments is that the buyer may run the business into the ground.

Also, economic conditions can change and, through no fault of the buyer, the business is no longer generating as much profits as in the past.

3.) Always Charge Interest

Earlier I stated that only 25% of the businesses that listed here at TheBizSeller.com in 2007 offered any type of seller financing. Yet of those that do, a surprising number of these sellers were willing to not only finance the sale of their business but to do it interest free!

There are several reasons why this is a bad idea.

First of all, offering 0% financing is just giving away money! Buyers expect to pay interest on the money they borrow.

If you sell your business for $200,000 with $100,000 down and finance the remaining $100,000 for 5 years at 8% interest you will make $21,162 in interest. There is no reason to give that away.

The buyer may try to negotiate with you to get a better rate but they are still prepared to pay something.

Which brings us to the second reason you should always charge interest on the money you loan - it gives you flexibility in negotiating. You can always lower your interest rate (Which is preferable to lowering the price) as part of the negotiation's give and take. But if you offer no interest up front it gives you nothing to offer during negotiations because you have already given it away.

And the last reason you should always charge interest is that the IRS may tax you as if you did collect interest ..... even if you didn't. It's called "Imputed Earnings" and it allows the IRS to estimate the amount of money you would have earned if you had changed a fair rate of interest and then tax you on those earnings.

How to increase the selling price of your business by doing some very basic preparation

2010-02-18T08:03:00.000-08:00

This week we will discuss your company's leases, contracts (with customers and/or suppliers), inventory and assets and more specifically we will talk about what you can do during the preparation phase so that these things add value to your business in the eyes of the prospect.

Making Your Lease More Appealing To The Buyer

If you are renting and your business depends heavily upon location for it's success, than the specifics of your lease will be key to a successful sale.

In addition to the monthly rent amount, buyers will look for two significant features in any lease:

1.) Assignment - Can your lease be taken over by the buyer without your landlord's approval?

2.) Length - How much time is left on the lease and does the renter have the option to extend it.

Leases are usually written with a "no-assignment" clause. This means your buyer can not take over your lease without the landlords consent. Unfortunately, some greedy landlords will see this as an opportunity to dramatically increase the rent - often to the point that it kills a sale.

You should read your lease now to see just what the terms and limitations are concerning assignment.

If you have only a year or two remaining on your lease, a smart buyer will make any purchase offer contingent upon his ability to negotiate a long term lease with the landlord. At that point, the fate of your sale will be out of your control and rest in the hands of the buyer and landlord.

Even if you have a few years remaining on your lease you should consider negotiating a new lease now. You don't have to tell the landlord that you are selling, just that you'd like to lock in a good lease for the long term.

In addition to adding a clause that will allow you to transfer the lease, you should attempt to get as many options-to-renew as you can.

Even if you have to start paying a higher rent it will be worth it. A small increase in your rent won't make your business less appealing to buyers, but a lease that is about to expire or can't be assigned will.

Know The Value Of Your Contracts

Gather up all the contracts you have with customers, suppliers, independent contractors etc. and review the terms of each.

Make a list of all your agreements and include the expiration date and general terms. For certain types of businesses, most buyers will request just such a list early on in their evaluation process. To protect your confidentiality do not include the names of the companies or any contact information.

If possible, try to evaluate these contracts from the buyer’s point of view. Which of these agreements would you, as the buyer, be glad to assume? Which ones would you want to avoid?

In truth, that question may be impossible to answer. One buyer may love the fact that you have a contract locked in place to provide you products to a customer for the next year or more. Another buyer may view that exact same agreement as a negative believing he could negotiate a better deal.

As with leases, a contract may or may not be assignable. So some agreements that are no longer attractive may not need to be assumed by the buyer. Likewise, before you promote the value of a low cost contract with a supplier, you want to make sure that contract will pass on to the new owner - don‘t just assume that it will.

Of course, if you have a contract in place, and based on current market conditions you know it's a good deal for your company, and you know it is in fact transferable to a new owner, then you certainly will want to play that up. This is exactly the kind of turn key feature that entrepreneurs are looking for in an existing business.

The bottom line is that you want to know the details about all your contracts with customers and suppliers ahead of time so that you can correctly answer all the buyers’ questions. At some point the buyer will review your contracts in greater detail - usually in the Due Diligence phase. So you don’t want to make promises that later turn out not to be true.

And just as importantly, you want to maximize the value, in the buyers eyes, of the contracts they will inherit.

Evaluate Your Assets & Inventory

Sell or dispose of any unproductive assets such as old machinery or unused computer equipment. A buyer won't pay for them and they only detract from the overall appeal of your business.

Likewise, now is the time to finally give up on all your outdated, obsolete and damaged inventory. Your customers haven't bought it and neither will your prospect.

Better to liquidate these assets now and get what you can for them - even if you take a loss. You may be able to donate some of these things to charity and get a tax break.

Padding your asking price with old, unwanted inventory or unused equipment won't make you money but it will slow down the sales process and possibly make the negotiations very contentious. Make it easier for your prospect to buy your business - get rid of this dead weight.

Next, look at the machinery and equipment that is still in use. Is any of it in need of repair or replacement? It so, invest in those repairs and replacements now - it will be well worth it. The buyer wants a turn key business - one with no need for immediate investment on their part to fix things.

If, after observing your facility, the buyer believes he'll have to sink a significant amount of money into updating the operation, it can only lower the selling price. Also, it will make your business look less desirable compared to the other, more modern businesses the buyer is considering.

How To Make A Good First Impression

Take a look around your office, store, warehouse or whatever your location. What kind of first impression do you think it will make on a visitor?

Is the office clean? The warehouse organized? Do employees greet visitors with a smile or with a sneer? Do they acknowledge visitors at all?

If you set aside a place outside for employees to smoke, is that area littered with hundreds of cigarette butts?

Admittedly, these are minor things that may have no effect on the business' bottom line. But to a buyer who is thinking of putting his life savings into the business, these small details send a powerful message.

There is no need to make major renovations. Small repairs, such as replacing a cracked window or fixing the sign out front can be done quickly, cheaply and will greatly improve the initial impression the buyer gets when he first lays eyes on your business.

If any of the needed repairs are the responsibility of you landlord, request that the repairs be made ASAP.

All of the steps mentioned here will take just a little time and almost no money. Yet, they can have a major impact on the sale of your business. While much of this may be common sense, even obvious, you would be amazed how few business sellers will take these simple steps when they put their business on the market.

This is good news for you because with just a little thought and effort up front you can make your business stand out from all the other less prepared businesses your prospect will see.

How Can I Serve You Better?

What's the one piece of information you have been looking for on the Internet but haven't been able to find?

Feel free to e-mail me at pat@thebizseller.com . Tell me a little about yourself and your business and what questions you have - I'll get back to you ASAP

How To Creat A Selling Memorandum That Will Motivate Someone To Buy Your Business

2010-01-21T09:08:00.000-08:00

The Selling Memorandum is an important sales tool that you will give to the buyer early in the process (but only after they have signed a confidentiality agreement). It should be a detailed and truthful overview of your business.

It should also be positive and compelling.

Consider it a brochure for your business. It is the first thing you give the buyer after they respond to your business-for-sale ad and it is the key to making a good first impression.

It will also serves as a reference guide that the buyer may refer back to again and again over the course of the selling process.

We will discuss two types of Selling Memorandum - a highly detailed, Full-length Selling Memorandum that is appropriate for most businesses with sales over $200,000 and a Summary Version or Mini Selling Memorandum that is shorter and appropriate for many single proprietorships, most single-location restaurants and retail businesses and most simple service businesses with few employees. Click here for a discussion and an example of a selling memorandum in the summary version

There are no hard and fast rules about what must be in your memorandum. If some of what we discuss below doesn't apply to you, feel free to skip over it.

We will also touch on ways you can explain and minimize any negatives about the business.

As you will see, the full-length version of the memorandum can be very detailed - it is not something you throw together in half an hour.

You should take your time and put plenty of thought into what you will say and how you will say it.

A Selling Memorandum should serve two important purposes:

1.) It should raise the buyer's enthusiasm level for your business.

2.) It should justify the asking price.

(At the end of this section we will give you some tips and advice on the actual writing of the memorandum and this should help you get your thoughts down on paper in an organized and interesting way.)

Full Length Selling Memorandum

Here are the 9 sections you may want to include in your Selling Memorandum:

1.) Executive Summary - This section gives the reader a thumbnail sketch of your business. It can be as short as a few paragraphs but need not be longer than two pages.

The executive summary should answer the following questions:

What products do you sell or what service do you provide? If you have a large product line you may want to only mention the products/services that produce most of your revenue.

For how long have you been in business?

What exactly is for sale? Is real estate included? Vehicles? Or is it simply your client list and inventory. If it is a retail business, how many locations are included?

You will include actual financial statements later, but in this section at least include the total sales and profits figures for the last 3-5 years. You should use your recast financial statements for these figures and you should label them that way.

I recommend that you also address why the business is for sale. (That question will certainly be on the mind of the buyer) Try to be as positive as possible. It can be as simple as one sentence: "Owner wishes to sell the company in order to pursue other business ventures".

It can even be covered with one word: "Retirement".

2.) Company History - Who started the company? What was the founder's vision at that time and how has it evolved? What are some of the growth milestones that the business has reached along the way? If new partners or investors have come on board since the beginning, who are they and how have they contributed to the company's growth?

3.) Marketing & Advertising - What advertising and marketing activities are you undertaking? If positive word of mouth plays a big part in attracting customers, mention that. If you get a lot of walk-ins due to heavy traffic outside your store, mention that.

Are there any new and exciting marketing/advertising opportunities that you would pursue if you were to continue to run the business? Mention them here and say why you think this avenue can boost sales.

Does your company occupy (or dominate) a specific niche or position within your industry or local market?

4.) Company Strengths - What advantages do you have over the competition? Are you known among your customers for being particularly good at something? Do you have exclusive or unique products? Indicate if you have any patents, copyrights or intellectual property.

If you are a retail outlet, is the surrounding area growing, or the demographic you serve growing? Are there any new hot products coming out that will improve sales?

If it is a franchised business, what plan does the Parent Company have that will grow the business? Is the franchisor a recognizable name with a good reputation and financial strength?

List any positive changes going on in the industry: breakthroughs in technology, pending legislation, growth in a particular demographic.

5.) 3 Years Of Historical Financial Performance - You don't need to include complete financial statements, just some highlights that show in numerical terms that the business is growing. If sales, profits and the owner's benefit have been trending upward you can list them here. Show 3-5 years worth of information from your Income Statements. Use pretax numbers and don't include interest as the taxes and interest the new owner pays will be different.

6.) Projected Future Financial Performance - If you can make compelling and fact-based projections of what the business can do in the future, you may want to include this section. Be conservative and base your projections on facts about your market and industry. Explain fully how you arrived at your projections.

Making pie in the sky projections can ruin your credibility. And throwing the word "Guarantee" around can get you sued. But, if you can make a credible case for solid future growth then you want to include it.

7.) Price & Terms - Explain how you arrived at your asking price. Anything about your valuation that is conservative should be pointed out. Also, discuss any financing terms you are willing to offer. Even if you are open to negotiating the terms, set down the minimum requirements so you eliminate those people who have no money. For example. "The owner is willing to negotiate the exact financial terms of the sale, but will require at least 30% down and a financing term of no more than 60 months".

8.) Review Of The Opportunity - In just of few sentences, reiterate why this is a great opportunity. List the top 3 or 4 most attractive features of the business and why you think the future of the business is even better than it's past.

If you like, you can include a few words about why you are proud of this business. What it has meant to you and your family. And why you are committed to helping the new owner successfully take over what you have started.

9.) Attachments - Here you would include any brochures or other product literature, any press clippings that mention the business favorably and any photos of the facilities. Any information on industry trends or research can be included in this section. If your business is a franchise, any literature from the Franchisor should be included here.

Dealing With Negative Information

** Weaknesses - Address any weaknesses the business has or has had that are now fixed. If last year the sales and profits dipped, explain why and what has been done to fix things. If the business has been down for the past couple of years, it's a good idea to put the blame on yourself instead of the industry, the economy or any other reason.

No need to go in to great detail now, just a single sentence stating that you are burned out or past due for retirement. You don't want to turn the buyer off at this point but you can't hide the obvious if sales have been decreasing. Acknowledge any such problems simply and then when you meet face to face with the buyer you can give a more detailed argument for why the business' future can be brighter than it's recent past.

** Possible Buyer Concerns - Don't be afraid to be honest about what talent the buyer should bring to the table - if there is a lot of customer contact, travel or technical knowledge required, say so. Better to have an incompatible buyer find out now than latter.

This can be addressed in the Executive Summary when describing the business. For example, you can say something like, "This is a great business for someone who thrives on a lot of customer contact".

A buyer who is new to your industry may have unnecessary fears that there is too much to learn or that they are not qualified. You may want to mention how easy it will be for someone outside your industry to get up to speed and if applicable, what training you are willing to provide.

Some Tips To Help You Write Your Selling Memorandum

Does the thought of sitting down and putting this information on paper make you uncomfortable? Don't worry, you are not alone. Lots of business owners can talk a persons ear off about their business. But asking them to write that same information down and they break out in a cold sweat.

Here are a few simple things you can do to get what you know in your head down on paper.

1.) Take a separate sheet of paper for each of the 9 categories above and brainstorm each of the facts about your business that belong in that section.

2.) Write everything down that comes into your mind - don't edit yourself (not yet anyway)

3.) When you have a good list for each section, combine things that are similar and cross things off the list that are redundant

4.) For each feature/element you've listed, write a few sentences about the feature. Don't feel like you have to discuss every last detail of your business - that's impossible to do and it will result in a very tedious memorandum. No matter how much detail you give you will get follow-up questions from the buyer. This is a good thing. It gives the buyer a reason to pick up the phone and call you which is what you want.

5.) Put things in the form of a list or bullet points if it is easier

6.) Set aside what you have created so far and come back to it in 2-3 days. You will think of things you hadn't thought of before that you will want to include. And you may want to delete anything from the previous draft that seems trivial or less important. You will also want to rewrite anything that upon rereading it, seems unclear, misleading or unnecessary

7.) Give it to your spouse or partner to read. Is it clear, does it make sense to them? Have you left anything out? Could some things be said in fewer words? Or said with more positive language?

8.) Proof read it for typos and spelling errors several times.

How To Make Your Business More Appealing To Your Buyer

2009-11-24T15:12:00.000-08:00

Do all you can to lower the buyer's risk

Maybe a better way to say that is to lower the buyer's perceived risk. All business people hate risk, but buyers are especially sensitive to it since they are entering unknown territory when it comes to your business.

Of all the different businesses you prospects will consider buying - all other things being equal - they will choose to buy the one with the lowest perceived risk.

Here are 3 important steps you can take to lower the buyer's perceived risk of buying your business:

1.) Get your financial statements in order.

If I had to name one thing that you should do to maximize your chances of selling your business (and selling at the highest price) it would be to have detailed and accurate financial statements. If the buyer doesn't trust your financial statements they won't buy your business. Hire a professional to prepare at least 3 years of financial statements and your prospect will feel much more comfortable about investing in your business.

2.) Be honest about the business' weak spots.

Buyer's will usually find the skeletons in the closet.

So don't try to hide them.

If a large portion of your accounts receivable are old and/or uncollectable, if key employees plan to leave after the sale or if the machinery is old and the inventory obsolete, the buyer will find these things out eventually. Better that they hear the truth from you up front than to discover it on their own later on. When they find out the truth on their own they will distrust everything you say and they will perceive that buying your business is risky.

3.) Reduce your contingent liabilities.

Issues like unpaid taxes, accounts payable in dispute with a vendor or accounts receivable in dispute with a customer will always put off a buyer. The unknown is scary and the buyer will almost always assume the worst.

Don't even let these items become an issue.

If you to address these problems up front it will always be easier to fix and will cost you less than what the buyer will imagine in their worst-case-scenario thinking.

Confidentiality - Why It's Important.... Even When It's Not

2009-06-09T07:22:00.000-07:00

Usually, we use the term confidentiality to mean that the sale of your business is a secret. But when the business is very small or the owner is ill or has talked openly about retirement, the sale has always been common knowledge.

If this is the case, you should still be concerned about confidentiality.

Your tax returns, P&L statements and customer lists are still confidential documents. Proprietary information like manufacturing processes or recipes add tremendous value to the business the buyer is paying for.

Regardless of your situation, you must insist that prospects sign a confidentiality agreement before seeing any in depth financial information and you must insist buyers only talk to you (and not your employees) throughout the process.

Sometimes you will get requests for information from a very good prospect that you just can't fulfill. For example, early in the process, a buyer may request a list of your customers or suppliers. (He may even ask to meet with these people)

You must determine why the buyer wants this very specific information. Does he want to steal your customers from you? Or perhaps the buyer wants to see if you are overly dependent on one customer. If 80% of your revenues come from just one or two clients, that is a legitimate red flag that would concern any buyer.

But your prospect doesn't need a complete list of your customers along with contact information to find this out. Instead, you can prepare a report that shows what percentage of you revenues comes from each customer (or the top 10 or 20 customers if that's more appropriate).

Remember: Only one of your prospects will end up buying your business. But all the other prospects will still posses whatever information you give them after they drop out.

So a good question to ask yourself when deciding whether or not to provide certain information to a prospect is:

If this person does not buy my business, could they use this information to harm my company's value or the success of the new owner?

If a buyer absolutely insists that you provide a certain piece of information that you are uncomfortable providing, you have three choices:

1.) You can flatly say "no" and risk losing him as a prospect.

2.) You can give him the exact information he asked for

3.) You can prepare a report that provides just the information you are comfortable revealing and hope that it will satisfy the buyer's need.

Exactly how you handle a situation like this will depend on the quality of the prospect who makes the request.

But whatever you decide, make sure that the buyer understands you are not trying to hide anything: it's just that there is certain information that you are uncomfortable releasing now, but that once the buyer has submitted a Letter Of Intent he will have complete access to your business.

Just because the sale isn't a secret doesn't mean prospects can just show up at your business whenever they please, or have direct contact with your employees when you are not around.

Even when the sale is not a secret this information is highly confidential and must be protected.

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