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The Devil May Be in the Details

When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.

In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. For example, the Reps and Warranties may kill the deal. Other areas such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these can quash the deal. Personality conflicts between the outside advisers, especially during the
due diligence process, can also prevent the deal from closing.

One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:

  • Buyers who lose patience and give up the acquisition search prematurely, maybe under a year’s time period.
  • Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
  • Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
  • Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
  • Inexperienced buyers who are unwilling to lean heavily on their experienced advisers for proper advice.
  • Sellers who have unrealistic expectations for the sale price.
  • Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
  • Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
  • Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
  • Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.

Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed.
If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jppi via morgueFile

Family Businesses

A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering
selling the business:

  • You may have to consider a lower price if maintaining jobs for family members is important.
  • Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisers have been with the business since the beginning and just are not “deal” savvy.
  • Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
  • All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
  • Confidentiality in the sale of a family business is a must.
  • Meetings should be held off-site and selling documentation kept off-site, if possible.
  • Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.

Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisers. They can also move the sales process along as quickly as possible and assist in negotiations.

Keeping it in the Family

It’s hard to transfer a family business to a younger kin. Below are some statistics regarding family businesses.

  • 30% of family businesses pass to a second generation.
  • 10% of family businesses reach a third generation.
  • 40% to 60% of owners want to keep firms in their family.
  • 28% of family businesses have developed a succession plan.
  • 80% to 95% of all businesses are family owned.
Source: Ted Clark, Northeastern University Center for Family Business

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: naomickellogg via morgueFile

Two Similar Companies ~ Big Difference in Value

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s…

What Are Buyers Looking for in a Company?

It has often been said that valuing companies is an art, not a science.  When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.

Quality of the Earnings

Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses.  A non-recurring expense could be:

  • meeting some new governmental guidelines,
  • paying for a major lawsuit, or
  • adding a new roof on the factory.

The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron.  Almost every business has a non-recurring expense every year.  By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year.  These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.

Sustainability of Earnings

The new owner is concerned that the business will sustain the earnings after the acquisition.  In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power, or if the last few years of earnings have reflected a one-time contract, etc.  Will the business continue to grow at the same rate it has in the past?

Verification of Information

Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet.  How about potential litigation, environmental issues, product returns or uncollectible receivables?  The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression.  In addition, they may also lead to a higher price and a quicker closing.

© Copyright 2015 Business Brokerage Press, Inc.

 

A Reasonable Price for Private Companies

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required.  Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones.  This makes digging out information for a privately-held company difficult for a prospective purchaser.  So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.

Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value:

  1. A value placed on the company by an outside appraiser or expert.  This can be either formal or informal.
  2. The seller’s “wish price.”  This is the price the seller would really like to receive – best case scenario.
  3. The “go-to-market price” or the actual asking price.
  4. And, last but not least, the “won’t accept less than this price” set by the seller.

The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy.

What can a buyer review in assessing the price he or she is willing to pay?  The seller should have answers available for all of the pertinent items on the following checklist.  The more favorable each item is, the higher the price.

  •  Stability of Market
  •  Stability of Historical Earnings
  •  Cost Savings Post-Purchase
  •  Minimal Capital Expenditures Required
  •  Minimal Competitive Threats
  •  Minimal Alternative Technologies
  •  Reasonable Market
  •  Large Market Potential
  •  Reasonable Existing Market Position
  •  Solid Distribution Network
  •  Buyer/Seller Synergy
  •  Owner or Top Management Willing to Remain
  •  Product Diversity
  •  Broad Customer Base
  •  Non-dependency on Few Suppliers

There may be some additional factors to consider, but this is the type of analysis a buyer should perform.  The better the answers to the above benchmarks, the more likely it is that a seller will receive a price between the market value and the “wish” price.

© Copyright 2015 Business Brokerage Press, Inc.

 

SELLING A BUSINESS: UNDERSTANDING CONFIDENTIALITY

Confidentiality

It is important to understand the various aspects of confidentiality when it comes to selling a business.  This can involve understanding what to disclose and when, and the legal obligations that need to be met by business sellers.

Knowing what to disclose and when

Knowing what to disclose and when can have a significant impact on the sale of your business, so hiring a business broker who can advise on such matters is an important step.  From a buyer’s perspective, they want to know as much as possible about the operations and performance of the business so that they can make an informed decision whether or not to offer and at what price.

Account details such as cash flow and existing contracts may be requested.  Because of the sensitive nature of some of this information, particularly when it comes to existing relationships and contracts with suppliers and customers, business sellers may be reluctant to reveal more information than is absolutely necessary.

Once people invested in the business — including suppliers, employees and customers — learn that the business is for sale, various knock on effects can have a detrimental effect on the sale price.

Managing uncertainty

This is because of the element of uncertainty that appears when a business is put up for sale. Suppliers, employees and customers have an existing relationship with the business.  This relationship can change when it is sold in various ways.

Customers, for example, expect a certain level of quality from the business, but there is no guarantee that they can expect to receive the same levels of quality once it is sold.  Loss of sales can damage both the business and the sale price.  Suppliers may request different terms.  And employees may be understandably concerned about their job security, productivity can fall and they may even start to look elsewhere.

For these reasons, confidentiality is paramount.  Sellers can benefit from a Confidentiality Agreement that prevents the buyer passing on sensitive information.  In this way, buyers can access the information they need to make an informed decision but third parties will not be able to learn of the sale of the business from the buyer.  Brokers, with their understanding of confidentiality and its potential impacts, can advise on the creation of a Confidentiality Agreement.

What details need to be disclosed?

Business sellers can give the buyer warranties and indemnities about the business.  Warranties are factual statements about the company.  Breach of warranty in the case of false information being provided could open the seller up to claims for damages from the seller at a later date.

Indemnities are promises to reimburse the buyer in the case of certain events causing a loss to the buyer.  Writing warranties and/or indemnities into the sale agreement therefore gives the buyer an understanding of the business’s current position together with a measure of protection.  However, their inclusion also typically pushes the sale price up.

Use a broker

Business brokers can advise sellers whether warranties, indemnities or both are most appropriate and what should be included, for example, a statement that the company’s assets reach a certain value.  Limits can also be placed on the seller’s liability.

This can partly be done by the process of disclosure, where the seller and their broker draft a disclosure letter with more specific clauses and exceptions to warranties and indemnities.

 

This article was contributed by BusinessesForSale.com, the market-leading directory of business opportunities from online media group Dynamis.

Copyright © 2015 Business Brokerage Press, Inc.

Top Ten Mistakes Made By Sellers (that do not use Colonial Business Brokerage)

  1. Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow.
  2. Starting off with too high a price with the assumption the price can always be reduced.
  3. Assuming that confidentiality is a given.
  4. Failing to plan ahead to sell / deciding to sell impulsively.
  5. Expecting that the buyers will only want to see last year’s P&L.
  6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
  7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
  8. Not accepting that the structure of the deal is as important as the price.
  9. Trying to win every point of contention.
  10. Dragging out the deal and not accepting that time is of the essence.

© Copyright 2015 Business Brokerage Press, Inc.

Why Sell Your Company?

Selling one’s business can be a traumatic and emotional event.  In fact, “seller’s remorse” is one of the major reasons that deals don’t close.  The business may have been in the family for generations.  The owner may have built it from scratch or bought it and made it very successful.  However, there are times when selling is the best course to take. Here are a few of them.

  • Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity.  Other than borrowing against the assets of the business, an owner’s only option is to sell it.  They have spent years building, and now it’s time to cash-in.
  • No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
  • Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company.  Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value.  Proper planning and documentation can preclude an emergency sale.
  • Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone.  Losing interest in one’s business usually indicates that it is time to sell.
  • Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it.  A business may be standing still, while larger companies are moving in.
  • An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity.  An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”

There are obviously many other reasons why businesses are sold.  The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time.  And consider the old adage that says, “The time to prepare to sell is the day you start or take over the business.”

Who Is the Buyer?

Buyers buy a business for many of the same reasons that sellers sell businesses. It is important that the buyer is as serious as the seller when it comes time to purchase a business. If the buyer is not serious, the sale will never close. Here are just a few of the reasons that buyers buy businesses:

  • Laid-off, fired, being transferred (or about to be any of them)
  • Early retirement (forced or not)
  • Job dissatisfaction
  • Desire for more control over their lives
  • Desire to do their own thing

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The buyer will never have owned a business before, and most likely will buy a business he or she had never considered until being introduced to it.

Their primary reason for going into business is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective buyers want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one’s own business, buyers must be able to make that “leap of faith” necessary to take the risk of purchasing and operating their own business.

Buyers who want to go into business strictly for the money usually are not realistic buyers for small businesses. Keep in mind the following traits of a willing buyer:

  • The desire to buy a business
  • The need and urgency to buy a business
  • The financial resources
  • The ability to make his or her own decisions
  • Reasonable expectations of what business ownership can do for him or her

What Do Buyers Want to Know?

This may be a bit premature since you may not have decided to sell, but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your business. Here are some questions that you might be asked and should be prepared to answer:

  • How much money is required to buy the business?
  • What is the annual increase in sales?
  • How much is the inventory?
  • What is the debt?
  • Will the seller train and stay on for awhile?
  • What makes the business different/special/unique?
  • What further defines the product or service? Bid work? Repeat business?
  • What can be done to grow the business?
  • What can the buyer do to add value?
  • What is the profit picture in bad times as well as good?

Buying (or Selling) a Business

The following is some basic information for anyone considering purchasing a business.  It may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.

His or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyers now want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one’s own business, the buyer must be able to make that “leap of faith” necessary to take the plunge. Once that has been made, the buyer should review the following tips.

Importance of Information

Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don’t overlook a “gem” of a business because you don’t or won’t take the time it takes to find the information you need to make an informed decision. Try to get an understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his “story” may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can’t expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don’t try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure–don’t obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. The seller will be teaching you the business and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer. Don’t depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the “leap of faith” necessary to achieve business ownership. Outside professionals normally won’t tell you that you should buy the business, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: “no.” You will want to get your own answers–an important step for anyone serious about entering the world of independent business ownership.