A recent survey revealed the following percentage breakdown of last year’s business sales by business types. The information was furnished by business brokerage firms nationally and compiled by Business Brokerage Press.
|Food & Drink related business||14%|
|Auto related businesses||9%|
|Distribution type businesses||11%|
|Service type businesses||25%|
Service type businesses include dry cleaners, quick print, video stores, etc. Other businesses include coin laundries, delivery, product, and vending routes, and any that don’t fit into the other categories listed.
What does this mean to you as a business owner? It indicates that service type businesses seem to be creating the most activity from business buyers, followed by retail and the food and drink sector. The service sector has also been the leader in businesses sold by business brokers for the previous two years. This coincides with the growth nationally in the service sector coupled with the broad range of businesses included in it.
The food and drink sector, which includes restaurants, fast-food, taverns and the like, has always been a popular one for buyers. One reason is that most people frequent these types of businesses on a regular basis and therefore are familiar with them. Plus, there has always been a certain “celebrity” status connected with this sector.
However, statistics aside, today’s buyer has more knowledge, experience and education than ever before and is willing to consider almost any type of profitable business.
The most recent editions of BizComps, the leading resource for comparable sales data (www.bizcomps.com ) has some interesting information on small business pricing based on the three major regions of the country – Eastern states, the Central states and the Western states. They cover thousands of actual business sales over a ten year period. Here is the breakdown:
Location Average Sale Price
Western states $299,500
Central states $221,951
Eastern states $285,941
Using the Western states as the base, since that region of the country has the highest average price business, businesses in the Central states sell for 74 percent of the average price in the Western states; and the average price in the Eastern states is 78 percent of the Western states average.
The buyer loves your business; it’s just what he or she has been looking for. He has reviewed your financial statements and has made an offer contingent on several items. You’ve reviewed the offer and it looks fine, so what’s next? The contingencies in the deal mean that the buyer or his or her advisors have some concerns. In larger deals, this process might be called due diligence. However, in the smaller business sale, the items of concern are usually spelled out as opposed to a general review of everything. The reason for this is that larger businesses or companies have a lot more areas of concern than the typical smaller business.
Most contingencies concern the review of financial statements and/or business tax returns. Others may involve lease issues, the seller staying on for a set period of time, or some very specific issue such as repaving the parking lot, if the landlord won’t or isn’t required to.
Unfortunately, some contingencies may be hiding other ones such as a list of fixtures and equipment included in the sale. Sounds easy on the surface, but the seller forgot that two pieces of equipment currently not in use need repair or the walnut desk in the office belongs to Grandfather Smith and is not included. Or, while reviewing the lease, the buyer discovers that the landlord requires that the business must close by 9:00 PM or some other restriction applies and was not disclosed. Deals have fallen apart over similar issues.
Most contingency problems can be resolved prior to the business being placed on the market. The seller should do all of the following:
• Check the status of all furniture, fixtures and equipment (FF&E). Remove any that are not included in the sale or are inoperable if not in use – or make repairs.
• Review any contract such as the lease, any equipment leases, and contracts that will be assumed by the buyer. Make sure there aren’t “clinkers” in them. If there are, disclose them to a potential buyer out front – and be sure your business intermediary is also aware of them.
• Be prepared to answer questions such as:
– Are there any environmental, governmental or legal issues?
– How long will you be willing to stay and work with a new buyer – at no cost?
– Will the employees stay?
– Why was last year the worst one in years?
– Why was last year the best one in years?
The list could go on and on, but sellers need to be ready. Buyers don’t like surprises. A business broker professional knows the process like a book and can be invaluable in preparing the business for the marketplace.
For many owners, selling their business is a new experience, and there is always the fear of the unknown. Selling a business is a not only a major economic decision, but it can also be an emotional one. After all, many business owners have spent many years, and a lot of hard work building the business. When the decision to sell is made, there will inevitably be accompanying concerns. However, when faced head-on, these concerns can usually be addressed and resolved. Here are some of the major concerns and ideas on how to deal with them.
Getting the Highest Possible Price
Every seller wants to get the highest possible price for their business – that’s a given. Here is an old, but very accurate definition:
- The Asking Price is what the seller wants.
- The Selling Price is what the seller gets.
- The Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.
Today’s buyers are more educated, more sophisticated, and more demanding than ever before. They seem to be searching for a “sure thing” – yet, many are afraid to make the leap-of-faith necessary to make the final plunge. Buyers are also more numbers conscious than in prior years. Somehow they think they can buy a business and continue with business as usual.
Sellers, on the other hand, must understand that the buyer may buy with an eye to the future, but is only willing to pay for the past performance of the business. The buyers believe that the future of a business is up to them and they should reap the benefits of their efforts. The value or price, however, in their minds, is based on what the seller has done with it.
In order to obtain the highest possible price, the seller should make sure that the financial records are crystal clear. Any issues, whether, financial, operational, legal, or environmental, should be addressed and resolved prior to putting the business on the market. Hidden issues have sabotaged more sales than anything else.
This may seem a contradiction, but the seller must go to market initially with a fair price. Too many times, a seller’s first inclination is to start with a very high, and very unreasonable, price. They may feel that the business is really worth what they are asking and may be unwilling to accept the fact that the price is unreasonable. The thinking is that an interested buyer can always make an offer. Interested buyers will feel that the price is so high that a fair offer would not even be considered. A professional business broker can advise buyers on what is reasonable and what is not.
A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.
It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer’s approval of the seller’s books and records.
The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.
Here are some tips on contingencies:
- There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
- It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say – “it ain’t going to happen.”
- Contingencies should be limited to very important or critical issues – those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
- Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
- Contingencies come in all sizes and shapes. Very few offers don’t contain at least one, and usually more than one. They are an inevitable part of selling – and buying a business. A business broker knows what is reasonable and what is not.
The following is provided as a simple explanation of common leasing arrangements within a small business transaction. It is not intended to provide legal advice.
The New Lease
A new lease is created generally when the prior lease has expired or is about to and when there are going to be substantial changes to the existing lease. A new lease would be executed between the purchaser of the business and the landlord. It is a new document either drafted by an attorney or used in a standard form that is available at stationery stores and in many books. A new lease involves negotiations between the owner or purchaser of the business and the landlord.
A sub-lease is nothing but a lease within a lease. For example, if the seller of a business is permitted to sub-lease the premises, he or she, as far as a new owner is concerned, is the landlord. In this case, the actual landlord is still dealing with the seller and has no relationship with the buyer. Obviously, the seller needs the permission of the landlord or lessor to assign or sub-lease.
The Assignment of the Existing Lease
This is the most common form of allowing a buyer the use of the premises in which the business is located. In an assignment, the seller is “assigning” all rights to the existing lease to the new buyer. Once the assignment is executed, the seller usually has no more rights in that lease. However, in most assignments, the landlord reserves “all rights” in the lease. In other words, the seller, who may be a tenant or an assignee, is still responsible to the landlord if the buyer does not perform.
The cliché is that the key to business success is: location – location – location. If you own a business in which the location is an important reason for the success of the business, and you are considering selling, then the lease is a very critical issue in the sale. The time to deal with this is not in the middle of a sale, but before you even place the business on the market.
Business brokers can recite many a story where, on contacting the landlord in the midst of a pending sale, they are told that the landlord has other plans for the space when the lease is up next month. Fortunately this is not a common occurrence, but if the lease is an issue, the time to deal with it is now.
The Steps In Dealing with the Lease
The first step is finding the lease.
The second step is to read it.
The third step is to visit the landlord and work out any lease issues.
Before placing your business on the market, you need to see where you stand on the all-important issue of the lease. After reviewing it, set up an appointment to visit the landlord. If there are only a few years left on the lease, see about getting an extension. If you have more than that left, still check into getting an option to renew the lease at the expiration of the present term. After all, if the location works, the longer the lease the better in most cases. It might also be a good time to see if the landlord has ever considered selling the premises. By owning the property, you will never have to worry about leases again.
If location is not important and the business is such that moving it is a non-issue, then obviously the lease is not important. However, if the business is one that is dependent on its existing location, then the lease issue is crucial. The time to iron out any details is before the business is placed on the market.
This is a story based on a true incident – only some of the details have been changed. The buyer and seller were ready to close on a business when the buyer asked to look at the list of fixtures and equipment that were to be included in the sale. After a few minutes reviewing the list, the buyer said that the desk lamp on the owner’s desk was not listed. The seller explained that the lamp was a gift from his parents many years ago and therefore it was not included. The buyer got very upset, stating that the lamp was just perfect for that desk and he wanted it. The seller tried to explain that the lamp had lots of sentimental value, but that he would replace it with another desk lamp. This did not satisfy the buyer, and in order to stop the sale from falling part, the seller agreed to subtract $1,000 from the purchase price to keep the lamp. That made the desk lamp a very expensive one.
The point of this is that when buyers look at a business, they assume that everything they see is included in the sale. Sellers should keep this in mind when selling their businesses. If something is not going to be included in the sale, remove it from the premises prior to any prospective buyer looking at the business. Sellers sometimes think that they can remove the painting on the office wall since their grandmother painted it. The picture really looks good on the wall never imagining that the buyer also will think it looks great on the wall – and the problems begin.
Business broker professionals have seen deals fall apart over a piece of family memorabilia that was never intended to be included in the sale, but was there when the buyer looked at the business. The word to sellers is to remove anything – and the key word is anything – that is not included in the sale. The alternative is to list everything that is not included on the listing agreement, but it is usually less complicated simply to take them home.
One other thing – if there is a piece of equipment that is inoperative, such as the computer on the back desk, or the refrigerator in the basement of the restaurant – get rid of it. Or make sure the listing agreement states that the following equipment is inoperative. Again, it’s really easier just to remove these items.
A professional business broker will see that these potential dealbreakers won’t disrupt the closing.
Depends on whom you are asking. If you’re the seller, you might say that the asking price is too low. The buyer would say, obviously, that the asking price is too high. How can they both be right? Who decides?
Most sellers have an idea of what they want for their business. It can be based on their knowledge of the industry and what similar businesses have sold for. It may be, however, based on just a wish. There is the old, but true, story of the two partners who decided to sell their business. When asked what the price would be, they both responded with the same answer – $2 million. When asked how they arrived at that price, they each said that they wanted to be a millionaire and two times $1 million was $2 million.
Sellers often say that the asking price doesn’t make any difference since it can always be reduced. What they don’t realize is that if the price is not realistic, buyers won’t even look at it. Buyers are aware that they can make an offer, but if the starting point is too high, what they consider a fair price may be so low that why bother even making the offer.
Studies using various data bases comparing actual selling prices of businesses with their asking prices show that the difference is about 15 percent for small businesses. The larger the business, the smaller the spread. Businesses sold for $1 million-plus sell for about 90 percent of the asking price, while smaller ones sell for about 85 percent of the asking price. The important thing to remember is that the data is based on sold businesses only. There is no data, obviously, comparing the businesses that didn’t sell.
Sellers have to keep in mind that starting with too high an asking price may well prevent a very qualified buyer from even looking at the business. You know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn’t. What is the right price? A business broker professional has tools to help sellers arrive at a reasonable starting point. There may be comparable market data based on similar sales. There are methods based on the cash flow of the business and a multiple using other business factors such as location, down payment requirements, competition, annual sales variations and other determinants.
Ultimately it’s the marketplace that decides the ultimate selling price. Serious sellers listen to the marketplace. After all, if 10 buyers are willing to pay X for the business and there are no other buyers, the price is X. The seller doesn’t have to accept that price, but he or she must accept the fact that the market will only pay X for their business.
Since studies of thousands of business sales show that the sales price ends up being, on average, 85 percent of the asking price – so sellers shouldn’t dream or wish for too much.Read More
What are the odds of your business actually selling once you have made the decision to sell? Well, if the annual sales of your business are $750,000 or less, research indicates that the odds of your business selling are only 18 percent. If your annual sales are $750,000 to $2 million, your odds increase to 25 percent. If your annual sales volume is above $2 million, the odds increase to 30 + percent. Keep in mind that approximately 75 percent of all businesses have annual sales of less than $750,000.
What does this all mean? To put it bluntly: if you are thinking of selling your business, you have about a one in five chance of it actually selling. This obviously begs the question: why are the odds so poor? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why some businesses didn’t sell-as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.
- The business is no longer listed for sale. The cash flow was strong, but a lot of buyers thought that the deal was overpriced.
- Buyers were intrigued, but the economics of the deal wouldn’t make sense, and the seller wouldn’t negotiate.
- There was serious interest, but the owner got distracted by an arrangement with a friend to solicit offers. None came through.
- We almost had a deal, but financing was impossible to find.
- We had three offers, including an accepted bid for $4 million, but the buyer couldn’t get financing.
- The deal dragged on for months but fell apart for lack of financing. . .
They say that timing is everything. Many business owners wait until the economy is down. Their own business is also paying the price for the slowdown, so they elect to sell. Now they discover that the price they thought they could get for their business is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.
One factor that emerges from the comments by intermediaries above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price in cash. Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find,” “the buyer couldn’t get financing,” and “…fell apart for lack of financing.” The reasons that obtaining financing is so difficult are (1) the business doesn’t qualify for financing, (2) the buyer doesn’t qualify for financing, and, most importantly, most small businesses are not financeable. Banks are generally not interested; the Small Business Administration (SBA), although certainly an option, only comes through in less than 10 percent of deals. If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.
Tips for a fast sale
- Have up-to-date financial information available
- Prepare a current list of fixtures & equipment
- Maintain normal business hours
- Spiff up the business
- Set a realistic price
- Be willing to negotiate
- Gather all of the information a buyer might like to review
Here are two major ways to increase the odds that your business will be the one in five that sells:
- Make sure that you are serious before you put your business up for sale. You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth – it’s what a buyer is willing to pay. Find out if the price you are asking is in the “ballpark” before you go to market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.
- Be willing to finance the sale of your business. Counting on the businesses selling for all cash or assuming that the business can be financed will most likely make your business one of the four that don’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive.
Following these guidelines and tips might not sell your business, but it will certainly increase the odds. Almost any business will sell under the right circumstances. If you are serious about selling, the first step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in today’s economic climate.
The Perfect Business
The perfect business, the one that would be sure to sell, has the following attributes:
- a reasonable price
- a reasonable down payment (hopefully 40 percent of the full price or less)
- seller financing
- reasonable sales (hopefully increasing each year)
- seller earnings of $60,000 or more
- a compelling reason for sale
- a desired or popular industry type
- attractive and strategic location (if important for business type)
There is an old saying that goes something like this: “The worst day of working for yourself is better than the best day of working for someone else.”