When the owner of a business makes the decision to sell, he or she is taking a giant step that involves the emotions as well as the marketplace, each with its own set of complexities. Those sellers who are tempted to undertake the transaction on their own should understand both the process and the emotional environment that this process is set against. The steps outlined below are just some of the items for a successful sale. While these might seem daunting to the do-it-yourselfer, by engaging the help of a business intermediary, the seller can feel confident about what is often one of the major decisions of a lifetime.
1. Set the stage.
What kind of impression will the business make on prospective buyers? The seller may be happy with a weathered sign (the rustic look) or weeds poking up through the pavement (the natural look), but the buyer might only think, “What a mess!” Equally problematic can be improvements planned by the seller that appeal to his or her sense of aesthetics but that will, in fact, do nothing to benefit the sale. Instead of guessing what might make a difference and what might not, sellers would be wise to seek the advice of a business broker–a professional with experience in dealing regularly with buyers and with an eye experienced in properly setting the business scene.
2. Get the record(s) straight.
Although outward appearance does count, what’s inside the books is even more important. Ultimately, a business will sell according to the numbers. The business broker can offer the seller invaluable assistance in the presentation of the financials.
3. Weigh price against value.
All sellers naturally want to get the best possible price for their business. However, they also need to be realistic. To determine the best price, a business broker will use industry-tested pricing techniques that include ratios based on sales of similar businesses, as well as historical data on the type of business for sale.
4. Market professionally.
Engaging the services of a business broker is the key to the successful marketing of a business. The business broker will prepare a marketing strategy and offer advice about essential marketing tools–everything from a business description to media advertising. Through their professional networks and access to data on prospective buyers, business brokers can get the word out about the business far more effectively than any owner could manage on an individual basis.
In addition to using a business broker, there are specific steps you can take to increase the chance of a successful closing.
Know why you want to sell your business. Before placing your business for sale, it is important that you both know why you want to sell your business and that you are certain about this decision.
Have a plan for what you will do following the closing.
Make sure important parties are on board. The time to discuss the sale of your business, as well as future plans, with partners, spouses, children and other involved parties is before you list.
Communicate to your outside advisors that you want the deal to work.
Choose your battles. Both buyers and sellers need to be willing to compromise. It is helpful to consider in advance the areas that are most important to you so you can come to the table with a willingness to compromise in other areas.Read More
The Letter of Intent (LOI) is a pre-contractual written instrument prepared by the buyer for the seller, which is usually the preliminary understanding of both parties. The Letter of Intent can also be called Agreement in Principle or Memorandum of Understanding. They all have the same general meaning and lay out the following: What is being purchased and what is not, how much will be paid, and the general terms. It is also meant to be non-binding (more on this a bit later) on either the sell side or buy side.
In any event, most transactions are started with an LOI. The LOI precedes the Acquisition Agreement, better known as the Purchase and Sale Agreement. It is a non-binding agreement subject to the buyer obtaining satisfactory due diligence by both parties.
This is how the LOI has been defined by Stanley Foster Reed, author of The Art of M&A:
“A Letter of intent is a pre-contractual written instrument which defines the respective preliminary understandings of the parties about to engage in contractual negotiations. In most cases, such a letter is not intended to have a binding effect except for certain limited provisions. The Letter of Intent crystallizes in writing what has, up to that point, been oral negotiations between the parties about the basic terms of the transaction. While the Letter of Intent is usually non-binding, it does create a moral commitment and allows the buyer to proceed with the extensive due diligence process with a feeling of confidence. Conversely the seller is required to withdraw the company from the marketplace and not discuss the potential sale with anyone else.”
The elements of the Letter of Intent are as follows:
- The price of the company
- The form of purchase: Is it a stock or asset sale? What is being purchased and what is not?
- The structure of the sale: Specifications about cash, notes, stock, non-competes or consulting agreements, contingencies, etc.
- Management contracts: Specifics about for whom, duration, and incentives
- Closing costs and the responsibilities of the buyer and seller, such as environmental due diligence and title searches
- Representations and Warranties: Boilerplate legal statements
- Brokerage fees: Who pays and how much?
- Timing for completion: Drop-dead date for due diligence and financing period; How long before money is exchanged and final closing takes place?
- Insurance: Proof of insurability; What happens with policies?
- Disposition of earnings before closing and viability of non-ordinary expenditures before closing (conduct of business)
- Access to books and records, key customers, and key employees prior to closing
- Disclosure of any outstanding non-compete agreements or obligations with third parties
- Stipulation of confidentiality of buyer (a breach could cause the seller to sue the buyer): The buyer promises not to disclose information about the seller to outsiders and to not disclose that negotiations are underway.
- Seller will take the company off the market for a designated period of time of forty-five to sixty days (a breach could cause the buyer to sue the seller).
The LOI is at the heart of the transaction and reveals key issues early on in the process. The signing of the Letter of Intent begins the buyer’s due diligence process and his or her ability to secure the necessary financing. Although the LOI is just the beginning of a lot of necessary paperwork, both sides will assume that the LOI represents the basics of the deal and that they have reached an agreement in principle.
Most individual company owners only sell one business in their lifetime. A corporate buyer, however, may have been involved in quite a few transactions – some that worked and some that did not. What does this mean for the seller? The acquirer may have an experienced team or have been through the business transaction process more than once resulting in a lopsided contest — the amateur (the seller) versus the professional (the acquirer).
Selling a business is not like selling real estate. Confidentiality is, in most cases, critical. A seller does not want employees, suppliers, and customers/clients to be aware of a possible sale. The sales process also cannot distract the owner(s) from managing the day-to-day operation of the business. Real estate is also much easier to finance than a business purchase, unless the acquirer is a first-rate company.
It is important that sellers do their own due diligence on a prospective acquirer to make sure that the acquirer can complete the transaction if both sides are in complete agreement on terms and conditions. The seller has most likely retained a professional intermediary, paid that firm a retainer, retained legal and accounting professionals, etc. Since the potential acquirer will want to do his or her own due diligence, it is important that the seller do so also.
Where is the Money?
All acquirers, whether big or little, should be able to show the seller that they have the financial resources to make the deal. Unless, the acquirer is a large and successful company, where acquisition funds are not an issue, an acquirer’s financial statements and/or the company’s financial statements should be made available. A credit report would also be important. An acquirer who can complete the sale, subject to due diligence, should not have difficulty supplying this information.
What do References Reveal?
A seller should check for information about any prior deals that the acquirer has made. This would include any financing contacts or other lenders. This list would include any previous acquisitions. Talking to a previous seller can reveal how their deal went; how the acquirer was to work with; whether they did everything they said they would; etc. Talking to managers of previous acquisitions by the buyer can tell a seller how employees were treated, etc.
Does the Chemistry Work?
It is important that the chemistry clicks between the seller and the acquirer. Due diligence on both sides can help build the trust necessary for the deal to work both ways. If the seller is staying with the company for an extended period of time, it is also critical that he or she is comfortable not only with the acquirer, but also with the new management team if it’s not the people who are doing the deal.
Several million businesses change hands every year. The vast majority of sellers are selling a business for the first time. It’s very important that they use professional help. Without it, they may likely receive less than fair value, be involved in a difficult selling experience, and may not receive all of the monies due them. Professional advisors such as intermediaries, lawyers (only those with deal experience) and accountants are necessary.Read More
There are lots of reasons why the sale of a business falls apart. The reasons can be grouped into four major categories: those caused by the buyer; those caused by the seller; those caused by a third party; and those caused by “acts of fate”. (Anything that does not fit the first three categories can be lumped into this fourth category of things that just happen.)
Some sellers really don’t a valid reason for selling. Without a strong commitment to selling, a deal is very difficult to hold together. Some sellers are just testing the waters. Others are holding out for a price that is just not supportable by the numbers. Sellers who didn’t check with their tax advisors or other outside advisors may be in for some surprises forcing them to withdraw from a pending sale. An unusual, but common, reason is that the seller panics about what they will do once the business is sold.
One could almost change the Seller’s information above and label it Buyers. Buyers may discover some unknown (or unmentioned) problem, such as an environmental issue or governmental one.
Many buyers realize during the due diligence process that they aren’t cut out to run a business. Or, they can’t make that “leap of faith” necessary to buy their own business.
Landlords are probably the leading third party cause of a sale not being completed. The next biggest cause comes from outside advisors giving overly aggressive advice to buyer and/or sellers.
Many outside advisors, in their zeal to assist their clients, forget that the goal is to put the deal together.
Acts of Fate
This includes everything else! The seller may not be able to substantiate, at least to the buyer’s satisfaction, the earnings of the business. Problems may arise, unknown to either party, from federal, state or local government agencies.
Your professional business broker is aware of all of the reasons outlined above and knows how to deal with them. Although business brokers cannot provide legal advice, they are quite familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in business transactions. These attorneys will usually be more efficient and cost-effective than attorneys who do not specialize in business transactions.
Business owners are often asked, “Do you think you will ever sell your business?” The answers vary from: “Only when I can get my price” to “Never” to a realistic “I don’t really know” with everything else in between. “When will you sell your business?” is often asked, but very seldom answered. Certainly, misfortune can force the decision, but no one can predict this event. Most don’t believe or accept the old expression that advises, “It is always a good idea to sell your horse before it dies.”
There is an also an old adage that says: “You should start planning on exiting your business the day you buy or start one.” You can’t predict misfortune, but you can plan on it. Unfortunately, most sellers wait until they wake up one morning, and just drive around the block several times working up the courage to begin the day working in their business. This is a common sign of “burn-out” and is an-going problem with small business owners. Or, they face family pressure to start “taking it easy,” or to move closer to the grandkids. Now what?
There are really only four ways to leave your business. Obviously, the easiest is to put the key in the door and walk away. It’s also the worst way! The years of hard work building a business has a value. Another way is to transfer ownership to one’s children or child. Assuming one of them is interested and capable, it can mean a successful transfer and a possible income stream. A third way is to sell it to an employee. The employee may know the business, but may lack the interest or skill for ownership or the funds necessary to pay for it. The fourth way, and the one taken by the majority of small business owners, is to sell it and move on. Every business owner wants as much money as possible when selling, so now may be a good time to begin a pre-exit or pre-sale strategy. Here are a few things to consider.
Buyers want cash flow.
Buyers are usually buying a business with a cash flow that will allow them to make a living and pay off the business, assuming it is financed – and most are. Buyers will look at excess compensation to employees and family members. They will also consider such non-cash items as depreciation and amortization. Interest expenses along with owner perks such as auto expense, life insurance, etc., will also be considered. A professional business broker is a good source of advice in these matters.
Appearances do count.
Prior to going to market, make sure the business is “spiffed up”. Do all of the signs light up properly at night? Replace carpet if worn; paint the place and replace that old worn-out piece of equipment that doesn’t work anyway. If something is not included in the sale – like the picture of Grandfather Charlie who founded the business – remove it. An attractive business will sell for much more than a tired and worn-out looking place.
Everything has value.
Such items as customer lists, secret recipes, customized software, good employees and other off-balance sheet items have significant value. They may not be included in a valuation, but when it comes time to sell, they can add real value to a buyer.
Eliminate the Surprises.
No one likes surprises, most of all, prospective buyers. Review every facet of your business and remedy any problems, whether legal, financial, governmental, etc., prior to placing your business up for sale.
Your professional business broker can assist in all facets of preparation. They know what buyers are looking for and they also are familiar with current market conditions.Read More
Here are some tasks business owners should consider completing before going to market to help their
- Remove any items not included in the sale. That family heirloom portrait behind the counter of Grandfather William, founder of the business, should be removed.
- Remove or repair any non-functioning equipment.
- Prepare an operations manual to show a new owner all the functions of the business, how things are done, the major customers and suppliers, samples of advertising, and any other information that would help a new owner manage and operate the business.
- Take care of any outstanding bills and resolve any legal, tax, or governmental issues.
- Bring your financial statements up to date, and have your accounting professional prepare them for a buyer’s inspection.
- Clean up the business inside and out. Fill the shelves, clean up the inventory, and paint the interior if necessary.
Many experts say that the best time to sell is when the business is better than it’s ever been. This may be good advice, but few follow it. Why sell when business is good? You just suffered through a few not-so-great years and now the experts are telling you to sell? Right or wrong – good or bad – the decision to sell is generally event-driven. For example: declining health, a partnership break-up, personal issues, too much competition, family member elects not to purchase the business, etc. Retirement sounds like a good reason, but it has no time pressure, unless a seller has made the decision to retire at a certain age. Even then, when the seller realizes that he or she will have nothing to do after a sale…the idea loses its appeal.
However, one thing that a seller can do, without creating any pressure about selling or not selling, is to take a bit of time every year and prepare – just in case. This means tying up loose ends. Make sure financial records are current and complete, leases reviewed and renewed if necessary, any litigation resolved if possible, licenses and permits updated, agreements and contracts renewed and updated if necessary. You could call this eliminating the surprises, and you could also call it good business.
By doing this, if a potential sale comes out of nowhere – you’ll be ready.
Confidentiality Agreement – A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.
It is common practice for the seller, or his or her intermediary, to require a prospective buyer to sign a confidentiality agreement, sometimes referred to as a non-disclosure agreement. This is almost always done prior to the seller providing any important or proprietary information to a prospective buyer. The purpose is to protect the seller and his or her business from the buyer disclosing or using any of the information provided by the seller and restricted by the confidentiality agreement.
These agreements, most likely, were originally used so that a prospective buyer wouldn’t tell the world that the business was for sale. Their purpose now covers a multitude of items to protect the seller. A seller’s primary concerns are to insure that a potential buyer doesn’t capitalize on trade secrets, proprietary data or any other information that could essentially harm the selling company. A concern of the prospective buyer may be that similar information or data is already known or is being developed by his or her company. This can mean that both parties have to enter into some discussion of what the confidentiality agreement will cover, unless it is general in nature and non-threatening to the prospective buyer.
A general confidentiality agreement will normally cover the following items:
- A general confidentiality agreement will normally cover the following items:
- The purpose of the agreement – it is assumed that in this case it is to provide information to a prospective acquirer.
- What is confidential and what is not. Obviously, any information that is common knowledge or is in the public realm is not confidential. What information is going to be disclosed? And what information is going to be excluded under the disclosure requirements?
- How will confidential information be handled? For example, will it be marked “confidential,” etc?
- What will be the term of the agreement? Obviously, the seller would like it to be “for life” while the buyer will want a set number of years – for example, two or three years.
- The return of the information will be specified. For example, if the sale were terminated, then all documentation would be returned.
- Remedy for breach or determine what will be the seller’s remedies if the prospective acquirer discloses, or threatens to disclose any information covered by the confidentiality agreement.
- Obviously, the agreement would contain the legal jargon necessary to make it legally enforceable.
One important item that should be included in the confidentiality agreement is a proviso that the acquirer will not hire any key people from the selling firm. This prohibition works both ways: the prospective acquirer agrees not to solicit key people from the seller and will not hire any even if the key people do the approaching. This provision can have a termination date; for example, two years post-closing.
The sale of a company involves the disclosure of important and confidential company information. The selling company is entitled to protection from a potential acquirer using such information to its own advantage.
The confidentiality agreement may need to be more specific and detailed prior to commencing due diligence than a generic one that is used initially to provide general information to a prospective buyer.
Tips on Maintaining Confidentiality
- Use a code word or name for the proposed merger or acquisition.
- Don’t refer to any principal’s names in outside discussions.
- Conversations concerning the merger or acquisition should be held in private.
- Paperwork should be facedown unless being used.
- All documents should be kept under lock and key.
- Important data maintained on the computer should be protected by a password.
- Faxing documents should be done guardedly.
What a “loaded” question you may think, but the reality is that almost no business owner and their business reach the qualifications of “Ready to Sell” without professional assistance from a qualified individual.
Getting your business and yourself, as the business owner “ready to sell”, takes quite a bit of work and preparation. You need to know and work with someone whose sole profession is selling businesses. You know your business better than anyone, but do you know how to get it ready and in its best shape to sell? Most probably not and the worst mistake a business owner can make is try to get both themselves and their business ready to sell and then try to sell it themselves.
Experience has shown us that more often than not, the Seller will spend more time and money trying to sell and take less than the business is actually worth because they skipped the professional assistance they needed to insure the best price. In short, leaving money on the table!
It is an unwise decision to put your business up for sale without knowing that you are fully prepared.
Preparation may range from simply sprucing up your business to preparing all financials in their true earnings condition, knowing what your industry is doing, understanding the tax implications of a sale, how you can gather more dollars for your business beyond the closing, knowing who most probably will be your buyer, the best manner in which to market your business and last, but not least, you certainly want to make sure that you know exactly what your business is worth.Read More