The Process of Selling Your Business– Offer and Acceptance Page 4 of 5

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An offer may come first as a Letter of Intent (LOI).  It’ll generally include the price and terms being offered, the sale structure (asset sale versus stock purchase), a closing date, contingencies and conditions of a sale.

Terms presented in an offer may outline the payment method, scope and length of a non-compete agreement, transition terms, incentive payments, identification and condition of assets being bought, identifying of liabilities to be thought, any seller guaranties, and other exchange details. Contingencies will detail all action items needed before completion of sale.   Verification of monetary and operations information ( Due Diligence ), acceptable inspections, adequate lease transfer arrangements, adherence to licensure and regulatory bodies certifications, financing approval, lawyer review and approval of all sale documents, are all common sale conditions. Contingencies will most likely be tied to completion dates. An offer might be accepted, defied, or changed and presented back to the buyer as a counter-offer. Till agreement is reached by both parties, either party may withdraw their offer. In considering an offer, be certain to appraise the purchaser’s qualifications, financial resources, and methodology of securing any payments to be made. A great price from a risky buyer won’t be the best answer.

The Process of Selling Your Business, The Confidential Marketing Memorandum Page 3 of 5

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The Confidential Marketing Memorandum

 

The Confidential Marketing Memorandum

 

The information presented to a certified buyer after execution of a non-disclosure agreement may include :

 

  • A record of your business
  •  An top level view of your business, including info about your firm’s services and goods, operations info, and staff structure
  • Information concerning your market, including client mix, rivals, and industry developments
  • A listing of the assets included in the sale
  • Information per your facilities, including lease terms, for example.
  • Fiscal info that might include : Balance Sheets, Earnings Statements, details on any liabilities to be assumed, equipment leases
  • Details on the price, terms, and sale structure of which you are providing your company

 

Private or sensitive information need only be disclosed during Due Diligence process.

 

 

 

 

 

 

The Process of Selling Your Business– Confidentiality Page 2 of 5

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Marketing Your Business

Once you’ve established offering price and terms, your hunt for the right buyer starts. Customers might be found through a specific search of potential applicants in your industry, or maybe the business ventures section of local and regional papers. Pro business brokers are in communication with several qualified prospects, and aid in the circumspect search and screening of strategic consumers. The Significance of Confidentiality is the KEY in keeping up the goodwill of your company and in minimizing the interruptions of the work place during the promotion of your business. Doubtful about the way ahead for an organization that is for sale, staff and consumers could start to look somewhere else for work and services. It is generally best to delay until an exchange looks imminent before vital people are told of a sale. To help minimize exposure, categorical information pertaining to your company should be made public only to qualified shopper prospects after they have executed a non-disclosure agreement.

A certified buyer prospect is an entity which has established:

*  A need to acquire a company

*  Monetary capacity critical to complete your exchange

* The qualifications and resources critical to run your company

* The eagerness and capability to go forward in an opportune fashion.

The Process of Selling Your Business Part 1 Of 5

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Valuation & Structuring a Sale Price

The value of any business is the price and terms that a consumer is content to pay, and a seller is content to accept for that company.

That said, a professional business broker will have the power to supply an opinion of worth that reflects what a consumer would expect to pay, given an arm’s length exchange. There are plenty of valuation techniques, and one must take care to include the numerous factors 100% unique to each business.

Very frequently, easy industry “rule of thumb” analysis techniques aren’t relevant to your business.

While it is normal to use an EBITDA or some multiple/ratio to establish value there are several reasons for that proportion to alter.

For Instance :

Provable revenue has a higher acknowledged worth than non-recorded revenue ;

Repeat income has a higher accepted worth than does one off sales ;

A well diverse client base has a higher acknowledged value than a customer base that includes 1 or 2 buyers accounting for the majority of all sales.

Industry developments, company trends, company history, FFE  price and condition, capital wants, entry barriers, intellectual property, worker turnover, and owner’s obligations are simply a few of the factors that may impact a firm’s value.

Building a reasonable price with terms competitive with other companies for sale will help you in achieving acceptable results. Your business broker or other pro will work with you to find that range.

Structuring a Sale Price.

Alas, establishing a price is only a bit of the puzzle! Valuation is mostly determined with the presumption the seller will be offering terms compatible with the present market.

If you’re thinking about retirement, offering longer than “market” terms could be of advantage to you alongside upping your chance of finding a professional buyer. If you’re in a scenario where a all cash sale is the sole possible alternative, your business broker can work with you to explore diverse sales structures including presumption of liabilities by a buyer as a type of payment, 3rd party financing, or discounted sales costs.

Optimizing the Valuation of Your Business

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Two companies which make the same quantity of money don’t always have an equal value. Unless located in a novel market condition, eg. the present technology boom, the number one indicator of worth for a business is EBITDA or cash flow. For business-to-business services firms, which often have comparatively few assets, the impact of cash flow on total value is far more heavily articulated.

That said, two firms with the same cash flow may alter considerably in worth for a great number of reasons. Clearly demand is a big factor which will drive valuation multiples up in certain sectors and down in others.  As an example IT Services and Net Service Suppliers were in demand in 1999-2000 and, as a consequence, their multiples were comparatively high re other service industries. Even inside a business, firms with similar cash flows can change considerably in value. What are the factors responsible for deciding these fluctuations and what can business possession do to improve the value of their business before a sale? The solution to these questions is going to enable business owners to realize ideal worth in the sale of their business.

 

Run It Like a Business

The less dependent you are on any one shopper or customer or worker and the more transportable your revenues are, the more enticing you are probably going to be to an interested party.   As extreme example, if you have one customer that includes most of your revenues and that customer came to conduct business with you because you are family and you underbid the market by x% and it is a hand shake deal… Any interested party is going to find the situation terrifying and devalue the quantity of money flow you’ve been creating. Alternatively if the earnings are widely dissipated among clients who’ve contractual agreements to resume business with your firm over a period (perhaps on a subscription basis), at market rates, and the consumers understood relationship is with your company instead of you… Any interested party will feel they’ve a good possibility of maintaining the client base and will assign larger value.

Present It like a Business

For a purchase prospect to ascertain their level of interest and to make an appraisal of value they may review whatever information is provided to them applying to the business. The advantages of complete, correct and well documented information will reinforce the value of your business in many strategies:

1.  Reduced risk generally justifies a larger value. If the taking party knows in extensive detail what they are getting there should be less understood risk concerned in the purchase.

2. You increase the possibility of finding the best match – a purchaser who actually wants the business you are supplying for sale. Higher demand often equals higher value.

3.  The undeniable fact the business is well organized will most likely reinforce acknowledged value.

4.  “Time is of the essence.” Even after the parties reach first agreement, transactions run the chance of not being successfully finished. The more strenuous, time intensive and complex the Due Diligence groundwork period the less chance the deal has of making it. If your information is properly prepared the required research process will go smoother.

5. You nearly lose the component of pricey post-closing legal action due to confusion about the character of what’s being conveyed as you have correctly portrayed the business. It can pay to be nicely prepared.

And even if you do not sell, you will be more effective and worthwhile by reason of being organized and informed.

Planning and Preparation for a Business Sale

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 Deciding When to Sell

Deciding when to sell might be touch call. If you’re like most entrepreneurs, the concept of selling your business pops into and out of your thoughts.  However the idea sounds good sometimes only to be put at the rear of your intelligence as a burst of new orders have to be satisfied. The explanations for selling are common and it could be surprising to you that a business owner’s incentive for selling is among the first things a possible buyer will ask about. Retirement, relocation, a change in career, are common incentives for selling.

Some entrepreneurs will sell when operations become too big to control personally, or they lack the resources to provide capital required for growth. It is vital to make plans for a transition before the evidence of burn-out and detachment show up on your fiscal reports. Enterprises that show downward sales and profit trends have a tendency to drive buyers away and/or wear away the best price you may receive for your business. If you know that retirement or a change in career is at hand, start getting ready to find the best buyer for your business.

The ideal time to sell your business is just before its pinnacle. At this point you are most certain to sell in a punctual fashion, and achieve the best compensation package for your business. Permit yourself sufficient time to find the correct buyer. It frequently takes six months to a year to find the best party, and another 60 days to finish the exchange.

Cutting The Umbilical Wire

When your clients call, are they looking for you, or is it your company name they identify with? Could any one of your qualified staff handle their desires? Are you the key technologist, the only one qualified to supply the product or service your clients demand? Are you able to take a holiday, and feel satisfied that your business may continue to run well? A possible buyer will wish to be sure that the majority of your clients will make it through a change of possession, and therefore the goods and services your company delivers can continue to develop. The transferability of a company and its buyers immediately influences a corporation’s nominal value. If you’re essential at your company, and want to sell your business inside the following couple of years, making attempts to share your consumer relations and operations commitments with key workers can help attain a great transition.

Why Buy a Franchise?

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“Major advantages and benefits of buying a franchise business”

Minimize Your Risk: One of the primary and major reasons you should consider buying a franchise business opportunity (versus buying an existing independent business or starting one from scratch ), is it gives you the opportunity to go into business for yourself with an excellent chance of success, while at the same time minimizing your risk of failure.

Starting a new business is inherently risky. Most studies conclude that over 90% of new businesses fail within 3 to 5 years. In comparison, U.S. Dept of Commerce studies have shown that over 92% of franchised businesses are still operating after 5 years in business.

Buying and owning a franchise is not for everyone. And there are some obvious disadvantages to buying into a franchise business like the lack of complete control and required payment of franchise and royalty fees for example.  If you do not like following a model or structure, this might not work for you. That being said, the overwhelming success of franchising as a viable and proven business model is simply undisputable.

Below is a list of other well known advantages and benefits of buying and starting a franchise business today.

  • Risk Reduction: Franchise industry stats indicate that the franchise business failure rate is approximately 2 to 3%, compared to over 80% for all new independent businesses started.. Although some small business experts believe that the failure rate for franchise businesses is higher that 3%, it is still is significantly lower than going it alone.
  • Proven Business Model: One of the major hallmarks of franchising is that it can offer entrepreneurs a turnkey business model with established and proven operating systems, services, and products already in place.  Having a proven system already in place eliminates the guesswork and errors a common business owner would normally face.
  • Financial Assistance:    Lenders are usually very comfortable financing the purchase of a franchise because they already have a proven track record.  Bankers usually look at franchises as having a lower risk of repayment default and are more likely to loan money base on it.        
  • Management/Consulting Assistance: An established franchiser can offer a wealth of knowledge and training on how to successfully manage and operate a franchise business. Keep in mind that the Franchiser has a vested and shared interest in your success and will provide the support and training necessary to ensure you are ultimately successful.
  • Franchise Site Assistance: Most retail franchise companies play a very active role in helping new franchisees select locations that have the best chance of providing good traffic and exposure. They can also help negotiate leases and provide invaluable advice and assistance during the build out phase of a retail location.
  • New Products and Services Development: To stay competitive in the market place most successful franchise companies will devote the necessary time and resources to develop new and profitable products and services.

 

Preparation for a Loan to Buy a Business

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At this point, you are either still looking for a profitable company to buy or have settled already in acquiring a certain company. Whatever you status is, the next essential thing you need at this point is money – funds to purchase the business you are eyeing. This is where business loans come in.

Since President Barack Obama signed into law the Small Business Jobs and Credit Act last month, reports state that loans backed by the Small Business Administration (SBA) increased by 30 percent for this year. When SBA ended its fiscal year, it had approved $16.84 billion, or 54,826 small business loans. This was within the past 12 months. The increase is attributed to the measures enacted by last year’s stimulus, which eliminated fees and increased the government’s maximum guarantee to 90%, up from 75%-85%.

The other side of the coin however, is that many businesses that filed for a loan were denied. Why so? Based on the study conducted by the Federal Reserve Bank of New York during June and July of 426 small-business owners, it found 59% of small businesses wanted credit, and half of those were denied. In addition to the small businesses that got nothing of what they sought, about 75% of those surveyed said they received “some†or “none†of the credit they wanted.

In an interview, Kausar Hamdani, Senior Vice President and Community Affairs Officer said, “Until now, we’ve only heard anecdotally about difficulties for regional small businesses in obtaining credit without any numbers to confirm this.†Meanwhile, Bernard Clineburg, Chief Executive of Cardinal Bank, said in her interview with MarketWatch, “As a bank that wants to make small business loans, we can’t find the borrowers…qualified borrowers are hard to find.â€

Then what can you do to make your company more qualified? Here’s what we found out.

Be well-organized financially. As they say, talk is cheap. Lenders prefer to see things in black and white. It’s best to present to your lender your annual and interim financial statement, tax returns from the past three years and of course, your business plan, stating where your company has been and where it is headed. Of course, you should state that you intend to buy a business.

Be ready to tell your story. If your company survived the financial downturn, then you are worthy of a loan. What could set you apart is how you managed to survive and how you paired up compared to your competitors.

Transparency. It’s a cliché, but ‘honesty is the best policy.’ If you had unappealing credit history, your company shouldn’t hide it, instead bring it up front and explain the situation. After all, banks will find out about it once they check on your lending records.

Be realistic. Like any other loans, companies should be prepared to put up collateral for their loan. Percentage may vary but 15 to 30 percent is ideal.

What does it take to be successful?

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Certainly, you need adequate capital to buy the business and to make the improvements you want, along with maintaining some reserves in case things start off slowly. You need to be willing to work hard and, in many cases, to put in long hours. Unfortunately, many of today’s buyers are not willing to do what it takes to be successful in owning a business. A business owner has to, as they say, be the janitor, errand boy, employee, bookkeeper and “chief bottle washer!” Too many people think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses must be “doers.”

Is It a Good Time To Sell Your Business?

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It is no secret that the recent economic conditions have had a significant impact on most privately-held businesses over the past year or to. Not surprisingly, these same challenging economic conditions have also had a negative impact on merger and acquisition (M&A) activity. Thankfully, many privately-held businesses are beginning to see stabilization within their industries if not the beginning of a slow recovery. As a result, M&A activity appears to be on the rise. This is a good sign for all business owners, but particularly for those who are contemplating retirement in the next few years. Even so, there are a number of factors that impact the structure, timing, and valuation of a business sale. This includes the quality of the business, the number of qualified buyers, and the availability of financing.

Current Environment

Business quality – The quality of a business is still a key factor for attracting buyers. Now more than ever, acquirers are attracted to profitable companies with strong gross margins, loyal customers, tenured employees/management and attractive growth potential.

Many companies have been cutting costs to improve profits, but cost cutting has its limits. Once costs are optimized revenue growth is going to be the engine that impacts profitability. For example, we have seen businesses that have maintained their customer base over the past couple of years and have even gained new customers. Although their overall revenue and average revenue per customer is down from previous years, it is expected that the pent up demand from these customers will have a significant impact on future profitability as the economic environment improves.

Availability of qualified buyers – Some prospective acquirers perceive the current economic climate as an opportunity to expand or diversify their own business. And while some business owners believe that the only buyers right now are bottom feeders, this is definitely not the case. EBITDA multiples have decreased somewhat since 2007 according; however, strong companies are still being fully priced – because the demand for high-performing companies is definitely higher than the supply. In our own practice, we are currently negotiating deals that have multiple interested buyers.

In addition, private equity groups have cash to spend and are looking for opportunities. The amount of capital available for investment from U.S. private equity groups is at an all-time high with a gap of $400 billion between the amount of funds raised over the past few years and the equity invested.

Finally, some companies/industries have become even more attractive because they have proven their ability to perform well during the economic downturn. Health care, technology, and certain manufacturing companies are all enjoying this kind of increased attention.

Financing – Acquisition financing is more difficult to obtain than it was two years ago, but transactions are still getting done as lenders seek to finance deals that make sense. However, lenders are being more particular when it comes to approving buyers. They are looking for buyers who have relevant experience, a clear business plan and collateral assets.

Positive trends are important, and some lenders are interested in seeing a full-year on the books in 2010 – with improved performance over 2009 – before they will approve financing. In some cases, transactions may require more seller financing than was required in the past, so factor this into your planning. Even so, your goal should be to be substantially cashed out at closing.

Going Forward

The time to sell is when the business is steady or growing, the employee base and/or management team is stable and (perhaps most importantly) when an owner is ready based on his or her personal and financial objectives. This means sellers should understand what the market may be willing to pay for their business, and should plan ahead with a professional adviser to help determine the best time to sell.

Waiting a few years as the economy continues to recover is a valid strategy if the owners have a longer term retirement horizon. However, this may be an ideal time for planning an eventual sale. Business owners cannot control the external economic environment, so they should focus on the internal factors that can make a business more attractive. These factors include management succession, diversification of revenue, competitive or strategic advantages, opportunities for growth, asset base, and transparent financial records among others.

Trends are important when determining the right time to sell. If you do not have a system for tracking certain metrics and trends then this is a good time to implement one. Positive trends can demonstrate predictable or recurring revenue streams, and the ability to track such trends on a quarterly or even a monthly basis can be very valuable. The exact metrics to track depend on the type of business, but in general you should have the ability to track sources of revenue by customer, product/service and geography, as well as detailed costs and any other metrics that may be unique to your particular industry.

If you are contemplating a transition –  structuring a buyout by employees, or selling it to a third party – you should be asking and answering a host of specific questions. In our experience, we have realized that planning ahead and following a well-executed process can increase the value of a business by 10-30%.

I invite you to contact us if you are interested in planning a future sale. Our conversation will be strictly confidential, and I am sure it will be worth your time.