What Would Your Business Sell For?

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There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register.

When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?”

“Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s your profit.”

A commonly accepted method to price a small business is to use Seller’s Discretionary Earnings (SDE). The International Business Brokers Association (IBBA) defines SDE as follows:

Discretionary Earnings – The earnings of a business enterprise prior to the following items:

  • income taxes
  • nonrecurring income and expenses
  • non-operating income and expenses
  • depreciation and amortization
  • interest expense or income
  • owner’s total compensation for one owner/operator, after adjusting the total compensation of all other owners to market value

Here are some terms as defined by the IBBA:

  • Owner’s salary – The salary or wages paid to the owner, including related payroll tax burden.
  • Owner’s total compensation – Total of owner’s salary and perquisites.
  • Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

Developing a Multiplier

Once the SDE has been calculated, a multiplier has to be developed. The following (just as a guideline) should be rated from 0 to 5 with 5 being the highest. For example, if the business is a highly desirable business in the current market, “desirability” would be rated a 4 or 5. If the business is in an industry that is quickly declining or nearly obsolete, “industry” would be given a 0 or 1 rating.

  • Age: Number of years the seller has owned and operated the business.
  • Terms: Is the seller willing to offer terms?  For example, will the seller accept 40 percent as a down payment with the seller carrying back 60 percent at terms the business can afford while still providing a living for the buyer?
  • Competition: Consider the local market.
  • Risk: Is the business itself risky?
  • Growth trend of the business: Is it up or down?
  • Location/Facilities
  • Desirability: How popular is the business in the current market?
  • Industry: Is the industry itself declining or growing?
  • Type of business: Is the business type easily duplicated?

The average business sells for about 1.8 to 2.5. Obviously, if the SDE is solid and the multiple is above average, the price will be higher. Keep in mind that the price outlined includes all of the assets including fixtures and equipment, goodwill, etc. It does not include real estate or saleable inventory. The price determined above assumes that the business will be delivered to the buyer free and clear of any debt.

Veteran Wisdom

When all else fails, the words of a veteran business broker will work.

Asking Price is what the seller wants.

Selling Price is what the seller gets.

Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Sellers should keep in mind that the actual price of a small business is about 80 percent of the seller’s asking price.

Selling Your Business? Expect the Unexpected!

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According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes the business owner into selling. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:

How much is your time worth?

Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.

How involved do you need to be?

Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.

Are there any other decision makers?

Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.

How important is confidentiality?

This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.

Rating Business Buyers in Today’s Market

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Making the initial decision to sell is tough, but once that decision is made, there are many diverse options.  Small businesses are more sophisticated than ever, and the individuals purchasing these businesses are complex and come from varied backgrounds.  Here is an overview of the most active categories of business buyers in today’s market:

Groupings of Family Members

People within a business owner’s own family often opt to buy the family business. In fact, this stands as one of the more common types of small business buyers.  One reason is that business owners are more comfortable with a relative taking over the prized business, as they often built it up from nothing.  Quite often the family member looking to take over the family business has been carefully groomed and tested over the years to ensure that he or she is ready to be the true “heir apparent.”  In this kind of situation, the family member truly is the best person to buy the business.

However, there is a downside.  Family dynamics can be quite complex, and a variety of conflicts may develop.  Issues may quickly arise ranging from whether or not the departing business founder and family member can really leave the business to whether or not the new buyer actually has the funds to make the purchase.  These, and similar issues, can cause significant disruption in the transaction of the sale.  In short, families come with histories and their own, and often complex, internal issues and discord can arise.  This means that an outside buyer is often the best possible option.

When it comes to determining whether or not a family member is the right buyer for a given business, it is necessary to look at three vital issues: the ability of the family member, the financial standing of the family member and the agreement amongst the family.

Selling a Business to a Business Competitor

Business competitors are frequently overlooked when it comes time to sell a business.  Why?  Usually there is a concern that a competitor will take advantage of the knowledge that a business is up for sale and may try to attract existing customers or clients away from the selling business.  Yet, if the business meets the needs of a competing company, they may be willing to strike a very good deal in order to acquire the business and expand.

When it comes to selling a business to a competitor, a business brokerage professional can prove to be quite useful.  One reason for this is that they can use confidentiality agreements so that the name of the business being sold is only revealed after contacting the seller and further qualifying the competitor in question.

Selling to a Foreign Buyer

Foreigners love the idea of buying a business in the United States.  There are many reasons why they find this notion to be attractive.  For example, by opting for an existing business many foreigner business owners are able to bypass difficulties such as licensing, finding a job in their own profession and issues with a language barrier.  Many of these types of concerns can by circumvented, to an extent, by opting for an established entity.

Commonly this kind of buyer is accustomed to working very long hours and is already a successful business owner in his or her own right.  Yet, this does not mean that their business acumen will coincide with that of the seller.  Once more, this is where the expertise of a company can come into play.

There is one additional note to consider when selling to a foreign buyer.  Small business owners often believe that foreign companies and independent buyers will “pay big” for their business.  However, the fact is that foreign companies are usually only interested in acquiring businesses or companies that already have sales in the millions.

Dealing with Synergistic Buyers

A synergistic buyer is one that believes that a given business would stand as a perfect fit for his or her own existing business.  Part of the thinking is that by acquiring the new business, this buyer will be able to lower costs, gain new customers and incur other important benefits and advantages.  It is interesting to note that synergistic buyers often will pay more than other buyers due to the fact that they see tangible, and perhaps even immediate, benefits for making the purchase.  Similar to working with a foreign buyer, synergistic buyers rarely look at small businesses, but instead seek out mid-sized companies that meet their overall criteria.

Financial Buyers

In short, financial buyers can be quite demanding as they potentially have a long list of demands.  The bottom line for these buyers is that they want maximum leverage.  Yet, they also fall into the right category for a seller who wants to continue to manage his or her company after it has been sold.  Financial buyers frequently play “hardball” and will make an offer that is lower than other types of offers.  However, they often make non-financial provisions that could be important to the seller, such as the location of the business, the retention of key employees and a myriad of other factors.

Financial buyers are only interested in a business that is able to yield enough profits to support both the existing management and provide a return on the investment to the owner.

The Individual Buyer

The majority of sellers of small to mid-sized businesses want to deal with the individual buyer if possible.  Quite frequently these buyers are mature, ranging in age between 40 and 60, and are experienced veterans of the corporate world.  For these buyers, owning a business not only is a dream, but also it is something that they now can afford.  Understanding what this kind of buyer wants is a key component in making the deal happen.

In general, any buyer that is looking to replace an existing job is a very good prospect.  Owning a business is clearly much more involved than being someone else’s employee, and these new responsibilities and potential risks can frighten many prospects away.  Yet, this category of buyer has a deep internal need or “drive,” which may help make the deal happen.  Further, the individual buyer may approach the deal with fewer strings and other assorted complications than many other types of potential buyers.

One Final Thought

Sifting through the various potential buyers to find the right one can be complicated.  As a result, it is best to leave this process in the hands of professionals  who have the experience and know how necessary to decide on the best possible prospects.

Why Sell?

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There are a number of different reasons why selling a business can be an emotional event. The business may have been in the owner’s family for generations. The owner may have built it from scratch or bought it and then poured the necessary energy into it to grow it into a successful, profitable business. For these and many other reasons, “seller’s remorse” is actually one of the major causes of a deal falling through. However, despite the emotional ties to a business, there are times when selling is the best course to take. Here are just a few examples of those times.

Burnout

According to industry experts, burnout is a major reason owners consider selling their businesses. Over time, the long hours and 7-day workweeks can take their toll. On the opposite end, business owners who thrive on challenge may get to the point that the business has just become boring – the challenge of creating it or growing it has been replaced with the mundane daily activities of running it. Losing interest in one’s business usually indicates that it is time to sell.

No succession option

Sons and daughters may be disenchanted with the family business by the time it’s their turn to take over. They may have their own dreams to fulfill that do not include the family business.

Unexpected circumstances

This is the number one reason a business owner should make plans about selling even if he or she is not planning to sell for many years. A good question for a business owner to ask is, “If an unexpected circumstance should occur tomorrow that would require me to sell my business, what would I wish I had already done?” Unexpected events include such things as accidents, illness of owner or family members, divorce, and partnership issues. Unfortunately, these events are seldom predicted, and too many times, a forced sale does not bring maximum value.

Need to cash out

The need to cash out may be caused by an unexpected circumstance, such as a costly accident or illness. Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. In such situations, an owner in need of additional cash has two options: borrowing against the assets of the business or selling the business.

Outside pressure

Successful businesses create competition. There are times when a business owner discovers that the competition has built to the point where it is easier to join it than to fight it.

An “out of the blue” offer

There are times when a business may not even be on the market, but someone or some other company sees an opportunity and makes an unexpected offer. This may be a great time to sell as the owner is likely entering the negotiations from a position of strength.

There are obviously many other reasons why businesses are sold. The most important factor is that the owner is convinced that it is time to sell and has a clear understanding of his or her reasons. And, whether that time is now or many years in the future, the wise owner will consider the following: “The time to prepare to sell is the day you start or take over the business.”

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.

Sales Price vs Asking Price

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A recent survey by BizBuySell, using their data, makes for not only interesting reading, but is very informative. BizBuySell, one of the leading websites which list businesses for sale, is providing a valuable service to all sellers by providing this date.

One  figure is significant because it bears out a figure from other sources. The chart in the BizBuySell report on small business sales price versus asking price came out at approximately 84 percent for 2011, just about the same as many other indexes.  This is a very valuable statistic. The BizBuySell report represents thousands of sales and therefore the percentage of asking price versus selling price is very meaningful.

When an offer is presented to a seller and is only 20 percent less than the asking price, the information in this report can help make a deal. And, certainly if the offer is only 10 or 15 percent less than the asking price, the results of thousands of closed deal should make a seller grab the deal. It’s pretty hard for a seller to argue with thousands of sales. What this figure strongly suggests is that businesses are listed for about 15% more than what they are really worth in the market place.

Want to sell your business? What You Need to Know

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Surveys of the business brokerage industry maintain that only 25 percent to 30 percent of businesses that are listed for sale actually ever sell.

The three main reasons the majority of businesses listed for sale don’t sell:

• The owner has an unrealistic expectation of the business’ value.

• The business is breaking even or losing money.

• There is a fundamental problem with the business and/or the business model.

Sometimes one or all three of these conditions exist at once.

Most businesses can be sold, provided that one of the above three issues doesn’t exist, or a new owner has the ability to fix the problems.

Having a realistic expectation of a business’ value is a manageable condition and perhaps the easiest to solve. For many owners, it can be difficult to come to a realistic expectation of value.  This is understandable because most small business owners have invested a significant amount of time and money, not to mention blood, sweat and tears, into their “baby”.  Selling the business is like one of their children who is about to leave home for the first time.

Determining a realistic value of the business is essential and will do the most to prepare a business for sale. How to do this?  First, do a little research on business valuations.  Many business owners think the business is valued on a multiple of revenues.  A buyer is much more interested in the businesses EBITDA or re cast earnings than revenues.  Getting a realistic value for your business should be the first priority.  Because Empire Business Solutions is an experience M&A specialist, we can help you determine a realistic value for your business.   We have access to valuation software and transaction comparables which can provide a basis for a realistic price for your business.  Please call us for a free article on valuation or a free consultation on selling your business.

Next, talk to a M&A/business broker advisor who has transactional business sales experience.  Make sure that the person has real-world experience in the size of business that you are considering selling. Theory is great, but you want someone who has done this before and can give you an honest assessment of the value.  Most M&A/business broker advisors have software which can generate a reasonable opinion of value so you can get an idea of value.

If the initial indication of value from your advisor is within reason of your expectations, the next step might be to get an independent and objective third-party business appraisal. A formal appraisal will give you the most information on the business’ value and will be the most thorough. This can be expensive but can be useful in negotiation with a potential buyer. The appraisal must be objective and, therefore, it should not be provided by your current bookkeeper or CPA.

It should be completed by someone who performs business appraisals on a regular basis. Since a state license is typically not required to execute business appraisals (unlike in real estate), review the appraiser’s qualifications and designations.

The second two issues are more problematic and more difficult to repair. A business that is losing money can be very difficult, if not impossible, to sell. On top of that, the business model might be flawed or not working right, creating the losses in the first place. Questions that need to be asked are as follows:   How long has the company been in business?  Is the business model viable in today’s economy?  What is it about the business that isn’t working?   Can new products or services be offered under the current model that will create appeal to the clients being served?  Can the business model be fixed?  These questions have to be answered honestly in order for the business to be repaired prior to sale. If the flaws can’t be mended, it might be time to rethink the business in general and, possibly, wind the business down.

After reviewing the business model for viability, you may determine that the business might be losing money but the model itself is not flawed. The owner needs to look at why the company is in the red. A business that is losing money can be very difficult or impossible to sell as buyers will not want to take on someone else’s burden. Many business sellers who are in trouble often try and convince a prospective buyer of the business’ potential and that, under new ownership, the troubled business will thrive. Buyers often do purchase businesses based on their potential, however, they typically will not base a price on potential but on the past financial performance.

To improve the business’ profitability, scrutinize every expense.  Once changes are made, those items can be added back or adjusted to the financials, retroactively, to show what the business would have looked like had those changes been made.

By educating themselves about the reasons why businesses don’t sell, owners who desire to exit their companies via sale stand a much better chance of completing that goal.

Rating Today’s Business Buyers

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Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.

The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.

Synergistic Buyers

These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.

A Final Note

Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.

Why Sell Your Company?

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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.

  • 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.
  • 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.
  • 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.
  • 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 an old law that says, “The time to prepare to sell is the day you start or take over the business.”

Who Is the Buyer?

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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?