Rose Stabler

When Is The Right Time To Sell A Privately-Held Company?

There are many factors that determine best timing for selling a small business: the financial condition of the company, valuation, growth cycle, profit history, and the current market.

There is one aspect about timing that comes into play that seems to dominate all other factors....it is the business owner's emotional readiness to sell. However, if the primary determining criteria in the decision to sell your business is emotional readiness, you may put yourself in a weaker bargaining position when you do decide to sell.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, the mergers-and-acquisitions marketplace, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value. Internal conditions within a company, of course, also change -- often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value -- sometimes eroding value and sometimes increasing value.

Yes, it's easy to understand that you should hold on to a growing business....sell it after it grows bigger. But how should you start thinking objectively about the best time to sell? Well, imagine the life of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can't see the top, when it looks like it's all up from here. When others can see the top, they may not buy, or they may pay prices based on the downside trend and higher risk factor. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. Buyers are not too interested in declining businesses. To get the best deal you have to sell on the way up -- not at the top or the downside -- and when the market and prices are good.

Markets change and fortunes change from year to year. The current status of the small business market place in Houston is hot. Buyers in every category are plentiful, our economic position is one of the top in the U.S., business policies are in place for continued prosperity and growth, interest rates are at historic lows, and capital is available for business acquisitions.

Fueling the market are the different categories of buyers. For example, a variety of people in the Individual Buyer Category are:

• early baby-boomer corporate retirees
• corporate refugees who have suffered a downsize
• foreign buyers seeing U.S. businesses as investment opportunities while the dollar is still valued lower against their own currency
• 30-something-up-and-comers aggressively buying and building

Increasingly, corporate America, both public and privately-held companies, are acquiring smaller firms as part of their strategy for growth and innovation. Private equity groups, too, are actively seeking add-on acquisitions in Houston for their investment portfolios. Each of these buyer categories, the strategic buyer and the investment buyer, vary in their acquisition criteria regarding the sectors they are targeting and the revenue ranges they require. However, we have seen one major common trend occurring. More and more private equity firms and corporations are looking for smaller businesses. These strategic and investment buyers in increasing numbers are considering businesses with lower minimum cash flow and total revenue generation as acquisition candidates than they were just one year ago.

We expect this trend to accelerate, especially in Houston, for two reasons. First, while the national credit crunch may have impacted the larger transactions, the smaller transactions are still very active because all buyer categories for privately-held, small enterprises are looking to put their money to work. Secondly, Houston has been minimally affected by the credit crises and has been deemed recession proof. As a result, the city is a major target in the business acquisition marketplace.

Buyers exceed sellers and we have a robust exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers, and acquisition appetites and prices will fall. It will shift to a buyer's market rather than the seller's market that exits today. As a seller, you do not want to be participating in that buyer's market.

The time is right when the external and internal conditions are right...when the market, the buyers, and values are good and financing terms are favorable. When those factors are right, it's time to get your emotional readiness in line, or you are likely to miss the boat. It's that simple. If you turn down a great market, when buyers are willing to pay a great price, and if you wait too long for your emotional readiness to catch up, the market cycle or your business' internal conditions will likely have changed. The Market is ready and it is never wrong -- and like time, unfortunately, it waits for no one.

The Buyers For Privately-Held Companies And Why They Buy

Most owners of small and medium-sized businesses don't think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them don't even realize that their business may be an attractive acquisition target.

With about 8,000 Americans turning 60 every day, about 20% of businesses owned by boomers will be looking for buyers within the next three years. We are now in the initial stages of what is expected to be the greatest wave of business transfer activity in U.S. history. This future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner's readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: The Individual Buyer, The Investment Buyer, and The Strategic Buyer. Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

THE INDIVIDUAL BUYER CATEGORY

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 to $3 million. Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. These qualifiers give Individuals confidence in the business' continuity and stability. Employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

THE INVESTMENT BUYER CATEGORY

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, they number in the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

The relative sizes of acquisitions by category of buyer (compressed into their broader categories) is shown in the accompanying Table.

THE STRATEGIC BUYER CATEGORY

The Strategic Buyer is usually a public company or a larger privately-held company. Their targets are businesses that would compliment their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that joining the two companies will produce more, or be worth more, than just the sum of their parts. Here's a simplified example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2-3 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.

Selling Your Company? What Is It Worth?

When it comes time to sell your business, knowing how to enhance its value and PLANNING AHEAD are key to doing it ON YOUR TERMS.

Selling a business can be complicated and very time consuming. Since the average business sale transaction takes anywhere from FOUR TO TWELVE MONTHS, business owners need to be in the right frame of mind when they embark on the process. A big mistake that is often made is not planning well enough in advance to optimize its value and not having a strategy for exit.

THE CONCEPT OF VALUE was set forth as early as the first century, B.C., when Publilius Syrns wrote his Maxim 847: "Everything is worth what its purchaser will pay for it," or as an early British economist, Samuel Bailey wrote in 1825, "Value, in its ultimate sense, appears to mean the esteem in which an object is held." So, a closely held business may have a high value to its owner resulting from the efforts expended to build it, but it may have a lower value to a potential buyer who may be more interested in return on investment than past efforts of the Seller.

Thus, a proper valuation of a business will result from a dispassionate analysis of the firm's objective and subjective factors such as: the firm's financial condition, future income and expense risk factors, market and industry considerations, management and marketing functions, and the perceived esteem with which the business is held by its industry.

VALUATION METHODS

Two methods commonly used by BUSINESS BROKERS / INTERMEDIARIES to determine fair market value of privately-held businesses are the Multiple Method and the Discounted Future Benefits Method.

Multiple Method

The most viable valuation method for small businesses is the multiple method. This formula applies a multiple factor to the previous year or current year projected Discretionary Earnings figure to arrive at a purchase price. The Discretionary Earnings figure is a combination of several factors: Seller Discretionary Earnings (SDE) = Pre Tax Profit + Owner's Salary + Additional Owner Perks + Interest + Depreciation + Adjustments for One-Time Events. Note: Net working capital and real estate would be additive values. Typically, small businesses will sell in a range of one to four times multiple of this figure. This is a wide range, so how do you determine what to apply? In general, a one to two times multiple is for those businesses where the seller is "the business" or is "a one-man show." In other words, if the seller leaves, so too can the customers. Businesses with declining revenues, and high-risk businesses, such as restaurants, are in the one to two-and-a-half times multiple range. Three to four times multiple is for businesses that have been around for several years, have shown sustainable growth, have a solid base of clients, assets that will not have to be replaced in the immediate future, are involved in growth industries, and have expansion possibilities. Of course, there is a lot more to factor into the equation such as current economic and market conditions and the CATEGORY OF BUYER that the business will bring.

Examples of Positive factors that raise multipliers include: aProprietary products, with strong brand and/or patent or trademarkaDiversified customer base - no one customer more than 10% of sales aStrong management teamaWeak competitors and a healthy market share for your companyaProducts that are early in the Product Life CycleaAbility of the company to meet some growth with current plant and equipmentaNo pending legal or government actionaFinancial ratios that are near or above industry averages aand these OTHER POSITIVE ASPECTS.

Examples of Negative factors that lower multipliers include: aProducts that are just like competitors aOne or a few customers make up more than 25-30% of sales aStrong competitors and a weak or declining market share for your company aProducts that are near the end of the Product Life Cycle aMajor investment needed soon in plant and equipment aPending legal or government action aFinancial ratios that are below industry averages aand these OTHER NEGATIVE ASPECTS.

About the factors listed above ---if your company has one, or even a few, of the negative factors --- you are typical! There is no perfect business, but buyers will use these factors to negotiate the price down. You should address POSSIBLE PROBLEM AREAS and outline how the negatives can be overcome by a new owner. Buyers will look at the price of the business and determine if they can make sufficient profits to earn a livable salary, pay the new debt service, and provide a reasonable return of their investment. Ultimately, this is the test to see if the price and terms of any deal are reasonable.

Discounted Future Benefits Method

When forecasted future earnings can be reasonably developed, then the Discounted Future Benefits Method is often preferred by some buyers. This method utilizes one of several forms of forecasted after tax earnings over a period of five to 10 years. These earnings are then converted into a value using a present value concept. This method is more applicable to larger businesses that have stable or predictable earnings. Buyers often expect a 25% to 35% rate of return from an acquisition.

Buying A Business - Does The Purchase Price Make Sense?

When considering the purchase of a business, how do you determine if the price is sound? The following formulas can help quantify that answer.

While this is not meant to be a foolproof analysis, it can help validate the purchase price based on real-life criteria. It takes into account that you:

• need a livable salary
• will have debt payments
• will need working capital at time of purchase
• will need cash for a down payment
• should expect to receive a reasonable return on your cash investment (ROI)
• will want a safety cushion to fall back on

For a simple assessment of a business opportunity, let's assume the following scenario:

• Asking Price for the janitorial company is $500K.
• The janitorial company and the buyer are both qualified for SBA financing.
• Current Federal Prime Rate is 5.25%.
• A SBA loan can be obtained at 7.25% for 10 years.
• Working Capital needed is $25K.
• Seller's Discretionary Earnings is $178K.
• Expected Return on Cash Investment (ROI) is 25%.
• The owner is paying his nephew $20K more than a regular employee could expect to earn.
• The current owner is taking a salary of $60K.

A 20% cash injection as a down payment is a typical SBA requirement, which means $100K in liquid funds is required. Based on a $425K loan ($500K purchase price - $100K down payment + $25K working capital) at the assumed terms and by using an amortization calculator, you would find that the annual loan payment would be $59,880.

The Table for Seller Discretionary Earnings delineates the owner's total bottom line benefit as a result of owning the company. This is the total non-business related benefits going to the owner and family members on an annual basis. One-time, non-recurring or unusual expenses are typically things such as a new phone system, website development, outdoor signage or moving expenses. See the Table for other items that are used to arrive at SDE.

Fair market wage is an amount that the owner would pay a hired employee for a particular job. For instance, if the owner has been paying his nephew $40K for a job a new hire could do for $20K, the excess wages of $20K would be added to the benefit column in the SDE Table. As for paying yourself a salary, you can determine what you consider fair wage for what your role would be in the company -- or you can put all of the other numbers into the equation and see what is left for salary. If it adds up to your satisfaction, then so far....so good.

ROI for the purposes of this exercise is calculated by multiplying the cash investment by a reasonable interest rate that should be expected on the investment. This is a subjective percentage and a change in this number can substantially change the result of the analysis. Investment options, such as putting your money in U.S. Treasury bonds has little risk, therefore only 4.5% interest is received. The stock market option, on the other hand, has a higher risk with a higher average ROI of 11% (source: Ibbotson Associates). Venture Capitalists investing in risky internet start-up companies might look for 45%+ ROI. None of these options, however, puts the investor in the driver's seat -- there is absolutely no control over the performance of the funds in which they invest.

Historical data indicates that a 25% ROI is reasonable for a medium to low risk small business acquisition. The greater the risk of the business, the higher the rate of return should be.

As evidenced by the 25.8 million small business owners across this country (source: US Small Business Administration), there are many people who choose to have complete control over the ultimate success and performance of the money they invest through business ownership.

Let's plug all the numbers into the Final Analysis Table to determine the soundness of the purchase price of the business opportunity at hand. The return on the cash investment was calculated by multiplying $100K (cash down payment) by 25%.

After deducting wages, debt service, and a return on your cash investment from the earnings, the business still generates $33,100 in additional funds to take vacation with the family, or increase marketing efforts for the business. You almost have enough to hire a manager to run the business for you. Now would you buy this business under these circumstances? It would appear, yes! Of course this is a simplified assessment and not all factors are considered, such as growth potential, equipment condition, and other issues that should be considered when determining risk and working capital that might be needed to keep the company viable and growing.

Inc. Magazine - "It's a Seller's Market for Buying Businesses."

It's all about supply and demand.

Potential buyers and sources of capital for the acquisition of profitable privately-held companies is plentiful while the supply of businesses on the market is not. This makes a profitable, established business a hot commodity and in demand. Inc. Magazine spells it out in this month's issue, "The Most Valuable Businesses in America."

During my first conversation with Darren Dahl in February, in preparation for his writing the article for Inc. Magazine, he wanted to understand what drives the value of a business and why some businesses are more desirable than others. I first described the Houston marketplace, which enjoys one of the top economies in the nation. Location, location, location is always a value driver, and a business location is no exception. I've been writing about Houston's hot economic climate for over a year now and told Mr. Dahl that Houston is a "bulls eye" target for business acquisitions because of it. We cannot satiate the marketplace of buyers because there are not enough businesses currently for sale.

Good businesses are in short supply. The number of buyers looking to buy a business far exceeds the number of businesses available. So when a new business hits the market it will usually sell very quickly if the owner's expectations are realistic, if their financial history and data are upward trending and in good order, and is marketed properly. We have buyers lying in wait for businesses such as these and are ready to act quickly when one comes along. They know that if they don't pull the trigger, they will miss out to someone else who will.

One of our "Serial Entrepreneurs," as described in Inc.'s article, agreed to a conference call with myself and Mr. Dahl, and pretty much described what makes him tick and what he looks for and why. Entrepreneur Gary has been working with Don Piercy, one of our staff of professional brokers, for several years and has four businesses in his collection and is currently in the process of acquiring his fifth. We thank Gary for taking time out from his very busy schedule to share his viewpoints.

In continuing the issues surrounding value, while a price tag can certainly be put on any item for sale, including a business, price doesn't mean value. Value is in the eye of the consumer. It is the perceived benefits that the business represents to the market of buyers that makes it valuable. Perceived benefit, or value, looks different depending on who's looking. And, ultimately, the price that will actually be paid will be determined depending on how MANY are looking. Which means if lookers are plentiful, demand is high. The price will reflect that demand.

I further explained that while the reasons that business owners of small privately-held enterprises sell do not vary significantly, the reasons for buying do. I described the various categories of buyers and their respective acquisition criteria and told Mr. Dahl that the price each type of buyer is willing to pay directly correlates to their motive for the acquisition. This is why it is important for business owners to know who the most likely buyer would be for their company prior to going to market.

It was then that Mr. Dahl decided to focus his article on the buyers rather than on the attributes of the business. Inc. Magazine's article covers the U.S. market as a whole and does not describe all buyer types. But it definitely describes the current Seller's Market that exists for profitable businesses for sale today.

In closing and of particular relevance, is that 8,000 Americans are turning 60 every day, which means about 20% of businesses owned by boomers will be on the market within the next couple of years. About 60% to 70% will be exiting within a decade, which means we will experience what is expected to be the greatest wave of business transfer activity in U.S. history. The future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

Not only is this important for those owners of small businesses who are considering their exit, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --

• Have generated 60 to 80 percent of net new jobs annually over the last decade
• Employ 50.6 percent of the country’s private sector workforce
• Represent 97 percent of all the exporters of goods
• Represent 99.7 percent of all employer firms
• Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration

Selling Your Business? Attend Our Exit Strategy Seminar

Certified Business Brokers (CBB) will host a breakfast Exit Strategy Seminar on April 10, 2008 in Houston's Galleria Area. The seminar team will consist of CBB's M&A Group, Merrill Lynch Wealth Management Advisors, as well as Tax, Legal, and Accounting professionals. The seminar will cover key issues surrounding the successful sale of a privately-held company:

• Maximize your company's value.
• Who would be the most likely buyer?
• Understand the sale process.
• Plan for retirement.
• When is the right time to sell?
• Minimize post-sale taxes.

The seminar is free. Breakfast will begin at 7:00 AM and the presentation will begin at 7:30 AM and be completed by 9:00 AM. This session is specifically for owners whose businesses have annual gross revenues in the range of $2.5 to $20 million. For details about location and to reserve your seat, please email rose@certifiedbb.com or call our office at 713-680-1200.

People put tremendous thought into launching a business. They should put equal planning into selling one. Typically, business owners are so busy handling daily operations that they give little thought to what they’ll do when it’s time to retire, sell, or turn over control. Suddenly, that day arrives. Which means these business owners are not completely prepared for the sale of their business. Making the shift too quickly or without proper planning can make a difference in the proceeds received from a sale. This affects retirement, estate taxes, sales taxes and even the business’ worth at sale time.

It is all about planning, preparation, timing and execution. We will discuss the current Houston economy and the current business transfer marketplace. We will walk through the sequence of events involved in the entire sale process from valuation, right-timing, to what to expect after the sale. Merrill Lynch Wealth Management Advisors will discuss retirement strategies and how to best invest your after-sale proceeds to sustain your lifestyle through your retirement years. Tax, legal, and accounting professionals will be addressing those aspects of the business sale transaction.

Selling A Business in the Houston Marketplace -- It's Still Hot

Back in March 2007 I wrote an article touting Houston's booming economy. In revisiting that article, while there is certainly economic turmoil on today's national scene, Houston is still hot!

The reason for this blog post is to share some of our current hands-on observations and experiences that keep us aware of the climate in Houston. And, I'm not talking about green house gases or other global warming theories. These are facts straight from the microeconomic level.

Our firm is like a barometer for the Houston business marketplace. We know what business owners are feeling and thinking -- they talk to us. Everyday, we visit with these entrepreneurial people who are keeping Houston's economy as one of the best in the nation. And, we also serve as the information source for those who want to become business owners. Yes, they talk to us too. They are calling from New York, California, Ohio, Canada, England, well -- in other words, we are seeing international interest in Houston for business acquisitions.

What we are finding is that many business owners in Houston who are ready to sell their businesses or are beginning to prepare for their exit, are hesitant. They don't know what's going to happen in the upcoming election and they are worried about the economy they tell us. Not only are these valid concerns, they are the realities facing the nation today. Who isn't worried about these issues?

But let's talk facts -- Let's focus on the facts about the Houston marketplace:

1) The number of businesses in Houston is growing and our population is growing. Corporate firms are either relocating their headquarters to Houston or are making strategic acquisitions of smaller businesses here to expand into our market. From corporate, private equity, to the individual entrepreneur, they have their eyes on Houston. No wonder, Houston ranks #2 best business climate in the Nation (Site Selection).

2) We have full-occupancy in our Class A office space, and we have experienced the #1 job-growth rate in the country (U.S. Bureau of Labor Statistics) due to the opportunities available in our expanding market.

3) Our housing market is #1 in America. Houston is bucking the trend of decreasing home sales, as reported by USA TODAY on 2/15/08. Houston was identified as one of only a few US metro areas showing home growth. In fact, the Houston Association of Realtors in their January 16, 2008 press release, reported 2007 as one of the best years on record for property sales in Houston, second only to 2006.

4) Texas has the one of the top 10 best economic outlook rankings in the U.S. according to senior economists for the Wall Street Journal. Another senior economist with Moody's Economy.com, says in his Texas economic forecast through 2008, "Houston is probably the state's biggest economic hot spot thanks to its sheer size and broad-based growth and booming energy industry." Houston is indeed a world-class city and economic powerhouse.

5) At a panel convened by the Center for Houston's Future this month, experts concluded that one of Houston's strengths was its entrepreneurial culture and a shared feeling that growth is good, rather than threatening. Other driving forces mentioned were the city's great port, critical mass of industry clusters, and its cultural arts districts. "We really are impressed by Houston," said one expert on the panel, "we're convinced you are on your way to becoming America's fourth global city after New York, Chicago and Los Angeles."

I can go on and on, but I'll leave it at that for now. Of mention, however, is Inc Magazine interviewed me last week for their upcoming April 2008 issue. They, too, are aware that Houston is the happening place. They wanted to know what specific types of businesses are hot in Houston and what do buyers look for when they are evaluating a business for acquisition. So there you go. If you are a business owner and have been wondering if you should test the water, jump in and ride the wave. It's not only the weather that's hot down here in Houston.

Houston TABB Chapter Announces Luncheon with Guest Speaker Former Federal Reservist Bill Sherrill This Week

HOUSTON -- The Houston Chapter of the Texas Association of Business Brokers (TABB) will hold its their first monthly luncheon for the new year on February 27, featuring guest speaker Mr. William Sherrill as he presents Houston's economic forecast for 2008.

Mr. Sherrill, who has significant experience in such fields as real estate development, electronics, manufacturing, banking, and finance and has made noteworthy contributions in these areas, will discuss Houston’s Economic Forecast for 2008 . Mr. Sherrill has been twice appointed as Governor of the U.S. Federal Reserve Board and served as Director of the Federal Deposit Insurance Corporation (FDIC). A champion of entrepreneurial management, Mr. Sherrill founded the Center for Entrepreneurship & Innovation at University of Houston's Bauer College of Business and currently serves as its Co-Chairman.

Houston's Chapter of TABB hosts monthly luncheons for its members which focuses on a range of topics such as educational programs, legal, tax, economic, local trends, and other issues that impact the business transfer marketplace in Houston.

Certified Business Brokers (CBB), whose team members have served on TABB's Houston Chapter Board since 1983, is the largest business brokerage firm in Texas and was established in 1974. The firm was a founding member of the International Business Broker Association (IBBA), the largest business broker association in the world, and a founding member of TABB, the precursor and model used to form the IBBA and other business broker associations across the country. Their clients are the owner's of small to mid-market privately-held companies. Their services include Business Brokerage, Mergers, Acquisitions, and Business Valuations.

Buying A Business - Huddle with the Experts

Acquiring a business is a team effort and finding the right business broker (intermediary) is just the start of building your squad. Here's a very common question posed by prospective buyers:

"I'm ready to purchase a business that's currently available for approximately $1.1 million. I feel I need a person who can help me with the due diligence, valuation and general advice. Where can I find such a person?"

The answer is: You don't simply need one person.

Making a business acquisition is a team effort, and your business broker, also known as a business intermediary, is the quarterback. The broker drives the deal through communication with the buyer, the seller, the attorney and the accountant. We do everything to move the deal along, including coaching and some psychology.

It's an extremely emotional process. Sometimes, the reason deals don't get done is that emotions get in the way. A good intermediary will take the emotion out of the transaction. Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process common sense must be injected into the game plan.

As the coach, the broker sees the big picture. S/he keeps the ball rolling towards the goal and creates the synergy needed to prevent false starts, fumbles and setbacks.

Your broker can help you find your other team members, including an attorney to protect you in the legal aspects of the transaction and an accountant to tackle the numbers and tax issues.

As a general rule, small business owners sell a business only one time -- and buyers purchase a business only once in their lives. A business owner's professional advisors who have counseled them on the operations of their business consists of their attorney who does general business law and their accountant who does their books and tax filings. New buyers, too, have probably called on attorneys for various reasons such as preparing a will, for example, and have used accounts to file their income taxes.  It is important to note that these types of professional advisors may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller*s tax situation and vice versa. Negotiations are opposing in nature and require creative solutions by experienced business brokers, the negotiators.

Good brokers will have a list of professionals with whom they have worked with in the past - deal makers versus deal breakers. You need an accountant and attorney that specialize in business transfer transactions.

You wouldn't call an eye doctor to perform foot surgery, so why call a patent attorney or a general accountant to help you perform due diligence on an acquisition candidate. You need specialists.

Professional advisors can make or break a deal. You must articulate your wishes to your team in order to have them working together towards the common goal. Each advisor, such as a business broker (intermediary), an attorney or an accountant, has a specific role in the transaction and should be working on behalf of their client to achieve the objective for which they were engaged.

Your advisors should provide the information you need in the time period required -- so you can make the decision on the purchase. You are the ultimate decision maker in the deal.

The buyer, seller, and their advisors involved in a transaction must have a shared understanding of the price and terms of the deal.......who is getting what and for how much......or the sale may be doomed before it starts. To help prevent wrecked deals, good communication between all of the parties involved is a priority. Unless they are told, outside advisors may not realize how much the buyer and the seller want to consummate the sale.

The accountant needs to know from the client that this is an earnestly desired transaction and that, unless something completely unanticipated is discovered, his or her job is to provide, review, and verify the financial records of the business in order to get the deal done.

If there is no one monitoring and leading the progress of the transaction, the ball can be dropped somewhere along the way before the final yard...before breaking the plane of the goal line.

The use of a professional business broker to captain the effort can alleviate communication problems and keep the momentum rolling.

The experienced business broker has been through the due diligence and closing process many times, much more often than any of the attorneys or other advisors involved. They keep the deal on track and act as the captain that keeps the team working together towards the common goal.......the successful consummation of the sale.

As long as all advisors involved are operating on the same wave length as their respective clients -- the buyer and the seller -- the odds are good that the deal will happen.

10 Reasons Why Selling A Business Is So Different Than Any Other Selling Environment

Privately-held businesses are sold in an environment that is unlike the selling environment of anything else you can imagine!

Sound surprising? After you review the following ten reasons that make selling a business different, perhaps you will agree.

1) Confidentiality

How do you sell a fully-operational, profitable business without anyone knowing it's for sale? Adverse things can and do occur when people know, or think they know, a business is for sale. Confidentiality must be maintained. Here's why.

• Employees get nervous and may leave for more stable employment. They believe that new management will mean new employees. That may be true in public company acquisitions but is generally not true in private company sales. Your staff represents a significant portion of your company's value. Should your key employees leave, most buyers of private companies will not buy.
• Competitors may take advantage by using the information as a way to gain an advantage and pirate customers. After a recent seminar on buying, selling and pricing businesses, a businessman said to me, "I wish you had given this seminar last year. Your information would have saved me $150,000." He had decided to sell and had sent information to his competitors and others within his industry offering his company for sale. Shortly thereafter many customers stopped coming in. Apparently his competition was using the information to undermine customer confidence by saying, "I know you have done business with Joe for years but - he's selling out you know and . . ." Twelve months later business is almost back to normal. Many companies have not survived this mistake.
• Suppliers extend credit to your business because of your good payment record over the years. Now they hear you are "on the block". Might they put you on COD? What impact might that have on your business?
• Bankers have a healthy skepticism of small business. They want your business but they have been burned in the past by others. They know that a very high percentage of small businesses fail. What's that? Who's trying to sell his business? Might the bank decide not to renew your line of credit? Call your note(s)?
• Customers may lose confidence and decide to trade elsewhere. Where are you without your customers?

In summary, sell it but don't let anyone know it's for sale. What else must be sold under that condition?

2) Business Owners Do Not Know What The Business Is Worth

Essentially every business person we have worked for has confided that they really did not know what their business was worth. They admitted that although they didn't know what the business was worth, they knew what they wanted for it."

What seller of any other item being sold doesn't know the item's worth?

3) Buyers Don't Know What They Want To Buy

An overwhelming majority of buyers come to us and profess to be in search of either a light manufacturing opportunity or perhaps a distribution company. This is code for "I really don't know what I want to buy but I'd feel silly telling you that." Later, virtually all admit they really didn't know what they wanted. The odds of a person buying the business that attracted them to our offices are 1 in 500! The odds of buying a company within the industry for which they initially stated a preference, 1 in 50!

What else has to be sold to someone who doesn't know they want to buy it?

4) The Major Selling Point Is Intentionally Concealed 

A business owner's desire to minimize taxes overrides the desire to show bottom line profits. You have to look between the lines in order to determine the real earnings of a private company.

Can you think of any other situation where a seller intentionally conceals a major reason to purchase?

5) Everyone, Yet No One, Knows The Value

Ask ten buyers what a business is worth and you will get at least 10 different answers. One of the ten will offer more than the rest. Why? More on this later. Buyers, as with sellers, don't really know what a business is worth. Unlike virtually every other commodity sold, there is no public record of sale prices for private business. As a result, we have seen a multitude of valuation methods used by buyers, sellers and advisors to estimate a business's value.

What else has to be sold under conditions where nobody knows the real value but everyone has an opinion?

6) Future Value Of The Purchase Is Dependent Upon Who Buys It

You own a business and a home. So do I. We both have profitable businesses and nice homes. Let's swap homes and businesses just for the change and variety. It's now a year later. The value of our homes is basically the same. What about our businesses? Might one of us be in trouble, perhaps both of us? What do I know about your business? What do you know of mine? Think of a business as a vehicle. Will a new operator drive the business to higher peaks, or drive it into the ground?

What else is sold where the future value of the purchase is so dependent upon who buys it?

7) Third Parties Refuse To Ratify The Wisdom Of The Purchase

We can buy virtually anything and a third party will participate in the purchase by providing the financing. This participation essentially ratifies the wisdom of our purchase. An excellent example is the purchase of real estate. The bank appraises the property, ratifies we are not paying too much and gives us a mortgage. Business equipment and inventories are not favorite collateral with bankers. What percentage of the asset value would they lend anyway? Which asset value would they use? Liquidation Value, Book Value, Replacement Value, Value in Place, Net Book Value - and what equity or loan to value percentage would they apply - 60%, 50%, 40%? What part of a business' value is attributable to the value of assets? Usually less than half. How much will your banker lend you on your business' assets today?

What other major purchase can you make where a third party will refuse to participate in the financing to any degree of significance?

8) Conflict Between Personal Desires And Financial Considerations

Financial considerations are important but do not drive the business owner's ultimate decision to sell. Business owners sell their businesses to gain a lifestyle change. The decision is a combination of personal and financial considerations. Nothing a business owner will ever sell will have the personal attachment the business represents. Buying a business is a personal and lifestyle decision also, not purely a financial one. Buyers are seeking independence, freedom to express themselves and their ideas, the ability to take control of their own future. Obviously, the financial aspects of a purchase are important but financial considerations do not drive the ultimate decision to purchase. Nothing will have as great an impact on a buyer's way of life than buying a business. Both buyer and seller have to balance the imagined personal gain against uncertain financial prospects. A business opportunity, not a business guarantee, is involved.

What other purchase or sale can you imagine that involves such a high degree of personal involvement and financial uncertainty?

9) Too Many Customers

Those who sell businesses are inundated with buyers. It seems everyone is either professing to be a buyer or knows one. Buyers are everywhere. Finding the right buyer is another story. It's always been a seller's market for viable businesses.

Can you think of any other business where people complain of too many customers?

10) Extremely Emotional Atmosphere

A business is to its owner as a child is to its parents. Your business is an extension and a reflection of you. It's your baby and you do not have to sell. You have sacrificed yourself, your family life. There have been times when you didn't take anything out, rather you put everything back into the business. All those long hours, your hopes, your dreams. . . now you are thinking of selling? Put the business up for adoption?

What else is bought and sold in such an emotionally charged atmosphere?

In Summary, the environment in which a business must be sold is challenging and unique. Therefore, the methods used to sell a business is also unique and is modeled to meet those challenges. Although the sale of a business is different than the sale of essentially anything else, what occurs is straightforward. For an understanding of the process, assume your business is a public company. Before attempting to attract a suitor your board of directors would first engage an investment banker to identify appropriate acquisition candidates (buyers) and determine the company's worth. The investment bankers would provide the board with information as to the best acquirers and what values or strategic advantage might be achieved through a sale or merger of the firm. The board of directors would then decide if sale or merger of the company was in the best interest of the stockholders. Assuming the decision to sell was ratified, the investment bankers would then package your company so as to be most attractive to the appropriate acquiror(s). Essentially, a similar process is used by business brokers / intermediaries to sell private-held companies, but dealing directly with business owners - not a board of directors - on a more personal basis.

When the decision is made to sell and the sale is properly conducted, your business can be sold for the best price and terms without anyone ever having known it was for sale.