The decision to sell your business is one of the biggest decisions you face as a business owner.
Whether you are a single Owner-Operator or a Member of the Board of Directors, making the decision to sell, and how to go about it, are not as easy as you might have initially imagined.
Under ideal circumstances, you need time to plan and prepare the business, and yourself, for the selling process. Selling can take many shapes and is part of an all-inclusive exit strategy.
But there are times when the decision to sell is something that comes sooner than you may have been expecting.
Whatever your reasons for selling, we are here to help. We have listed some of the most common questions we receive about selling a business below, but every situation is different and every business is different. Schedule a short call with us to learn more about the selling process, how it applies to you and your business, and let us help answer some of your immediate questions and concerns.
The best time to sell is when a business is doing well. It is best not to wait until after a business has peaked; the selling price can suffer. However, almost any business can be sold, even if it is not doing well, if the sale is handled professionally and priced correctly.
A company’s value depends on many factors such as: cash flow, financing terms, value of assets, type of business, financial history, condition of equipment and premises, lease arrangement on premises/equipment, competition, location, and future potential, among other factors. By analyzing your business and comparable sales in your industry, your VR Business Intermediary can advise you on the proper pricing strategy for your business. For larger businesses we recommend a third party valuation. Buyers are much more likely to pay top dollar for a business when documented evidence supports the asking price. Most financial institutions insist on a business valuation before they will consider financing.
What is the difference between the terms Discretionary Earnings, Cash Flow, Adjusted Net Income and Owner's Benefit? And what do they mean?
These terms tend to be used interchangeably but they are usually defined as profit before income tax plus depreciation, interest, owner’s compensation and other owner benefits. It represents the amount of money the owner has available to pay himself, to invest in additional equipment, to make the note payments on the business and pay taxes.
I am planning to sell my business in the next two years. What steps should I be taking now to assure a smooth (and profitable) transition?
Buyers always confirm the financial standing of a business during due diligence. Financial statements and tax returns need to be up-to-date and accurate before a buyer asks to see them. A buyer is not insulting a seller when he asks you to prove your numbers. He is only being a prudent businessperson. In addition to books and records, the appearance of your business is paramount. Buyers like well maintained equipment, clean facilities and current sellable inventory. Make it easy on the buyer to make a positive decision by making certain your business shows like a winner.
Why aren't all the financial documents of the business I am considering to buy available before I make an offer?
Just as you would not want your personal financial documents made available to the public, business owners want only serious buyers to have access to such private information. Your Business Intermediary will provide you with summary information including gross sales, general expenses, lease information and cash flow. He/she will assist you in drafting an offer based on that information and protect you by making the offer contingent on your satisfaction with the seller’s business information upon your full investigation. An Offer to Purchase Agreement simply says, “If everything I assume about this business proves true, this is what I am willing to do.” You, the purchaser, then have the right to proceed, withdraw your offer or make a new offer based on your investigation. The seller, once he/she has accepted your offer, must stand by those terms unless you and you alone choose to alter them.
Buyers need to have some funds to offer as a down payment in order to acquire a business. We work with buyers in a variety of ways to help them tap into all available resources to finance your new business. Below are some examples:
- Very Common: cash equivalents (checking and savings accounts; money market funds), stocks and bonds, Certificates of Deposit, gifts/ loans from friends and family, second mortgages and other real estate loans, seller financing, credit card financing.
- Moderately Common: SBA financing/ bank loans/ bank lines of credit, retirement accounts (IRAs, 401Ks, SEPS, pensions, etc.), borrowing against a different existing business (lines of credit, accounts receivable factoring, inventory financing, equipment financing), asset sales (real estate, autos, etc.).
- Rare: customer and supplier financing, venture capital, small business investment companies, private placement, convertible debt financing.
You can’t ever be completely certain. But consider this: a Buyer isn’t likely to simply walk away from his deposit. In addition, we recommend that Sellers conduct their own due diligence on Buyers during the due diligence phase of a contract. This might include credit, IRS and reference checks. In addition, it’s normal to request a personal guarantee from the Buyer as part of the security agreement in the Note.
Most owners find that the frustration, expense and time involved do not yield cost savings and many end up working with unqualified buyers. In fact, because they do not have access to a large number of qualified buyers, many owners end up selling their business for much less than they could have received by working with a well-established Intermediary. Plus, owners find it difficult to work directly with buyers while maintaining confidentiality. Selling a business is a specialized trade. It is prudent to seek professional assistance when it comes to selling an asset as valuable as your business.
Sellers benefit from the expertise provided by a professional business broker in various ways. One of the more significant benefits is the ability of the seller to spend their time managing their business during the selling process, thereby maintaining or increasing their cash flow and ultimately maximizing their sales price. Additionally, professional business brokers help sellers:
- Analyze the business, the marketplace and recommend a selling price.
- Create maximum exposure among buyers through broker networks, advertising and buyer contacts. Screen all buyers to avoid wasting time with unqualified buyers.
- Maintain confidentiality about the sale in order not to alarm customers, employees and suppliers, or giving a market advantage to a competitor.
- Manage the selling process from beginning to end including the coordination of all forms and documents and work alongside professional advisors such as attorneys and accountants.
Professionalism, expertise and a long track record of success that has led to the development of a proven system for selling businesses. Since 1979, VR has sold over 50,000 businesses through our network of national and international offices. VR is the only international network of full-time business broker professionals that focus exclusively on the sale of small to mid-size companies. One clear benefit to sellers is the expansive exposure to prospective buyers through the VR network both nationally and internationally. Additionally, VR is also a member of some of the largest business broker networks to help provide maximum exposure.
Why should I pay a higher commission to a Business Broker than a Real Estate Broker charges to sell my business?
Business brokerage is a highly specialized field comprised of well-trained and experienced professionals. There are numerous differences in selling real estate property and selling an on-going business. A professional business broker must understand how to perform cash flow analysis to best benefit his/her client, maintain complete confidentiality, advertise for results and advise the seller in such vital areas as pricing, terms, offer structure, negotiations, legal issues, and business enhancement prior to offering a business for sale. Only an experienced business broker can perform all these functions to the best advantage of a seller. The standard commission charged is minimal when one considers all the functions necessary to facilitate a smooth and satisfactory transfer of ownership. It is also important to keep in mind that a business usually takes longer to sell versus a home. A recent national survey showed that, on average, it takes 182 days to sell a business.
It is our job to orchestrate process of selling and help you achieve your goal.
Please contact us with any questions and or need of assistance.