Selling A Small Business

INTRODUCTION

Is it time to sell? Selling your business is a major decision! You have devoted your time, money, and energy to building, running, and operating your business. It may well represent your life’s work. You may have already decided that now is the right time to sell, and you want the very best professional guidance you can get. This is when working in tandem with a professional business broker can make the difference between just getting rid of the business and selling it for the very best price and terms!

ARE YOU READY TO EXIT?

If you’ve gone this far, then selling your business has aroused enough curiosity that you are taking the first step. You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself.

Question 1

The first question almost every seller asks is: “What is my business worth?” Quite frankly, if we were selling our business, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.

*Insider Tip:

It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. Only the marketplace can decide what its value is.

Question 2

The second question you have to consider is: Do you really want to sell this business? If you’re really serious and have a solid reason(s) why you want to sell, it will most likely happen. You can increase your chances of selling if you can answer yes to the second question: Do you have reasonable expectations? The yes answer to these two questions means you are serious about selling.

The First Steps

Okay, let’s assume that you have decided to at least take the first few steps to actually selling your business. Before you even think about placing your business for sale there are some things you should do first. The first thing you have to do is to gather information about the business.
Here’s a checklist of the items you should get together:

o Three years’ profit and loss statements

o Federal Income Tax returns for the business

o List of fixtures and equipment

o The lease and lease-related documents

o A list of the loans against the business (amounts and payment schedule)

o Copies of any equipment leases

o A copy of the franchise agreement, if applicable

o An approximate amount of the inventory on hand, if applicable

o The names of any outside advisors

Notes:
If you’re like many small business owners, you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.

Make sure the financial statements of the business are current and as accurate as you can get them. If you’re half way through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper.” As you will see later, pricing a small business usually is based on cash flow. This includes the profit of the business, as well as the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.
Prospective buyers eventually want to review your financial figures. A Balance Sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see income and expenses. They want to know if they can make the payments on the business (more on this later) and still make a living. Let’s face it, if your business is not making a living wage for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc. and feels that he or she can increase business.
*Insider Tip:
The big question is not really how much your business will sell for, but how much of it can you keep?. The Federal Tax Laws do determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? There are some new tax rules, effective January 1, 2000, that impact certain businesses on seller financing. The point of all of this is that before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.

WHO IS THE BUYER?

Buyers buy businesses 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:

o Laid-off, fired, being transferred (or about to be any of these)

o Early retirement (forced or not)

o Job dissatisfaction

o Desire for more control over their lives

o Desire to do his or her 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). The prospective buyer wants 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, the buyer 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:

o The desire to buy a business

o The need and urgency to buy a business

o The financial resources

o The ability to make his or her own decisions

o 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:

o How much money is required to buy the business?

o What is the annual increase in sales?

o How much is the inventory?

o What is the debt?

o Will the seller train and stay on for awhile?

o What makes the business different/special/unique?

o What further defines the product or service? Bid work? Repeat business?

o What can be done to grow the business?

o What can the buyer do to add value?

o What is the profit picture in bad times as well as good?

A FEW THINGS TO CONSIDER

Buyers Want Cash Flow

The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your accountant or bookkeeper and begin to get your financial statements in order, with cash flow the order of business. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, as well as owner or family compensation. They will consider any excess compensation to employees and family. Buyers will also look at large, one-time expenses such as a new computer system or remodeling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional business broker considers when advising a selling client on a selling price.

*Insider Tip

What about the Internet? The Internet is a real “buzz” word – and if its use is appropriate for your business, then developing a web site is important not only to your on-going business, but also to a buyer. Many buyers are conscious of what the Internet is doing for many businesses. If you have a web site for your business, it could be a big plus.

Appearances Do Count

The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will be slightly lower because you haven’t replaced it. The time to “spiff up” the business is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell occurs. Keep-in-mind that anything that increases sales also increases profits and the all-important cash flow!

Everything Has Value

There are other things that add value to your business. Don’t discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customized software programs, or good employees. These are termed “off-balance sheet items,” and although not used in most pricing models, they add to value. Look at your business very carefully so you don’t overlook those items that make your business more attractive to the buyer.

Eliminate the Surprises

Long before you put your business on the market eliminate the surprises! Review every facet of the business and remedy any problems that could appear during the sale process. No one likes surprises – most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.

*Insider Tip

This may sound like something that should have been done when the business first started, so it may be “after-the-fact”. You should create an operations manual. You may already have started one years ago, or simply, have thought of doing one. Now is the time. It may actually create added value to the business. Even if it doesn’t, it will impress buyers that you have your business “act” together and should help you sell more quickly and effectively. Preparing a manual on how to operate your business can also be helpful even if you don’t want to sell. It doesn’t have to be elaborate, just cover the basics. A collection of ads that you have placed a catalog or sample of products, publications, or menus (if the business is food related) is also impressive. Include anything to do with the business that might be helpful for a new owner. However, don’t include anything that is proprietary, such as customer lists, suppliers or secret recipes, etc.

YOU CAN HELP

We look forward to working with you in finding a suitable buyer for your business. You, as the seller, are an integral part of the total marketing program. We would like to offer a few friendly recommendations that will help in our marketing efforts. We have checked those items that we think will be especially applicable to your type of business.

It might also be helpful if you took a good look at your business from the perspective of a buyer. Try to put yourself in the place of a prospective purchaser of the business. What would you do to make it more attractive or more saleable? Obviously, the financial records of your business are critical to the sale of your business, but how it looks is also important. First impressions really count! If a potential buyer doesn’t like the appearance of your business, the rest of it may never get a chance. If you have any questions, please don’t hesitate to call us. It’s only by working together that we’ll get the best results.

You might want to check the following to see if any of them are applicable:

o Keep normal operating hours. There may be a tendency to “let down” when you put your business up for sale. However, it’s important that prospective buyers see your business at its best.

o Repair signs, replace outside lights, etc. You don’t want your business to look as if it has been neglected.

o Maintain inventory at a constant level. If you let your inventory slide, your business will look neglected. If anything, increase it so your business will look busy.

o Remove items that are not included in the sale and unnecessary items, especially if inoperative.

o Repair non-operating equipment or remove it if you are not using it.

o Tidy-up outside premises.

o Spruce-up the inside of the business.

COMMON SELLER QUESTIONS

How long does it take to sell my business?

It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often “backfires,” because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.

Why is seller financing so important to the sale of my business?

Surveys have shown that a seller, who asks for all cash, receives on average only 70 percent of their asking price, while sellers who accept terms receive on average 86 percent of their asking price. That’s a difference of 16 percent! In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What happens when there is a buyer for my business?

When a buyer is sufficiently interested in your business, he or she will, or should, submit an offer in writing. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one), or other pertinent details of the business. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time.

At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider. There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer — just that all offers should be looked at carefully.

When you and the buyer are in agreement, both of you should work to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business.

What can I do to help sell my business?

A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure they are familiar with the business closing process and the laws of your particular state. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks, unless there is an alcohol or other license involved that might delay things, you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.
What can business brokers do – and, what can’t they do?

Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do — as well as what they can’t. They can help you decide how to price your business and how to structure the sale so it makes sense for everyone — you and the buyer. They can find the right buyer for your business, work with you and the buyer in negotiating and every other step of the way until the transaction is successfully closed. They can also help the buyer in all the details of the business buying process.
A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.

Why a Local Business Needs a Website

Many local businesses feel that a website is only good for e-commerce businesses. However, it’s just as important for local businesses to have a website as everyone else simply because it provides more exposure. More people rely on the internet than ever before to find out about local businesses, which mean that it could be the most effective way to advertise.

A local business website does not actually have to sell anything. Regardless of whether it’s a landscaping business, a cupcake shop or a mechanic, having a website can simply be about informing the general public about their services. This will allow the business to share prices, menus and much more information easily without having to field phone calls about services.

In addition, a local website can have contact information on the site. This can allow consumers who are interested in the business to reach out to the company and ask questions easily. This can also include various quote services so that it removes a step from the standard process of calling, making an appointment and so on.

Another benefit of having a website up and running is that it can be used within search engines. More people will look for a business inside of a search engine before they will ever use the old-fashioned yellow pages. As a result, those without a website are missing out on the opportunity for new business because they aren’t being located anymore.

Businesses that operate locally don’t need one of the fancier websites but they do need an online presence. It helps within the search engines and helps customers to know that they exist and that they are making the attempt to modernize themselves with a website.

Many local businesses have received such great business from their website that they have decided to go with an e-commerce site. Those businesses who sell products can begin to sell online and reach a larger target audience. By offering another channel in which products are available, businesses are no longer required to rely solely on their zip code for customers. They can make as much profit as they desire based upon how far they want to ship their products.

Websites are extremely useful in today’s marketplace. Many consumers will visit a website before actually going into a business, even if it’s just around the block. The reason is because time is money. No one wants to waste any of their time, so visiting a website can tell a person a lot about the business before they ever step foot inside.

The businesses that don’t have a website are simply lost in the mix because they’re not competing with the businesses who have realized the importance of a web presence.

Starting a Daycare Business – Inside Secrets to Success

Most people that run a successful babysitting business in their local area have considered the possibility of starting a daycare business. If you have a love for children and your area has room for some professional child care then you have what is necessary to consider starting a daycare business in your area. While it seems like it should be such a breeze to start up your new business there are some things that you should take into consideration before beginning your business. Thinking about and planning for these things in advance will help keep you from being surprised at the last minute with any problems.

The things that you should keep in mind when considering starting a daycare business are whether you have a love for children and would like to work with other people’s children day after day. The day care business is not generally one that will make you rich, but it can support you. If you have a real love for children then you have a strong basis to start your new business. Another thing that is very important to understand before beginning your new daycare business is to check out your local area and see if there I a real need for additional child care. If the market is saturated with other child care businesses then it may be difficult for you to make a profit.

You should also get a copy of any licensing regulations to make sure that your place of business (generally your home) is in compliance with local codes. You can probably expect that you will be looked over rather closely because of your working with children. Just make sure that everything is up to par and you should be fine.

Getting a Small Business Loan – Will It Ever Be Possible?

With continuing talk of the UK and global economies facing challenging times into the foreseeable future many entrepreneurs are concerned as to how much support they can expect from their banks.

There are numerous stories of business owners suddenly finding their bank facilities taken away, previously friendly bank managers turning into the latest enemy, or being dealt a blow with a dramatic increase in fees or interest rates. Whereas previously loans were being granted in a reasonable time frame it’s not unheard of to be faced with a discussion with banks that can go on for months.

But don’t despair! It seems that banks are slowly dipping a toe back into the market, but bank attitudes have shifted – there is much more focus on serviceability… ‘demonstrate to me that you can repay your loan even if times get tough for you.’

Despite a tougher regime there are still some actions you can take to get the bank on your side.

Review What Your Business is About

All the best plans change as the general business climate changes. Nothing ever stays still and the businesses which will survive know that their market, and the way they do business, never stagnates.

As we start coming out of the economic darkness, and before you think about approaching your bank, now is the time to fundamentally examine where your business is today. How did you deal with the rough times? Has your market changed, even slightly, over the last two years? Are customer’s expectations different? Have recent events dented the confidence or purchasing ability of your target market? Will your customers be thinking twice about ordering your all-singing-and-dancing product? Will they no longer be able to accept your high price even taking into account your quality service? Have your costs significantly increased rendering your idea or business unprofitable?

You must not make the assumption that because your business model was viable two years ago that it is still viable today. Be wise enough to re-look at all the underlying factors that delivered a successful business.

Approaching the bank with a business model which has not been reviewed to take into account the lessons learned, is not going to get you the answer you want.

Write a Business Plan

So many business owners still don’t write a Business Plan; they don’t see the value of investing time in researching and writing one. Even in the good times banks liked to see a Plan but now, when banks need more persuading than ever to say ‘yes’, a Business Plan is essential.

Whilst many regard Business Plans as documents written solely for the bank this is not the case. A Business Plan must be seen as a tool which can act as a convincer for the bank and as a control and check for you. A well researched Plan will help you understand the pitfalls of your new venture or expansion; it will highlight the flaws in your thinking and potentially save you from making an expensive mistake.

Before you approach the bank commit time and resources to writing a Business Plan; it may be less painful than you think.

Know Your Business Inside Out

The bank is not going to rely solely on your Business Plan when it assesses your loan request. Many small business owners fail to understand that the bank is lending to them, not the business. You are the business.

In assessing whether your business has the capacity to repay the bank will want to find out as much as they can about you and how well you know your business. This means lots of probing questions. You must be prepared for this. You must research all aspects of your business; you must know your Business Plan inside out; you must know all the key financial aspects of your business.

Testing serviceability of the loan is one of the key assessment criteria. Do you know whether you afford to repay the loan if interest rates went up by 4% or your sales fell by 10%? Test your assumptions under different scenarios; the bank will, so be prepared to beat them to it by having the answers to hand.

Prepare in advance by thinking about what the manager is likely to ask you. What would you want to know about a business if someone was asking you to invest your hard earned cash? Once you have these questions, find out the answers.

Have Something to Lose

The bank will only want to support committed entrepreneurs. These are people who have committed not only their time but also their financial resources. If you want the bank to support your business then you have to show you are prepared to lose something if it all goes wrong. Asking the bank to take all the financial risk is not going to get you the loan. You must be prepared to put your money or other personal assets on the line. After all, if you don’t believe enough in your business to risk your assets, why would you expect the bank to?

Before you approach the bank for a loan, examine your personal commitment to the business; does it look compelling enough to an outsider? Seeing what you are prepared to lose will help the manager come up with a fair assessment of your commitment to making your idea work.

Talk to Your Bank Manager

If you are already borrowing and your business has suffered over the last year you must ensure that you don’t adopt the ostrich position – head in the sand. Problems do not go away by themselves, no matter how hard you try to convince yourself.

If your problems are affecting the business then one of the first people you need to see is your bank manager. The old saying, ‘Forewarned is forearmed’ is so true. No one likes surprises sprung on them and a banker is no different. You must share your concerns. Hiding away from the bank is no solution. A lack of facts or being kept in the dark is a sure way of creating panic and this can lead to incorrect and disastrous decisions being made. Avoid this by talking and informing.

This regular flow of communication is vital if you are likely to need more bank support in the future. How you handle your relationship today is how you and your business will be perceived tomorrow.

Banks can be known for making life tough but you have a part to play. Make it easier for the bank to support you by providing them with all the necessary information they need so that you come across as a business owner worthy of support.