Archive for July, 2009

Business owners are used to being in charge and having things their own way. In fact, that may have been the deciding factor in becoming a business owner in the first place. And that may be a problem when it comes time to sell. The potential buyer probably has that same strong desire.

Without flexibility on the seller’s part, any offer from a prospective buyer is likely to be substantially discounted. There are three flexibility areas that will result in a higher price: provide detailed information; provide owner financing; and provide owner training and transition support.

Provide Detailed Information

It is legitimate to be concerned about giving out too much competitive information to people who will not ultimately buy your business. Holding back information that prospective buyers need in order to decide how much the business is worth to them forces the buyers to assume the worst.

Prospective buyers will discount the value they needed in order to understand how much the business is worth. Of course, there must be a signed non-disclosure agreement before any confidential information is released.

Owner Financing

Financing is a struggle in most business transactions. Owners would like 100% of the cash at closing. Buyers would like 100% seller financing.

Being willing to provide some seller financing is much more than helping buyers with the down payment. It is a huge statement of a seller’s confidence in the business, the ability of the buyer to succeed, and the accuracy and completeness of what the seller has told the buyer.

A direct correlation exists between the amount the seller is willing to finance and the price of the business. All cash deals can be discounted by 20% verses deals where the seller is doing 10% to 20% financing.

Most banks and the SBA now normally require some owner financing in order to approve the loan to the buyer.

Sellers should be willing to finance at least 20% to 50% of the price of the business. By doing this, the seller is actually likely to get more cash at closing and a total higher price than if the seller demanded all cash up front.

Owner Training/Transition

When the sellers walk out the door, the buyers fear that much of the business walks out with them.

Although it may be appealing to take the cash and run, there will be more cash to spend if sellers are willing to do their part to ensure the success of new owners.

• Offer to train the buyer on being the owner of the business. This usually lasts from two weeks to two months.
• Offer to make introductions to employees, customers and suppliers, giving each confidence that at least in the short-term, it will be business as usual.
• Offer to be available to answer questions that may arise for a longer period of time, perhaps as long as a year.

Each of these actions will reduce the risk to buyers and increase the price they will be willing to pay for the businesses. In addition, these actions will enhance the buyers comfort level.

Why does connecting Michael Jordan’s name to a sneaker make it worth twice as much money to a teenager? Because it gives the sneaker the personality of the great basketball player. The teenagers want to be able to relate to the character that they respect so much. The difference in price between the “no personality” generic brand and the sneaker with personality becomes incremental profit to the business and to Michael Jordan.

Are you getting the higher profit from your product or service by giving it personality, or are you settling for the prices you can get for your product’s features and benefits?

When you developed your sales and marketing strategy, you probably have decided on your target market and the benefits your products and services would provide them. This is what almost every book and workshop on the subject tell you to do.

There is one important component of marketing strategy that many leave out. That is deciding and communicating the “personality” of your product or service.

Highly successful companies spend a lot of time and money developing and communicating the personality of their products and services.

You do not have to use Michael Jordan or other endorser to give your product personality. BMW combines the major differentiating features of its cars, highly engineered automobiles, with its advertising message, “The Ultimate Driving Machine,” to communicate a confident, take charge personality. With their personality, BMWs are not cheap and there is a waiting list to buy their top-of-the-line models.

Establishing and communicating personality is important in all industries. Restaurants can live and die by the personality that they project. Law offices and other service providers define the prices they are able to charge by the personality they project.

Before you settle for having to sell at the lowest price, look inside your business to see if there is a personality you can develop and communicate for your products and services.

One of the biggest concerns buyers have when they look at your business is that when you walk out of the door, much of your business goes with you.

Employees, customers and suppliers may be more loyal to you than they are to the business itself. If this is true, then much of the value of the business cannot be sold to someone else. This can substantially reduce the price you can get for your business.

One way for you to avoid this problem is to establish a team of key employees who will stay after the sale and maintain strong relationships with current customers and key suppliers.

Having a knowledgeable loyal employee team in place, people who have positive relationships with current customers and key suppliers increases the likelihood that a buyer will be willing to pay the full value of your business.

Customer concentration is a major issue when more than 10% of revenues come from one customer or when more than 25% of revenues come from the top five customers.

This situation may create several major concerns to prospective buyers. The biggest one is that only one or two decisions from customers can turn the business from profitable to unprofitable. From the buyers’ viewpoint, this becomes much more likely after the seller leaves the business.

Buyers will typically discount the amount they are willing to pay for a business with high customer concentration by 30-50%. Worse, many buyers decide not to make an offer at all if the customer concentration is too high.

Sellers who face this issue must invest the time and money in sales to increase the number of customers and to find ways to increase the revenues to other customers.

Look closely at the profitability from top customers and make changes as appropriate.