Posts Tagged ‘Selling a business’

Some business owners forget to plan for their exit strategy, others recognize that the last part of their business ownership can have a major effect on what the financial reward their business can provide them and the legacy that they will leave with their employees, customers and the community when they leave their business.

Increase the Price You Get for Your Business – Businesses are usually run just how the owner wants. However, you can probably get make your business more salable and valuable in the marketplace by making it more appealing to a buyer. Many of these changes have bigger impact if they are done long before the business is put on sale. To get the most impact, these changes should be made at least one to two years before you are thinking of selling.

Here are just a few changes that can have a big impact on the price you get for your business:

• Key Employees – 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.
• Report Income – When it comes to reporting income, you, like most small business owners, want to pay as little in income taxes as possible.
• Customer Concentration – 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.

An individual owner may have been in the business for a long time and have a strong enough understanding of how the business is doing without any detailed financial reports. The buyer will not have that same information and ability.

Without adequate information, most qualified buyers will not complete a deal. If they do complete the deal, they will probably assume the worst case scenario and discount the price accordingly.

Sellers should work with their accountants to develop detailed reports that will help them and buyers to understand their businesses better and provide more assurance that the financial information is accurate.

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.

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.