Selling Businesses with Challenged Financials

Sometimes it is necessary to sell a sound business that has a poor financial performance. Because the business sale process almost always involves a financial review prior to looking other aspects of the business it is very difficult to motivate prospects to fairly review these opportunities.

Yet there are some things that both the business intermediary and the business owner can do to increase the likelihood of a sale and negotiate a desirable final sales price. These include:

1. Try to find emotional triggers in buyer prospects other than pure financials. Perhaps a genuine love of the industry. A desire to stay close to home. An opportunity in a growth field. These and other reasons may encourage a prospect to take a serious look at a company even when the financials are challenging.

2. If the revenue figures are good and the gross margin is acceptable then a buyer with experience in the business who has a history of lower operating costs may be willing to pay more than the “formula” price based on prior earnings. They have the experience to know that they will be more profitable than the seller.

3. Some buyers in certain industries may have additional cost savings even if the contribution margin is not what it should be. Any industry that gains from economies of scale or industries with route efficiencies may have competitors that want to buy businesses in order to decrease their costs.

4. Be prepared to provide seller take-back financing. If you are determined to sell this is often less risky than it seems because most buyers can only put a certain amount of cash into a purchase. Without third party sources of financing you are faced with either taking the cash at settlement as full payment or taking the “risk” of nonpayment on a note. Nonpayment is a real and problematical risk. But, if the nonpayment risk is on money you were not going to get under any other deal structure, what do you really have to loose?

5. Share the risk with the buyer. You expect them to believe you about how much opportunity your business has, yet, we often find the sellers will not place any faith in buyers. Earn-outs based on increases in revenues, decreases in cost, or other measurable standards can give comfort to a buyer that you will be there and that you really believe in them and the business. Remember most franchisors receive most of their income through ongoing fees, not startup fees. This gives franchisors credibility when they help with site selection and promises of future assistance.

6. Agree to stay involved. If you are a really good operator perhaps you need a buyer who is a really good salesperson. Working together for a period may provide a great solution for both of you. Especially if you combine this period with a gradual stock sale or an Earn-out where the final price is based on the performance during the cooperation period.

7. Grit your teeth and fix your business problems. A year of so of good results can overcome several years of poor results. If better sales and marketing, lower back-end costs, or another approach can improve your business’s bottom and top line do it. If you prove the value through performance you will get paid the value when you sell.

In summary, to obtain a sale and maximize the price potential of a business with underperforming financials you must carefully market to prospects who are either motivated by something other than the financial analysis, can generate economies of scale, or have better cost structures. Sound businesses with troubled finances can be sold by using creativity and sharing risk.

Need help, try Harvest Associates for exit strategy and business sale advisory and barkerage services.

Business Sale Negotiations Start At First Contact with a Prospect

A through interview of a prospective buyer of a business before negotiations start provides the negotiating ammunition needed to increase the final sales price.

By properly interviewing a prospective buyer you can learn what he values and will pay for. Effective negotiation based on those increased benefits to the buyer will increase your business’s sales price.

For instance a buyer with great experience and business sense may not have deep cash reserves. That buyer is going to value financing as much as a low price. This may provide opportunities to increase the price in return for creative financing.

Once you understand what the buyer values you look to see how your business aligns with those values. In a perfect world the buyer that values what you have the most will pay the most for your business.

An example is when a delivery company buys a competing firm that operates in the same territory. Because of the nature of delivery routes the closer each delivery stop to the next one the lower the cost. A purchase like that should lower costs for both the acquirer and the acquired company. If handled properly this buyer will pay more than other buyers.

The key to unlock this potential value is to ask questions that allow the buyer to tell you about themselves and the criteria they are using in trying to find the right business for themselves.

Start with simple questions like, “What interested you in this business?” People will tell you whether it was price, location etc. Maybe they say it was the location. Then you can ask, “What about the location made it attractive to you?” Maybe it is that it is close to their home and they have a young child.

Now, if there are only a few other businesses in the area the buyer wants to be located in, we can start to build a case for the value of this business based on location.

This really becomes important later in the negotiations when the buyer is saying, “Why would I pay that price?” It is simple. “It is where you want to be located, isn’t it?”

Careful buyer prospect interviews are just one step in the sales process necessary to collect the full sales value of your business. Experience does count.
_______________________________________________________

When you are ready to sell, make sure your broker provides this type of service. Better yet, contact Greg Caruso at Harvest and increase your Return on Exit. Learn more at www.harvestbusiness.com

Thinking of Selling Your Business, Plan Early if You Own a C Corporation

Quick Tip – If you are operating as a C Corporation and are profitable you should seriously look at converting to a S Corporation. From an operations point of view it usually does not affect your results. Yet, when you sell your business the change can save Sellers up to half of the Federal Income Tax liability. This can be 10-25% of the total sales price.

The analysis to determine what is best for you is technical and every situation must be individually reviewed. Therefore, if you have a C Corporation ask your accountant, transactional attorney, or call us to find out more about converting your company to a S Corporation.

Score resources Can Help Your Business

Score can help your business. Score counselors are experienced retired business people who provide consulting to help your business. Additionally at their website they have some very helpful templates. These templates may be of more assistance to beginners but any business owner might benefit. They include business plans, financial models, sales forecasts, and more. Click here to go to the Score site.

Look at Your Business From a Buyers Point of View

All business owners know that when they are selling their products they must look at the transaction from the buyer’s point of view. They must make their service or product appealing to the buyer.

Yet when they proceed to sell their business they forget this basic premise. By not generating top profits and meeting prospective buyer’s other desires, business owners loose precious sales value.

Lets look at selling your business as if we were selling chocolate cake. A customer enters the bakery with the intention of purchasing a beautiful cake. They see a wonderful chocolate cake on display. Next to that cake is another cake just like it, except this one is cut in half, displaying the moist inner layers of chocolate and fudge. The whole cake could easily sell for $45.00 or more.

Now, imagine the same cake with a huge chunk simply broken off of it. How much is the cake now worth?

Very little has changed about the cake. Probably 95% of the cake is untouched. But a customer would be unlikely to pay $42.75 for it. (95% of $45.00)

Yet, when owners sell their business, they think damaged goods should sell for 95% of full price. The key point is that a few surface issues with a business can greatly decrease its value. If these problems revolve around profitability, value will plummet.

In just a few years, poor results can wipe out the value of a business that has been painstakingly built over many years. All the more reason to sell while your business while it is still going strong.

Slight increases in perceived buyer risk, slight reductions in profits – both can cause big swings in your business value. Therefore, it is important to ensure that your business is running on all cylinders when you prepare to sell. Buyers, as a rule, are merciless about paying full price for a distressed business.

To maximize your sales price, visualize your business sale from the buyer’s point of view. Make sure all your assets show well and your business is profitable. Get full value from your business.

If you are concerned about how your business might stack up feel free to contact us at Harvest Associates for a free consultation about your business and your future.

410-507-5441 or click here. To learn more about Harvest's Services, click here

Selecting an Intermediary or Broker for Your Business Sale

One of the most important decisions you will make when selling your business is the selection of your business broker or intermediary.
It is essential to select a broker that is experienced, knowledgeable, has integrity, and that you can work with.
Click on the link to see the full article and to get the PDF file of questions you will want to use when selecting a broker.

How To Select a Business Broker or Intermediary

When to prepare a strategic business succession and exit plan

If you are 50 or older you should prepare a succession and exit plan every year. By making a plan that has a 5 years window you can bring key employees and family members into the conversation. This way you get valuable input. It also will allow you to gauge the interest of these important people in buying your business. Planning for family succession is very different from other exit strategies. Employee buy-outs can generate favorable sales prices.

For certain companies, an ESOP may work. An ESOP is an Employee Stock Ownership Plan. It has very favorable tax treatment for the seller and the new owners but has quite a bit of regulatory red tape. For that reason, you usually need at least 25 employees and a business value of over $2,000,000. Everyone gets a share of the ownership. Again, by starting early you can look into all your options without scaring everyone. After all, it’s at least five years off. Your employees will be pleased that you are thinking about these things.

More info.

Make Sure Your Buy Sell Agreement Addresses Partner Disputes

Lets spend another minute on the buy-sell agreement. As discussed, death is insurable. More complex is how feuding partners can separate. Deal with this when you are starting your partnership. If you cannot work out a fallback agreement then, think what it will be like if the business is not doing well and one of you wants to leave. Don’t always assume your partner will be the one to leave. Few former owners we talked to thought they would voluntarily leave their business when they started it.

Prepare a Strategic Succession and Exit Plan

Ideally you should begin planning your exit five years before you leave your business. This gives you plenty of time to determine what you want to accomplish, make adjustments and implement the plan.

Of course if you are like most people knowing when you are five years from leaving your business may be problematic in itself. For that reason we believe every business owner should carry on some level of exit planning.

If you are too young to work on an exit plan your may want to call it a succession plan. We would combine that with a buy sell agreement if you have partners. Insure your death to provide for you spouse, perhaps with an insurance trust. If you desire or need to, insure your death to pay your bills and you have an effective plan succession plan for many small businesses. More difficult is disability. This can be insured but the price can be significant. We would recommend you seriously consider disability insurance if your health allows it.

If you have, partners make sure you have a buy-sell agreement. Again, death is easy for most people because of the reasonable cost of term life insurance. More complex is how feuding partners can separate. Deal with this when you are starting. If you cannot work out a fall-back agreement then, think what it will be like if the business is not doing well and one of you wants to leave. Don’t always assume it will be your partner wanting to leave either. Few owners we talked to thought they would voluntarily leave their business when they started it.

Address these matters at all times in your business life. We will continue with this topic in a future post. Thanks now.

www.successfulexits.com

Take a Vacation and Improve Your Business

Taking a vacation will force you to improve your business. Yes, basking in the warm sun, while sipping an ice cold margarita, will do more good for your business than frantically racing through another day.

By taking a vacation you will improve your business three ways:

1. You will find ways to delegate routine tasks. You will eliminate some very mundane tasks. When you return continue on with this new found delegation. It will provide you with more time to do important work. Remember the receptionist and mail clerk have many urgent tasks and no control of your time. As a business owner you must find time for important tasks like planning that will grow the business.

2. You will clear your mind. With a clear mind you will be able to make normal decisions much more rapidly. You will also find yourself making better decisions. Surely you have experienced being so busy that you can hardly make simple decisions like ordering off a menu.

3. By not thinking often major life decisions or major business answers will just come to you. Deciding to add a new product line, or hire a key executive or other major decision may do more for your overall efficiency than days of routine decisions.

Remember, take a vacation and improve your business by improving your delegation skills, relaxing so you make better decisions, and having the answers to major decisions just appear.

For more go to www.successfulexits.com