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.
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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