Important Questions When Selling Your Business

If you are considering selling or transferring your business, please take a moment to consider these important questions:

• Have you looked at how this transaction will affect your personal estate, your family and your key employees?
• Did you know that only 11% of businesses sell for full value? Have you looked at ways to improve the value of your business and discover its true worth?
• Do you know how to reach all potential buyers? Preserve the deal through the due diligence phase? Bring the sale to completion?

Selling your business is complex and difficult. Selling it alone is down right dangerous. Get help from competent accountants, attorneys, and intermediaries. Of course we recommend Harvest Associates as an intermediary.

Selling Your Business, What is Fair to Those People Close to You?

When selling a business, as in the rest of life, if you don't know what you want you are sure not to find it. Our next several posts will involve balancing all of the factors you must plan for when selling your business. Solving this riddle is the essence of a successful business succession and exit plan.

Knowing what you want involves balancing many competing interests. The first area we will talk about is determining what is fair for the people closest to you.

Spouse:
Most couples have talked about how they will handle the sale of the business for years. In most cases the spouse is fairly straight forward since downstream financial support is usually the main issue.

Children:
One of the most difficult situations is deciding what is fair treatment for your children. Each child has different interests and abilities. Some will work in the business and some may not. Sometimes a child will want to run the business after you retire but just does not have the ability. These are all difficult decisions. They take great soul searching. Each situation is different and depends on the people involved and the underlying business. In the end you must do what you think is right.

Key Employees:
These can make great buyers. If they are not interested in buying their commitment to stay with the business for at least a year or more after a sale can greatly enhance value. You need to think about this and work out something fair to all.

We advise that you start talking about these issues to these key people in your life at least 5 years prior to your projected sale/retirement. By making it clear that you are planning for the somewhat distant future you can begin gauging interest and possible solutions without the upset that an immediate decision "sprung" on people can cause. www.harvestbusiness.com

Why New Franchises Sell Better than Existing Businesses with Poor Financials

We are frequently asked by business sellers why a new franchise with no actual financial history will sell before an established business with good revenues but poor overall financial performance. Selling a new franchise is like selling a dream. It is a dream that is backed up by other successful performances, proven systems, and a qualified central management team. Yet the buyer’s future operation is still only someone’s vision. There is no historical financial performance that clouds the stellar possibilities with the reality of average or below average performance. The ugly possibilities remain tucked away. Because of this the untested new franchise appears to have much less risk than a poorly performing established business.

A business with poor financial performance is in a difficult spot. The normal due diligence process involves looking at financial performance before any other aspect of the business. The ugly possibilities take front and center. For this reason a “good” business with poor financial performance will be seriously looked at by very few qualified buyers.

On the other hand a business with well performing financials clearly has less risk than a new franchise. It is proven. Cash flow has been established. A buyer’s conservative accountant can review the information and come up with a valuation that is in the range of what will be paid for the business.Available third party financing follows this trend. A successful existing business is quite easy to finance through the SBA or sometimes local lenders.

A new franchise is fairly easy to finance through the same routes when demographic factors justify the operation. Yet when we get to poorly performing existing businesses the only financing is from the buyer or seller’s pockets. Generally there are few third party sources. New franchises sell before financially challenged existing businesses because of the perception that there is less risk associated with the purchase. The way to capture the buyer before they purchase a new franchise is to reduce the buyer’s risk. Unfortunately this is usually a combination of lower price and seller financing.

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