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Selling a Business

Businesses are sold for all sorts of reasons. If you’re considering the sale of your business, ask yourself the following questions: selling a businessWhat do you want for yourself, and for your employees, as conditions of the sale? Are there any family members that might be interested in continuing the business? Is there the possibility of an employee buyout? Do you want to work for the company after the sale? Are you ready to retire, or is there something else that you would like to do? Could you report to someone else? How much of your self-esteem is tied up with owning and running your company?

Thinking through the implications of a sale for you, your family, and your employees will go a long way toward helping you determine the type of buyer with whom you would be most comfortable, and what terms of sale you require?

Getting Ready to Sell

If you’ve ever sold a home, you know the things you do in preparation for the sale. painting, making repairs, removing any clutter, making sure the landscaping is as appealing as possible, etc. In selling a business, it is much the same. The facility itself should be as appealing and clean as possible, and all systems need to be in good working order, electrical up to code, etc. Beyond these obvious housekeeping items, make sure that operations are meeting contemporary standards of good business as can be found in most publically traded companies. This would certainly include first- class financial statements, budgets, business plans, and management that is not dependent on you.

Focus on the strengths of your business. Buyers generally don’t want diversified businesses; they want resources concentrated in your strongest activity. They like to see data showing profitability by activity or product line.

Who owns the real estate? If your company does, consider buying it yourself or moving it to another corporation. The price of the business may not change much, and you will have retained a valuable asset.

And be sure to run the business as though you were going to own it in the future. Don’t allow things to “slide”.

Types of Buyers

There are two basic types of buyers, financial and strategic. Financial buyers represent the largest segment of buyers, and view the purchase simply as an investment. They often look for businesses they can buy using debt financing for 50% to 75% or more of the price and that have sufficient cash flow to service that debt.

Valuation of a business can be a challenge, and often begins with some multiplier of EBITDA (or Earnings Before Interest, Taxes, Depreciation and Amortization). In other words, cash flow generated by operations. The more attractive the industry, and the business, the higher the multiple.

Selling to a financial buyer can be advantageous, since they generally do not know your industry well and may overlook some weaknesses in the business. They generally also have ample sources of financing. The downside is there are seldom any synergies, such as access to a larger sales force, or access to attractive markets not served by the current business, or redundant functions that could be consolidated at substantial savings.

Strategic buyers expect synergies with their other holdings. They can afford to pay a premium, but they may not need to because they know the market. Strategic buyers may or may not keep you on after the purchase and their goals may differ from yours.

Buyer Expectations

  • Audited financial statements.
  • A sale can be via stock, or assets and liabilities. Buyers usually prefer the asset/liability transaction as there is less risk. Ask your accountant for an analysis of both, and the tax consequences, which may be useful in negotiations with the buyer.
  • Once a price has been agreed to, the process of Due Diligence begins. This allows the buyers to inspect the business in detail to verify that it has been accurately portrayed. Once Due Diligence has begun it is unrealistic to believe that the pending sale can remain a secret from the employees.
  • All contractual understandings between buyer and seller should be in writing and approved by attorneys representing each side. Included in this could be a commitment not to compete for a specified number of years, notification of sale to suppliers, employees, bankers, creditors, etc., and a guarantee that full disclosure of current or threatened liabilities has been made.
  • Buyers often ask the seller to finance the transaction. Be sure to assess the risk in so doing should you be inclined to do so.

Who Should Handle the Sale?

Business Brokers. Brokers bring current knowledge of the marketplace, expertise at attracting potential buyers, and contacts with sources of financing. For this, expect to pay about 10% of the sales price as a commission, some of which may be requested up front. As with any line of work, there are good ones and not so good business brokers.

Carefully check out broker candidates, seek those with experience in your industry and who have sold companies like yours in the past.

Private bankers. Private banking departments of commercial banks frequently offer services to high net worth customers. These may include assistance in selling a business. Fees usually range from 3% to 6% of the total sales price. Performance incentives are sometimes added. On larger, more complex transactions, there might be a monthly retainer as well.

Investment bankers. Investment banks are an attractive option, but they usually concern themselves only with larger ($25M+) transactions. Investment bankers offer significant advantages in the sale of larger businesses: structuring the transaction so as to optimize tax and payment issues. Investment bankers often are experienced in marketing companies to international buyers. If a well-respected banker takes your company on, it becomes a credential. But investment bankers come at a premium. Fees range greatly depending on type of transaction, size of company, size of the transaction, etc. Fees often contain incentives providing powerful motivators for the investment banker to get as high a price as possible for your business.

Valuation of the Business. There are several techniques for valuing a business. The best advice is to use your accountant and whomever you choose to help you sell the business to arrive at an appropriate and fair selling price.

The Importance of the Business Plan. Any prospective buyer will greatly value an up-to-date business plan for the business. It reflects well on the business and its management, and it is surprising how often businesses don’t have them available. What’s more, preparing the business plan does not signal a sale to employees.

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