Author: Sara

When is the last time you reviewed the lease on your business premises? When you signed it years ago?  There are some important reasons that should prompt a business owner to revisit the terms of his lease. If you can’t assign your lease to a new owner, you may not be able to sell your business. A similar concern is that if you can’t assign the lease, it may cost you a lot of money. This means that the landlord may want what could be termed as a “transfer” fee; or the seller may have to reduce the price accordingly. Whether you are thinking of selling or not, it is a good idea to review your lease and the transfer of lease provisions.

It’s also a good idea to check what happens at the end of the lease. Is there an option to renew and if so, how soon before the termination of the lease do you have to notify the landlord? And, just as important, do you want to stay, or is it time to move on?

A recent article in the New York Times titled “Thinking Past Location in Finding Space” said: “With rent typically the second largest expense after salaries for small business, and with office occupancy costs up sharply in many markets, a simple miscalculation can cost an entrepreneur her business.”  An existing lease may make it difficult to negotiate a lower rent with the landlord, but it may be worth a try. If the rent is benchmarked with similar businesses, a landlord may be convinced to make some adjustments.  Landlords don’t like late rental payments and they especially don’t like going through the eviction process.

If you are just now looking for space for a new business or if it’s time to move into new space, here are a couple of things to keep in mind when reviewing a new lease.

• The first thing to do is to find an attorney who is experienced in leases—this will be an excellent investment.
• If the business requires a lot of space or if location is critical, engaging a commercial real estate broker who represents tenants is also an excellent investment.
• Keep in mind that landlords want to pass on as many of the costs of leasing property as they can. Taxes, landscape upkeep, parking lot maintenance, shopping center advertising and promotion—the list is endless. The good news is that if they are looking for tenants they may negotiate on some of the items.
• Always ask the landlord for enough free rent to pay for the move into the new facilities or ask to have the premises remodeled for your particular usage.
• Make sure the space works for your business requirements. Is the parking sufficient? If the premises are inside a building, do the hours it is open work for your business? Do the premises have the necessary hook-ups for your needs? And, most important, does the space under consideration allow you to expand, grow – meet new requirements, etc?

By following the points outlined above, your new business or your new space should allow you to build or grow your business. If you’re in an existing space, some of these strategies may allow you to renegotiate your existing lease, or make some beneficial changes when you renew it.

The obvious answer is probably that most people are looking to buy a business that makes a lot of money. But the real answers may surprise you. Here is a list of just a few that buyers have mentioned:

•    Pride of ownership
•    A business that looks like fun to own and operate
•    Happy employees
•    Financial records that make sense
•    Good growth prospects
•    A well-known or popular business
•    A good track record
•    A great location
•    A seller who is willing to finance the sale
•    A reasonable price

Certainly, a buyer wants to make money when buying a business, but there is more involved, as the list above indicates. If you’re even thinking about selling, a visit with a business brokerage professional will pay big dividends by finding out what local business buyers are really looking for.

A recent survey asked leading business brokers and intermediaries: What is the seller’s biggest obstacle to selling the business? In other words, why do business owners who are considering selling fail to follow through?

Seller’s Biggest Obstacle to Selling

The answers to this question were revealing, fascinating and important for prospective sellers to understand and consider prior to placing their business on the market.

The biggest reason was one that most people would guess—price. Here are a few explanations that sellers offered concerning price:

•    Price—net amount after tax proceeds

•    Never enough dollar value in the deal, after taxes, lawyers, accountants, brokers

•    Price justification

•    Price versus offer

•    They don’t want to accept the market price of the business

•    Price does not meet owner’s retirement needs

•    Understanding that valuation is based on historical cash flow rather than “potential” cash flow

•    Perception of value of their business in the marketplace based on reliance of an ill-informed source

Price was the area most mentioned (by far) as the reason sellers don’t sell or, not to mince words, why businesses don’t sell. A professional business broker is aware of local market conditions, has comparable sales data available and is knowledgeable in pricing businesses.  Keep in mind that the ultimate decision-maker in determining a selling price is the marketplace. If you are not willing to accept what the market is willing to pay, then you should reconsider your reasons for selling—and read on.

The Next Biggest Obstacle

Two obstacles other than price were mentioned more frequently than any others.  One of these had to do with books and records—or the lack of; and the other was a fairly new obstacle—seller’s remorse. You read that right: not buyer’s remorse, but seller’s.  Here are some examples:

•    Money/letting go

•    Motivation

•    Giving up business

•    Price and emotional ties

•    What are they going to do after selling?

•    No more income stream

•    Being ready to really let the baby go

•    Motivation to actually sell when the offer comes

•    Can’t afford to retire

•    Pricing, indecisiveness (family/friends advise)

The point here is that sellers really shouldn’t put their business on the market unless they are totally convinced that they want to sell. Check with your business advisors, family members, and most important of all, ask yourself if this is really what you want to do.

Financial Information

Although inadequate books and records, etc., probably cause more difficulty than seller’s remorse, this subject is far less emotional than whether you really want to sell your business.  Although it deals with straightforward numbers rather than emotions, it still takes its toll. Too many sellers wait until they have made the decision to sell and are ready to put their business on the market before they realize that their books and records don’t measure up to a buyer’s expectations. Today’s buyer wants to see everything in black and white; they are not willing to accept a seller’s version of sales and profits. If you are even considering selling your business, now is the time to go to your financial advisor, accountant, or CPA and have your financial records put in order in such a way that the information can be verified and a buyer or his or her financial advisor can easily access them. Contact your business brokerage professional, who can advise you about what buyers are really looking for when examining a seller’s business financial records.

Needless to add, but worth adding anyway: proper record-keeping should be done on an ongoing basis rather than on the eve of the decision to sell.

You’re considering selling your business.  Your accountant or financial advisor has reviewed your profit and loss statement, and told you what he or she thinks your business is worth. Is this a valid figure? Do the numbers reflect the real value of your business? Below are some other factors to consider regarding the true value of your business. These factors may not have a specific dollar amount attached to them, but they certainly influence value and the price a business may sell for.

•    Are you serious about selling, and is it the right time? (Use this only if selling is the reason for the valuing.)

•    What are the two or three biggest obstacles to growing the business?

•    Why is your business different than the competition?

•    If you don’t own the real estate, what is the status of your lease?

•    What is the short-term and long-term trend of your business and the industry?

•    Does, or can, international competition impact your business?

•    Why do customers patronize your business, or why do clients use your services?

•    Have you increased prices recently, and if not, why not?

•    How much will you need to invest in your business over the next three to five years to maintain your customer/client base? How much to increase it?  How will you spend it?

•    Are there any legal or governmental issues facing the business?

•    If you got hit by the proverbial truck, is there someone who could run the business?

•    Can the business be relocated? Should it be relocated?

•    What are the secrets to the current success of the business?

•    What prevents the business from growing?

•    If the business is based on your personal goodwill with customers, knowledge of the product or services, etc., are you willing to stay for a fairly long period of time to assist in transferring this personal goodwill?

•    If you were given an additional $100,000, and you were much younger, what would you do to grow the business?

An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”

Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”

It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.

Sellers should understand that both what they hope to accomplish in the sell of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.

Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.

These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price.  During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.

Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.

•    Buyer Qualifications
•    Full Price
•    Amount of Cash Involved
•    Financing
•    Confidentiality
•    Commission/Selling Fees
•    Closing Costs
•    Exclusive Listing
•    How the Business is Shown
•    Advertising/Marketing
•    How a New Owner Continues the Business

By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.