Author: Sara

What are the odds of your business actually selling once you have made the decision to sell? Well, if the annual sales of your business are $750,000 or less, research indicates that the odds of your business selling are only 18 percent. If your annual sales are $750,000 to $2 million, your odds increase to 25 percent. If your annual sales volume is above $2 million, the odds increase to 30 + percent. Keep in mind that approximately 75 percent of all businesses have annual sales of less than $750,000.

What does this all mean? To put it bluntly: if you are thinking of selling your business, you have about a one in five chance of it actually selling. This obviously begs the question: why are the odds so poor? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why some businesses didn’t sell-as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.

• The business is no longer listed for sale. The cash flow was strong, but a lot of buyers thought that the deal was overpriced.
• Buyers were intrigued, but the economics of the deal wouldn’t make sense, and the seller wouldn’t negotiate.
• There was serious interest, but the owner got distracted by an arrangement with a friend to solicit offers. None came through.
• We almost had a deal, but financing was impossible to find.
• We had three offers, including an accepted bid for $4 million, but the buyer couldn’t get financing.
• The deal dragged on for months but fell apart for lack of financing. . .

They say that timing is everything. Many business owners wait until the economy is down. Their own business is also paying the price for the slowdown, so they elect to sell. Now they discover that the price they thought they could get for their business is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.

One factor that emerges from the comments by intermediaries above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price in cash. Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find,” “the buyer couldn’t get financing,” and “…fell apart for lack of financing.” The reasons that obtaining financing is so difficult are (1) the business doesn’t qualify for financing, (2) the buyer doesn’t qualify for financing, and, most importantly, most small businesses are not financeable. Banks are generally not interested; the Small Business Administration (SBA), although certainly an option, only comes through in less than 10 percent of deals. If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.

Tips for a fast sale

• Have up-to-date financial information available
• Prepare a current list of fixtures & equipment
• Maintain normal business hours
• Spiff up the business
• Set a realistic price
• Be willing to negotiate
• Gather all of the information a buyer might like to review

Here are two major ways to increase the odds that your business will be the one in five that sells:

• Make sure that you are serious before you put your business up for sale. You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth – it’s what a buyer is willing to pay. Find out if the price you are asking is in the “ballpark” before you go to market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.
• Be willing to finance the sale of your business. Counting on the businesses selling for all cash or assuming that the business can be financed will most likely make your business one of the four that don’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive.

Following these guidelines and tips might not sell your business, but it will certainly increase the odds. Almost any business will sell under the right circumstances. If you are serious about selling, the first step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in today’s economic climate.

The Perfect Business

The perfect business, the one that would be sure to sell, has the following attributes:

• a reasonable price
• a reasonable down payment (hopefully 40 percent of the full price or less)
• seller financing
• reasonable sales (hopefully increasing each year)
• seller earnings of $60,000 or more
• a compelling reason for sale
• a desired or popular industry type
• attractive and strategic location (if important for business type)

There is an old saying that goes something like this: “The worst day of working for yourself is better than the best day of working for someone else.”

There was a study done, years ago, that showed that the reason businesses were for sale had a direct relationship to its probability of sale.

The above results point out the more serious or valid reason for sale, the higher likelihood that the business will sell. Despite its age the results today would probably be more dramatic. Most of those looking for a business to purchase in today’s market would shy away from businesses that are under-capitalized, showing insufficient profits or any in which the seller was just attempting to sell for profit only. Today’s buyer is better educated, has more knowledge about business and is more wary than his or her predecessor. The financial records better be complete, all information available – and the seller must have a valid reason for sale.

It is evident from the results above that such reasons for sale as: retirement, health issues, family problems followed by “burnout” have the highest probability of sale. Burnout is not a new issue, but it is generally preceded by many years of doing the same thing. It’s difficult to accept burnout from a seller who has been in business for only a short time.

There is an old saying among business brokers and that is that it takes a willing seller – and a willing buyer to complete a successful sale. The moral of all this is that the more valid the reason for sale, the better the chance the business will sell quickly – and without undue problems.

Many people who are selling their business think that once they find a buyer, the business is sold. Unfortunately, the real work is just beginning. Once a buyer is interested, there are the inevitable questions that must be answered. After the questions are answered and the buyer has satisfied himself or herself that the financial aspects of the business are satisfied, the buyer is probably ready to make an offer.

An offer is prepared and it generally contains contingencies or conditions on which the offer is subject to, in addition to offering the price and terms under which the buyer is prepared to pay. Assuming the price and terms are acceptable to the seller, the next step is for the seller to do what is necessary to satisfy the contingencies. These can be as varied to the buyer’s reviewing all of the seller’s financial books and records, a serious look at the lease and its terms to a requirement that the seller pave the parking lot or redo the rest rooms.

Definitions

Offer – an expression of willingness to purchase a property [business] at a specific price [and terms].

Contingency Clause — see Condition

Condition(s) – provision(s) in a contract that some or all terms of the contract will be altered or cease to exist upon a certain event.

Conditional Offer – purchase contract tendered to the seller that stipulates one or more requirements to be satisfied before the purchaser is obligated to buy.

Dictionary of Real Estate Terms, published by Barron’s Real Estate Guides

The first task for the seller is to accept the price and terms then review the contingencies to insure that they are reasonable and acceptable. If the price, terms or contingencies are not acceptable then a counter-offer is prepared and the terms that are acceptable to the seller presented to the buyer. Once the parties agree upon all of these items, then the job of satisfying the buyer’s contingencies is begun. A time period in which all of this must be done is usually specified in the offer. If such a time period was not specified, the buyer could take his or her “own sweet” time before approving – or not. The seller obviously has to furnish the materials and information necessary for the seller to satisfy himself or herself.

If the buyer is satisfied that everything is as represented, he or she signs what is termed a Contingency Removal form. If everything is not satisfactory to the buyer, then the offer can be renegotiated or the sale falls apart and the buyer’s deposit is returned and the seller is now back to square one!

Unfortunately, a lot of time can elapse between the offer and acceptance and the buyer deciding to move forward. Time is the essence of the deal and the longer it goes the more likely that serious problems can develop. If these problems are not addressed promptly, the pending sale can fall apart and then the seller must then look for another buyer and begin the process anew. The professional broker is aware of all of this and can greatly assist the seller in making sure that only serious and committed buyers begin the process.

Let’s assume that the buyer and seller are in agreement on price and terms. Now comes the task of gathering all of the information necessary for an escrow company or closing attorney to draw the necessary paperwork. The seller must also gather the lease information, insurance data, equipment lists, inventory information and everything else necessary to close the sale.

If the buyer is using outside financing, then the seller, along with the buyer, must gather all sorts of financial date to submit to the lender. There are also the various representations and warranties the must be reviewed – and approved, by the parties involved.

As one can see, the path from finding a buyer to the closing of the sale is an arduous one and fraught with problems every step of the way. Only an experienced professional business broker can guide both parties through the maze and insure that every step is addressed and covered satisfactorily.

Sellers – Here’s How Selling Your Business Can be Made Easier

If you’re considering selling your business consulting with a professional business broker is your first step. They can assist in all of the areas mentioned in this newsletter. In addition they can do the following:

• Greatly increase the number of potential buyers through their own databases and the various Web sites available to them.
• Help in pricing the business so it will be competitive in the marketplace.
• Will keep you advised on market reaction.
• Present only qualified and serious buyer prospects.
• Handle the details so you can spend your time operating your business.
• Coordinate all of the paperwork so the sale can be expedited quickly and easily.

Selling your business is a major decision! You have devoted your time, money and energy to building, running and operating your business. It may well represent your life’s work. You have decided that now is the right time to sell, and you want the very best professional guidance available. This is when working in tandem with a professional business broker can make the difference between just getting rid of the business and selling it for the very best price and terms.

Below are some of the most common questions asked by sellers. The responses are based on both experience and knowledge. If you have questions of your own, ask your business broker professional.

What can business brokers do — and what can’t they do?

Business brokers are the professionals who can facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do — as well as what they can’t. Business brokers can help sellers decide how to price a business and how to structure the sale so it makes sense for everyone – seller and buyer. They can find the right buyer for your business, work with you and the buyer in negotiating, and at every step of the way until the transaction is successfully closed. They can also assist the buyer in all the details of the business buying process.

A business broker professional is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. Sellers have to understand that only the marketplace can determine what a business will sell for. The amount of the down payment a seller is willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.

How long does it take to sell my business?

It generally takes, on average, between five and six months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner the business brokerage firm has all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business.

It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments – and support the buyer and his or her family.

Why is seller financing so important to the sale of a business?

Surveys have shown that a seller, who asks for all cash, receives on average only about 70 percent of the asking price, while sellers who accept terms receive on average 86 percent of their asking price. In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of a business selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.

What happens when there is a buyer for my business?

When a buyer is sufficiently interested in your business, the business broker professional can help in the preparation of an offer or proposal. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one) or other pertinent details of the business. The buyer’s proposal will be presented to you for your consideration. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer could withdraw it at any time.

Your business broker professional will submit all offers to you for your consideration. At first review, you may not pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider. There is an old adage that says, “The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer — just that all offers should be looked at carefully.

When you and the buyer are in agreement, the business broker will work with both of you to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business. Your business broker professional will work with you throughout the entire sales process.

What can I do to help sell my business?

You can cooperate fully with your business broker professional and any other advisors that you are using. A buyer will want up-to-date financial information. If you use accountants, you can work with them to make current information available. If you are using an attorney, make sure he or she is familiar with the business closing process. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks, (unless there is an alcohol or other license involved that might delay things), you don’t want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.

And, finally, your team of advisors must all be working towards the common goal of selling your business for the best price and terms available in the marketplace, and closing the sale as quickly as possible. Only by being as cooperative as possible with everyone involved can your business interests best be served.