What Makes a Business Unique
Most business owners think that their business is unique. There are obviously many different attributes that can make a business stand out from others. However, there are some key factors that make a business both unique and, at the same time, make it more valuable in the marketplace and more desirable by prospective purchasers. Just as importantly, these unique factors also need to be generally transferable to a new owner. Here are some key ones:
Intangible Assets
One example of an intangible asset could be a long-term lease for a great location that is transferable to a new owner. Other examples include a mailing list of current and past customers, a popular franchise relationship, a well-known product line such as Hallmark, or a well-established mailing program designed to attract new customers or clients. Trademarks and copyrights are some other examples of intangible assets.
Difficulty of Replication
For example, in most jurisdictions, liquor licenses are doled out by population or on some other limited basis. One can not just decide to rent some space and open a liquor store. Franchises often limit the number of units in a geographical area. Selling certain brand collectibles is a license not granted to just any store.
Proprietary Products, Services or Technology
A business owner may have developed, or have had developed, software unique to their business which is a key to its success. Or the proprietary item could be something as simple as a secret recipe for a food item, sauce or other food product unique to a restaurant.
Reputation
There is the pharmacy that is known all over town for delivering prescriptions or other medical needs. And there is the hardware store that will still sharpen knives or fix screens. Then there are the local businesses that have “just what you need” or that special something that makes them known all over town. While these characteristics make these businesses unique, it is up to a new owner to continue them.
When looking at businesses to buy, buyers should look beyond the numbers for the unique qualities that separate a particular business from the pack.
Read MoreAre You Serious?
There are three good questions to consider before selling your business.
First, “Do you really want to sell this business?” If you’re really serious about selling and have a solid reason (or reasons) why you want to sell, it will most likely happen.
Second, “Do you have reasonable expectations?” You increase your chances of selling if you can answer “yes” to this second question. This can include your expectations about the selling price, the time it will take to sell your business, and the amount of seller financing you are willing to offer.
Third, “What will you do once your business sells?” The time to consider this is before you place your business on the market. This may seem obvious, but many transactions fall through because the business owner did not consider what he or she would do once the business was sold.
A “yes” answer to the first two questions plus having an answer to the third question (other than “I don’t know”) means you are serious about selling.
Read MoreSelling Your Business? Do-It-Yourself is Risky Business!
When the owner of a business makes the decision to sell, he or she is taking a giant step that involves the emotions as well as the marketplace, each with its own set of complexities. Those sellers who are tempted to undertake the transaction on their own should understand both the process and the emotional environment that this process is set against. The steps outlined below are just some of the items for a successful sale. While these might seem daunting to the do-it-yourselfer, by engaging the help of a business intermediary, the seller can feel confident about what is often one of the major decisions of a lifetime.
1. Set the stage.
What kind of impression will the business make on prospective buyers? The seller may be happy with a weathered sign (the rustic look) or weeds poking up through the pavement (the natural look), but the buyer might only think, “What a mess!” Equally problematic can be improvements planned by the seller that appeal to his or her sense of aesthetics but that will, in fact, do nothing to benefit the sale. Instead of guessing what might make a difference and what might not, sellers would be wise to seek the advice of a business broker–a professional with experience in dealing regularly with buyers and with an eye experienced in properly setting the business scene.
2. Get the record(s) straight.
Although outward appearance does count, what’s inside the books is even more important. Ultimately, a business will sell according to the numbers. The business broker can offer the seller invaluable assistance in the presentation of the financials.
3. Weigh price against value.
All sellers naturally want to get the best possible price for their business. However, they also need to be realistic. To determine the best price, a business broker will use industry-tested pricing techniques that include ratios based on sales of similar businesses, as well as historical data on the type of business for sale.
4. Market professionally.
Engaging the services of a business broker is the key to the successful marketing of a business. The business broker will prepare a marketing strategy and offer advice about essential marketing tools–everything from a business description to media advertising. Through their professional networks and access to data on prospective buyers, business brokers can get the word out about the business far more effectively than any owner could manage on an individual basis.
What Sellers Can Do
In addition to using a business broker, there are specific steps you can take to increase the chance of a successful closing.
Know why you want to sell your business. Before placing your business for sale, it is important that you both know why you want to sell your business and that you are certain about this decision.
Have a plan for what you will do following the closing.
Make sure important parties are on board. The time to discuss the sale of your business, as well as future plans, with partners, spouses, children and other involved parties is before you list.
Communicate to your outside advisors that you want the deal to work.
Choose your battles. Both buyers and sellers need to be willing to compromise. It is helpful to consider in advance the areas that are most important to you so you can come to the table with a willingness to compromise in other areas.
Read MoreAnd a Letter of Intent Is…
The Letter of Intent (LOI) is a pre-contractual written instrument prepared by the buyer for the seller, which is usually the preliminary understanding of both parties. The Letter of Intent can also be called Agreement in Principle or Memorandum of Understanding. They all have the same general meaning and lay out the following: What is being purchased and what is not, how much will be paid, and the general terms. It is also meant to be non-binding (more on this a bit later) on either the sell side or buy side.
In any event, most transactions are started with an LOI. The LOI precedes the Acquisition Agreement, better known as the Purchase and Sale Agreement. It is a non-binding agreement subject to the buyer obtaining satisfactory due diligence by both parties.
This is how the LOI has been defined by Stanley Foster Reed, author of The Art of M&A:
“A Letter of intent is a pre-contractual written instrument which defines the respective preliminary understandings of the parties about to engage in contractual negotiations. In most cases, such a letter is not intended to have a binding effect except for certain limited provisions. The Letter of Intent crystallizes in writing what has, up to that point, been oral negotiations between the parties about the basic terms of the transaction. While the Letter of Intent is usually non-binding, it does create a moral commitment and allows the buyer to proceed with the extensive due diligence process with a feeling of confidence. Conversely the seller is required to withdraw the company from the marketplace and not discuss the potential sale with anyone else.”
The elements of the Letter of Intent are as follows:
- The price of the company
- The form of purchase: Is it a stock or asset sale? What is being purchased and what is not?
- The structure of the sale: Specifications about cash, notes, stock, non-competes or consulting agreements, contingencies, etc.
- Management contracts: Specifics about for whom, duration, and incentives
- Closing costs and the responsibilities of the buyer and seller, such as environmental due diligence and title searches
- Representations and Warranties: Boilerplate legal statements
- Brokerage fees: Who pays and how much?
- Timing for completion: Drop-dead date for due diligence and financing period; How long before money is exchanged and final closing takes place?
- Insurance: Proof of insurability; What happens with policies?
- Disposition of earnings before closing and viability of non-ordinary expenditures before closing (conduct of business)
- Access to books and records, key customers, and key employees prior to closing
- Disclosure of any outstanding non-compete agreements or obligations with third parties
- Stipulation of confidentiality of buyer (a breach could cause the seller to sue the buyer): The buyer promises not to disclose information about the seller to outsiders and to not disclose that negotiations are underway.
- Seller will take the company off the market for a designated period of time of forty-five to sixty days (a breach could cause the buyer to sue the seller).
The LOI is at the heart of the transaction and reveals key issues early on in the process. The signing of the Letter of Intent begins the buyer’s due diligence process and his or her ability to secure the necessary financing. Although the LOI is just the beginning of a lot of necessary paperwork, both sides will assume that the LOI represents the basics of the deal and that they have reached an agreement in principle.
