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Can I sell the business without the services of a broker?
While still managing your business, you need to do an evaluation including justification of price, prepare presentation material, write and place advertisements, identify and contact target purchasers, screen, qualify, and educate the purchasers, evaluate offers, negotiate detailed contract terms, and perform the myriad tasks associated with the closing process. You must maintain confidentiality, or you may damage the stability and value of your business. You should use a lawyer and accountant with experience in business transfers.
What are the benefits of using a professional Broker?
The broker will increase your credibility with buyers, as quality buyers both appreciate and value a professional involved in the process. An intermediary can buffer the emotional aspects of the negotiations and provide step-by-step assistance through the sale process.
A broker will maintain the confidentiality that is crucial for the protection of the value of your business throughout the process. The process will be time-consuming, you have a full time job successfully managing your business; you do not have the time to invest in becoming proficient at successfully selling your business. By working with an experienced business broker, you will typically obtain terms that are more favorable and a higher price than you will without professional assistance.
Which type of broker should I consider?
Listing services allow you to do-it-yourself. You pay a fee to have someone advertise for you, not much more to it. Realtors and their MLS often fall into this category. We recommend this option for very small businesses when confidentiality is not an issue, and the business has little if any goodwill associated with its value.
Business brokers like Choice Business Opportunities, Ltd. specialize in working with companies with NET incomes from $25,000 up to $2 million. The broker will be experienced in evaluations, confidential marketing, qualification/education of purchasers, negotiation of contract terms and conditions, and can attend to all the details of your transaction. While the state of Colorado requires a business broker to have a real estate brokers license, a business broker is a professional who specializes in the sale of businesses, occasionally selling real property owned by the business owner, not a realtor who occasionally sells a business.
A mergers and acquisitions (M&A) intermediary will be a more sophisticated firm offering similar services to larger companies, generally with NET income over $2 Million. Many M&A transactions are to institutional, synergistic, and financial purchasers. The firm will often function as a consultant for both purchasers and sellers and the organization may have a number of in-house legal, accounting, financing, and valuation specialists.
Investment bankers (technically, a securities brokerage firm) provide services to large often publicly traded companies. Companies generally valued at over $20 million provide substantially different services required in larger complex transactions.
How do I choose a broker to work with?
It takes more than a slick presentation to perform; the brokers experience and integrity make the difference. Ask for and speak with the broker’s references, both clients and customers. Ask tough questions and be comfortable with the answers. Will the broker invest the time to allow you to understand the process? Will they show you how to understand purchasers and their motivations? Do they present and completely explain an evaluation including a justification of the selling price? Have they dealt with your expectations, concerns, and goals in a frank and straightforward manner? Are they committed to protecting your best interests while providing real world win-win solutions?
Business brokerage is a very specialized field; there are but a handful of full-time professionals in Colorado. Interview a number or potential brokers before you decide. Experience and integrity make a world of difference.
Why is confidentiality important?
About the process
How much will my business sell for, and why?
There are literally dozens of methods used to place a value on a small business; we must understand the purpose and scope of the evaluation before we understand its relevancy. Accountants often determine a value of a business for a number of reasons related to estate issues and IRS considerations. The only way to get a more concrete idea of value is to have a professional provide an evaluation of “fair market value” of the business; but be certain the evaluator demonstrates to you the validity of the results.
Your business will sell for its fair market value. The price at which, given an arms length transaction and a reasonable period of time on the market, a purchaser could reasonably be expected to pay and a seller could reasonably be expected to accept, purchaser and seller both being in possession of all pertinent facts and neither being under any compulsion to act. More important than the price you sell for, it is what you put in your pocket that that is most important. Your broker should be able to help analyze the tax consequences the various negotiated transaction terms, structure and allocation will have on your bottom line.
When is the best time to sell?
How long will it take to sell the business?
How is the business advertised once on the market?
The reality is few transactions result directly from a purchaser responding to a particular advertisement and then actually purchasing that business. Advertising is primarily designed to maintain a constant level of potential purchaser contacts. We benefit from dozens of new purchaser inquiries a week, and devote the time to qualify and educate them. Between our advertising and professional referrals, we are confident any serious purchaser in our market will find and contact us.
An advertisement cannot “sell” your business, selling your business is the job of a qualified professional. Beyond advertising, we develop and initiate a proactive marketing campaign unique to your specific business. In addition to our extensive database of qualified, motivated purchaser purchasers, we often target qualified local and national synergistic or strategic purchasers, through direct mail, telephone, or trade specific publications.
Who is the likely purchaser for the business?
The individual purchasers make up the largest group of prospective purchasers for small businesses, and generally represent your best opportunity to sell for top dollar. They are frequently successful corporate executives, engineers, and salespeople who have funds to invest in businesses they will actively manage. They are generally unhappy with corporate bureaucracy, motivated by a mandatory relocation requests, or forced into early retirement due to mergers or down sizing. Many are wealthy individuals, successful entrepreneurs, or foreign nationals moving into Colorado for a lifestyle change. Most individual purchasers will have little or no direct experience in operating the type of businesses they buy and have a higher regard for your hard-earned goodwill.
Financial purchasers are primarily interested in your business net earnings and opportunities for growth, typically well-heeled individuals, companies, or institutions looking for ways to increase returns on their cash investments. They are generally willing to look at many different types of businesses or industries, but most often want businesses with an existing management team that will remain intact and an investment that will not require hands on management. Financial purchasers can be an excellent option if you have stable management in place and show over $1 million in net earnings. Be prepared for intense negotiations and extreme scrutiny during due diligence.
Strategic purchasers are interested in an arrangement whereby the combination of their current operations and yours create a large positive influence on the future of their business. They may be a similar company from another region that wants to expand into your area, a company in a related but not competitive business, and occasionally one of your competitors. You must be ultra cautious in contacting these purchasers to protect confidentiality and be confident your message demonstrates the wisdom of their potential purchase.
Our experience is that managers, employees, friends, and direct competitors are generally not likely the best purchasers for your business. A word of advice, an uneducated or ignorant purchaser may well be easy to work with initially, but when they fail miserably, you will not enjoy the fallout.
How is the purchaser pre-qualified?
Any contract you agree to should be contingent upon a review the purchaser’s credit report and allow you the time to do everything you feel is appropriate to be fully satisfied the purchaser has the business acumen necessary to be successful.
What should I expect when working with a broker?
After the initial activity, you may find the process remarkably quiet, while we work to find the right purchaser. We commit to our clients that they should never have to meet with more than three potential purchasers; our job is to pre-qualify the purchaser. You will not waste your valuable time meeting purchasers who have not done serious investigation and are ready, willing, and able to purchase your business. We are able to address all concerns the purchaser may have and believe that your meeting with the purchaser is one of the last steps before offer and acceptance. You will not be subjected to, nor should you ever enter into harsh back and forth negotiations. We may need to discuss some minor issues the purchaser raises, before our presentation of the signed contract to purchase.
We will thoroughly go over the contract with you to confirm your complete understanding the transaction and provide you ample time to review and discuss the contract with your advisors. We urge you to listen to and understand the advice of your advisors, but ask that you make your own decisions.
You will again find it quiet, while we work to coordinate purchasers due diligence, manage the satisfaction of contingencies, work through the purchasers do before closing activities, and assemble closing documents. The closing should be anticlimactic, generally taking 1-2 hours.
What should I do or not do when I put the business on the market?
Purchasers will need to trust you and clearly understand your reason for sale, always be candid and truthful. A word of caution, you are better off showing the business “warts and all” so to speak, rather than trying to “sanitize” you records.
Focus on running your business as if it were not for sale; do not become distracted, your bottom line is what counts. Good records and documentation are important. We often recommend eliminating excessive personal or non-business related expenses, turning unused assets and obsolete inventory into cash, resolve any outstanding legal disputes, and remove personal assets from the business.
About the sale
What should I expect in the Buyers offer?
Most transactions are structured as the sale of assets, tangible (such as real estate, equipment, inventory) and intangible (such as goodwill, customer accounts, trade names). We understand your accountant may wish to sell the your stock of your corporation, and while we do occasionally recommend the sale of your stock, you must fully understand the increased risk associated with the sale of a “security” and have competent legal counsel with an understanding of securities law. When you structure the sale of your business as the sale of its corporate stock, you are selling a security as such, a completely different collection of laws protects the purchaser of this security. Be certain you understand how to reduce the risks for a future claim from the purchaser.
How will the financing of the purchase be structured?
Typically, purchasers’ equity investment will come from their own cash reserves or funds obtained from borrowing on their equity in real property, securities, or retirement funds. The purchaser will consider your willingness or resistance to finance a part of the transaction as a direct expression of your confidence in the business and confidence in its worth. You should not consider financing without a substantial down payment from the purchaser, generally 40 to 60% of the transaction value. Transactions with properly structured financing are successful, improper structure will most often lead to failure. A high price, low down, and/or short-term payouts is likely to lead to a failed transaction.
We recognize when it is advisable and feasible to seek financing through banks and lending institutions, usually involving SBA loan guarantees. Banks have strict lending criteria for acquisition loans and are normally reluctant to finance business purchases. If your business complies with the stringent qualifications necessary, an SBA guaranteed loan program would enable financial institutions to finance the transaction. The purchaser will need 25 to 35% down payment on non-real estate backed loans and 20 to 30% down if real estate is included in the transaction. In our experience, the SBA often requires the seller to carry 10 to 20% of the transaction subordinated and virtually unsecured. To qualify for SBA guaranteed financing we must provide three years of tax returns showing clean profit sufficient to repay the loan, maintain sufficient working capital, and provide the purchaser with a reasonable salary. Substantial tangible assets (preferably real estate) and the professional qualifications of your purchaser are also critical. Be aware the bank and banker often becomes a negotiation partner with the purchaser requiring you to make last minute concessions in price or terms in exchange for granting the loan. You should carefully consider the tax benefits of an installment sale, before you substantially discount the business value in an effort to avoid financing the transaction. There are several national companies that will buy seller finance notes, once matured for six months to one year. If you are unwilling to finance at least some of transaction, we may not be able to sell your business.
What information will a prospective Purchaser want to review?
Before having an agreement on price and terms, it is appropriate and necessary to provide the potential purchaser selected information. The purchaser should have access to the past three to five years financial statements (profit & loss and balance sheets), complete business tax returns, list of hard assets, copies of real property leases, and summaries of all leasing or financing commitments. General nonspecific business information regarding number and type of customers, product lines/services mix, marketing material, number of employees, and competition are also acceptable. When preparing our marketing documentation we carefully screen this data, removing personal data (social security numbers, home address etc.) and If A/R A/P summaries are appropriate we remove the customer/supplier names.
Once the contract for purchase is in place and purchaser begins due diligence, you want the purchaser to verify and confirm absolutely everything they consider appropriate. The purchaser will examine additional financial records, bank statements, complete A/R A/P aging, payroll records, depreciation schedules, etc. They should inspect the hard assets furniture, fixtures, equipment/vehicles, inventories, facilities, and leasehold improvements, check on pending or potential litigation, liens, legal standing, and corporate minutes, and review your marketing and operations, customer base, all contractual agreements, patents, licenses, special permits, organization, and in short every phase of your business. Your future best interests are served by full and complete disclosure.
What should I expect a purchaser to require for training?
Our experience is that long-term employment agreements with the purchaser are rarely satisfying experiences, we recommend you be very cautious negotiating such agreements with the purchaser.
Should I expect to sign a non-compete agreement?
When should I tell my employees about the sale?
What specific steps should I take to minimize difficulty after the sale?
Understand that your exposure to potential litigation is significant, if the transaction is handled improperly. Using an experienced broker can help minimize your exposure. But understand that, if and in the event, the purchaser is unsuccessful and bankrupts the business after closing, it is highly likely that rather than accept personal responsibility for their actions, the purchaser will choose to sue you for misrepresentation.