Archives for category: Business Ownership

No, this is not about Starbucks!  It is about Sellers that are not realistic, do not understand the market, do not understand the economic reality or even their own business marketplace, especially in relationship to selling their businesses!

You have no idea how many calls and e-mails we get each week – from E-commerce Owners, in particular – who have ten (10) people visiting their portals a day, earn a Net of $6.00 a month, have been in business for seven (7) months and want to sell for $500,000 in the name of “potential”.  What are you people smoking!?!?!?

(A.   We never said we were nice people.)

(B.    You may not like what we say, but we are painfully honest with our comments…)

We are not picking on E-commerce people, but we mention them because they seem to be the most exaggerated in their demands, since history actually did permit a greater amount of elasticity for the sale of such companies.  But that is just it:  It is history!

Several things affected the erosion of the E-commerce market.  First, it was the Dot-Com debacle of 2000-2001.  Market multiples in the sales of Internet-based companies of all kinds declined, markedly.  And the market in businesses of all kinds slid in a downward manner, simultaneously.

Second, the market crash of 2007-2008 caused a further erosion of business values of all kinds.  The resulting Revenue declines marked a complete change in the way Buyers and Lenders viewed market trends and what they looked at, in buying or funding acquisitions.  No longer will either party simply assume that a Revenue decline that has appeared to stabilize, will do so on a long term basis, and they will wait to be assured of that fact.  And no longer will a strong increase be viewed as a long term trend, until such a trend is proven.  This means that a startup will normally not be able to be funded, or even taken seriously by a Buyer, until it has proven it can (usually) withstand three (3) years of financial strength, fully supported by Tax Returns.

Third, funding has become much easier to obtain, in purchasing a business, since 2008.  But businesses without Real Estate or other tangible assets to convey, or Buyers without tangible assets for a Lender (and/or SBA) to use as security for the debt, are still difficult.  That lets out high multiples and startups.  Any loan secured by the SBA for more than $350,000 must undergo a valuation by an outside appraiser.  Again – this lets out high multiples!

Finally – and this is specifically directed at E-commerce Owners, although it is applicable to some, others as well – the market has softened, even in areas where growth is evident.  In fact, that growth is specifically why the market has softened.

What we mean here, is that E-commerce companies have experienced exceptional Gross Profit Margins, until relatively recently.  But with the increase in the number of such companies, even some of the most mature, some of the most immense E-commerce companies have seen a reduction in their Margins.  This is common in any industry where competition grows quickly, and E-commerce is not immune to such an impact.

Even if your business has not been adversely affected in this area, if it is happening to the industry leaders, Buyers will assume that it will undoubtedly catch up with yours, sooner or later.  And they will either offer a radically low amount for your business, or (fearing they might insult you,) they might walk away without ever making an offer.

THIS DOES NOT MEAN THAT E-COMMERCE IS BAD!

IT DOES NOT MEAN THAT BUSINESSES CANNOT BE SOLD!

In fact, the market is very robust, right now.

But what is does mean is that the Sellers have to be reasonable with their expectations.  They need to understand the pressures that are endemic in their markets.  And they need to understand that – again, back to E-commerce, in particular – they may have to take a note for a fairly large portion of the financing of their businesses.

The times, they are a-changing, and every-changing.  We need to keep ahead of the curve and change with those times.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

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Whenever an offer is made, the Buyer obviously has to get the best deal possible for him/herself, both in Price and Terms.  The Seller needs to logically do the same, from his/her perspective.  There is always a balancing act between those issues.

Buyer and Seller both have a need to feel like they “won” something.  The Buyer will naturally feel that he/she paid too much in some cases, and the Seller will feel that he/she gave away too much.  If both feel that way, it may be said that the deal was rather fair, if you think about it.

Many times, Buyers will not look at the motivation of the Seller and the practical issues surrounding his/her position, in making offers that are viewed by a Seller as being unrealistic.  These can kill not only the deal, but any chance of performing a negotiation that does not cause antagonism between the parties.  The net result is that such attitudes will keep both sides from being creative with their thinking, and precluding them from obtaining mutually beneficial terms.

The key is for both sides to be REASONABLE!  The Seller has to be reasonable with his/her pricing and expectations; the Buyer has to be reasonable with the Terms and Price he/she offers.

What is reasonable?  It varies from deal-to-deal, and a good Broker will help in making that clear.  A bad Broker will simply make a difficult situation worse.

As an example, we are dealing right now with a very viable business – one that has a strong history of growth, no imminent impediment to future growth, excellent financial records to take to the SBA and no real reason for the Partner-Owners to sell, except that they differ in the direction the business must take to accommodate future growth.  They have decided to part, selling after doubling the business’ size in the four years they have owned it.  So, there is no divorce, no terminal illness, no one is so angry that they cannot wait for the right deal.  All of this has been explained to the Buyer.

The Buyer is terrifically experienced, has great potential to grow the business further and can qualify for an SBA loan; however, he is in a slightly difficult cash position.  Through his offer, the Buyer has stated that he wants the Seller to allow him to come in with almost nothing in the way of a deposit, (with more at contract signing,) he wants the Seller to take a large second position note to allow him to conserve his limited cash, and on top of that, he is offering 30% below the asking Price.

It ain’t gonna happen!

There is nothing in this deal to allow the Seller to feel secure about this Buyer’s ability to operate successfully, because of his poor cash position; there is nothing to make the Seller to feel warm and fuzzy about the price; the Seller is taking a risk by taking part in the financing by taking a note; and if the Buyer should fail through no fault of the Seller, the fact that the Seller’s note is in a second position means that he will, in all probability, simply lose any hope of getting any part of that note back, through legal action.  In essence, all the Seller would be getting for certain is about 50% of his asking price, with the recovery of remainder perceived as being highly questionable.  There is no semblance of a “win” for the Seller; any “win” is solely on the side of the Buyer.

Some Buyers appear to have this attitude that the World owes them; that they have some sort of God-given right to purchase a business, and the Seller should do anything and everything in their power to accommodate that acquisition.  This is not a reasonable position!

And some Sellers believe their businesses should bring in prices that are far above any price that can be qualitatively and quantitatively supported.  One of the statements we hear, when we suggest that the price is too high, is something like:  “Yes, I know the price would normally be $X, but if the Buyer does this, than and the other thing, the business can double with the foundation I have laid!”

Our answer is:  “Then YOU do those things!  And when you accomplish them and the Revenue/Profits grow as a result, then call us to list your business!”

Sellers, you cannot expect the average Buyer to pay a premium for your business, for the privilege of expanding the business through his/her own efforts.  The Seller is getting paid on the basis of the good will and infrastructure he/she has generated, normally as expressed as a function of Adjusted Cash Flow; the Buyer increases the value of that same business through his/her own work ethic and the investment he/she makes in the further expansion of the business.  The Buyer should not be asked for making the business grow, through his/her own activities.

If either party comes into the negotiation with unrealistic attitudes or expectations, both will be sadly disappointed at the result.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

So, two priests walk into the Parish House and turn on their computer…  No, this is not the start of a bad joke.  Well, actually it really is.  Except that the joke was on the priests when they fell victim to a money scam from outside theUSA.

Such scams are everywhere – not just from outside of the US.  Any time there is $1 at issue, there is someone RWA (that’s business lingo for Ready, Willing and Able,) to make a grab at that Dollar, in the most inventive and intricate ways.

This will be our longest post, to date.  So get comfy…

We have seen/heard about a terrible, apparent epidemic that has seems to have befallen Business Owners and forced them to sell their EXTREMELY PROFITABLE businesses at sacrificed prices.  It would appear that each of these people have had fathers, mothers, sons, daughters, husbands and/or wives that are dying, and require the Business Owner to give up his/her business, in order to care for the terminally ill relative.  Except that it seems that it was all a scam, in many cases.

The Sellers use this sob story to get you to buy into their grief, thinking you would not then be the kind of person who would lie – not while sacrificing so much, in order to take care of a sick loved one.  They believe that you would suspend the deepest research activities you might normally take, because this is such a good deal, and from a person with such a good heart.  They might even take a note, because if they get the down payment, they have made sizable money!

In this very real example, you see that “Business Owners” can be con artists.  What is really sad is that these scammers make it difficult for the Business Owner that really has a relative in trouble, because now everyone is suspicious of such stories.

Brokers can be con artists as well.  (We are Brokers; therefore, saying this is particularly difficult for us to do!)  They can exaggerate earnings, potential, competition – you name it!  It is difficult to determine who the guilty party may be, if you find erroneous information coming from the Broker, because sometimes they will simply provide the information that has been given to them by the Seller.  It is no less difficult for them to validate such information as it is for a Buyer.  Whether it is a Broker or the Seller does not matter; your challenge, as a Buyer is the same.

We know of a series of false Broker-issues that occurred, exemplified by a call we got from a prospective Seller inVirginia.  The Seller said he had a business to sell that would bring in a price of $2 million.  Obviously, we got in the car and headed there, immediately.

We met to go over his Company Tax Returns and after about two hours of work, we were forced to tell him that, in our preliminary analysis, the business was only worth about $650,000!  The Owner was obviously crushed, and we asked him where he got the idea that the business was worth $2 million?  He replied that it was from another Broker.  So, we asked, if the other Broker gave you such a great price, why did he not list with that person?  The Owner replied that he wanted to, but that the Broker wanted $5,000 to provide a final report and list the business!

We were forced to tell the Business Owner that the Broker he was apparently dealing with previously was not really selling businesses; he was selling BAD price opinions.  The idea is to get the Business Owner all excited about the exaggerated price, which in turn gets many people to forget common sense, or push them into questioning the information the con artist provides them.

This is not the first time we have seen this kind of scam.  There was one company that ended up recruiting representatives nationally, to do nothing but sell these kinds of false reports.  Their pitch was that they could provide the Business Owner with a price analysis, allowing the Owner to use this documentation to sell their own businesses, and save themselves a lot of money by not using a Broker.  They charged $7,500 and more, and there were a LOT of Business Owners that bought into this concept.

In all honesty, we sell a Price Analysis program, ourselves.  But there is an easy way to validate the price that is obtained from us and any other Broker around – and we can show that proof with every transaction.  The way to do this is to take the information, (if the Broker does not already do it for you,) and actually to the math to determine whether the Cash Flow justifies the price quoted.  It is fine to look at Depreciation schedules and the present value of Capital Equipment, but in Small Businesses, that information should not represent the overwhelming majority of the value.  Overpricing practices such as those suggested above do exactly that:  They impress the Business Owner with valuing practices that look great, but do not have anything to do with the ability of the Buyer to afford the purchase or obtain a loan to make the acquisition.  In mid- to large-sized businesses, there are other issues; in SMALL BUSINESS, Cash Flow is overwhelmingly vital determinant in price!

The Business Owner or Buyer, in any analysis of an opportunity to sell or buy, MUST perform this critical test.

There are many other types of scams out there.  There are some with Buyers, (in the absence of a Broker to act as an intermediary or an attorney to advise the Seller,) providing small deposits with a contract that actually allows them to take over the business immediately; the Sellers later find out that the contract have signed leaves them no further ability to obtain the balance of the price.  They have sold their businesses for just the deposit money, without realizing it.

Or, the Buyer that is requested to provide a deposit, only to find that the deposit money is not refundable.  Some of these kinds of scams are run against people – Buyers and Sellers, alike – with whom English is not their original language.  The agreements are confusing and constructed for that very reason.  The terms are verbally explained, but are not always what is actually written in the contract.  The target of the scam signs in good faith, but later finds out that he/she is legally bound to something that was not at all what he/she understood it to represent.

But the biggest scams we are now seeing by far, are those involving lending processes.  The crash of the credit system in 2008 has made acquisition funding more complicated and difficult.  People are desperate for sources of loans, and the con artists have taken note.

But so many of these scams are uncovered by doing the most routine kinds of research.  And the tool is right there at your fingertips, as you read this:  It is called The Internet!  Look at the company that is promoting itself and find out whether it has any history.  Is it licensed to do business in the area in which it resides?  Does it offer references?

Complaints on the Net are not always a barometer of whether a given company is legitimate.  The complaint may be due to the fact that the individual lodging the complaint did not get what he/she wanted, but not necessarily because the loan company did anything illegal or dishonest.  With loan applicants, it may be that either the applicant had faulty credit or insufficient capital to bring to the transaction; or the business they wished to buy is overpriced, or otherwise not a good lending candidate.  Applicants that have been denied can be unreasonable and viscous in their comments.  Unfortunately, the Internet invites that kind of anonymous commentary.

The key is to look at trends.  Staying with the lending theme, have an inordinate number of people had the exact, same complaint?  Or, are the complaints so incredible sounding, as to at least warrant that you do more digging, before committing to that company.  One example was an applicant that said he was told by the “lender” that it was having a cash crunch, and that he (the applicant) needed to put money into the system for that lender to continue the application.  This occurred on several occasions and the applicant said he ended up spending $8,000, until he realized he was being taken for a ride!

The point there is, if you are borrowing money, why would you need to lend the lender money, in the first place?!?  People do irrational things, then money is waved at them.  The key word to us is REASONABLENESS!  You need to use reason, with all transactions of this kind.  If it does not smell right, DON’T PLAY THE GAME!

Case Study

One group with which we were trying to work on an extremely large transaction, promoted itself to be out of Manchester,England.  It said it had the ability to lend up to $500 million.  ALARM #1:  A company like that would go through high level networking to get its leads, communicating at the top of corporate ladders, rather than promoting itself on small business forums on the Net.  They do not need the small business Buyer!

We played along, to see how far this would go.  ALARM #2:  The company had no Web Site and the e-mail address was a gmail account.  The principal told us his Web Site was down for maintenance.  That has happened to us, but it did not affect our e-mail account with a domain name attached.  Why would a company that is worth a half a billion dollars use a free e-mail account?

ALARM #3:  The language used as poor, in terms of both its vocabulary and sentence structure.  This was particularly noteworthy in the contract the company offered.

ALARM #4:  We asked for proof that the company had that kind of money at it disposal, and it provided us with account numbers, telephone numbers and even a contact person, for a bank out of Singapore, with branches in Britain.  The information we were given was purported to be directly from the bank.  However, that contained questionable information, including the fact that it supposedly listed the company’s complete account number.  NO bank in the World is going to send out account numbers to an anonymous individual (like us) over a fax!

ALARM #5:  We called the bank, in England.  The contact person listed in the documents given to us by the supposed lender was a name that was completely unknown to the bank, and the bank’s customer service representative said the account number we were given was not a correct number.  When we questioned the lender, he insisted we had done something wrong, because the account number was complete and accurate.  Double-checking the information with the bank yielded the same result.

FINALE:  Up until that time, when the lender’s principal called on the phone, Caller ID had always showed the caller’s number as “Private”.  The discussions became so heated that the principal called several times, and the last time divulged some interesting information by allowing the true telephone number to come through:  That number showed that it originated with a 234 Country Code.  Since we have done international business in Africa, we immediately knew that the phone call was coming from Nigeria – not Manchester, England!!!

It must have been such a successful scam, that an almost identical con artist ran advertising a few weeks later.  When we questioned that one, we were actually the recipient of a mild threat.

Keep in mind that not all scams involve you giving the con artist money.  In the lending application process, you will be asked for Social Security Numbers, Bank Coordinates and so forth.  In this electronic world, that kind of information can lead to Identity Theft, which is far more dangerous to you, than $5,000 out of your pocket!

Remember:  If it sounds too good to be true, it normally is.  When lenders promise funds without security, without regard to your credit score and so forth…run, do not walk to another source of loans.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

Questions constantly arise about Brokers’ Commissions:  What are they and why are they frequently higher than the rate charged by Residential and Commercial Real Estate Brokerages?

The levels of Commission Rates are negotiated between the Seller and the Broker.  Although those fees may be similar in various regions, and even to a large degree, across the Country, there is no specific percentage that is designated by any particular governmental or association authority.  In fact, to do so may be illegal.

It may be that some Brokers will state a specific rate and refuse to negotiate; but that is their prerogative, not because there is some law or organization that stipulates such a decision.

Some Sellers may ask, “My business is so small; can you discount the fee?”  Again, some Brokers will, but others will specifically refuse to discount smaller deals, for several reasons.  First, because if the rate is quoted on a percentage basis, the Broker’s own fee is reduced, simply because a percentage of a smaller sale obviously represents a smaller dollar return to the Broker.  And second, because smaller deals are frequently more difficult, time consuming and expensive for the Broker, than a larger deal.  Many larger companies have better books, more detailed accounting systems, more documentation, better advertising…all things that help in making the pricing and presentation to prospective Buyers easier on the Broker.  When a smaller business is asking for a discounted commission rate, he/she is asking for the Broker to accept a smaller percentage of a smaller price – so in effect, the Broker’s dollar amount is reduced twice – in exchange for the privilege of working twice as hard, in some cases.

Some Brokers will, some will not.  And sometimes, it will depend on the business itself:  How much is that business in demand?  How good are the records?  How cooperative is the Seller?  In the vast majority of cases, if Real Estate is involved, the Broker will offer a reduced rate, without being asked.  But again, it depends on the Broker – it is all subject to negotiation.

Moreover, some Brokers charge for Inventory, while others do not.  Some Brokers that charge their fee to include the Inventory may charge a lesser percentage than those that do not figure Inventory into their fees.  But not always.

You, as the Seller, have to know what you are being charged, BEFORE you get to the settlement table.  BEFORE you sign that Listing Agreement.

Frequently, we are asked why our Commission percentages are higher than Residential Agents’ charges.  The answer is relatively simple.  When a Residential Agent lists a property, the Agent puts a sign on your lawn, puts it into a Multiple Listing system, puts a lock on your door that allows all Agents in the area the opportunity to show your home, without the Listing Agent being present.  That Listing Agent may not even know your home was shown until the next day, when he/she gets a report from an appointment company that handles the showing schedules.

When your business is up for sale, obviously we do not put a sign in the window!  In fact, the advertising – whether on our Web Site, some multiple listed database, or in other media – is always done in an abstract and confidential way, so that the casual reader cannot identify your business.  The promotion (by any responsible Broker) should give enough information to make it attractive and interesting, but not enough to allow your employees, landlord, vendors and customers to know that your business is for sale, and become alarmed.

That means that each and every business is, by necessity going to require much, much more personal attention, personal communication and personal TIME, for every potential Buyer.  The responsible Broker goes through several stages of qualifying every single Buyer, and giving those individual Buyers information ABOUT the business, BEFORE he/she ever gets the identity of the business, itself.

This means that Brokers do not necessarily earn more than Residential Real Estate Agents; they frequently earn less, because they cannot do the volume of sales transactions their Real Estate compatriots do, and each deal normally takes far longer than the average Residential sale.  This DOES NOT mean that Residential Agents do not work for their commissions – far from it!  It is simply a different business, with different responsibilities and requisite skill sets.

We only accept about 30% of the businesses we are asked to list.  And one of the big reasons is that we feel that we cannot list too many businesses at any one time, and still do justice to each.

Some Brokerages brag that they have 400 or 500 listings!  We are uncertain why some sellers thing that is such a good thing.  Unless they have more than 50 Agents, how can such a Brokerage promote any of those businesses, competently?  (And by the way, the same can be said for Commercial Real Estate.  We have tried to relocate several of our Clients, and found that the major Commercial Real Estate Brokers do not always know their own listing portfolio, because of the volumes they carry!)

In fact, what happens is that those kinds of Brokerages typically specialize in something like Convenience Stores or Liquor Stores – something that is high in demand and volume of potential sales.  Some go so far as to post their listings on an erasable board, in their offices.  On the basis of the claim that they have that number of listings, they invariably get Buyers simply walking in to their doors.  The Buyer says he is looking for a Convenience Store, and the Broker points to the listing board and invites the Buyer to pick one out!

That is great for the Buyer – but it does NOTHING to promote your individual business!

If you have a Liquor Store or a Convenience Store to sell, that may work for you.  There is nothing wrong with that approach, legally or ethically.  It is a matter of style, and whether that fits into your need.

If you are a Buyer, the real danger with that scenario, is that many of those listings are not real listings, at all.  We are familiar with one Brokerage that boasts about that kind of listing volume, except we have been told by both Buyers and Sellers alike that most of those are not real listings.  They are a function of a Business Owner telling the Broker, “If you find a Buyer willing to pay a quadrillion dollars for my business, call me.”

That means that the Broker really has no idea about the true value of the business…because he/she has no idea of the Cash Flow of the business…because he/she has never actually seen any written documentation on the business!

When you are looking to buy or sell, actually talk to the Broker, before you do anything.  It should not take you long to determine whether he/she knows what he/she is talking about.  If they are just throwing stuff against the wall to see what sticks, regardless of which side of the deal you are on, your interests will not be well served.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

A vital issue to the sale of any small business is the Seller understanding his/her own Cash Flow position, as it applies to a potential sale.

It is amazing how few Business Owners understand this issue.  Many operate out of their check books, feeling that if they have money left at the end of the month, that is good enough for them!

Keep in mind that we are not Accountants, we do not pretend to be Accountants and we do not even play Accountants on TV!  The discussion provided here must be viewed in that light; however, the term “Cash Flow” is quoted in any number of documents and reports as a “non-GAAP” financial measurement, anyway.  (GAAP itself is defined as the Generally Accepted Accounting Principles by which Accountants operate.)  Cash Flow is utilized as a term most frequently by non-Accountants, as well.  You see it in the vast majority of advertisements and other promotional materials, when Sellers and Brokers offer businesses for sale, but also in more technically oriented documents such as quarterly and annual reports from some of the Country’s largest companies.  However, in those latter documents, Cash Flow is normally, specifically labeled as a “non-GAAP” measurement of financial health.

That’s not to say it is an invalid measurement; but what it does mean is that it is something that has a wide variety of definitions and you, as a potential business Seller, need to understand what each individual Buyer or Broker is using to measure his/her definition of Cash Flow.  The absolute only way to do that is to disclose your own definitions, whenever information about your business is presented.

We are really going to discuss what Cash Flow means to the average Business Owner and Broker, (contrasted with what might be meant in a public company’s Annual Report,) with the emphasis that even here, there are broad variations in definitions.  The Seller or Broker should be able to explain him/herself in great detail.  If you provide vague answers, it is an invitation to the Buyer to back off of the deal.  The perception will be that you are playing games, or that you do not know what you are doing!  You or your Broker should be able to tell the Buyer – in writing – what methodology has been employed in a Cash Flow report, and why.

Cash Flow is not even a universal term.  Brokers will frequently label terms like “Sellers Discretionary Cash” (SDC).  EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) which is a more descriptive term than any of the others.  But it is not necessarily as all-encompassing as what is normally thrown into either Cash Flow or SDC.  There are many, many other terms used by many, many individuals, particularly in small businesses.  So again, you absolutely need to provide documentation, or ask your Broker to do so, in writing.

(We are currently involved in a C-Store negotiation, and the Broker admitted in advance that she was a novice.  She kept saying that the Seller was “making about $13k a month…”  The term “making” was vague, but in fact meaningless to us:  Was that Gross?  Net?  Adjusted Net or Cash Flow?  She was terrific in answering all questions in what she meant in great detail, and certainly was not hiding anything.  But the example demonstrates that lots of people use lots of different terms, none of which are standardized and demand clarification.)

Generally speaking, Cash Flow is comprised of, Net Profit, ideally as claimed in the Seller’s Tax Returns, plus Adjusted Expenses such as:

  • One-time items purchased by the Seller, which either would never to be replaced, or would not need to be replaced within the next number of years.
  • Expenses that the new Owner will not inherit, like the loan the Seller is paying off for when he/she bought the business; the Buyer will have his own loan, but the Seller’s own loan will be retired with the settlement, as will his payments.
  • Non-cash expenses, such as depreciation and amortization.
  • Some Tax Expenses.  (This is where your Accountant is invaluable!)
  • Any payments the Seller has made that are absolutely not part of the business expenses. (We once saw three salaries in a business, but no employees; I asked the Seller about it and he said those were he three grandchildren, all of whom were in kindergarten, first and second grades.)

This last issue is where arguments usually start. There are some adjustments that should not be legitimate business Expenses, but extracting them and proving they are not germane to the operation is difficult, if not impossible. The Seller that argues that issue is not very wise, in many instances.  For one thing, these individual items are frequently not terribly large, and pushing the Buyer to accept them will frequently create more of an air of suspicion or negativity than they are worth.

Even if those Expenses are not part of the business, Buyers will not be able to get any lender to agree to honor those adjustments, when the bank is using the Cash Flow for the purpose of granting a loan.  Moreover, if the Seller puts this in writing, he/she is opening him/herself to scrutiny from the IRS, which could very well then see such comments as a confession to Tax Fraud; the Broker that cooperates could have some liability in this area, as well.

Some Sellers/Brokers put the Seller’s entire Salary into the adjustments. This is not wrong, but the Seller/Broker should disclose this in advance, and the Buyer should know that this needs to be adjusted again for him/herself, when applying for a loan to fund the acquisition.

The Seller’s Fringe Benefits are another area that need to be understood.  As a general rule, if the Seller has an established IRA or other Retirement programs for himself and for which the Company is paying, these are added to the Cash Flow.

Health Insurance is commonly added back in, as well.  If it is not specifically required to continue the daily operations of the business, the Seller/Broker is completely justified in adjusting such an Expense and adding it to the Cash Flow total.  BUT YOU NEED TO BE ABLE TO DISCLOSE AND EXPLAIN YOUR METHODOLOGY!

Also, be very careful to understand that all Cash Flow and the resulting recast P&Ls you create in using such information, is based on historical data; it is the result of your (the Seller’s) own activity and methods of operation.  Cash Flow is used as the basis for pricing the sale of many small businesses.  IT IS VITAL THAT NEITHER YOU NOR YOUR BROKER DOES ANYTHING THAT WOULD SEEM TO EVEN HINT THAT THESE FIGURES CONSTITUTE ANY KIND OF A GUARANTEE THAT THE BUSINESS WILL CONTINUE TO EARN AT THIS LEVEL!!!!  Any assumptions should be solely made by the Buyer, him/herself.  This is the area where most lawsuits occur.

Cash Flow issues are the most crucial areas of the transaction.  It is the basis for attracting Buyers, and their understanding and faith in your disclosures is vital to whether the deal will be adversarial in nature from the beginning, or whether they will decide to move forward, at all.  And it provides you with an idea of whether your Buyer pool will be able to get financing, once the two of you agree to terms.  It sets the pattern for everything that follows!

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

We do not mean, are you sick and tired of the Business?

What we mean is, are you and your business positioned for the maximum sale price, offering the best view of a prospective Buyer coming in for a look-see, and can you turn it over with confidence that you are giving the Buyer the best shot at succeeding?  That does not mean you are guaranteeing him/her success; but it does mean that you are providing the Buyer with a positive environment, both inside and outside your doors, and a workable foundation for him/her to take over.

For example, who is the face of the business?  If you are a micromanager, (or is you are simply a solo operator,) and every sale is due to your sole efforts, every problem is handled solely by you, and the Customers only know your name, when dealing with the company, you could be in trouble.  This could mean that anyone coming in behind you could fail before he/she starts, because the company really means very little to the Customers; it is YOU they feel that they deal with, not the ABC Corporation.

It is like when football start John Unitas left the BALTIMORE Colts, (yes, we are still bitter about the move to Indianapolis…)  No matter who the next quarterback was to be, no matter how good his prospects, Unitas was so beloved in Baltimore that the fans were ready to hate the next guy.  (You younger people can replace Favre with Unitas, andGreen Bay with Baltimore…)

Business can be exactly like that.  In some businesses, customers can get a comfort zone with one person, and when he/she leaves, they feel a personal sense of loss, perhaps even a betrayal.  This is particularly true when long term, repeat transactions are characteristic of the daily business routine.  People will frequently wait for the same person to cut their hair, whether the customer is a male or female; people will ask for the same auto mechanic; the same doctor.  When going to a Walmart or similar retail operation, the brand is the issue – you do not necessarily ask for the same cashier.  But if you are a Home Builder, you might ask for the same guy at the local Lumber Yard, because that guy knows your traditional needs and the transaction is viewed as more efficient and secure.

Similarly, populating the business with family members or people that are so, personally close to you that when you leave, so will they, is a huge mistake.  Ask yourself:  What will happen to the business when I walk out the door?  If the business fails after the sale because of the actions (or inaction) of the Buyer, that is not your problem.  But if your business is organized so the company cannot keep going without you, it is unsalable, or at least salable only at a very discounted Price.

Financial issues need to be addressed, before you can sell, as well.  One of the biggest things to bring to order is how expenses are expressed, in order to reduce Taxes.  The more you attempt to legitimately obscure or camouflage your Profits, the less the Bank or the Buyer is going to be willing to accept that Cash Flow as a function of the Price you demand.

And for those of you who just plain hide money – like the guy to accepts cash in his Retail store and simply does not report it to the IRS – God bless you!  But do not try to then use that as a part of the Cash Flow that will translate into a selling Price.  You profited from the fact that you cheated the IRS; do not think that you will get that same money reflected in the Price.  A Bank will simply not honor that kind of thinking, when considering a loan for your Buyer.

And speaking of Taxes, what terms will you need to employ in selling the business, or how should you structure the proceeds for the best tax advantage?  Making these decisions at the settlement table is a radical mistake.

Long term planning is best in other areas – sometimes, LOONNGG term planning means years in advance.  Making certain that your Clients are not too heavily concentrated takes enormous effort and time, to accomplish.  Having one Client that represents more than 20% of your business can heavily reduce interest in your business, or at least be used against you in negotiating Price.  (The 20% number is not engraved in stone, since some Buyers become alarmed when the number goes above 10%, while others will say it is not a problem until the number approaches 40%.)  The issue is that the sale of any business has the potential of a loss of some Clients; if there is a concentration of business in one Client, the threat of losing that one Customer can be catastrophic, and that will weigh heavily on the Buyer, one way or another.

Finally, most small Business Owners do not have a written Business Plan, or if they ever did, they forgot all about them once they got the loan to start or buy their businesses.  When selling a business, having an updated Business Plan can be an extraordinary plus, for the Seller.  It can be the most powerful tool with which to impress the Buyer about the business’ history, and its prospects for the future.  If you have one, use it.  If you do not, consider creating one.

There are many other issues that should be considered.  But these are the most vital, in our view.  As stated, these can make the difference between getting a maximum from your business, or being able to effectively sell it, at all.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divesture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at http://www.bafgroup.com. Thank you for your interest.)