Selling Your Business?

A recent (August 2016) survey performed by Pepperdine Graziadio School of Business and the International Business Brokers Association suggests that manufacturing businesses are suddenly, very much in demand. Manufacturers with Revenues of between $1 million and $50 million per year are selling quickly and at higher relative prices than at any time in recent history. The successful sale of companies of this kind appears to be far faster and with better pricing than service operations and distributorships, which have historically outpaced manufacturing by a substantial margin. Restaurants and service businesses still have the lead for sales under $1 million in annual Revenue, perhaps simply because they are more affordable for the small business person.

 

Normally, in an election year, Buyers would appear to be hesitant, and our business brokerage activity slows dramatically, particularly during the six months leading up to electionday. But for whatever reason, this year we have found an extremely active Buyer market. Certainly, one of the big reasons is the low interest rates that are available.

 

We also represent two (2) small manufacturing-oriented operations for sale, and the demand for these has increased dramatically, compared to activity we have seen from our other listings. Liquor Stores are a particular favorite in the retail market, but these have been difficult to sell over the past two years, because of premium pricing demanded by the Sellers. Demand for other Retail-oriented stores has been somewhat lower this year, for a variety of reasons. Restaurant sales have – as always – been fairly brisk.

 

If you or anyone you know has a business of their own and are thinking about retiring, now could be an ideal time, before the market changes and interest rates begin to rise.

(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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Selling Your Business…and the SBA!

As you may or may not know, the SBA does not lend funds to anyone, for the purpose of purchasing Businesses.  Banks actually lend the money, while the SBA provides insurance of sorts, that it will put up to 80% of the amount loaned, should the Business fail.

This is a crucial thing for Business people to understand, for a couple of reasons.  First, it is important that any Buyer understands that he/she is going to need to qualify with both the Bank and the SBA.  It is a two-tiered process.  SBA Preferred Lenders are financial institutions that essentially make all the decisions right there at the Bank, because the SBA has given them permission to qualify once, according to the SBA’s guidelines and regulations.  Even though there is this two-tiered process, if the Buyer is dealing with an SBA Preferred Lender, it is not as though the application needs to be physically reviewed by the Bank, then processed over to the SBA for a second series of delays and qualification at another location.  With Preferred Lenders, all the qualification work is done at one time, and in one place.  There are multiple players involved, but it still streamlines the process.

That still does not mean that the two-tiered system is a piece of cake!  We were in the process of selling a very large Liquor Store, and the Buyer decided he wanted to use his own Bank – which certainly he has the right to try to do.  The Bank was a Preferred SBA Lender, but after five months of waiting, still had not given the Buyer a decision.  All they kept saying was, “This is a great deal!”  The Seller was obviously frustrated and demanded an answer, one way or the other, or he was going to terminate the contract.  The Buyer confronted his Bank, and after five months of jerking him around, the Bank, finally said, “We are sorry, but we do not lend money for the purchase of Liquor Stores!”

This was not an SBA decision.  This was strictly the bias of the Bank’s own Portfolio Manager, simply because she was personally, morally opposed to anyone drinking alcohol.  The Buyer happened to have a great deal of money on deposit in that particular Bank, and though the Bank did not want to lend him funds for the purpose of purchasing a Liquor Store, they delayed the process for five months because they did not want to decline him, and have him leave the Bank in anger!

When the Buyer told us about we immediately put him in contact with another SBA Preferred Lender with which we had worked on several occasions, and the deal was completely funded and settled in 45 days.  Once again, it had not been the SBA that was the holdup.

Many Business Sellers do not like the idea of selling their Businesses to someone who was going to use the SBA, to obtain funding for the acquisition.  Unfortunately, unless the Buyer has several hundreds or millions of dollars stuffed in his/her mattress at home, there is no other way to obtain funds to purchase a Business.  Commercial Banks will not do that, with Small Business purchases.

We are regularly asked by Sellers if we can find an “all cash” Buyer.  Sometimes, this can be done.  When we sell a Convenience Store, a Gas Station Dealership or other types of businesses, perhaps priced up to his much as $250,000, there are some circumstances where we find people with those kinds of funds.  But frankly, even if someone has $250,000 in their checking account, in most cases they would prefer to leverage that money by using it as a down payment and ultimately purchasing a Business for perhaps $750,000 or more, with an SBA loan.  It simply does not necessarily make good economic and financial sense to spend all of one’s money in buying something for cash, in that manner.

The resistance that Business Sellers have to the SBA comes from their fear or concern that such loans take an inordinate amount of time.  Buyers hate the thought of using the SBA because they say it requires a mammoth amount of paperwork, in order to complete the application.

But the truth of the matter is that the SBA does not take a huge of time, if the applicant or his/her Broker or CPA knows how to complete the forms in an efficient manner.  The vast majority of delays with SBA loans are because the application is provided inaccurately or incompletely.  When the Bank or SBA has to go back and forth with the Buyer in attempting to get the information done correctly, it will naturally take a tremendous amount of time, because the SBA and Banks are both bureaucratic institutions.  Because of the way we package SBA loans, we would normally get them through in about 45 days or even less; it can take a little more time if the purchase includes Real Estate.  Such a delay of that type is normally due to scheduling issues for Real Estate Appraisals and/or Environmental Surveys.

From the Buyer’s side, yes it does take a fair amount of paperwork, in order to complete the application.  But we are always amazed when people say that.  Do Buyers really believe that a Bank or the SBA is going to provide $500,000 or $1 million in loans, without any such documentation?  Without being asked specific questions about their ability to handle the funds?  About the ability of the Business to make timely payments?  Why does this seem so unreasonable?

Business Sellers, please do not fear the SBA.  Do make certain that the Buyer and/or the Brokers involved are knowledgeable in the application process, so as to have the best probability of a positive result, in the most efficient manner possible.  Ask where the Buyer plans to obtain his/her loan, and make certain that the Bank used is a Preferred SBA Lender.

And for your part, make certain that your books are in pristine shape.  Make certain that your Corporate Tax Returns are up to date and that you have signed copies of them for the Buyer to take to the Bank.  The Bank will want to see the last three (3) years of Company Tax Returns, plus current Financial Statements, (Profit and Loss Statements, and current Balance Sheet); they should be no more than 45 days old.  If you take a paycheck, principally because you are an S Corp. or a C Corp., you should include your W-2 forms, for each of the Tax Returns you provide.

When you think about it, none of these things are unreasonable requests.  All of these things can be done efficiently, particularly if you know about them in advance.  Your Broker or CPA should be able to take you through this process, very quickly.

Keep in mind one other thing:  Without the SBA, the only way to sell your Business is for you to act as the Bank, and take a note for the majority of the sale price.  Suddenly, the SBA looks pretty darned good, and doesn’t it?

(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.)

Selling a Business: Timing is critical!

In 2007, we spoke to a number of Business Owners about selling their businesses.  We spoke to them about the potential for a recession looming around the corner, principally because of what we saw as the “bubble” in both Commercial and Residential Real Estate.  Many of them declined to sell at that point, stating that there businesses were simply doing “too well”, at that point.

As we moved into the deepest part of recessionary regression in 2008, many of those same people came back to us and then wanted us to sell their businesses, and sell them as quickly as humanly possible.  Unfortunately, as we looked at their Financial Statements, the erosion of their Revenue and Profits suggested that the value of their respective businesses had dropped tremendously.  They could no longer command the kind of Prices they might’ve enjoyed in 2007, and in some cases their businesses were unsalable, at almost any reasonable Price.

The moral of this is certainly not that we are blessed with some sort of crystal ball, and that what we say is tantamount to gospel!  But there are certain rules of thumb regarding the timing of selling businesses that cannot be argued.

First and foremost is the fact that if you own a business, you always – emphasis on the word, “always” – want to sell when you are doing “well”.  No one wants to buy your business when it is in a downward spiral.  And even when the Revenue drops slightly, it creates alarm bells for a Buyer and his/her Lender.

Buyers and Lenders ask for Financial Statements for the past three (3) years, to determine historical trends on which a buying or lending decision is ultimately made.  They want to see that the business has a stable financial record at the very least, and preferably shows growth throughout that trending period.  Any decline of any kind raises concern.  Is that decline a temporary one, or does it represent a larger, more long-term deterioration in business that will continue with the new ownership?  The current owner may explain the reason for the drop in business and the fact that the decline is essentially behind him/her, but Buyers and Lenders cannot and will not take such an explanation as gospel.

They need proof, and that proof can only be borne out by a return to normalcy, as exemplified by Financial Statements.  They are certainly not going to take the word of someone who’s business is in decline, and whose method of dealing with the difficulty is to get out.

This means that the Seller simply has to wait it out, rebuild profitability and then show financial statements that demonstrate the return of the business.  Depending upon how much business has been lost in the decline, this could mean waiting a full Fiscal Year of resurgent business, or more.  There are some mechanisms we have used to provide evidence that a business has been rebuilt in a credible way to a Buyer in less than a year, but Lenders are far more difficult an audience.  They will frequently require at least a year of evidence that the business has been rebuilt to a satisfactory level, and that evidence is just as frequently only supported by a Tax Return, to that effect.

A second element of timing has to do with interest rates.  When a Buyer makes a decision to buy a particular business at a particular Price, the amount of Cash Flow is one of the most critical issues.  Cash Flow, in this case is loosely defined as the amount of money the Buyer can project at the end of each year, after all expenses have been paid except what he/she needs to pay Debt Service, followed by whatever is left to provide him/her with a Personal Income.  Debt Service is further defined as what the Buyer will need to pay the Lender, on a monthly or annual basis, in order to purchase the business.

The Cash Flow is normally projected on the basis of historical profitability of the business, which obviously then goes back to the Financial Statements discussed above.  The relative certainty over the ability to project Cash Flow is obviously then why the confidence in the stability of Revenue and Profits is such a vital concern.

The projection of the Buyer’s Personal Income is something that can also be projected, with relative ease.  He/she knows what he/she pays in rent or house payments, car payments, utilities, average credit card payments, and so forth.  If the business is purchased through an SBA loan, the bank will demand this information, in writing.  The total of this amount is somewhat set in stone.

The amount paid for Debt Service is also somewhat set in stone.  With the amount of average Cash Flow, minus the amount of Personal Income the Buyer requires, that net amount that results is the money left for Debt Service.  From a Lender’s perspective, this is the dollar amount that is viewed with a certain amount of reverence.  The Lender will require that this amount equates to the monthly or annual Debt Service, normally plus about 25% to provide the Buyer with a certain amount of working cash reserves.

And Debt Service itself can be broken down into the sum of payments made toward Interest plus Principle.  This is where understanding the impact of Interest Rates is of critical importance to a business Seller.

Because we know that Debt Service is, as stated above, somewhat set in stone as a total amount, if Interest Rates rise, payments toward the Principal must come down, in order to meet that total.  Business loans are almost always amortized on a 10-year term, so reducing the payments for the Principal by increasing the amortization is not an option.  The only variable that remains is the Price paid for the business.

This means that, if Interest Rates rise, the Price paid for the business must come down.

This is where the politics of the US Government will radically impact any business that is for sale.  Regardless of whether a Seller is a Democrat or Republican, understanding the dynamics of changes in the makeup of the Senate, the House of Representatives or the Presidency, and the impact of such changes on the economy and the Federal Reserve system, is critical in understanding when it might be time to sell a business.

Finally, any recession is liable to wreak havoc on a business sale.  During recession of the 1980s, the Federal Government sought to ease the impact of the recession by devoting more resources in the way of SBA support to small businesses.  Virtually any economist around will say that small businesses led the recovery of the economy, during that time.  In 2008, the way the federal government dealt with the economy was largely to ignore small businesses, in favor of salvaging larger enterprises, such as AIG and GM.  Whether this was right or wrong will not be argued, in this essay.  But the net effect was the fact that small businesses suffered dramatically, and for a period of six months or more, the SBA was virtually out of business.  The only way to sell a business at that point in time, was for the Seller to take a note.

As this is being written in mid-2015, the effects of some of the policies and practices of that time are still being felt.  In many cases, Buyers cannot obtain an SBA loan from some of the largest, national banks; they are faced with going to local or regional banks to obtain those kinds of financing.

This post in our blog is being written well in advance of a changeover from the Obama Administration, but it is not too early for a Business Owner to contemplate selling his/her business before a new administration is put into place.  Selling a business takes time; it is not like flipping a switch.  The Business Owner that is been on the fence about doing so, should seriously think about doing that now.  The Fed has already hinted that interest rates will probably rise in the fall of 2015, which will then probably have a dampening effect on prices that can be demanded for any given business, regardless of how well they might be doing, at this time.

Moreover, for the reader that may be viewing this post well after the 2016 elections should take all of this to heart, because this philosophy will not only impact a changeover from President Obama to whomever succeeds him; it will impact any interim or general election that might take place in the future, as long as Interest Rates themselves are not cast in stone.

(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.)

Thinking of Selling Your Business?

For some, we have been writing a blog about BUYING businesses.  It has been fairly well received, and the proof of that is:  (A) We have not been thrown off of the Web Site – yet…  And (B), we have received a number of very positive comments from around the USA and even the World, both on the Blog site itself, and even more, privately.

So, now we turn to business Owners, or potential Sellers.  Yes, we are Business Brokers.  No, this is not a shameless attempt to get you to list with us.  (If you wish to do so, GREAT!)  This has more to do with the state of the marketplace, whether it is time to sell, how to get ready and so forth.  Some will deal with Brokers – but in a generic sense.  Other posts with have absolutely nothing to do with Business Brokers, we promise!!!

And the first issue is:  Do you need a Business Broker, in order to sell your business?

As self-serving Brokers, obviously our answer would be an unqualified, YES!  But that is not always true…

There was one business in particular where we sold the man a small Retail business, and in two (2) years, he grew it by an enormous amount.  The local residents noted the improvements and one day, one of them walked up to the Owner and offered to buy it for cash, right then and there!  The Owner was tired of the business and accepted on the spot.  Then called us and asked for us to find him another business.

He avoided the Broker Commissions and made a handsome profit.  But in retrospect, after we looked at his books, we noted that he probably sold at about a 25% discount, below what he could have commanded in the open, competitive market – far more than the commission we would have charged him.

And that is part of the key.  One of the things we, as Brokers attempt to do is to ideally provide for a maximum pricing presentation, and promote it in a competitive arena.  Competition can only exist if there are two or more parties in the mix.  Someone that walks up to you and simply offers money is frequently – not always, but frequently a “bottom feeder”, who is looking to sneak in and buy at a discount, without anyone like a Broker to push the pricing envelope.

Some Brokers are better than others, at this.  NO QUESTION!  There are some really bad Brokers out there, who would sell their souls for fifty cents; and they would push you to take the fastest deal, no matter how bad it might be for you, in order for them to get their commissions quickly.

But there are good and bad Doctors.  Good and bad Attorneys.  (In all of our transactions, we have only had two Buyers lose their deposits, and in BOTH circumstances, it was their Attorneys that were the cause of the losses!)  In your businesses, it is certain that there are good operators, and bad operators, among your competition. Certainly, all Brokers are not created equally, either.

The key for you is to take a critical look at the Brokers you are considering.  And one way of doing that is to ask them for references.  Another is to ask them for their ideas on pricing.  Many unprincipled Brokers will do one of two things, to get you to sign with them.  The first is, “I have a Buyer for your Business!”  The connotation is that they have a SPECIFIC Buyer for your SPECIFIC business.  A more truthful statement might be: “We have a couple of Buyers looking for your KIND of business.”  That is a statement that does not guarantee you anything, (which is why they do not say it that way,) but it is a far more honest statement, and probably far, far closer to the truth.

We know of one Broker in Maryland who told a business Owner that he had A BUYER for her business, and she offered him a commission agreement for that one Buyer.  But the Broker never put the name of that specific Buyer in the agreement, tying her up for months until she extricated herself from the threat of owing this Broker a commission, for every Buyer that came through other sources.  She was terrified that if she took any other Buyer’s offer, from any other source, this first Broker would suddenly show up and say, “I brought that Buyer to you, first; he was my original Buyer.  You owe me a commission!”  When she finally contacted us, we put her in contact with an Attorney, who sent a brief note to the original Broker, severing his agreement.  That agreement was a voidable one, and it put her in a safer position.

The second way that unscrupulous Brokers try to generate listings, is to promise you huge amounts for your business, that are way out of line from reality.  One Owner called us and said he had something like a $1 million business he wanted to sell.  When we reviewed his books, it was obvious that his business was properly priced at closer to $350,000!  We asked where he got the idea it was worth more, and he said it was from another Broker.  When we asked why he did not list with the other Broker, he responded that the other Broker wanted $5,000 for the final report and an up-front listing fee.

Obviously, that other Broker was not really selling businesses; he was selling pricing reports.

The difference from the service we provide and the example of the Seller we cited above is that our Broker Price Estimates show how the suggested Price is a rational one: It shows the Seller a Cash Flow Analysis, demonstrating how a lender could accept such a price.  With the previous example, when we performed our own Cash Analysis and Broker Price Estimate, the $1 million price would suggest the Buyer would lose a substantial amount of money every month, before he/she ever took a dollar out, for him/herself!

This is the kind of analysis you, as a prospective Seller, have to keep in mind when pricing your business, whether you work with a Broker or not.  If the business cannot carry the note payments, if there is an insufficient Return On Investment, the price is generally speaking, too high!!!

So, do you need a Broker?  Not necessarily, but you better know what you are doing.  Do you do your own colonoscopy?  Would you represent yourself in court, if you were accused of murder?  Ideally, in any technically-oriented scenario, you put the issue in the hands of the expert.

The question becomes, is the Broker you are looking to list with:

• Experienced?
• Well regarded in the community and referenced?
• Does he/she understand business?  (Someone that has never run his/her own business may not be your best bet; do they really understand business ownership/management, and can they effectively communicate with you and the Buyer about those issues?)
• Does he/she even understand how to read (and therefore explain) a P&L?  You would be surprised at how many do not!
• Is his/her judgment sound, such as in the area of pricing?
• Does he/she understand what to say and, sometimes more importantly, NOT to say in a negotiation?  (This is where most Business Owners, themselves fail.)
• Does he/she understand the variety of advertising and promotion instruments that might be best for your business?
• Does he/she cooperate with other Business Brokers?  (Not many do, in most areas of the Country, unfortunately.  This is to your disadvantage!)
• Does he/she understand financing?  It does you little good to get a great offer, and the Buyer has no way to finance the deal.

Not all Brokers are created equal.  But a good Broker will generate more in Price, than what you pay him/her in commission.

(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.)

Selling Your Business: Vital Factors in Pricing

Once again, we have received an email from a Business Owner telling us how much Revenue he is earning per year and how much he pockets, then asking us how much his business is worth. Friends, it just ain’t that simple! There are a lot of issues that go into the Buyer’s psychology in buying a business, and a major portion of it is Profitability. But there are a tremendous number of other considerations, as well.

But staying with Profitability for just a moment, the Profit that the Seller says he/she is reporting on his/her tax forms are unquestionably not the entire picture. There are any number of adjustments that can and should legitimately be made in most businesses, that add to the bottom line from the Buyer’s perspective. These are things that we need to examine, prior to rendering any kind of a decision on estimating the Price. It does not take weeks or months to make such a pricing estimation, but it is also not something that can be responsibly done on the basis of a three line email.

Every Seller seems to want a “quick and dirty” pricing estimate. Frequently, even some of the more amateurish Brokers will lean on multiples of Profit or Cash Flow. This might be fine for casual discussion, but it is an approach that quickly and frequently breaks down, providing misleading results for many, many businesses. One of the big problems is that the multiples change from industry to industry. Another is the nature of the relationship that the business has with its clientele, which can increase or decrease the multiples utilized, even within a given industry.

Moreover, even if one insists on solely utilizing some sort of multiple, there are a huge number of additional, less tangible factors that come into play. The following is a list of only some, emphasize S-O-M-E of these intangibles:

• The number of years that the business has been open is a mammoth consideration. The SBA will frequently not even entertain thoughts of financing an acquisition unless there are three (3) years of tax returns filed on behalf of the business. The reason for this is that many businesses go through a “honeymoon” phase, where the operation can be doing extremely well for the first 18 months, and then sales fall appreciably, thereafter. Below three years of experience, the Price can frequently compared to other businesses of similar size, but with greater maturity. And in some industries, the longer the business has been operational and Profitable, the higher the Price expectation may be, even past the three-year threshold. E-commerce is an example of one such type of business.
• Consistent performance and growth is a huge factor. When a business goes down even marginally, we will often hear the Sellers say that it was a “blip”, or temporary decline that will be quickly overcome. Frankly, the Buyer and the bank do not want to hear that. They want to see proof. That “blip” may be just what the Seller says it is. But the Buyer and bank take the perspective that for all they know, that “blip” may be just the start of a long-term erosion in Revenue and Profit, which could well bury the business. Some Sellers tell us they do not want to sell because their businesses are doing too well. Our response to that is that this is exactly when you want to sell! This is the point at which you can get your highest Price. Buyers want to buy a consistent, if not growing business entity. They certainly do not want to buy a company that is in its death throes, or at least struggling. And if they do, they are absolutely not paying top dollar for such an acquisition. More typically, Buyers will want to know that they are purchasing a company that is not only growing by itself, but is part of an overall industry that is expanding and growing.
• Customer loyalty is something that Buyers could or should be looking for. This is often evidenced by repeat purchases or customer referrals. Keeping a tracking mechanism of some sort is usually worthwhile.
• There is no such thing as a “recession proof” business. But Buyers will want to see proof that the business has few, negative influences caused by outside factors. As an example, an e-commerce business needs to demonstrate that it did not suffer broadly if and when Google updates occurred.
• One of the most critical issues to any Buyer or lender is the involvement of the current Owner, and the confidence that the business can continue to operate once that Owner has departed. Businesses where the Owner makes all the decisions and is “the face of the business”, carry a tremendous amount of liability with them, and their pricing suffers as a result.
• The Seller should be able to demonstrate what, if any growth opportunities lie ahead and briefly, how they might be captured. Frequently, the intelligent Buyer wants to make sure that he/she is buying a long-term investment, rather than just a job.
• Excellent relationships with suppliers can be important. Written contracts with such suppliers are also preferred.
• Depending upon the business, written contracts with Buyers, maintenance agreements and similar instruments that can work toward guaranteeing a certain amount of income will absolutely enhance the Price.
• Profit margins, compared to the industry standard or other competitors can and should be examined. We are dealing with one business right now that, for the purpose of generating market share, has a 20% lower Profit margin than the industry, as a whole. Anyone that is studying the business sector as part of the due diligence process understands this, and has consistently stayed away from making offers at the level the Owner has arbitrarily set as a threshold.

As a Seller, these of some of the things to which you need to be extremely sensitive. These are the kinds of things that will add to or detract from the kind of pricing that you can anticipate. But they also impact the speed with which the business can be sold and whether you will ultimately receive terms that are to your benefit, in order to receive the maximum in return on your own investment.

(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.)

Business Sellers that Self-Destruct

During the process of brokering a business, we note several “bookmarks”that occurred during the process. The first is certainly when the seller engages a Broker.Another is when an acceptable Letter of Intent is signed by the Seller. A third occurs when a Contract is signed by both parties, with a fourth following the Buyer receiving funding. The final bookmark is the closing or settlement, were money and keys are actually exchanged.

These bookmarks are not individually, monumental events, except for the closing. However, during the selling process a certain psychology can creep into the Seller’s thinking that can be monumentally devastating.

The decision to sell one’s business can be depressing, it can be thrilling for the Seller, or it can be simply like turning a page in a book, where the Seller simply moves from one activity to another. But there is no question that in many cases, when he or she makes a decision to sell, that the Seller is mentally gone, well before the settlement occurs. This is something that is critical for any Business Owner to understand and guard against, whether you are represented by a Broker or trying to sell your business on your own.

At the time we sign a listing agreement with the Seller, we unfailingly warn him or her to keep the business thriving, as though he/she has no thought of selling. We tell the Seller to continue to make plans and moves for both short and long term maintenance and even increases in sales. We tell them to do everything they would normally do in their human resource areas, so that the employees have no loss of incentive in their own daily activities. The business environment should remain clean and attractive, so that the Buyer is impressed with even the cosmetic aspects of the business, which reinforces the successful look of the business, in every way.

Finally, inventory maintenance is critical! In retailing, there is nothing that speaks to success like clean, organized and well stocked shelves. This is one of the areas we find Sellers to be most deficient, during the sale process.

The bookmarks suggested above, each appear to denote specific times where Seller may let up, thinking he/she can put feet up and relax. It is probably worst once a Letter of Intent is signed; however, in the vast majority of cases, a Letter of Intent does not constitute a Contract of Sale. Either party can walk away, without liability or obligation to each other. But because price and general terms are agreed, the Seller (and the Buyer,) sometimes treat the Letter of Intent as though the deal is done.

As we write this, we are currently engaged in a Retail business sale where this has become a catastrophic issue. We have warned the Seller, (on a weekly basis, both verbally and through email,) about the dangers of reducing his vigilance and keeping inventory up. Those warnings have gone unheeded. Specifically as a result of his allowing the inventory to erode by almost 50% below his normal levels, sales have diminished for the last two (2) months, compared to the same two (2) months in the previous year. The Buyer is not stupid! He can walk into the store, see the partially stocked shelves, and understand that something is most definitely amiss.

Because the attorneys for both parties have been slow to put together the Contract of Sale, this stage of the sale has dragged out far longer than it should. That certainly plays a part in the Seller’s mental state, but it cannot excuse his actions, or reduce the problems it has caused.

The result of this situation is that the Buyer has reduced his offer by 40%, from what was originally stated in his Letter of Intent. The Seller has almost no choice in the matter, at this point. Certainly, he can refuse the current offer, but it will take him months and months to recover the goodwill and resulting momentum of selling activity that has been damaged just over the past two months. We have an alternative Buyer, but that person is also taking a critical look at the current state of revenue and profits, and rethinking the amount to be offered, or whether any offer should be made at all.

The moral of the story is that the deal is never done until the Contract is signed, and you – the Seller – have your money, in your pocket! Please be very careful, Mr./Ms. Business Owner, not to be the root of your own undoing!

(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.)

The Business Seller, as a Liability

When we speak to people about starting up businesses, or when we speak to Business Owners that are thinking of selling, invariably they will ask when they should get the business ready for sale.  The answer is the same:  You start the sale process when you first start the business!

At any time we are asked to list a small business for sale, one of the very first questions we ask the Seller is:  When we get you a Buyer, and you walk out the door at the moment settlement ends, what happens to the business?  Forget the signs, the widgets you might sell, forget the number of years in the business and the good will; is the business so tied to the name, the face and the personality of the current Owner, that any Buyer is going to find the business slumps, sometimes fatally when the Seller leaves?

If it is a business that is highly dependent on personal sales activity, and that sales activity is closely aligned with the current Owner, there is potential trouble for a Buyer.  When you start a new business, frequently the Owner IS the face of the business.  There may not even be another face in the place, except for that of the Owner.  But if the Owner does not turn over that responsibility to others, he/she can become unquestionably attached personally to the success of that business.

Companies with names of the founder – such as Frank Smith & Company – can have the same difficulty; but over time, if Frank Smith turns the public representation over to others, it does not run the same risk.  Clients do not necessarily need to know that Frank Smith is there.  If they are not dealing with Frank Smith on a day-to-day basis, they may not care, at all.  What they really care about is the person with whom they work on a daily basis; the person the Customer feels knows them and their needs, and will take care of those needs with the most care.

If they were first introduced to the Company’s services by Frank Smith, and gave all orders to Frank Smith, turned to Frank Smith for any problems they incurred with the products or services they ordered, so that good ol’ Frank personally dealt with any complaints and their resolutions, then Frank becomes indispensible to the continuance of the business, itself.  You, as the new Buyer potentially have a tremendous difficulty in overcoming this.  When John Unitas left the old Baltimore Colts, he was such an icon that everyone was going to hate the new guy, no matter how good he might have been:  He was just not John Unitas!  The same happened when Brooks Robinson retired from the Baltimore Orioles.  Sean Connery was such a great movie James Bond, that no one has ever achieved that same allure.  Sports fans and movie goers felt some kind of a connection with these people, and the analogies really have merit.

This does not have to kill a deal.  But careful planning by both Buyer and Seller is crucial.  If a Seller has not established a separation between him/herself and the business, it can mean reducing the price to anticipate losses that are inevitable, when such a Seller leaves.  Sometimes it means a long transitional period, where the Seller stays on to give the Buyer a chance to catch on with the Customers.

In some instances, an “earn-out” is appropriate.  This is when the price is more or less set at a maximum, or in general terms, rather than as an absolute dollar amount.  Payments are then usually made on the basis of the actual performance of the Company after the sale, perhaps on a percentage of Revenue or Gross Profit.  This is typically done over a three (3) to five (5) period, on a declining payment basis.  For example, in the first year, 50% of the agreed amount is paid; in the second year, 35% is paid; in the final year of a three (3) year payment system, the last 15% of the agreed payout is made.  If the business erodes because of the Seller’s disappearance, so does the total amount paid.

This is common in service businesses, where the Principal is an active part of the business and his/her presence is a major factor in its success.  In this situation, business retention is not something that can be taken for granted, as it might be in a Gas Station where the brand and location are more important than the Owner.

One of the biggest deals we have done in this way was a company that was the largest Real Estate Brokerage in its service area.  In that case, the issue was that the Real Estate Agents were not guaranteed to stay with the Company, since they are Independent Contractors and are free to move among other Brokerages, at will.  If they decided they did not want to stay, they could have left en masse, and the Buyer would have been left with nothing but a big, gorgeous, empty office.

The earn-out demanded that the Seller remain with the Company, at least on a superficial basis, sometimes working actively with the Agents in the beginning, then tapering his activities slowly over the three-year payout period.  The earn-out made him a participant in the success of the transition.  Large Hair Salons can be sold on the same basis, because the individual Hair Stylists are also Independent Agents who can leave at any time, for any reason and take their “books” of business with them.

A business with an Owner, who is the key to the historical success of any business should be viewed in the same way.  Understanding how sales leads are generated, how transactions to the business are closed and who and how customer relations are handled are key to understanding whether this is an issue, in your purchase.

(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.)