Ten Axioms

Ten Axioms

The business ownership transfer profession has several vehicles for the sharing of information, much like many other industries. These various channels include the national organizations, newsletters, data bases, blind surveys conducted by the previously mentioned, and numerous books and articles published by those who are regarded as prominent in their particular area of expertise.

Over time, the same messages are repeated with a different perspective. The information always reinforces certain axioms that the profession generally accepts as self-evident principles for the successful sale of a business.

Part of the mission of those in the profession, is to educate clients about the process of valuing, buying and selling businesses. The following is a collection of ten of the primary concepts to keep in mind when considering the sale of your business by using the services of a professional intermediary.

1. Can and Can't Do
It is important to understand what a professional intermediary can do to facilitate the sale of your business, as well as what they can't do. The intermediary will use their resources and expertise to help you determine an optimum selling price for your business and a structure of the sale that makes for a win-win transaction for both buyer and seller. They can usually find an ideal buyer for your business, negotiate the offer to purchase, assist the buyer with the details of the transaction, and coordinate other advisors efforts to a successful closing.

However, intermediaries are not magicians who can sell an overpriced business. A business will usually sell when priced right, and the terms are appropriately structured. The terms can greatly influence not only the total value of the transaction, but the successful sale of your business.

2. Pricing the Business
For many business owners, the sale of their business represents not only the largest transaction they will make, but also final compensation for their life's work. They should be encouraged to enlist the services of advisors; which may include an attorney, accountant, banker, a business intermediary, and possibly a real estate professional. A qualified appraiser should be engaged to perform the initial step in the process: valuing the business.

Independent appraisal is a trend in business ownership transfer that is rapidly gaining momentum. Buyers and their advisors often question the objectivity of a selling price determined by seller advocates, especially if the price is not well documented by a qualified appraiser. A professional appraisal puts the seller in control with a comprehensive justification of the sale price.

Ultimately, the marketplace will determine the sale price of the business. Keep in mind that a buyer with the financial capacity to buy your business is probably as shrewd and savvy as you. Asking too high a price will drive prospective buyers away, or at best will slow the process; and most likely to a standstill.

3. Financing and the Down Payment
An analysis of several thousand businesses for sale and closed transactions revealed that a down payment of less than 40%, produced an 80% better chance of the business selling. As the percentage of down payment climbed, both the selling price and the percentage of businesses that sold declined. Fewer buyers are willing to look at businesses with higher down payments. There are always others, where they can buy more business for the same or less money down.

Most sellers are unaware of how much interest they can generate by financing the sale of their business. Seller financing sends a message to the buyer of the owner's confidence in the financial strength of the business.

4. How Long Does it Take
One survey of businesses sold, over the last ten years, reported that the average time from putting the business on the market to closing the sale was 187 days, with a median of 147 days. A breakdown of the survey indicated that only 6% sold in less than 90 days, 34% in 4 to 6 months, 37% in 7 to 9 months, 15% took 10 to 12 months, 7% up to 18 months, (+/- 1% over several years) or effectively: 86% closed in 4 to 12 months. The survey does not include the time the seller takes to assemble the information requested by the intermediary for the valuation of the business and the Confidential Business Profile before going to market. Another key element in the time it takes to sell the business, is that the business be priced right from the start. Some sellers want to begin the process under the assumption that they can always lower the asking price of the business. If the business is overpriced at the start, most buyers will decline the opportunity to further investigate the business. Consequently, adding to the time on market.

5. Sellers Homework
It is best to plan for the sale of your business, rather than waiting until you are under compulsion to sell for financial or personal reasons. Develop a sale file of information that includes three years of financial records, a detailed list of all furniture, fixtures and equipment, loan documents and equipment leases, franchise agreements (if applicable), the premises lease and any lease related documents. Settle any pending litigation, address environmental issues, and make any needed repairs to comply with local codes. Remove items from the premises that will not be included in the sale. Buyers tend to assume that whatever they see when touring the business will be included in the purchase.

6. Confidentiality
For the initial promotion of your business, the intermediary will use generic descriptions of the business. The process of screening prospective buyers includes the requirement for them to sign a strict confidentiality agreement and provide proof of financial capacity before the intermediary will release any specific information. As the buyer's interest increases, more information will be supplied to match the growing evidence of buyer sincerity. The intermediary will continually remind the buyer of the importance of confidentiality. The seller must also maintain confidentiality in their day-to-day business activities.

7. Advisors
As previously mentioned, intermediaries should encourage clients to enlist the services of attorneys, accountants and other professional advisors when exiting their business. When choosing an attorney, select one who is seasoned in the process of buying and selling businesses. Lawyers who are experts in litigation, tend to have a win-lose perspective and sometimes lose sight of the objective to close a deal balanced for buyer and seller. Inexperienced lawyers are often reluctant to advise their clients to take any risk. Attorneys who have experience in successful negotiations for selling a business, know what is reasonable.

8. Tend to the Business
Selling a business can be an intense emotional drain; a major distraction at best. By engaging a professional intermediary, you can continue a very essential part of the process: managing the daily operation of the business.

Some sellers have a propensity to let things slip once the business is officially for sale. Keeping regular operating hours, maintaining inventory at normal levels, tending to the appearance and good repair of the premises; all make the right impression on prospective buyers. Constant attention to the business is now more important than ever, to maintain sales and earnings.

9. Decision Time
When you are presented an offer to purchase, keep the negotiations moving forward. Even if the offer is not what you expected, there are usually other points that will offset any disappointment; such as terms, which ultimately produce more money, a consulting agreement or buyer qualifications that indicate the right buyer. The right buyer may be better than a higher selling price. In many cases, the structure of the transaction is more important than the sale price. Once an offer is tendered, time is of the essence. The longer negotiations drag-on, the less likely that the transaction will close.

10. Retirement
Sellers tend to assume that they will retire after selling their business. If you agree to stay on in some capacity, such as with a consulting agreement or a management contract, these can actually result in the buyer paying a higher price for the business. A seller who remains with the business helps to minimize risk for the buyer. Depending on your objective in selling the business, you could "take your money off the table" and keep your job.

In summary, keep in mind that a prospective Buyer represents your final customer. The information requested by the intermediary is used to entice an offer by answering a Buyer's questions. Buyers have four universal questions:
1. If it is such a good business, why are you selling?
2. How much money does it make?
3. If I buy it, what is the upside potential?
4. How did you determine the selling price?
When the buyer is comfortable with the answers, the business usually sells.

Professional Consulting Services, focused on minimizing the gray aspects in the transfer of business ownership; to facilitate a successful transaction.

Ten Axioms for the Seller to achieve a successfull transaction

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