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In the spirit of the season, we offer a wish list for a typical buyer and seller of a small business. Entrepreneurs who are selling their companies, as well as those looking to purchase, generally agree on what would make the process more seamless overall.

Today’s blog focuses on what the seller wants:

•    A qualified buyer – This not only means someone with the financial resources to meet a down payment and secure financing, it also describes someone with experience owning or managing a business -- perhaps with some knowledge of the industry itself. A qualified buyer more than likely has established ties to the geographical area and if married or in a domestic relationship, has the support of his partner.

•    An appropriate offer – A seller appreciates an offer that is solid, reasonable and timely. Sellers expect contingencies to be a part of the offer, but also anticipate these to be realistic. One of the most common contingencies is a lease transfer with equitable terms for the buyer.

•    A practical due diligence phase – Sellers are pleased to answer questions and share pertinent data during the due diligence phase; however, buyers should take care not to pose queries or make statements that may be perceived as an insult to the seller. Common sense should dictate how the buyer should best introduce discussions on past decisions the seller made or how the business is run on a daily basis. Buyers should prepare their due diligence requests in writing and as soon as possible after the offer has been accepted.

•    A smooth closing – The closing should be a time of celebration for both parties, not a time for second-guessing, bickering or hesitation. Hiring a closing attorney experienced in the business transfer process helps immensely. By the time everyone is seated at the closing table, all questions should have been answered, all pre-closing paperwork completed and the buyer and seller should be confident this is a win-win situation for everyone involved.

•    An efficient transition – Most sellers, particularly those who created the business from the ground up, truly want to see the business continue to grow and prosper. Sellers want their buyers to be successful, and most will work hard to ensure the buyer is completely comfortable with all facets of the business during the training period that begins after the closing. This transition phase often involves introducing the new owner to suppliers and customers and showing the buyer everything related to running the business, from how to operate office equipment to the best way to manage employees’ schedules.

As a business broker, I have most enjoyed working with buyers and sellers who are forthright, reasonable and agreeable. Having realistic expectations on both sides and keeping a professional and positive attitude throughout the business transfer process goes a long way toward reaching a successful closing.
 

In our third installment of “tips from the experts,” we discuss a topic of great importance to both buyer and seller:  how will this transaction be financed?

When a buyer or seller contacts me to inquire about the business brokerage process, it has been my experience that financing is not always at the top of everyone’s mind – but it should be!  Many companies listed for sale never reach the closing table, and lack of financing is almost always the reason these businesses do not sell.

While it would be a much easier process if all buyers brought 100% of the contract price and associated costs in cash to the closing table, this rarely happens.

Typically, seller financing and/or SBA loans are used for financing a sale.  SBA loans are guaranteed by the Small Business Administration and are provided to small companies.

Christopher J. Kneer is vice president of commercial lending for Community Bank and specializes in both conventional and SBA loans.  He explains, “Banks view business acquisitions as risky transactions for two primary reasons: change of ownership and financing of goodwill.  For that reason, we utilize the SBA.”

Kneer provides these tips for potential sellers:

• The time to begin preparing for the sale of your business is three years out.  To get the highest price for your business, you need to have multiple and consistent years of earnings.  Banks and many buyers are suspicious of one great year and dramatically different results in previous years.
• Accounting quality is very important.  An arm’s length CPA should be working with your company.  Accounting issues and statements that do not match up from year to year are a major red flag.  If there are significant line items or particular issues on your financials, be upfront and point them out.  Spend the money on good accounting and it will come back twofold.
• Show earnings.  The time to strategically limit profits for income tax purposes is not while you are preparing to sell your business.  No bank wants to see a company that loses money every year and bases its sales price on “add-backs.”
• Have buyers pre-qualified.  Banks want to see buyers with industry experience, proper equity injections and liquidity.  It does no good to show your businesses to those that cannot qualify for financing unless they are cash buyers.
•  Plan to have a seller note involved in the transaction.  Due to changes in SBA financing, it is often necessary, and it also shows good faith in that you are willing to stand behind the business for sale.
• Plan to stay on for a period of time.  This also shows good faith that you are willing to help the new owner be successful.

 Solid and sound advice.

If you're thinking of selling your business in the future, you should be planning right now.

You've heard of homeowners preparing and then "setting the stage" to present their investments in the best possible light; business owners should also be preparing as far as possible in advance of selling their companies.

We spoke with Suzie Boland, president of RFB Communications Group, Inc., who offered these public relations tips for entrepreneurs:

1. If you haven't done so already, be able to define your unique positioning and unique value proposition -- succinctly (and that means in less than one minute).  Include what you do, for whom, and how what you do benefits your customers.  This is similar to what you may have heard described as an "elevator pitch" -- what would you say to interest someone in your business in the time you rode down the elevator together.

2.  Make sure your web site is current and expresses your positioning and value proposition.  That's the first thing prospective buyers will look at.

3.  Think about which of your clients would give you good recommendations and prepare a list with contact information.

4.  If you have any favorable and recent news articles, clip them and put them in a binder.

Great advice:  a business owner should never underestimate the value of established, positive public relations!

by Gokul Padmanabhan - Orlando, Florida Franchisee

Sooner or later many companies end up with more than they need for a successful operation. Being a business owner myself, I confess we love to dream big and perhaps overestimate when preparing for the future. We might obtain more office space than we presently need or buy more equipment “just in case.” We often mistakenly rationalize these decisions by declaring that if business increases significantly, we will need that extra room or additional piece of equipment.

The truth is, if and when you need the added space or that new printer (which does everything but make your morning coffee), you can always purchase it at the time you most need it for practically the same price you are going to pay for it today. So, why spend the money ahead of time?

As professionals in valuing businesses, we know that a profitable organization is valued based on its earnings -- not its assets. It makes sense, then, that having a smaller office or passing on the latest technological gadget does not diminish the value of your business at all. Indeed, running your business frugally and showing a healthy bottom line is a surefire way to increase the value of your business.

It is important to for small business owners to develop an Exit Strategy early on.  A three year plan is optimal; a three week plan is distressing!

The following is a list of important items to include in your strategy. Identify and gather all appropriate documents:
1.  Tax returns for the last three years
2. P & L and Balance Sheets for the last three years, plus the most current on you have available.
3. Develop a year end projection for current year of sales and expenses.  An explanation of any additional capital purchases needed, or recruitment of additional personnel required.
4.  A list of your top 10 accounts and the annual sales generated by each for the most recent year (if applicable).
5.  A list of assets that are owned by the company.  The year purchased, make and model, and fair market value.  Items like office furniture can be grouped together and listed as a group.
6.  A list of your key employees, their compensation and benefits, and how long they have worked for you.
7.  A description of your office space owned or leased, the terms if leased and options that are currently in place.
8.  A brief description of how you market your business and what areas generate the majority of your sales.  Give percentages and breakdown of sales by specific sectors.  Please also provide copies of any printed marketing materials you may have.
9.  Are there any pending law suit, employee or supplier issues a buyer should be aware of?
Upon your decision to exit, a business broker or intermediary, can help you value, market and sell your business, developing a current value for your business using the market approach, the income approach or the asset approach.