FAQ

Based on industry statistics compiled over the past few decades the average for all businesses listed is that only about 20% sell. While surprising at first glance, the truth is that just because a business is listed does not mean that it is a good business, or if it is and the business is wholly dependent upon the owner’s skills and knowledge, finding a buyer with the same expertise narrows the ‘most probable buyer’ field considerably. This is really a great example of why an owner with their sights on a sale in the next several years should be consulting a business broker to help identify areas which much be addressed to make the business more salable. Identifying and addressing those problem areas a year or more prior to bringing the business to market can make all the difference.

There are a variety of reasons but the following tend to be the major factors: a poorly run business, declining revenues, lack of management team, high dependence on the owner for day to day operations, poor reputation, poor financial documentation, a lease that cannot be assigned, and a lack of recurring revenues are all contributing factors.

Sadly, most businesses are not ready for sale. The list of areas to focus on is lengthy and an objective evaluation by a qualified business broker can usually help to identify which areas can be addressed to increase the odds of a successful sale. The most significant barrier is declining revenues over the past 3 years. Few buyers want to jump onto a sinking ship.

The absolute best time to sell is when the business is growing and performing well. 3 consecutive years of increasing revenues as well as an overall favorable economic climate is key. Good businesses with strong financial performance as well as a management team in place, and ideally a general manager who will remain with the business post-sale can be successfully sold in almost any economy. Beyond that the owner needs to be ready and committed to not just selling but to the sales process. There are obviously many other factors to consider but these are the major ones. Businesses that have checked all the boxes tend to attract lots of buyer interest which results in a successful outcome.

Generally, as follows: 1) determining the value of the business in the current market – this is the Broker Opinion of Value which is a determination of the most likely selling price which is normally expressed as a range. 2) signing the listing or engagement agreement. 3) completion of a Seller Interview which forms the foundation of the Confidential Information Memorandum (CIM) or Executive Summary – these are synonymous terms for the document which contains relevant information about the business which is provided to (ideally) only qualified prospective buyers. 4) listing and presenting the business to the market. 5) responding to buyer inquiries, securing an NDA from the buyer, initial discussions with a buyer, and pre-qualifying the buyer before sending the CIM. 6) answering questions from the buyer. 7) initiating a buyer-seller phone meeting followed by ongoing conversations to determine the interest level from both parties. 8) an in-person meeting with buyer and seller and oftentimes a tour of the facility when staff are absent. 9) preparation of a Letter of Intent (LOI) outlining the terms and conditions of the agreement to purchase. 10) negotiating the LOI. 11) the Due Diligence period. 12) the preparation of the definitive purchase agreement and other documents required by the parties. 13) closing of the transaction and funds wired/deposited into the seller’s bank account. 14) the training and transition period as outlined and agreed in the purchase agreement.

Successful outcomes require that the seller be engaged and highly responsive to information requests from the advisor. It is critical that financial updates be timely, that the business remains in ‘show’ condition (much like when a home is prepared prior to a showing), and a seller who understands that despite the sales process being stressful at times, that they remain focused on the prize at the end. Every sale is stressful but with careful planning and guidance from a advisor the stresses can be minimized. Beyond these the most important responsibility is for the seller to keep their foot on the gas and running the business for maximum financial steadiness and growth. Both the bank and the buyer will be demanding monthly financial reports leading up to the closing date. A significant hiccup in the performance of the business can derail a transaction almost right up to the closing.

As above, focus on the growth of the business and follow the guidance of the broker with a sense of urgency. A great business broker will hand-hold a seller through all aspect of the process, but the seller must be willing to accept and follow the advice of the broker.

From the date of bringing the business to the market it may take as long as a year or even more. While some sales may be completed in 90 days the norm is between 5 and 9 months. There are a lot of factors which impact the length of time but ideally the seller does not have to rush to sell and can wait for the right buyer. However, it is important to track the number of inquiries on the business as well as feedback from buyers who have taken an in-depth look at the business. Feedback from buyers as well as constructively addressing blind spots will help overcome concerns that you are likely to hear again. As always, if the price is too high the business may not even get a first look as savvy buyers understand the relationship between listing price, revenue, and Seller Discretionary Earnings (SDE). If these relationships are out of line a buyer will move on to businesses which fit the general criteria.

Communication and a sense of urgency to requests from the broker are the most important driving factors. Any negative issues which arise during the sales process should be quickly brought to the attention of the broker so that they are not blindsided during the process. In our experience most ‘issues’ become a mathematical problem which can be mitigated by a financial (math) solution. This does not mean an immediate reduction (re-trade) in the price but it may be mitigated through a creative deal structure.

Before any dialogue about the business the prospective buyer must sign a Non-Disclosure Agreement (NDA) in which a buyer agrees to maintain absolute and total confidentiality about the business and especially that it is for sale. A great broker will make sure that they reinforce the importance of the NDA and that they can and will be sued (by seller and/or broker) should they violate the NDA. Most if not all savvy buyers understand this but its important to remember that the vast majority of ‘buyers’ are first time buyers and do not fully understand the impact that a violation of confidentiality can have on a business. It can be devastating.

Once we have an NDA in place, the buyer has been pre-qualified, and one of more buyer-seller meetings have occurred a tour of the business will be scheduled. Most of these tours are after hours but on occasion the tour may be conducted during business operations and in these cases the buyer and broker are positioned as visitors, potential vendors, or service providers. Buyers are coached by the broker to maintain a low-key presence where questions and discussions are deferred to when the parties are in a location which provides absolute privacy.

The industry average is between 8% and 12% of the final selling price, but for transactions where the selling price is in excess of $1,000,000 most brokers will apply the Lehman or Double Lehman method which is a 1% (Lehman) or 2% (Double Lehman) reduction in the fee for each additional million dollar of final selling price. For a $4,500,000 sale price using the Double Lehman method the following would apply: 10% on the first million, 8% on the second million, 6% on the third million, and 4% on the fourth and subsequent million dollars of final selling price. Traditionally, when inventory is priced and sold above and beyond the price of the business (liquor stores for example where inventory levels change daily) a fee also applies, and the percentage is agreed upon between seller and broker. When real estate is involved, we discount the fee from the generally accepted fee percentage which would be charged by a commercial real estate broker.

We do not work with our clients on an “open listing” arrangement.  This is a matter of maintaining confidentiality. If you have more than one business brokerage firm working to sell a business, or you are trying to sell it yourself, the risk of a confidentiality breach is significant.

We only accept listings that we have confidence that we can sell.  When evaluating your business, we will be honest and upfront with you regarding its salability.  Many brokers will accept overpriced or unlikely to sell businesses to use these listings to attract buyers for their other businesses. They accept overpriced listings under the guise that the “market” will adjust the seller’s price. This approach usually results in an incredibly stressful and exceedingly long selling process and for many reasons, is usually unsuccessful for all parties.

When we engage with a seller, we make a very strong commitment to sell the business and believe that our experience will result in a successful transaction.

The question here is ‘how can I avoid paying a fee’. If there is a strong buyer known to the seller who is ready, willing, and able to complete a transaction we may offer a slight reduction in our fee but understand that locating a buyer is only one of a score of the hurdles that remain to get to the closing table and ultimately result in funds being wired into your bank account. There is no sale until you receive your funds.

Our listing agreement is for 12 months. On occasion we may reduce that period to 9 months. Not allowing the broker ample time to complete a transaction defeats the original purpose of the engagement.

We are intent on maintaining confidentiality throughout the marketing process and while an NDA should suffice, we take it a step further and let the seller decide when to disclose the identity of the business. In virtually all engagements we mask the exact location of the business and keep the description general enough as not to tip off a buyer. Buyers will sometimes object to not disclosing the name or more specific location as they have signed an NDA. Remember, as fiduciaries to our clients we work exclusively for them and early in the process will disclose only what will protect the confidentiality of the business. Savvy buyers understand and respect the process.

Depending on the size and type of business there are generally three types of buyers for a business.

• Financial Buyers: these are generally buyers who are seeking a business to operate as their primary source of income and are in effect, buying a job.
• Strategic Buyers: these are buyers who are looking to add your business to their own business. Their motivation may be the assets of your business which in addition to fixed assets would also include the customer relationships that you have built over time. This enables them to quickly scale without having to organically grow their business. These can also include buyers who have a portfolio of businesses where they may take advantage of consolidating back office functions to improve the profitability of the business being acquired.
• Synergistic Buyers: buyers in this category are seeking businesses which may compliment their existing business(es) as a logical extension to their product or service offerings.

Generally speaking, businesses in the Main Street or Lower Middle-Market are valued based on what is called Seller Discretionary Earnings (SDE) or Owner Benefit (OB) times the multiple for the size and type of business consistent with businesses in the same industry classification. The term ‘Adjusted Cash Flow’ is also synonymous with the above terms but is sometimes confusing as it also relates to other financial descriptions. The broker will conduct their initial financial analysis to determine the true benefit to the owner of the business. This process is called ‘recasting’ and uses the prior 3 years of federal tax returns as the basis for the analysis. Certain expenses which are benefits to the owner are added-back into the equation (and added to the net profit or loss shown on the tax returns) to arrive at a number which shows the true financial benefit to the owner. The customary add-backs include owner wages and the associated payroll taxes, depreciation, interest, amortization, non-recurring or one-time expenses, as well as discretionary items expensed by the business – charitable contributions for example. There are other certain personal expenses which may to added back but it is important to know that banks (including SBA lenders) which do not allow all personal benefits to be added back. While we are aggressive in using add-backs to determine the final SDE figure we also know that if the bank declines to accept those add-backs that the valuation of the business by the bank (yes, banks conduct their own valuation prior to finalizing a loan amount) may be discounted prior to closing. This leads to quite a bit of angst on the part of the seller and rightly so. Honesty and competence of the broker in setting real financial expectations for the seller is the only way that we know how to work with our clients. We tell them what they need to know rather than what they may want to know.

There are other attributes of the business which may increase or decrease the value of the business. These include having a competent team of staff which will remain in the business, intellectual property, social media scores, internal processes and documentation, and how the business ‘shows’ to a buyer, There are many more which may impact the value which your broker will determine as they take a deep dive into the business, its operations, and all of the attributes which contribute to the overall value.

The fair market value is, as the term sounds, the value that the open market places on the business as it compares to like businesses of the same size, location, and economic climate. Buyers will compare like businesses keeping in mind the ratio between list price, revenue, and SDE. Where the list price to SDE ratio is out of line buyers will usually simply determine that the business is overpriced and will not take a second look at the business to investigate further.

We do not and nor should you. There is a cliché in our industry which states ‘you can only steal it once’ and while we do not pass judgement on how businesses handle cash receipts, buyers and banks will not only completely discount cash from the equation but may question the integrity of the business owner casting a shadow over other aspects of the business. If you are not reporting cash now and are intent on selling your business for the highest price possible in the future, we strongly (emphatically) recommend that you begin recording all cash correctly.

Some but not all. Your broker will discuss each with you during the recasting process in advance of placing a value on the business.

Not normally except for businesses where inventories vary on a day-to-day basis (think retail liquor stores) and in these cases the business is offered at a price that does not include inventory and the inventory value (cost) is determined via a physical count 24 hours before closing. So, why is inventory usually not sold above and beyond the price of the business? Inventory is an asset that creates the cash flow which is a significant part of the price determination. The seller will transfer the amount of inventory that was historically required to produce the cash flow. For example, if the usual inventory amount were $100,000 then the final agreement would state that at the day of closing the inventory the business must have between $90,000 and $110,000 in inventory. If there is less than the agreed upon amount, then the price would be reduced and if more the price would be adjusted upward.

Normally, the seller delivers the business debt-free and keeps all cash, A/R, and cash equivalents. Most times the seller will leave some cash in the business. This is Working Capital which may remain as cash or A/R. As above, this is normal in Asset Sales. Stock Sales are another transaction structure and in these cases the buyer is acquiring all assets and all liabilities, so the seller does not pay off the debt at closing. Transaction structure is critical to the business sale and will have an impact on the cash delivered to the seller at closing as well as having a tax impact. It is important that the seller and broker discuss this in detail with the seller’s CPA or tax professional.

Many times yes, but see the above answer. Also remember that almost any item can be negotiated as a part of the sale transaction and the buyers need to have working capital may take the form of cash or A/R if a part of the agreement.

Per above, normally no.

In Main Street and Lower Middle-Market transactions Asset Sale is normally used to describe that the buyer is buying the all of the assets of the business (which is operating) but not the stock of the business, which would be a stock sale. In an asset sale the seller will keep all cash, A/R, and cash equivalents and pay off all debts and liabilities. In a Stock Sale the buyer is acquiring all assets including cash and liabilities. Now, there is also a variation in the term Asset Sale where the business may have closed or ceased operations and no cash flow is being generated. In these situations, the buyer is in effect simply buying the assets of the business (fixed and otherwise). This is commonplace in selling restaurants which have closed.

Only if it is a Stock Sale. Otherwise you will be retaining the EIN/TIN and the corporation. After the sale your corporation will remain in existence until all tax matters are settled and concluded. Your CPA will advise you on when the corporation will cease to exist. When Seller Financing is a part of the transaction structure the corporation will continue to exist, at the very least, until the seller note is fully paid.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

Because of the variable nature of the market and buyers we normally express the value of the business (the most likely selling price) as a range when working with the seller. This leaves some room for negotiating but can be offset by other creative transaction structures which provide value back to the seller. However, we do not inflate our list price in anticipation of a protracted negotiating process. The most important part of the pricing equation is the broker being able to defend their price valuation – both to a buyer and their lender. Weak or less than ethical brokers will not only inflate the price but also the sellers expectation with the idea that instead of objectively and honestly communicating the truth to their seller that they can blame the market on revealing the true value of the business. Honest, experienced, and competent brokers will tell the seller what they need to hear rather than to reinforce the seller’s unrealistic value and final sales price expectation. In the worst cases it is the broker who unrealistically sets the expectation to secure the listing. In the best cases the broker will provide honest and objective price valuations even though the broker’s opinion of price may be poorly received by the seller.

This tends to be every seller’s dream but many times they will have to settle for a lower selling price in order to receive all cash at closing. Where we excel is our knowledge of SBA financing where it is possible. However, in recent years the SBA has required that some portion of the sales price include some degree of Seller Financing. Businesses which are strong, growing, have a great team in place, and have pristine financials stand the greatest chance of being financed through an SBA 7a loan which may not include Seller Financing. But, as above, banks (and buyers too!) prefer some Seller Financing as it shows the seller’s confidence in the business and its future. Having some skin in the game makes everyone more comfortable and providing Seller Financing usually results in the strongest final sales price. What is more, the ongoing stream of interest-earning income via a Seller Note can provide some tax advantages which may be worth considering.

We never tell the landlord anything until we have a signed agreement with the buyer. One we have the agreement in place the landlord is informed that a lease assignment is being requested and in most cases the landlord may not unreasonably withhold the lease assignment. Landlords can present the largest obstacle to a successful transaction and the ability of the broker to prepare for and anticipate landlord resistance are also the most successful.

Buyers will usually obtain some level of financing to leverage their down payment. Savvy buyers know that using bank debt allows them to preserve their cash – some of which may be needed to further invest in the business for future growth. The SBA provides attractive options for a buyer (and thus the seller) especially when buying a business which is not asset heavy. Because the SBA focuses on cash flow rather than collateral assets it has become the lender of preference for many Main Street transactions. There are however many instances where the buyer or business will not qualify for an SBA loan. In these cases the buyer may have to resort to financing provided by a non-traditional (higher interest rate) lender, or Seller Financing. Not every business type (industry) will qualify for SBA financing but it is possible to find banks with an appetite for businesses which other banks deem too risky. A great business broker will have multiple SBA lending sources to pre-qualify their clients’ businesses. Remember though that it is not only does the buyer need to qualify, the business does as well.

In most cases yes: if the cash flow of the business will support the debt service. Because we work selectively with strong businesses where cash flow is more important than their underlying physical assets there will be goodwill, also known as ‘Blue Sky’. But it is important to understand that at the end of the day goodwill must fit within the overall mathematical calculation which makes a deal ‘pencil’. This means that the business must provide enough cash flow to meet the expenses of the business, the debt service on the business, and to pay the owner a wage which will support their personal living expenses, including their own personal debt.

A training and transition period post-closing is customary and sensible. Few buyers will enter a transaction where they will not have access to training by the seller or in some cases the most knowledgeable staff familiar with specific business operations. The usual training period is 2 to 4 weeks but depending on the experience and competence of the buyer it can be extended to satisfy the buyer as outlined in the purchase agreement. We highly recommend that for transactions which include Seller Financing that our sellers agree to some reasonably additional period of transition. This may take the form of training by phone or video conferencing and serves to protect the viability of the business which in turn helps ensure that the seller receives timely payments on the Seller Note. In our experience, by the time that the 2-week training period is over the buyer no longer wants the seller to be present. Available to answer questions but not present on the premises.

Seller Financing may be inevitable and required by the lender. Offering Seller Financing normally results in a higher selling price than when it is not offered, and it shows additional confidence in the future of the business by the seller which buyers strongly desire, if not require. Another reason for considering Seller Financing is that it can defer some taxes while providing interest-bearing income much higher than one could obtain from a bank deposit – especially with today’s meager interest rates.

This may be true if the business operates in an industry which a bank will not normally finance – fireworks or other high-risk businesses may only find financing at interest rates which make it almost impossible to meet the debt service. Businesses with year-on-year declining revenues may also be at risk in obtaining bank financing, as well as businesses where customer concentration is especially high. In addition, because most lenders have minimum lending thresholds it may be tough to obtain financing for businesses with valuations less than $200,000. Your business broker should be able to quickly tell you if bank financing will be difficult and great business brokers will have a lender pre-qualify the business prior to going to market.

You need to disclose material facts about the business which may impact business operations in the future. In fact, the failure to disclose known facts is contrary to the Representations and Warranties section of the purchase agreement. Misrepresenting the business in virtually any way can cause significant damage to the business, the buyer, and ultimately to the entire transaction and is likely to result in litigation at the very least. It is always best to provide facts to the buyer early in discussions for the simple reason that if they are discovered during Due Diligence the transaction will likely be immediately terminated or a significant price reduction will result. When in doubt, at the very least you should advise your broker and/or seek advice from an attorney.

It is important to understand that in the Business Brokerage industry the term ‘valuation’ is the Broker’s Opinion of Value which means the likely selling price range. Business ‘valuation’ can mean different things to different people depending upon the situation. For example, a valuation to determine specific value in a Buy-Sell or Partnership agreement can vary significantly. Valuations provided by a CPA or accountant rarely are indicative of what the business will sell for in the open market and many business owners have been seriously mislead by the value expressed by the CPA.