Best Practices for Marketing a Business for Sale

/in /by

Business for SaleIn our Day in the Life article, we gave you a sense of what we as brokers might do on any given day to move the ball forward on transactions. In this article we wanted to get more specific on a few things to keep in mind when you have a business for sale.

Confidentiality

There are several parties you want to keep a sale confidential from until it’s complete, including:

  • Customers
  • Employees
  • Competition
  • Creditors

Employees might seem like a fairly obvious one. You don’t want them worrying about job security and spending time applying for new jobs instead of keeping the business going. The same is true of your customers. They don’t know what will happen and may worry about how a sale will change your product or service and postpone doing business with you (or go with a competitor, who will then also find out) if they learn that you are selling your business.

You also don’t want to let creditors know. This isn’t because everyone you do business with is necessarily interested in going around town and spreading the news, but because they may also deal with some of your competitors and a casual comment can lead to word getting out much quicker than you expected.  

Keep the fact that your business is for sale known only to a selected group of trusted people.  Two basic rules of the road are: Be sure that buyers sign a NDA and that the ad used to market your business sufficiently shelters its name and location.

Targeting Likely Buyers

While it would be nice for the perfect buyer to just show up with some money, listing a business for sale isn’t that easy. You should be thinking about the profile of likely buyers so we can target them better.

Some questions to start narrowing the profile down include:

  • Is your business appealing to any buyer or a specific type of buyer?
  • Is a buyer looking for a business of your size or in your specific industry?
  • Is your buyer an individual? Another company (a competitor or one that wants to expand into your industry)?
  • Does your business require any special qualifications, licensing or certifications to own or operate?
  • Is your potential buyer looking to be an owner-operator or an absentee owner?  How would your business fit either model?

Answering these questions will give you a specific buyer profile.  You can then go to where those types of buyers are in order to have a more effective search.

Curb Appeal

When you get ready to sell a house, unless you’re selling it as a fixer-upper (not a great look in the business for sale world), you want to make it look its best. The same is true when you want to sell a business. There are things you tolerate when it’s your business that a new owner might find unappealing (and which can lead them to find the business less valuable).

These could be things as simple as peeling paint, squeaking door hinges, or out-of-order toilets. You and your employees may have gotten used to such things and may not even notice (or care) anymore, but a buyer with fresh eyes will. As you’re getting ready to take your business to market, these basic things need to be dealt with.

You should also be dealing with less visible things, like any ongoing disputes, or payable accounts that are not up to date, or software or infrastructure upgrades that are going to be expected by a potential buyer. All of these things require money to fix, but the shinier profile you’ll have as a result of making these tweaks will definitely lead to a better bargaining position when it comes to negotiating deal points later on in the process.

More Tips?

Every single week, our brokers meet to discuss the newest businesses for sale. While we keep our best practices in the forefront of how we market, we are also always sharing information with each other on how to improve the marketing for any given business. Put our expertise to work for you. Give us a call.

Case Study #43: From Painting Stripes to a Ten Figure Exit

/in /by

Sir Lines A LotWhen Lee Gregory first started Sir Lines A Lot, it was as a part-time business.  He had a regular job and spent his nights drawing the lines in the parking lots of banks and fast food restaurants.  He had to stand out in a crowded field and did so with great customer service.  That meant when he started bidding for larger city and state contracts, he had developed a competitive advantage.  That advantage took him all the way to a ten figure exit.

Getting Creative with Capital Needs

You may not realize it, but one of those trucks that puts yellow and white lines down onto the road costs $700,000 new.  Lee didn’t have those kinds of funds, but he did have a crew that had some mechanical skills.  So he went around the country buying used trucks.  Most municipalities who owned them would normally sell them after 10-15 years.  Lee and his team put a lot of sweat into reconditioning these trucks and making them last longer.  Average cost of these used trucks?  $70,000.  With some elbow grease and creativity, Lee and the Sir Lines A Lot team essentially paid 10 cents on the dollar for these assets.  Cost of capital isn’t always a barrier, it turns out.

Differentiating with Governmental Bids

When Lee started bidding for jobs at the city and state level, he went from the dozens of competitors he faced when servicing small retail businesses to roughly three.  Lee always wanted to build his business with integrity so he wasn’t interested in backdoor deals with government officials.  He wanted to earn the business fair and square.  Turns out his competition wasn’t doing a good job, as simply showing up and doing what he said he was going to do on time earned him a great reputation among municipalities.  

Once he had that reputation, he started suggesting to those who were in charge of putting together bids to consider putting stipulations into the bids.  These stipulations simply revolved around follow up and customer service that he knew he offered but that his competitors didn’t.  Those working in government saw those features as valuable additions for no additional price to the taxpayer, and soon Lee was winning some of those big jobs.

This didn’t guarantee he would always get the job: the law stipulated that the bid always had to be awarded to the least expensive bidder, and Lee recounts that he once lost a $4,000,000 job by $50.  “I’d rather lose a bid fair and square than cheat to win one,” he noted.

Mindset Shift

Due to the seasonal nature of the business, especially in Minnesota where the company was based, Lee (and his team) was able to count on 3-4 months off every year, and he was making a comfortable living, with the business throwing off between 20-40% margin of EBITDA.  But one day he was at a meeting with some colleagues in business and some basic questions led to a broker sharing the thought that Lee could be looking at a ten figure exit.  

While Lee knew the assets of the business alone were worth $4-5M, he had no idea the business could command such a premium.  He had also started to realize the stress of running the company, particularly the HR issues which he didn’t care for.  Maybe it was time to look at a sale.

As he did, he realized that his value wasn’t in fire fighting and dealing with the HR issues, it was, as we often discuss in these case studies, removing himself from the scaffolding.  He worked hard to make the company an attractive turnkey asset to buy but still with plenty of growth upside.

Better Books

As he prepared his business for sale, Lee realized that he had been lazy with books.  He didn’t actually know the average margin he made on any given job.  As he painstakingly went back through all the numbers and the cost of every can of paint, he realized that the work he was doing would not only offer potential buyers a much better look at the state of the company at present, but could also offer insight into growth opportunities that he hadn’t considered simply because he was comfortably cruising with the business as it was.  The marginal extra revenue in investing in a new truck here or a new process there wasn’t worth it to him, but it could easily be worth it to a new owner with fresh eyes and plenty of energy.

When his books were better Lee went back and engaged with the broker who had first shared the possibility of a big exit with him.  He ended up with four genuine offers and closed with the first one, though there were parts of the diligence that were challenging enough that he almost gave up.  But he saw his way to the finish line and the ten figure exit he was chasing.

Takeaways

Lee’s story offers some important lessons for those building a business to sell:

  • When you’re in a crowded marketplace, find a way to stand out with customers
  • If capital is an issue, find a creative solution
  • Beware complacency: this can lead to businesses plateauing in value
  • Keep better than average books: if you don’t you’ll have to spend a lot of time getting them ready when you do want to sell
  • Keep focused during diligence and don’t let its difficulties keep you from getting to the finish line

Have you been thinking about getting a valuation or selling your business?  Give us a call.  We’d love to help!

What to Look For (and Avoid) in a Business Broker Listing Agreement

/in /by

Business Broker Listing AgreementBehind all our business broker listings, there is a business broker listing agreement. This spells out mutual responsibilities between us and our clients. As with any contract, this is something that deserves your undivided attention, as we’ve said many times before that a business transaction may be one of the most important events of your life. In this article we’ll discuss the various provisions of any given business broker listing agreement and what you should consider before signing one.

Why Have a Business Broker Listing Agreement?

The short answer? To protect you, your business, and your broker. Remember that ultimately, contracts are not there in case everything goes right, but in case even one thing goes wrong.

Key Elements of a Business Broker Listing Agreement

While every agreement may vary, these are the elements you must have for any serious agreement to list your business.

  • Duration. This is the amount of time your business is listed for. As we’ve said in a previous article, selling a business can take between two months and two years.
    • Under twelve months: this is often pitched as offering more flexibility for the seller, but really, it puts undue pressure on a broker and as we’ll point out below, it may not really offer you the flexibility that it promises.
    • At least twelve months: this is pretty standard, as this recognizes that (and mentally prepares you for the fact that) this is a marathon, not a sprint.
    • Keep in mind that just because your engagement has passed doesn’t mean you won’t owe a commission to your broker. We keep records of everyone we introduce to a potential seller and if they conclude a transaction within a certain time period of the end of the engagement, a commission may still be owed. That’s why you need to be very clear on the details here, not just for your sake, but for your broker’s.
  • Right to Sell. In this section you are going to give us the exclusive right to represent you in a business transaction. We’ve talked before about the sorts of things we do to market your business.
  • Representation. Are you who you say you are? Do you actually own the assets you are purporting to sell?
  • Protection/Indemnification Clause. Should anything go wrong during the transaction, this section addresses the legal and financial rights and obligations of all parties.
  • Dispute Resolution Terms. Should significant problems arise during the transaction, how will these problems be cured? Will you use arbitration or litigation?  In which jurisdiction will the dispute be dealt with?
  • Commission. This varies per broker and agency but here at Apex we settle this at closing.

We’re Here to Help

In a world in which we so often click past “terms and conditions” because we don’t want to bother to read them, it can be hard to sit down and work through a document like a business broker listing agreement. But you don’t have to do it alone! We’re here to help and are want you to be comfortable as you pursue a transaction. Give us a call today!

Selling a Franchise: Is Selling It Back to the Franchisor Possible?

/in /by

While a person often buys into a franchise business with the hope of growing the location to sell one day, or possibly even to get into multiple units, there are times when a franchisee may have to sell the franchise back to the franchisor. In this article we’ll talk about this circumstance and what you need to keep in mind if you do so.

Part of the Deal Anyway

Selling a FranchiseYou will find that even in the best-case scenarios, in which you have decided to sell the business at a premium to an outside buyer, that the franchisor has the right of first refusal built into the franchise agreement they have with you. Simply put, that means that all they have to do is match the price that you have under contract with a potential and you will have to sell to them instead.

You can imagine that if you do have this clause in your franchise agreement it will not be particularly exciting for a potential buyer you are selling a franchise to to find out that they could be cut out at the last minute by the franchisor.

Franchisors do this to keep their options open as well: they might like to expand the footprint of their company-owned stores and buying a franchise back from a franchisee is one of the easiest ways to accomplish this. Part of this strategy also involves putting time limits on each franchise agreement and as an agreement comes to an end a buyback option may be in play also.  

Franchisors also keep a waiting list of those who would like to buy an existing location (and are willing to pay a premium to do so) rather than start one from scratch, in which case they can (and do) charge a referral fee to you if they end up giving you a buyer instead of you finding one yourself.

Even if the franchisor doesn’t decide to exercise the right of first refusal option, and they do accept the buyer you have found, they can still charge a transfer fee, which is also usually stipulated in the franchise agreement.  Furthermore, the buyer will still need to meet the then-current new franchisee qualifications (again, stipulated in your franchise agreement…see a pattern?).

Sometimes It Is the Best Option

There are times when selling a franchise to an outside buyer isn’t a real option.  The franchisee might simply be tired, not having realized how much work was involved to get the business to a certain level, and hence cannot make the business presentable for sale.  He/she may be in financial distress due to poor performance of the location.  Other times there’s a legal breach of the franchise agreement, for example when payments are not made on time or vendors are not paid in a timely manner. 

A breach of the franchise agreement can force the franchisee to sell the franchise back to the franchisor.

Even in circumstances such as these, the franchisor will want to keep the best foot forward for public relations reasons.  They will want, as much as possible, to keep legal and financial difficulties out of the public eye and to make a smooth transition with a temporary location closure, if it happens at all, for a very brief period.  As the franchisee, you’ll want to make this process easy as well by making sure your books and inventory are as up-to-date and as clean as possible.

Franchisees will also want to secure favorable non-compete terms as they exit the business.  Even though they may not want to work in the industry in the immediate future, they will have built up a fair amount of experience and may want to deploy that once the transition is over and they have had some time and distance from the negative outcome of their franchise experience.

Don’t Be Afraid to Ask for Help

Selling a franchise in any situation can be challenging and you don’t have to do it alone. Over the past three decades we’ve sold tons of franchise locations in many different situations. If you’re considering selling a franchise (or buying one) give us a call!

Which Small Business Valuation is the Best?

/in /by

We’ve talked in the past about the importance of a professional small business valuation. Today we’re going to discuss different methods of small business valuation and which one might be the best for you.

Why Get a Small Business Valuation?

Small Business ValuationWhile you might think that the main reason to get a valuation is to get a good idea of a possible sale price, there are actually lots of reasons to get one:

  • A desire to better understand the growth of your business. Perhaps the least often cited reason for a small business valuation, but maybe the most important.
  • Interest in a merger or acquisition. You will need to know your financial position relative to your target, and you can’t do that without a valuation.
  • A desire to attract investors. Investors will want to see some basis for what you’re asking them to invest in.
  • Life events. You may be involved in a divorce or may have to buy out another owner.
  • Sharing equity with your team. You can’t offer equity to your staff without knowing the financial value of what you are offering them.
  • Need a line of credit or loan. A bank will want to know what they are getting themselves into.
  • Examining tax-planning strategies. If you want to get ahead of the tax game, this is important.

Get Your Paperwork Ready

Get your paperwork ready.Whichever method of small business valuation you use, you’ll need to get a few things in order for the professional who is going to help you.

There are three categories of paperwork you will need:

  1. Financial paperwork. The person in charge of your small business valuation is going to want to see a minimum of 3 years of business tax returns and financial statements, like balance sheets, income statements, and cash flow statements.
  2. Miscellaneous paperwork. This covers items like:
    1. Leases
    2. Permits
    3. Licenses
    4. Certifications
    5. Contracts
    6. Business Credit Reports
  3. Tangible assets.  
    1. Vehicle List
    2. Equipment List (focus on larger asset with at least $500 value)
    3. Real Property description and appraisal (if owned by the business)
  4. Intangible assets. This is helpful information for items that don’t easily have a value assigned to them, yet are very valuable. This could include items like:
    1. Patents and Trademarks
    2. An email list (number and engagement)
    3. SEO rankings (rankings across various keywords)
    4. Online reviews (number and frequency)
    5. CRM (customer data and leads)

You should have ready access to these items anyway, even if you don’t have a valuation on the horizon.  They will certainly be required of you in any business transaction.

Methods of Small Business Valuation

There are actually quite a few ways to do a valuation, but in this article we are going to focus on four of them.

Market-based valuation

This is the most subjective valuation and is not focused on the particular numbers of a given business but rather what the recent sale prices of similar companies have been. Similar companies would be within the same industry and revenue range. Finding relevant sales data on privately held industry peers can be difficult.

Discounted Cash Flow (DCF) valuation

For those who don’t have good memories of their financing or accounting classes, this might be triggering.  It will take a look at projected cash flow and the time value of money to determine a value. Projecting cash flows into the future is easily manipulated and difficult to determine for most small businesses and can be an easy target for debate.

Asset-based valuation

This is pretty straightforward: assets minus liabilities. However there is a division between whether the business will continue on after a sale (going concern) or it will be closed (liquidation). Obviously in the latter case the valuation will be lower as liquidation means assets will very likely be sold below market value.

Seller Discretionary Earnings (SDE) valuation

This is the small business valuation we most often see at Apex. This small business valuation takes your earnings and applies a multiplier that is appropriate for your industry. You start with EBIT (earnings before taxes and interest) and add back:

  • Owner compensation (the new owner may choose a different level of compensation)
  • Owner benefits (like season tickets or lake house)
  • Non-essential, non-recurring, or non-related expenses (an IRS audit, for example, or a new website build).
  • Typically, the valuation will include a reasonable replacement salary for a new owner.

Which is the Best Method of Small Business Valuation?

The short answer is: the one that makes the most sense for your business. While we often see the SDE method most frequently used for transactions we handle, if you’re planning to liquidate your business, an asset-based valuation would make a lot of sense.

Professional appraisers don’t tend to lean on just one form of valuation. Part of their process involves blending different methods to come to a smart and thoughtful final number. That is definitely something the majority of business owners do not have the expertise to do, and why we recommend you hire a professional.

Give us a call to get started on the process!