Archive for category: Must Knows About Business Sales

Unlike many other transactions in life, a buyer and seller of a business need to establish trust with each other, as that trust will be called on even after the date of sale. If that trust doesn’t start during the due diligence period, a sale may even fall apart.

Contrast this with a real estate transaction, in which the buyers and sellers may never meet, even on the day of closing. They are represented by others and can close without meeting employees or learning processes.

Help in the Present

Many buyers may be owning and operating a business for the first time, so they will appreciate any kind of help they can get. Basic examples of easy connections a seller can make for a buyer:

• A resource or service to get incorporated, obtain an EIN, etc.
• Some business banks to consider, including a personal introduction to your own banker, if appropriate
• Introductions to other peers and colleagues who you have leaned on for business advice and help who may also offer some helpful advice to the incoming owner

Help in the Future

While some business owners are happy to ride off into the sunset after the transition period, never to think about or worry about their former business again, the truth is that many business owners like to know how their former company (and employees) are doing. Many really appreciate the phone call, long beyond an agreed-to contractual transition time, of, “Hey, could I run an idea by you…”

The trust and relationship behind such a phone call underline a great key to success in a business transaction: trust.

We always say that buyers and sellers are building trust not just with each other, but with everyone involved in the transaction, creating an environment of everyone rowing in the right direction. This means that buyers are disclosing everything to the bank financing the deal. This means that sellers are not hiding bad inventory or employee challenges. It means that advisors are using the right kind of communication, be it text, email, or phone calls, to move the transaction forward in a positive manner, always implying cooperation on all sides.

Checklist of Trust

So, to review, sellers should keep the following in mind:

• Share everything you can think of and even some things you might have forgotten about. Try to put yourself in the shoes of the buyer, taking into account what he/she knows about your industry and business in general and work from there.
• Be realistic. There may have been some areas you didn’t develop when you were an owner that are opportunities for the buyer. Be moderate in your claims.
• Communicate as quickly as you can. Nobody wants to be left waiting in any aspect of life, much less one of the most important transactions they can make. Try to get back to every request in a timely manner or ask for time you need (and deliver).

Buyers should keep the following in mind:

• Ask questions. There is no such thing as a dumb question in life, and certainly not in buying a business. Our advisors are here to help you with every single question you might have (and some you didn’t know you had).
• Disclose. Whether the bank is asking you for financial statements or the seller is asking you about your experience in the industry, always be transparent. There will be no benefit in hiding or withholding.
• Get help. You’re not expected to do this on your own. Use the right suite of experts, be they attorneys, accountants, or mentors, to help you with things you don’t know. If you don’t know something, go back to the previous point: ask questions.

Looking forward to working in trust with an advisor to sell your business? Give us a call today.

We recently ran into a situation in which a business deal started to teeter on the brink of falling apart. This wasn’t because the buyer and seller didn’t get along (meetings always went well) or because there was a haggle about price (it was a full price offer) or even because lawyers were overstepping boundaries. Deal points were being pushed back in a way that started to create suspicion and the seller’s response was, “Well the buyers need to just trust us.” We let them know that wasn’t going to cut it.

Consultation Time

In the original deal the buyer had wanted twelve months of access to the seller by phone or email to ask questions. Sometimes things come up later that aren’t covered in transition, and a buyer wants access to institutional knowledge and reflection. The seller revised this down to six months. This in itself was not a problem, as six months is still a lot of time, but as you’ll come to see, when added to other items, it started to contribute to a narrative of suspicion.

Note: very often, despite having negotiated transition time, buyers rarely use all agreed-upon consultations with the seller post-sale. By offering a generous consultation window, in some cases paid, sellers can give added confidence to buyers.

Training

The original deal had specified four weeks of training. The seller pushed back, saying he only wanted to do “20 hours a week, because that’s all I work anyway.” This is a fundamental mistake of the seller. It’s a mistake in attitude, treating a transition to a new owner as “just another week, which shouldn’t take any more time than any other week, and I better not be bothered.” It’s also a mistake in reality: just because the seller was only working 20 hours a week at the time of the sale doesn’t mean the buyer will be at the beginning of his business journey and will be putting in many more hours to learn the business.

Note: be ready to give the new owner all the support he/she needs. This is a big change for you as the seller, but realize how much bigger of a change it is for the buyer, who has to learn what you know like the back of your hand.

Noncompete

The original deal offered a five year/50 mile noncompete clause. The seller was trying to push back to 2 years/25 miles. This, more than anything else, was a problem for the buyer, and it would have led to problems with the bank if we hadn’t quashed it. If you’re looking at a ten-year note on an SBA loan, but the seller is implying he would like to be free to compete with you within a two-year time, banks (and buyers) aren’t going to be thrilled!

What was even more strange was that the reason for the sale was given as “retirement” by the seller…so why was he asking for the noncompete to be drawn down?

Note: if you want the freedom to compete again and start a business in the same category, be advised that this has every chance to sink a deal.

Ultimately, we got the deal across the line largely due to direct and honest communication with everyone involved. We spelled out understandable fears and we pushed back when modifications were unreasonable.

If you’re considering selling your business, you should be thinking about some of these issues. If you’d like to talk through them, give us a call.

Back in 2019 someone came into our offices wanting to sell. We did an informal valuation and told him we thought the business could get $575,000 on the market. He demurred, stating he needed $1M. We told him what he needed to do, which included working less in the business and more on the business. If he did, we could attain something closer to that value in a few years.

He kept checking in with us each year, all the while implementing the advice we gave him. We kept giving him better numbers as we observed those changes. Sure enough, four years later, we listed the business for $950,000 (and it sold).

We wish we could say how that always goes, but more often than not what happens is that someone comes in to tell us, “I need to sell now.” We walk through numbers and explain that the business is not ready to sell at the moment, at least not for the desired price, and that some time, from as short as nine months to as long as a few years, will be needed to get the business ready to sell. You being ready to sell doesn’t carry over to the business. The business has to be ready too.

When we tell this to people in this situation, they can get upset. But it’s not personal. In fact, we’d love to take a listing because there’s a chance for us to work and get paid. But we have to turn down far more listings than we accept. Accepting a listing means we believe:

• The business will sell. Brokers spend hundreds of hours on each successful transaction (and sometimes on the unsuccessful ones too). We’re not interested in taking on a listing if we don’t think the market is interested.
• Our buyers would be interested. Each of our brokers maintains a curated list of qualified buyers and we work as a team here so that all of those buyers find out when one of our brokers lists a business. We’re always learning new things and selling new kinds of businesses and while some buyers are only interested in a specific type of business or industry, many of them are interested in any solid business.
• The deal will be bankable. The majority of our clients at Apex are people who are using SBA financing to close the deal. There are clear criteria for SBA loans, (or any loan), including clean financials and current tax returns.

One more thing to keep in mind. What you may be willing to do is not necessarily what a buyer would be willing to do. Consider the seller phrase (which we have heard before), “I make $150k a year and I work 65 hours a week.”

Would a buyer be willing to work 65 hours a week?

Would someone who isn’t a subject matter expert or familiar with the industry be able to get away with only 65 hours a week?

How many ready and willing buyers have on their wish list, “Must work at least 65 hours a week when I buy a business.”?

You may be ready to sell, for various reasons. But make sure you have a business that’s ready to sell. And if it isn’t, have the humility to dig in one last time to get it ready so you can cash out on all your hard work.

Not sure what your business is even worth? Give us a call and let’s figure it out together.

Here at Apex we pride ourselves on giving ethical presentations of the businesses we represent. Unfortunately, there are some individuals who try to sell a business without holding themselves to our standards. Here are some common ways they can hide crucial information from buyers.

Misleading Inventory

There are a few ways inventory can be misleading, starting with basic human error. Bad systems and careless employees can create inaccurate data. But more frequently, we run into inventory that includes obsolete or worthless materials marked at their purchase price. Just as bad as obsolete inventory is inventory that may be expiring or earmarked for a client prior to a sale closing (and is not otherwise marked as “work in progress”).

Inventory is one of the basic measures of value in a business, so if it’s misrepresented, there are implications for valuation and the chance for a deal to get sidelined or derailed.

Personnel/Legal Issues

Not everyone’s labor problems are as public as say, Boeing’s. Most Main Street businesses that are prepared to sell are run by competent staff. But just because staff are competent doesn’t mean that they will stay with a new owner. Oftentimes even the nicest new owners can’t change the feeling that “it’s time to move on” for employees (and customers) so it’s important to make sure that, as much as can be estimated within the bounds of confidentiality, any personnel issues are fully disclosed. The same goes for any legal issues. On more than one occasion a seller has pledged to deal with an ongoing legal issue on his/her own dime as part of the negotiations pending a sale. That sort of honesty and willingness to compromise helps to get deals over the line.

New Technology/Competition

Often buyers will be entering an industry/market for the first time by buying a business. That means sellers need to be their eyes and ears for the state of the industry: what technology is coming up (or could come up) and what competition is present or could come soon? If you have grown complacent in past years, just staying in your business lane, it’s important to do some research into these subjects so that even if you miss something, it won’t be for lack of diligence on your part.

Unclear Financials

While clean books are a gospel we preach, when we say “unclear financials” we are less referring to the types that are incomplete or poorly categorized and more the ones that have dramatic changes with no context. Examples include:

• Large, unexpected expenditures
• Major changes to employee compensation
• Uneven expenses (or revenues)
• A significant amount of “miscellaneous” expenditures
• As mentioned above, inventory swings

The goal with financials shouldn’t ever be: “Hey, you’re the buyer; you figure it out.” Sellers should give as much context and explanation for financials as possible. No buyer yet has ever complained about receiving “too much information” about financial statements from a business.

Are you worried about getting fooled by some of these techniques? Let us help you in the process. Give us a call today.

Be honest. Just hearing the word auction sets off familiar sounds in our heads: “$300 do I hear four, bid-up bid-up bid-up…” It’s exciting. While a “controlled auction” may not sound as exciting, nor will it feature said “bid-ups,” it’s an excellent way for businesses valued at $1M and above to accept possible interests and proceed to a sale that maximizes value for everyone involved.

Preliminary Steps

As you might have guessed, a controlled auction is not a DIY process. You’ll want a professional to help you through the process, which includes:

• A marketing timeline: begin with the end in mind in terms of numbers and closing date
• Preparing a comprehensive buyer package
• Outreach to potential acquirers across multiple channels and platforms
• Execution of generic NDAs then a more specific NDA
• Offering preliminary details to interested parties

Indications of Interest (IOI)

After your M&A professional has done all of that, he/she will start gathering IOIs. Think of this as a dossier of “who we are, why we’re interested in you, and what we’re prepared to spend.” An IOI should include, but is not limited to:

• The credentials and philosophy of the acquiring individual or team
• Breakdown of working capital expectations
• Plans for current employees and management team
• Expectations of current owner participation post-sale
• A due diligence schedule and a list of required documents
• Target closing date
• Price range and transaction structure and the assumptions underlying them
• Additional issues (e.g. real estate, non-compete, licenses, etc.)

Narrowing Down the Candidates

With the IOIs in hand, the seller and broker can have calls and/or face-to-face meetings with the interested parties and move to the final stage, which is a submission of a formal LOI by a specific deadline. Competing offers puts a seller in a frame of abundance, allowing him/her to choose the best offer amongst ones that can value in total amount, structure, and cultural fit. It also puts the buyers on notice: they are not the only interested party; ergo they are on alert to put their best foot (and offer) forward, lest they lose out to someone more thoughtful (or aggressive).

A controlled auction isn’t for every type of business. As we said, most businesses that engage in this are worth at least $1M and may go up to $100M in value. Often, these businesses offer unique technologies, synergies, or market positions.

Just as business owners may have had decades building and growing a company but have had zero experience selling one, they will have even less experience running a controlled auction. The hidden weapon in the process will be your M&A specialist, who will leverage his/her expertise to guide you each step of the way, give you context for decisions, and offer second opinions on interviews and data when you are unsure.

Do you think a controlled auction might be the right fit for your business sale? Let’s chat.