Archive for category: Must Knows About Business Sales

Almost every week here at Apex, we meet to discuss new businesses that we will be listing soon or which have just been listed. Instead of getting into the nitty-gritty of each business, we go through key information which isn’t just important for brokers to know to share with their clients who are looking to buy, but is a fast and simple way for any potential buyer to understand a business that’s for sale. While every brokerage may have its own way of creating an offering memo, there are some key components that should always appear.

Key Business Activities

This is pretty straightforward. What are the products and/or services offered by your company? What’s your target market? Where are you located?

The Reason for Selling

This is one of the very first questions we ask our clients whenever we begin a discussion about a sale. We ask because we want more context to understand who we are working with and what his/her motivations are, but of course every single buyer will want to know as well, which is why it’s explicitly listed in the memo.

Key Highlights of the Business

This is not a SWOT analysis. It’s more of a highlight reel. We’ll highlight positives like a loyal customer base, growth potential, longevity of key staff, good margins, etc.  We will mention the risk profile of the business, but the entire section is obviously and understandably positively focused.

Financials

Sometimes employees don’t even get to see full financials, so you won’t see them here either. We’ll have put together some key numbers so that buyers can see trends without knowing your precise business mechanics. It’s also important to be oblique here because we want to keep the sale confidential and giving away too much information here (or anywhere else in the memo) may cause the information to leak out into the public and muddy the waters – whether it be with competitors or with employees.  Confidentiality is key.

Price and Expected Sale Terms

Of course somewhere in the document we’ll need to mention the price, and also mention any specific sale terms. We will discuss whether the seller is firm on cash up front or if he/she open to some portion of seller financing (remember that some fractional seller financing is often part of SBA loans). We also discuss the sale timeline and how long the seller is willing to stay on to be part of the transition (if at all) and his/her willingness to sign a non-compete agreement.

We’ve prepared thousands of these memos over the years which have gone on to be the first step in a successful sale.  Let us know if we can start putting one together for you!

Seller financing is simply a particular portion of the sale of a business that is financed by the seller. This can sometimes include 100% of the sale price, but very often it’s a much smaller fraction of that, and is a frequent component of SBA loans.

In this article we’ll discuss the benefits of seller financing to both buyers and sellers.

It’s a Bridge

Not all buyers can qualify for the entire amount necessary to close a sale, and not all sellers need the entire amount for them to do what they have planned next in their lives. Seller financing can help to be one part of financing that can include ROBS funding, an SBA loan, or personal/family savings. Very often it can be that small bit of financing that helps to close a sale instead of having it fall through.

It’s a Hedge

A seller who lacks confidence in the ability of the business to carry on after the sale may have difficulty committing to seller financing, as that money would then be at risk of being completely lost. Buyers know this, and it’s a solid psychological help to know that the seller is willing to defer some portion of the proceeds of the sale into the future, when the company will be much more reflective of the management skills of the buyer than of the systems put in place by the seller.

It’s a Deal Point

Remember that in a transaction there are many horses that can be traded. Perhaps the buyer wants a different percentage of the sale to be classified as intellectual property, which can lead to higher taxes for the seller. In response, perhaps the seller asks for a lower amount of seller financing or different terms. Seller financing is just one of many options to help move a transaction forward to a successful conclusion.

It’s about Money

We’ve discussed alternative financing for small businesses before. Unlike these algorithmic driven companies, seller financing remains “alternative financing” that almost always will cost less than those options, somewhere between Prime + 1-3%, though sometimes for less. Terms are usually more favorable as well, as the outgoing seller knows exactly what cash flow is available and what is reasonable to siphon off to service a note.

What we do best (and have done for many years) is bring together eligible buyers and worthy sellers to complete transactions with many kinds of financing.  Give us a call to see if we can help you!

In previous articles we’ve discussed different certifications that brokers can possess, and we’ve also offered many profiles of our team here at Apex.  But sometimes sellers can forget that there’s a “good fit” process to our work here as well.  We’re looking for the right type of sellers, not just anyone with a business and desire to cash out.  Below are a few things we look for when meeting sellers we consider representing.

Reasonable Chance of Sale

There are many factors that influence whether a business will sell.  The first, and most important, is proper pricing, which often comes through a professional valuation.  Many times we find that a business is overpriced, not just because of unrealistic ideas from sellers about what they are “entitled” to, but because the financial statements feature too many owner benefits that need to be accounted for in a different manner.

There are also other factors, like market conditions and the availability of financing that corresponds with those conditions.  But suffice to say that it’s very rare that we find a business with a reasonable chance of sale that doesn’t sell in a reasonable time.

Realistic and Committed Seller

Part of being a successful seller means knowing how much your business will sell for and how long it might take.  But another part of being successful is being committed to the work. There are so many things that go into pulling off a successful sale, but at the heart of it all is communication.  Successful sellers don’t disappear for days at a time, or leave emails with a lot of “to-dos” sitting in their inbox.

Sellers know that businesses don’t sell themselves and that even mildly interested parties will want a fair bit of information.  They don’t assume that a broker is working “for” them as an employee, but rather “with” them as a very experienced colleague who has been to this dance many times before. Perhaps most importantly, they have the humility to say “I don’t know” or communicate fears and challenges that they have.  We can’t help or fix what we don’t know about.

General or Specific Fit

As we’ve said before, we have literally decades of experience selling hundreds of businesses in our office.  While we may not have sold your specific type of business before (though that’s pretty unlikely), we’ve certainly sold the same size in revenue, or dealt with that industry, or have a list of qualified buyers who have told us to contact them the next time such-and-such a type of business in a certain price range comes up.

We have the right brokers to fit your every need. We as brokers are looking for these good fits ourselves, as we know that will make a sale not only easier, but more enjoyable.

If you’re committed to selling your business and have a realistic sense of what it can go for (or would like to find out), give us a call.  We’d love to help.

In the first part of this series, we focused on the purpose of a LOI (Letter of Intent).  In this article, we’re going to outline a basic structure of one.

Long form or Short form?

A LOI can be short or long form, and there are advantages (and disadvantages) to both.  A short-form letter will usually focus on price, a few key terms, the length of escrow, and an exclusivity period.

It will be easy to negotiate precisely because it’s short.  The obvious downside is that it leaves some important issues to be resolved down the road.

On the other end is a long form LOI, which will often contain some “legalese.”  These make sense in complex deals because issues that can be deal breakers are identified ahead of time, before diligence and other time-intensive activities.

The major disadvantage is that in identifying some of these key issues so early on, both parties can get bogged down in deal points before the process has even begun, and so momentum is slowed, or in some cases, stopped entirely.

What an LOI must have:

1. Price and consideration.  Will the purchase be all cash, or will it be in stock?  Will there be an earnout?  A promissory note?  A hybrid which includes all of the above or something entirely novel?
2. Structure.  Is this an asset purchase, or purchase of shares?  Will this be a merger?  This is very important for tax purposes.
3. Timeline.  When is this deal expected to close?
4. Exclusivity.  This means that buyer has a certain period during which no other potential buyers can be going through this process.  This might also include a stipulation for how/when a seller can terminate exclusivity.
5. Access.  The buyer is going to want access to employees, books, and records for due diligence purposes.  If the sale is being kept from your staff, you will need to structure a way for the buyer to gain the information he/she needs regarding your employees, as well as an explanation to the buyer of the reason for the secrecy.
6. Prohibitions.  Anything that the seller may not do between the time the LOI is signed and closing, which could include selling real estate, fixtures, or firing key personnel.
7. Encumberments.  Are there any third parties to be considered?  This could be leases, copier rentals, or key vendors that are part of the critical path of your business.
8. Conditions for closing, as well as stipulations for how the acquisition agreement/process can be terminated.
9. How disputes will be handled and in what jurisdiction.
10. Deposit, if any.  If this is part of the LOI, it should stipulate that such a deposit be paid into an escrow account, typically a third party.  It simply will make things easier if things don’t conclude in a sale.

This list is not meant to be comprehensive, and some LOIs may exclude some of these or add others. What’s key is for you to see what we stated in our first article in this series.  The LOI is an outline of where the deal is going to go. It’s a roadmap and there’s every reason for the buyer and seller to take their time to agree on what this map looks like so that both parties can reach their desired destinations: sale and liquidity event.  

In the final part of this mini-series, our brokers will share some stories “from the trenches” regarding LOIs in deals they’ve done.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Every business sale is a minor miracle.  Just as the skydiver gently times his pirouettes and turns in his parachute to land precisely within the giant X of his landing zone, so too do all parties aim at completing what needs to be done from the time an LOI is signed to the date a deal is set to close. Think about all the people involved.

Buyer/Seller

The seller has been given a great deal of paperwork to complete for the buyer’s due diligence.  If he/she has been preparing well to sell a business, this may simply be a matter of looking things up and filling in blanks.  

But, if those systems aren’t in place, there’s going to be a lot to do.  The seller has to form a company and work out contracts with new employees and/or investors.  He has to line up the money, which may involve both the SBA and a bank.  Speaking of which…

Bank

Loan committees don’t meet every day.  They meet every couple weeks – sometimes more frequently, sometimes less, but at those meetings, the banker representing you needs to have a substantial amount of paperwork in order to represent you well.  And who is going to get all that paperwork done?  You, the buyer.

Attorneys

The seller and the buyer will both be working with attorneys in order to make sure deal points are handled in a thoughtful and diplomatic way so as to preserve amity and keep the process moving forward.  These meetings may be contingent on items mentioned above.  Did we mention paperwork?

This is all to say that if everyone is aiming towards a date, and then there’s suddenly a delay, it’s a lot like a sudden stop in traffic when you’re driving a car.  Your muscles tighten up and your senses are on high alert.  In the case of a closing sale delay, the question immediately posed is: Why is there a delay?  If you don’t have a good answer to this question, a deal could go away.  Why?

For the seller, the concern might be, “Hang on, this person wants to buy my business, and he/she can’t get the paperwork done?  Is this deal even real?”

For the buyer, the concern might be, “Whoa, is this person hiding something from me?  Can I trust the documentation I’ve gotten so far?”

Honesty

The best course, as always in this business, is disclosure.  Be upfront about why there is a delay, explain what you are doing to correct it, and then hit the target.  The minor miracle of hitting a business closing date?  That miracle is enclosed in a bubble of trust.  The bubble might be able to take a hit – even two – but, you know what they say about third strikes…

Here at Apex we always ask you to keep your lines of communication open with us.  Whatever is on your mind throughout the process feel free to share.  We want to cross that closing date finish line with you, so you can move on to what’s next!