BUYER PROFILES – Part II
In buyer classifications, there also exists a somewhat rare species known as the turnaround specialist. This buyer is usually an experienced consultant looking for a bargain or diamond in the rough that he can transform from an under performing business to a profitable status. This type of buyer usually concentrates in the larger or mid market arenas where deals have the resources to justify his time. Smaller business offerings generally are not of interest to these buyers because of limited operational scope and lack of customer base. For similar reasons, most intermediaries will not work with companies that are in trouble in the small arena.
At first glance, it can be a bit overwhelming for buyers to acknowledge the many types of buyer groups that are active in the marketplace. In reality, the different classes of buyers will be concentrated on distinct types of acquisition strategies at any one time. It is our contention that an analysis of the types of buyers and their buying parameters can aid the acquirer to focus on deals that are most suited to their needs and buying capabilities. By being more focused, buyers will not jump from deal to deal as frequently and can concentrate on offerings that they are better positioned to acquire.
Gathering Pertinent Documents – Part II
Asset and Liabilities
There are assets and liabilities on a balance sheet that can be transferred with the sale or kept by a seller. A buyer needs to know exactly what assets and liabilities are to be transferred with the sale so that he can make an educated offer. Samples of these items include: accounts receivable, accounts payable, pre-paid deposits, cash, debt on assets, leases, etc. By identifying what is included from the start, misunderstandings can be eliminated. It is prudent for a seller to identify which leases and notes can be transferred to the buyer before the negotiating process begins. Discovering a liability that cannot be assumed until late in the process, after the deal has been structured, is inconvenient and could cause a deal to collapse.
A prospective buyer wants to know everything about the facility that will house his new business. A few questions to ask are: Where is it located? Is there a long-term lease? Is real estate included in the deal? What is the square footage? If you are renting, it is imperative to perform preliminary due diligence to determine if the lease can be assumed, how much time is left on the lease, and other factors that would be covered respective to the business transfer. Leases are not easy legal instruments to negotiate. The lease can be a deal stopper if attention is not paid to this area in the beginning. Most owners do not want to involve their landlords in the sale process until they know that the deal is going to go through. If the landlord is going to be difficult or change the lease term or rate to the buyer, it is a good idea to know what the new parameters will be before starting the process. If a landlord desires a longer lease than a buyer wants, a lease option to extend after the base period rather than a fixed long-term commitment may be used.
If you own the real estate and will be leasing to the buyer, it is important to determine the trend of building taxes and insurance and be prepared to put these trends in the lease. If is also important to determine the rent you would charge a new owner since it will have an impact on his cash flow. If you own the real estate and plan to increase the lease amount, be aware that this added amount would be subtracted from the cash flow resulting in a lower business sale price. Often the lease amount can be structured to remain constant for the first two or three years and then increase it. This delayed increase may not lower a sale price, as an immediate increase will. Again, awareness of these factors before the process begins gives you a stronger negotiating position.
The most valuable asset in addition to FF& E (Furniture, Fixtures and Equipment) is the employee base. At a minimum, the following questions at should be answered in the information prepared in a marketing package: How many employees are there? What is the tenure of each employee? What is the pay structure? Is there a stable workforce? Do the employees know the business is for sale? Is the owner willing to stay on as an employee? Whatever employee information is provided can be displayed without use of specific names by replacing the names with titles.
An excellent graphic tool to summarize the employee situation is an organizational chart. The chart should include the following variables: employee hierarchy, tenure, pay, responsibilities, and titles. Because the value placed on employees is a part of goodwill, it is more difficult to validate. The more information provided about employees, the more salable a business will be.
A chronological summary of a business will provide a prospective buyer a road map to a company’s history. A prospective buyer will be able to look at historic financial statements together with the company’s business history to perform an overall analysis. A sampling of questions to consider is as follows: Has a new line been recently added? Has the business been moved? When was this business formed? Is the business run by the original owner? What has been the marketing program since the company’s beginning?
Vantarakis, Alexander and Whitehurst, William. EXIT.
Gathering Pertinent Documents- Part I
When studying for a big final exam, attending study groups, preparing classroom notes, and going to the library were keys to success. The same is true for one of life’s biggest exams – selling a business. Having all the pertinent documents ready for the sale will shorten the amount of time it takes to garner the greatest amount of qualified buyers and to attain the highest justifiable price. Without all the pertinent documents, a buyer cannot make an informed purchase decision. The following items are a list of the minimum documents and information needed to prepare a business for sale.
Interim profit and loss statement and balance sheet
The interim financials will bring a buyer up-to-date on the financial strength of a company since the last completed corporate year and resulting tax return. A buyer cannot rely on dated information since sales trends can change monthly. The interim financial information is also necessary for lending institutions, and it is a safe bet that financials dated within 60 days of closing will be needed from buyer as well.
Three years of tax returns and income statements
Three years of data will paint a picture on the financial stability of a company. A prospective buyer needs to analyze sales and earnings trends to determine the direction the business is heading and also to be prepared for any cyclical trends. In addition, buyers need to track and analyze trends in expenses and margins. Even though sales are increasing, it does not mean a business is heading in the right direction. Any fluctuations, good or bad, will ultimately be determined with financial data from the past three years.
Current asset list
It is easier to justify a business sale price if assets comprise a significant part of the sale price. Anything above asset value is goodwill and is more difficult to justify. Comprising an asset list with a total value of the asset at fair market price will create a floor to the value of a business. It is important not to place individual values on assets, but rather to place a total value. By itemizing asset values, a buyer will spend more time questioning the value of individual assets rather than focusing on the collection of assets and the overall business. One exception to not listing out individual asset values exists when outside financing is used for a business transfer. A lender will normally require a fair market value to be placed on all assets over $500 including serial numbers.
Vantarakis, Alexander and Whitehurst, William. EXIT.
Timing is everything
A business owner can spend his entire career developing a business until it becomes his “baby.” Selling can be the most difficult and emotional decision a business owner will ever make. It is filled with emotions similar to sending a child off to college or giving a daughter away at her wedding.
The timing and reasoning for selling must be right.
The reason for selling will also be a paramount issue for a prospective buyer. A buyer needs to be assured that the reason for selling is not due to negative factors such as problems in the industry, increased competition, or employee problems.
We have had many owners tell us they are waiting for the best time to sell. The problem is that no one can ever predict when that time will be unless they have a crystal ball and can predict the future. Fortunately, the best time to sell can be determined by a common set of factors, which we have listed below.
Burnout / Boredom
If you have lost your passion for the business, hate to go to the office, and cannot wait to leave, then you should re-read this book and begin formulating an exit plan. Burnout and boredom are the most common reasons for
an owner selling his business. Many businesses that have flattened sales for two or three consecutive years are symptomatic of an owner that could work harder to drive the business upward but has lost the passion to do so. If sales have flattened or started to decline, then it is a good bet that there has been some deterioration of employee morale, customer service, and/ or supplier relations.
If you experience burnout, one of the worst things that can be done is to hold on to the business and continue to produce years of declining sales. Declining sales will ultimately have a negative effect on sale price, when or if you do decide to sell. A savvy buyer will realize that an additional capital injection and significant effort will have to be utilized before this type of situation can be turned around. The main lesson in this scenario is that the best time to sell is when an owner is able to detect his burnout in the early stages.
At some point in life, the time comes to reap the benefits of years of hard work. This is another common reason for sale in the industry. From a buyer’s perspective, this is the most justifiable reason for sale, which creates a comfort level when analyzing a business. If the owner does not have a family member to pass the business to,
he is faced with the prospect of selling. It is necessary to give a prospective buyer the right reason for selling. Listing retirement at age 40 is not an acceptable reason to sell for most buyers. Conversely, a business owner retiring at age 50+ who has been in the business most of his life is an excellent reason for selling from a buyer’s perspective.
Health is a very unfortunate reason for selling, since it is usually out of the control of a business owner. Often, the sale has to be quick because of a decline in sales and a void of top decision making due to less time being spent at the business by the owner. On the other hand, a prospective buyer will feel more comfortable with this scenario. Structuring a deal for a quick sale due to the owner’s health does not have to be for a lower price. A seller can set up a low down payment and longer owner note which will keep the sale price at the highest justifiable level, while getting the owner out quickly.
You should be leery of potential buyers that attempt to get a bargain, because of a seller’s vulnerable position. If there is an opportune time to hire the most capable business broker to assist in the sale process, this is it. So, the next step is to hire the very best support team available and use their advice.
In addition to being ready to sell and having a solid profitable business, the economic marketplace must have its “stars” aligned in order for it to be a good time to sell. As you are aware, a business cannot be run in a vacuum, therefore external forces not only affect the growth of a business, but also its salability. An ideal scenario to sell is when there is a strong economic environment of low interest rates, a growing stock market, a strong dollar, low inflation, low taxes, and a solid availability of capital. It is always a good idea to keep up with economic trends. While a bad economic setting does not help a sale, a good, profitable business will sell under most economic conditions: good or bad.
Lack of operating capital / Need for growth capital
If it were not for capital concerns, many business owners might never sell. There comes a point when the continued worry of funding accounts receivable, payroll, or the rent will push a business owner over the edge. A business can actually become harder to handle financially with increasing sales, even though there is more money generated by the business.
There is also the dilemma of growing a business to its maximum point and not being able to go beyond it due to a lack of funding or managerial ability. You say to yourself, “If I just had some more capital I could do X,Y
and Z and double the business.” Many owners that we have represented have reached a comfort level in their operations and do not want or feel comfortable with investing more capital to get the business to the next level. This is similar to burnout and many times the business will flatten out due to a lack of motivation. The salability will suffer as well as the sale price.
To know the future of an industry, it helps if you have a crystal ball handy. If the industry is heading in a bad direction, it is wise to evaluate the options. It would be unwise to suggest that every time an industry dip or change occurs that an owner should think about selling, but a management style that has proven successful in one climate may be challenged in another.
It’s amazing how infrequently successful business owners keep up with their own industry. The most common response is “I can’t do anything about it, so why worry?” The more aware an owner is of upcoming changes in his industry, the more prepared he will be in evaluating his options. The most successful sellers we have represented were usually the best informed regarding their industry and economic setting. Informed sellers regularly attend local Chamber of Commerce meetings, annual industry conventions, read trade publications, etc. These owners can talk on an informed basis about both economic and industry trends and make it procedural to understand quarterly changes in their income statements and balance sheets. The more informed you are, the better off you will be when the time comes to sell.
Employees are most company’s key assets, so make sure to have a solid team in place before you begin marketing your business. It does not matter significantly if a low level employee is lost, but once you lose a key salesperson or operation manger you will start raising eyebrows during marketing. Employees will not always be with you, therefore the best time to sell is when key positions have been stable for the past few years.
Nothing scares off good buyers more than key employees recently departing to the ranks of the competition. If selling is a near option it is a good idea to firm up relationships with key employees.
Sales / Cash flow
We will discuss the importance of cash flow in more detail in a subsequent chapter. It might not be an overstatement to say that in buying and selling small businesses, “Cash flow is everything.” The main scenarios when cash flow is not “everything” is when the assets are the only value of the company or if a competitor is
just looking at you clientele. If cash flow has stared to slide and you are thinking about selling, then there is some serious work to do. A Band-Aid will not work, rather you will need to get to the heart of the problem and get it handled.
When analyzing a business, prospective buyers and lenders key in on even the slightest slip in annual revenue and cash flow. Even an annual dip as small as 2% will cause a buyer and lender to start wondering if there are significant problems in the business. We have sold businesses with a drop in sales in two and three consecutive years, but the final negotiated sale price suffered as a result.
Vantarakis, Alexander and Whitehurst, William. EXIT.