Understanding Owner’s Discretionary Cash Flow – Part I

Let the numbers do the talking

We cannot stress enough the importance of hones and verifiable cash flow on the sale price of a small business. Many buyers and business brokers go as far as stating that cash flow is everything. Over 70% of small business buyers are first time buyers coming out of corporate America.  These people have one primary goal – to replace the income stream they lost coming out of their former jobs.  For these buyers, the owner’s discretionary cash flow secured through a small business acquisition is their salvation and their main decision point on company value.


BUYER PROFILES – Part II


Turnaround Specialist

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.



BUYER PROFILES

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

Financial Analysis

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.

Facility information

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.

Employee information

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.

Company history

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?

 

Source:

Vantarakis, Alexander and Whitehurst, William.  EXIT.

http://www.thevantgroup.com/book-exit-sell-a-biz/

 


Gathering Pertinent Documents- Part I

????????????????????????????????????????Developing a marketing package

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.

 

Source:

Vantarakis, Alexander and Whitehurst, William.  EXIT.

http://www.thevantgroup.com/book-exit-sell-a-biz/


Time is GoldDetermining When to Sell

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.

 

Retirement (age)

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

 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.

 

Economic factors

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.

 

Industry overview

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.

 

Employee stability

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.

 

Source:

Vantarakis, Alexander and Whitehurst, William.  EXIT.

http://www.thevantgroup.com/book-exit-sell-a-biz/


GrowthWe have spoken with literally thousands of buyers over the years, asking them why they were interested in venturing into business ownership. As former business owners and intermediaries counseling buyers, we have been in a position to take our own polls concerning buyers’ motivations. Although there have been many different answers, there are some basic motivations that continually reappear. It is our opinion that a short discussion relative to these motives can help put matters into perspective.Controlling One’s Own Destiny

Prospective buyers frequently mention that they want to control their own destiny. We have discovered that this is perhaps the strongest motivation for those venturing out of Corporate America into the ranks of business ownership.  We question if this is a well-informed reason for buying; the idea of controlling your own future is largely a matter of perception.

For example, many buyers believe that owning their own business means that the sky will be the limit, because they are now free to go as far as their personal abilities will take them.  While a seemingly unlimited profit ceiling might be a good motivator, many would-be owners overlook the many limiting factors on small business ownership.  Primarily, limited financial resources hinder most owners because obtaining additional funding is a difficult task. In addition, hidden factors such as timing, industry position, and lack of suitable labor can have more of an impact than a new owner’s entrepreneurial abilities.  Many seasoned business owners attribute their success to a significant amount of luck mixed in with their managerial expertise.

We suspect that many coming out of Corporate America venturing into business ownership merely trade one set of problems for another, much the same as people changing one corporate job for another in the hopes of leaving their business problems behind.  We find that by owning a business, not only does one bring his old set of problems with him, but he also inherits a new set of problems.  There is nothing wrong with venturing into business ownership as long as a prospective buyer does a realistic assessment of his motivations.

Financial Reward

The lure of making substantial wealth attracts some buyers to the acquisition market. Many buyers have made a lot of money for their employers and now want to make that money for themselves.  When buying a business, there should always be a balance between risk and reward.   There is without doubt monetary reward in owning your own business.  Time and again as intermediaries we have seen true wealth accumulated by the business owner.  It can, in fact, be argued that the only way to accumulate true wealth is through business ownership.

As in most other situations, if there is reward, there certainly is risk.  Even business owners that have accumulated wealth and are selling their “cash cows” would not want to owner finance for this reason.  Sellers know how important luck and timing can play in successful ownership.  Not only does an owner have to have the complimentary skill sets needed for running the company, he also needs the luck of having a forgiving economy and the right time to get in to the right industry and business play key elements.  The prospective buyer needs to be realistic with the risk/reward proposition.  Both sides of this equation need to be deliberated before starting the acquisition process. Buyers must understand that as an entrepreneur, owners get paid last.

If a small business owner gets into financial trouble, he may find himself all alone with significant debt.  There are no friendly bankers when you get in trouble; bankers are businessmen that have, as their first obligation, the protection of their depositors.  Digging yourself out of a hole as a small business owner can be a long and tough journey.  At the risk of being negative, the number of annual bankruptcies of small businesses can be a touch of reality.

With respect to the risks involved, we have seen successful, experienced business owners expand into a different territory, only to fall victim to poor timing and fail.  At the same time, we have also seen first-time buyers with average skill sets and little experience take the plunge and have huge success.  As in any venture in life, being successful in business ownership requires a certain amount of good luck and attitude.

Being the Person in Charge

Purchasers also point to the lure of being their own boss. Prospective buyers often mention that they are tired of being under the microscope, having a boss looking over their shoulder. The lure of not having a boss in business ownership is synonymous with controlling your destiny. In reality, the small business owner finds himself working for many bosses.

Customers frequently tell the owner when and how high to jump.  The small business owner sometimes ends up being the subordinate to the customer.  In addition, lenders can seem like a boss dictating how things are to be done.   Furthermore, it is sometimes difficult for the business owner to ascertain if he is working for his key employees and suppliers, or if they are working for him.  Again, the prospect of having no superior gives only the illusion of not having a boss.

As in not having a boss, the lure of being independent and in control of your own time appeals to some buyers. It is true that when you own your own business you can decide if you don’t want to come to work on any given day. It is true that as a business owner you are not punching a clock or having a boss looking over your shoulder and can go home in the middle of the afternoon. But most experienced owners have found that in reality, they end up working over 40 hours a week, frequently work nights and sometimes weekends just to get the job done.  Perhaps it is the idea, the perception, that you have the ability to walk away when you want that is so appealing.  The end result is that the obligation to earn a profit and stay afloat wins out over personal control of the owner’s workweek or independence.

Ability to Use Personal Skill Sets

Buyers have expressed to us that owning their own business will allow them to demonstrate their true abilities. Controlling your own destiny through ownership experience will be commensurate to your own ability to successfully run the business enterprise. Many displaced executives coming out of Corporate America feel they have certain abilities that will raise the business to the next level.  It is equally important to look at the abilities that have been required of the existing owner to get the business to its current position.  Business ownership often requires abilities that run the gamut.  Many ownership situations require the skill set of a generalist more than the special skills the buyer has honed through years of corporate work.

For example, a new owner may find himself required to work with employees of varied skill and educational levels.  The corporate executive may have interaction experience with his peers but little management experience, and the management experience will probably be specific to a certain level of subordinate. This experience, or the lack thereof, can be a key determinant of ownership success. In operating a business, an owner might find himself dealing with company management one minute, and delivery drivers the next.  In counseling with business owners over the years, dealing with employees is a key reason for burnout and the leading reason business owners sell.

We realize that this chapter’s discussion on buyer motivation has had a negative spin. Our objective has been to have the prospective buyer consider both sides of the more common reasons that buyers buy.  On the positive side, we have interviewed many business owners that have amassed true wealth through their ownership interests.  Their experience in owning a business has been a very positive part of their lives.

Seller Motivation

A lack of seller motivation, as much as any other reason, can cause deals to fail.  As intermediaries, we have found it absolutely imperative that we know precisely why a business owner is selling.  Many buyers are skeptical of seller motivation, and with good reason. Many businesses are poised to go down the tubes and, as such, are the primary reasons many sellers try to sell. It is understandable why many buyers question the sellers’ motivations. Intermediaries often waste valuable time trying to work with an unmotivated seller.

There are many other acceptable reasons why sellers enter the marketplace for their businesses.  We feel a short analysis of these common reasons can aid the perspective buyer in identifying these situations as they appear.

Why Companies Are for Sale

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 reasons for selling must be right, and the reason for selling should be paramount to 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.  The following factors are the most common selling factors for a business owner:

Burnout / Boredom

A business owner can lose his passion for the business, hate to go to the office and cannot wait to leave. 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 reflect 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, employee morale, customer service, and/or supplier relations may have deteriorated.

 Retirement (Age)

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 business transfer 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 heirs to pass the business to, he is faced with the prospect of selling.

Health

Health is a very unfortunate reason for selling because it is usually out of the business owner’s control.  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 a longer owner note, which will keep the sale price at the highest justifiable level while getting the owner out quickly.

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.  A business owner will say to himself, “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.

Industry overview

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, business owners start contemplating a sale.  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.

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 king.”  The main scenarios when cash flow is not “king” is when the assets are the only value of the company or if a competitor is just looking at your clientele.  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 percent 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 for two and three consecutive years, but the final negotiated sale price suffered as a result.

Over-inflated offer

There are times when a business owner is approached to sell his business for an inflated value even though the business is not on the market.  Many business owners will take advantage of this opportunity if the price is right.

As in other aspects of life, psychology also takes a front seat in the transfer process.  Motivation is an important issue on both sides of the equation: buyer and seller.  It is important for the buyer to take a personal assessment of not only his own motivations, but also that of the seller with whom he intends to work.  After a careful understanding of motivations established on both sides of the equation, a buyer is much better prepared to successfully traverse the minefield of business acquisition.

 

Source:

Vantarakis, Alexander and Whitehurst, William.  ENTRANCE.

http://www.thevantgroup.com/book-entrance-buy-a-biz/


Business-Handshake

Business owner decides to sell business

The first step sounds like common sense, but unless a business owner truly decides to sell, the process cannot and should not begin. Perhaps when a supplier has sent a shipment late, an employee has quit, or a customer has not paid on time, you may have pondered the idea of selling. These scenarios occur daily for many business owners. Often, a more cataclysmic event needs to occur to push an owner over the edge into a selling mode, such as fatigue, retirement, or divorce.  Regardless of the event, a business owner must come to a definitive decision with himself before he begins this process. If not, he could waste time and money.

Determine the market value of a business

The ultimate value of a business will be the final price that will be negotiated between you and the buyer. Before placing a business on the market, a value or range of value must be established so that you have a basis for what and how to negotiate.  There are many different people that you can turn to in determining a business’s market value, which includes but is not limited to: CPA, attorney, valuation company, self, and a business broker.  Depending on who sets a value on a company, the pricing range can be wide. This is one of the most important steps, and should be handled with great attention.

Gather pertinent information into a marketing package

Unless someone knows your business intimately, such as an employee, customer, or supplier, a potential buyer will need thorough documentation to understand the business. A business analysis must be performed to explain the strategic plan, financial statements, strengths, and opportunities. The resulting marketing package created is the first interaction a prospective buyer will have with a business; therefore, the old adage, “You can only make a first impression once” could not be more appropriate. The marketing package should include at a minimum, information about financials, employees, assets, and the operation of the business.

Marketing the business

Once you have gathered the necessary documentation into a concise and complete package, what’s next? Potential buyers need to be approached in order to be made aware of your business. There are two basic avenues of marketing a business: hiring a business broker or selling it yourself. In general, there are many methods that either party can use to reach the market: the Internet, newspaper, trade associations, and others.

The most important factor is that a game plan is absolutely necessary to ensure that the greatest numbers of qualified buyers are contacted regarding the sale.

Identify potential buyers

For almost every solid and profitable business, there are prospective buyers in the marketplace. The key is determining who they are, if they have the necessary funding, and if they are a good fit. A brief list of potential buyers includes: corporate executives, customers, suppliers, competitors, investment groups, and employees. It is imperative not only to identify the potential buyers, but also to ensure they are financially capable of purchasing your business. There are a number of pre-qualification methods that can be used to ensure a prospective buyer is financially secure, a good fit, and sincere in his interest of your business. All potential buyers should sign a confidentiality agreement and provide verification of their financial ability to complete the transaction.

Arrange meetings with buyer and seller

The first meeting between a buyer and seller is similar to a first date. Each side is wondering if the other likes them.  The meetings with a seller are of paramount importance in a buyer’s final decision. A potential buyer will rely on financial statements to determine if a business is a good value, but will base the decision to buy on the relationship with the seller and the company’s appearance.  You should always be forthright in your answers and give quick responses to inquiries on updated information.

Offer to Purchase/Letter of Intent

After a buyer has met with the owner and completed the analysis of the financial statements, he will have three main options: pass on the business, ask for more information, or prepare a formal contract. The two most utilized legal vehicles used for formal contracts are a Letter of Intent and an Offer to Purchase. Both documents are very similar in that they represent a formal attempt to acquire a business. Most often, they are accompanied by an Escrow check, which is used as a “good faith” gesture. This check is essentially a preliminary down payment when the transaction is ultimately completed. If the transaction is not completed, the buyer with be returned his escrow monies unless he has completed his due diligence and has agreed to go forward in writing. At this point, the escrow check is deposited and non-refundable.

The main difference between the two documents is the level of commitment. A Letter of Intent is nothing more than a document stating intent by a buyer to buy a business. An Offer to Purchase is more detailed and binding. A Letter of Intent is usually followed by an Offer to Purchase. In some instances, a further step is taken with the preparation of a Definitive Agreement, which is a more formal version of an Offer to Purchase. Be advised that the documents are merely tools to ultimately get to the closing though they should include as many detailed “deal points” as possible.

Negotiating and deal structure

Once a legal contract has been presented, there are three primary decisions: accept, decline, or negotiate. The sale price is only one of several negotiation points on a contract.  Variables such as payment terms, length of

training, consulting agreement, and allocation of sale price are just a few items that can be leveraged to make a deal more favorable. The most important aspect in a business transfer is what a seller ultimately receives after the transaction has been completed.

Due diligence

Due diligence on a business is similar to the first two or three dates you have with someone. The beginning is mainly taking time to learn more about the other person, the business, and to determine if both sides are compatible.  Due diligence is performed by the buyer to ensure that the books, records, and operation of a business are as they have been portrayed. If it is a solid company, then the due diligence should be effortless, but if there are problems with the business, then due diligence could take longer and be more complicated. Due diligence can last between 7 and 45 days with the average length being around 21 days. The size, type, and complexity of a business, as well as the style of the buyer all affect the amount of time due diligence will take.

Closing

This is the best part of the whole process: the time you get paid. Prior to closing, the Offer to Purchase or Definitive Agreement is submitted to an escrow company or closing attorney, so that due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include: lien and title search, real estate and personal tax pro-rations on the business, preparation of closing documents, and disbursement of funds to seller.

 

Source:

Vantarakis, Alexander and Whitehurst, William.  EXIT.

http://www.thevantgroup.com/book-exit-sell-a-biz/


140529145344-serial-entrepreneur-620xaJennings, 54, has started 40 businesses in 35 years. An impressive streak — until he admits that most of the businesses failed. “But that’s what entrepreneurship is about,” he said. “We do what others won’t do so that later on we have the freedom to do what others can’t do.”

After 22 years of “dabbling” in his startup ideas — everything from selling exercise equipment and office supplies to running an auto service station — Jennings hit on his most successful one in 1995.

It was a residential locksmith service called Mr. Rekey, which he launched out of the trunk of his mom’s car when he was 35. It took a decade for the business to reach its first million in sales. Today, the Austin-based firm generates annual revenue of almost $8 million, employs 100 people and is a national franchise. “With Rekey, I finally figured it out,” said Jennings. “If I’m bootstrapping a startup, I have to be prepared to not give up too soon.” That’s what he did with all of his other startups. “I’d hit a wall in six months and not know how to take the business to the next level,” he said. “I’d go get a job until the entrepreneurial itch struck again, and I’d fall back into the same cycle.” The pattern stopped with Mr. Rekey. Six months after starting the business, he still wasn’t making money but he didn’t bail on it. He hasn’t looked back since.

Jennings says he loves the “game of business.” “I like taking educated risks and seeing something grow out of it,” he said. He got a taste of this after launching his first startup at 13. It was a door-to-door seed-selling venture that he pursued out of necessity. “My dad was an alcoholic who couldn’t hold a job and drank up the family money,” said Jennings. “If I wanted toys and cool clothes, and later on a car, I realized that I had to make it happen for myself.” He made $400 in the first year and $1,500 the next year. “I couldn’t keep up with demand,” he said. But that early startup experience taught him basic fundamentals about entrepreneurship. “At 14, the important lesson I learned was that it’s a lot about relationships,” he said. Over the years, Jennings has crisscrossed the country to launch his ventures, which has come at a cost to his personal life. He uprooted his son and daughter several times during their childhood (although both now work at Mr. Rekey’s corporate headquarters). He also separated from his first wife and subsequently remarried.

“Being a serial entrepreneur isn’t for everybody. You have to have that itch in your blood,” he said. As he continues to grow Mr. Rekey, Jennings is also involved in five other startups that he helped launch, including a garage door installation service and a house flipping venture with his wife. Still, life isn’t all about business. Jennings works half days and took a month-long vacation to Costa Rica last year. So what’s on his mind lately? Jennings said he’s starting to think about selling Mr. Rekey. “In a way, it would be nice to be free of it to start something else,” he said.

— Source: CNN Money


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Unlike the CEOs of major public companies, whose personal financial situation has little effect on their companies’ borrowing, if you are a small business owner, your personal credit is a major factor influencing your company’s access to capital. The power of personal credit scores to predict small business loan repayment, the legal structure of many small businesses, and small business owners’ use of personal guarantees and personal borrowing to finance business operations, all link small business owners’ personal credit to their companies’ access to capital.

Many, if not most, lenders will look at your personal credit score if you are a small business owner seeking a loan for your company. A 2006 report written for the U.S. Small Business Administration found that 71 percent of banks used small business owner credit scores when underwriting small business loans.

The use of the owners’ personal credit scores makes sense. As Federal Reserve Bank of Atlanta researchers explain, the personal credit record of the business owners is a good predictor of the repayment of business loans of less than $100,000.

The legal structure of small businesses also links personal credit to business access to capital. Approximately 72 of U.S. businesses are sole proprietorships, Internal Revenue Service data indicate. Because the debts of sole proprietorships are not legally distinct from those of their owners, lenders and trade creditors pay careful attention to the personal creditworthiness of sole proprietors.

Even when small business owners set up corporations to limit their personal liability for the debt of their businesses, they often tie their personal credit to their companies’ borrowing by personally guaranteeing the debts of their businesses and personally borrowing to finance their companies’ operations. According to analysis by the Federal Reserve, 41 percent of all small business loans and 56 percent of small business borrowing are personally guaranteed.

Studies show that many small business owners borrow personally to finance their business operations, further intertwining small business borrowing and owner personal credit. A paper by Alicia Robb of the University of California at Santa Cruz and David Robinson of Duke University indicating that about one quarter of new companies are funded by the personal borrowing of their founders.

For many small business owners, tapping home equity is an important way personal credit is transformed into business capital. Analysis by Minneapolis-based market research firm, Barlow Research shows that about one quarter of small business owners tap the equity in their homes to finance their businesses either by using their homes as collateral for business loans or by taking home equity loans and plowing the proceeds into their companies.

Drawing on personal credit card credit lines is another way that small business owners use personal credit to finance business operations. According to Intuit’sFuture of Small Business Credit Report, small business owners have $150 billion in outstanding credit card debt that they have used to finance their businesses.

 

—– Source: www.smallbiztrends.com