PARKER BRIGGS BUSINESS GROUP

Because your business represents a significant asset, properly marketing your business may be one of the most important events in your life.  This article, the second in a series, further supplies you with valuable information you may need as you consider selling your business.

In our previous article, we discussed the significance of keeping verifiable records, maintaining confidentiality, and the trend toward third-party valuation as important elements in marketing and selling your business.

This month, we will exam some key steps that follow the completion of a third-party valuation, including financing, some general parameters of many Listing Agreements, and methods to get your business marketed confidentially.

For this article, the titles of Broker, Business Broker, Marketing Professional, Business Marketing Professional, and Business Transfer Specialist are equal.

YOUR VALUATION IS READY

Having completed the submission of verifiable financial documents to a qualified business valuator, a completed valuation document will be then presented to you.  This document should be reviewed with your Business Marketing Professional. 

Keep in mind that most valuations use the past 3 years of financial data – and although there are some variances between different valuations, most typically include the following:

Certain math formulas are applied to your entity that reveals its financial operation.  Such analysis helps you see your business from a number of viewpoints.  Usually these figures are then combined and averaged to determine a fair and reasonable market value.

If the business shows profit, then intangibles (goodwill) will likely display their additional role compared to unprofitable concerns. 

For consistently unprofitable businesses, the value of the company might be narrowed to simply express assets minus liabilities.

Some valuations include a section that shows how much debt your business can service.  Several columns may be devoted to comparing returns (for the new owner) with varying down payment percentages and interest rates.  This helps you, as a seller, to know beforehand where your business stands in the eyes of a buyer who probably will seek financing.

Some may wonder why the Business Broker does not supply a valuation figure, as comparables are usually provided by real estate professionals.  The simple answer is: to avoid a conflict of interest. 

Much of a Business Broker’s compensation is paid at closing as a percentage of the closing price.  Because of this, it is generally unwise for the Broker to be involved in determining the company’s fair market value.  Doing so would allow the Broker to ultimately determine their own compensation.  A business, unlike your residence, is a living entity with many variables – and each business’s books and records are different.  The valuation you receive is specified to your business only.  Broadly speaking, Business Transfer Specialists are more inclined to market a business, not value it.  Properly valuing a concern requires years of expertise, experience, and training – as well as access to data to already closed sales. 

Therefore you should seek the advice of a qualified third-party business valuator to determine a comprehensive value specific to your concern. 

WHERE DO I GET A VALUATION?

Your Business Transfer Specialist sees many valuations as a usual course of their daily activities.  Some can show you sample reports and supply you names of a few professionals in the valuation field.  They can even submit an abstract of your financial data to several valuation concerns for pricing.  You can then make your choice. 

LISTING AGREEMENT - EXCLUSIVITY

Once your valuation is reviewed with your Business Marketing Professional, your first step to having your concern marketed is complete.  You are now further ready to have your business marketed.

As mentioned in our last article, a Business Marketing Professional works discreetly to market your entity.  They do this to protect your business from undesirables and to keep the operations of your business confidential and intact.  Business Marketing Professionals seek those individuals and organizations who meet certain buyer criteria – and these may be few in number.

Business Marketing Professionals must invest a considerable amount of time and capital to market a specific company to a specified qualified population.  They use targeted techniques to measure and generate interest.  They need knowledge of the market, must know how to read various financial statements, be able to communicate the salient features of an organization, be able to discuss analytics with other financial professionals - such as your accountant or the buyer’s attorney - and must be able to convey how your business can be a good fit for a prospective buyer.

Because of these circumstances, most business listing agreements are therefore exclusive.  They are exclusive to give the Marketing Professional the opportunity to market your entity using all their resources and eliminating their concern that your listing could be sold away from them at any time.  Without exclusivity, there is little incentive to invest the necessary attention to harvest the interest of a qualified buyer.

LISTING AGREEMENT – CLAUSES

Besides exclusivity, Listing Agreements include other information such as the legal location of the business, the length of time of the agreement, fees associated with the sale, and other specific details of each party’s expectations and behavior.  For example, many agreements have a performance clause that states that should a qualified buyer meet with an owner the owner should behave in a courteous manner to the potential buyer.  Marketing professionals and qualified buyers want to see the business and meet the owner.  They will have questions that the owner can best address.  The goal of such a clause is to seek cooperation of all parties in the spirit of facilitating a transaction.

Listing Agreements are designed to bring forth - upfront - issues of concern that both parties may encounter during the course of marketing and closing a transaction.  Selling a business has many “moving parts” and as such Listing Agreements address many of the specifics of such variables.  Often times a Listing Agreement discusses how and when fees are paid, credits and debits applied to a transaction (or the lack thereof), termination, representations and warranties of the seller.

It is wise, of course, to read any Listing Agreement in its entirety - making sure you understand the provisions - and to have your questions and concerns addressed to your satisfaction.  Most Agreements are devised to commence a transaction and to inform both parties of an agreed-upon approach so each party knows what to expect during the marketing and closing process.

MARKETING YOUR BUSINESS CONFIDENTIALLY

Business Transfer Specialists are professionals who apply discreet marketing techniques to generate buying interest from perhaps several qualified buyers.  They walk a fine line between providing enough information to perk interest, yet not enough information to reveal the identity or trade secrets of the concern until the right time.

Business Transfer Specialists prepare confidential marketing documents – which will have already met with the seller’s approval – that can be provided to potential buyers.  Business Transfer Specialists keep track of all outstanding marketing documents and need to follow up with all those in receipt of them.  Their goal is to professionally address their inquiries, review their objectives and circumstances, and to set appointments for the potential buyer to meet with the seller. They also make arrangements for a tour of the business, discuss financial highlights, and arrange for due diligence.

Potential buyers will sign confidentiality agreements prior to accessing detailed information about the marketed enterprise.  They will be qualified prior to any information being released.

Your Business Transfer Specialist represents you.  They are the go-between to protect your time and the confidential nature of your marketing activities.  They are skilled at qualifying potential buyers – and they work off-premise, ensuring the proper handling of sensitive business information.  Their role is to divert what may be those considered as undesirables – such as curiosity seekers, unqualified entities, or information-gathering competitors.  They keep the flow of inquiries away from your office.

These professionals also keep you informed of their progress.  Some weeks are very active in the market, while other weeks are quiet.  The business owner is kept appraised of the marketing results.

Hopefully, through reading this article, it becomes apparent why certain orderly steps are followed when selling a business: 1 – Verifiable financial records, 2 - Third-party valuation, 3 – Understanding of the listing agreement’s terms and conditions, 4 - Marketing confidentially with marketing materials that accurately portray the business, 5 – Meet with qualified buyers, 6 – Negotiating a price, 7 – Financing terms, 8 – Choosing a closing date.

These items are in this specific order as, if executed piecemeal or taken out of order, snags can and often do develop.  For example, suppose one wants to skip a valuation.  What then happens when future cash flow is trying to be determined?  Since this is a key figure, upon what basis is the price then determined?  How will a lender know that your price is realistic so to support credit?  Trying to do such calculations during the 11^th hour is risky and ineffective – and will hurt credibility.  Another example: Suppose your financial records are disorganized – how is anyone going to be able to tell how well or poorly your business is operating?  You may know the answer to this, but your business should be presented in the best light possible using standard accounting principles and clear recognizable formats.

FINANCING

Lenders will run the operating figures of the business through a series of financial tests to determine the loan amount and the viability of loan repayment. 

Recently, some lenders – like those following the Small Business Administration guidelines - added the need for a third-party valuation to the conditions of securing financing at or greater than $350,000.00.  By doing so, they are likely more assured that the values presented are sound – more so than by setting a price based on less meaningful approaches.

It is possible for a buyer to finance a substantial portion of the purchase price.  A buyer can place a down payment of 10% - 20% of the purchase price, with the balance financed.  After consulting their tax professional, an owner may opt to provide some financing.

Many business owners, as if by reflex, want an all cash settlement.  Although this is possible, it may at times limit the number of buyers who will be interested in your operation.  Why?  The buyer knows that often times he can leverage his capital 5 to 1 or even 10 to 1.  There may not be much incentive for the buyer to give to you 100% of his funds when he could just as well go out and buy 5 to 10 times as much additional business with this same capital.  It is not impossible to look for an all cash sale, but be prepared that it is likely that your business will need to be specially marketed and it may then take longer to sell than other businesses that are more flexible with terms.

CONCLUSION

Marketing and selling a business involves many elements that need to come together at the right moment for a close to take place.

Although there can be no guarantee of closing a sale, following the above steps can increase your odds for success.

In coming articles we will explore how to buy a business and the standards to be considered as a qualified buyer.

© 2008 Contributing writer Calvin Coolidge is cousin to 30th US President Calvin Coolidge.  As a National Representative, he holds the following certifications: Business Transfer Specialist (BTS), Financial Recasting Analyst (FRA), Business Marketing Professional (BMP), and Financial Recasting Consultant (FRC). He works with Parker Briggs Business Group in Morristown NJ.  He can be reached at 973-634-6340. E-mail: calvin.coolidge@parkerbriggs.com