PARKER BRIGGS BUSINESS GROUP

It must seem like only yesterday when you started or acquired your business.  Early dreams and aspirations brought much enthusiasm. Supporting your family, putting your children through college, and purchasing the home of your choice was all before you.  Had you previously worked for others, then here was your opportunity to plan, perform and perfect your vision of independence.

Many long hours were likely spent on developing your plans and putting your thoughts into action.  At times, trade was effortless, with sizeable orders flowing in with barely a sales call.  Other, leaner times were spent worrying over from where the next dollar would come.  

In retrospect, despite the challenging times, it likely was worth all the effort.

Today, many successful business owners are ready to exit their empire.  Some of the top reasons business owners market their profitable business are retirement, weariness, to redirect the priorities of their life, financial reallocation, or, sadly, poor health.

Many owners want to have their company presented to the scores of well-educated and willing entrepreneurial workers who are, or about to be, laid off and who are actively looking now for a business to acquire.  They also want their dealings responsibly introduced to complementary businesses who understand their operation’s objectives and priorities. They want discreet marketing exposure to international buyers.

What does today’s successful business owner do when they are ready to seriously market their firm? How do they quietly find such ready, willing, able, and qualified buyers? How does one go about having their interests presented in the best possible light confidentially?

Here, in this new series of articles, we are going to present you with answers to these and many more questions regarding what we believe are the most effective and preferred methods to sell a business.  We welcome your readership and hope you find this information cohesive, useful, and comprehensive.

STEP ONE: CONFIDENTIALITY

Maintaining confidentiality is the single most important initial step in retaining the value of your business.  When you are ready to sell your business, it is generally not a good idea to voice this decision.  Without complete confidentiality, the value of your operation may suffer from any of the following unintended circumstances: competitors may begin price wars, suppliers’ credit may be reduced or eliminated, loyal employees may look for other employment (perhaps with your contender!), and pestering rumors may fester.  Any of these events would not only be a cause of concern as it disrupts your current operations, but also could be consequential to the future value of your business and your plans to exit that business.

Placing an advertisement in a public circular may not be in your best interest.  Attracting calls from random unqualified curiosity-seekers is wasting your time and is risky - it may be your competitors or even their agents calling! In addition, your employees or associates may see your ad and that too could compromise your efforts.  Further, by taking resulting phone calls in secret – in trying to qualify the caller – you risk being overheard by employees or company visitors.  A few short words or unusual behavior can raise suspicion and compromise confidentiality.  

Likewise, displaying a “For Sale” sign on your building is out of the question – and it is not favorable to employ sales methods that enthusiastically reveal information that identifies you - like posting profiles or exhibiting photographs of your staff, building, or equipment.  

Marketing the sale of a business is NOT like selling real estate!

Methods to market your establishment must meet greater grade and certain criteria.  

To address confidentiality issues and to insure privacy, many business owners opt to engage a party outside of their firm to handle these delicate matters. A skilled business transfer specialist, for example, works quietly and diligently behind the scenes on their behalf - professionally marketing and confidentially presenting their practice to a pool of already existing qualified buyers.

Rule number one: Loose lips sink ships!

STEP TWO: FINANCIAL RECORDS

Preparing your business for sale brings us to the second step in the process: the importance of having clear, verifiable, easily identifiable, and coherent records.  

Many successful business owners are well-versed at running their venture and are not expected to be experts in bookkeeping and accounting.  However, should a qualified buyer (or hopefully a few qualified buyers) be interested in your organization, they will expect to see and scrutinize your financial records.  After all, they may be about to hand over to you good, cleared legal tender for what you demonstrate as an accurate representation of your enterprise – they want to know what they are buying.  Having orderly documentation available increases your probability of making a successful transaction.  Your credentials need to be honest and justifiable.

Exhibiting orderly books to prospective qualified buyers shows them that you respect their time and attention.  It builds your credibility.  You, the buyer, and the lender (if there is one involved in the transaction), can then make a fair determination of your business’s activities.  This allows all the parties to evaluate how your venture will be incorporated in their respective plans.  When such a determination can be made, buyers are less likely to then consider a purchase of another company that may have confusing, disorganized, incomplete, or inaccurate records.  Documents such as your tax forms, bank statements, invoices, accounts receivable and accounts payable, as well as a recent income statement (sometimes called a profit/loss statement) and balance sheet, to name a few, are frequently requested and reviewed.

Rule number two: It pays to be organized.

STEP THREE: THIRD-PARTY VALUATION

When founding your business, you may have prepared a written business plan - protocol completed to obtain a bank loan.  Knowing that it was subject to the banker’s inquiries, you probably were concerned about its impression so it was likely well-organized and thorough.  Your objective then was to attract the banker’s attention to increase your likelihood of obtaining a loan.

Conversely, when selling a business, a valuation of that business is a typical part of its conclusion – usually done to properly position your firm in the marketplace so to attract the attention of several qualified buyers. 

A business valuation is for the seller as a business plan is for the buyer.

In many transactions, a lender is involved.  Today some important lenders are requiring a completed qualified third-party valuation prior to making a loan commitment if the loan is above a conditioned amount.  This new requirement perhaps indicates a developing trend - the movement toward and importance of third-party valuation.

A third-party business valuation is a prepared document that places an impartial and informed value for your company based not only on its current financial position, but also its historical performance as it compares to other going concerns.  It should be in-depth and cover such items as debt service ability, finance options, cash flow, and profitability.

A qualified third-party business report can determine not just the value of the more obvious tangibles of your company (equipment, furniture, fixtures), but also the important – and often times least understood – intangibles (the goodwill) of your firm.  Some of the factors taken into consideration are: the number of years of operation, the diversification of clients, the region or area being served, competitive forces, advertising manner, company reputation and image, financial statements, the economic functionality of the venture, debts or loans on the establishment, and recent sector trends.

Completing the business valuation at the beginning of the process will not only provide a wealth of information, but it will have you already prepared for a variety of transactional scenarios.

For some reason, various owners are inclined to want to skip this step. Perhaps they feel that they alone can value their concern as they believe they are the most familiar party regarding their long history, the development of their company, and knowledge of their current stature.  While their experience and day-to-day expertise is unquestioned, often times however a business owner can inadvertently undervalue their entity.  This may happen due to a lack of awareness of how effective marketing practices and valuation methods could enhance their company’s value.  Also, further examination may uncover overlooked assets.  Perhaps companies’ assets may be difficult to value (such as artwork, specialized machinery, or collectables).  Such uncommon rarities may not exist in other similar businesses already for sale, thus yielding you greater value. So this – the current impact of market inclinations - may enhance the value of a concern. Other value-enhancing components may be an unthought-of intangible: appealing hours of operation, fringe benefits (like travel, child-watch services), a large profit margin, unique market niche, location in a convenient city or in a beautiful countryside, and the willingness of the previous owner to provide counsel. In some circumstances, your company may be just what another distant or nearby company needs to achieve competitive tier pricing from suppliers.

Marketing any business at too great of a price is the greatest single factor that causes an enterprise to not sell.  Fixating on a predetermined unverified desired (or random) price usually indicates a circumstance where the owner, perhaps not willfully, could overvalue the company.  Passionate price-seeking may be due to pressing personal financial issues, vague thinking, over attachment, or lack of true commitment to consummate a transaction.  This approach is generally not in the best interest of producing a mutual exchange as it seems to disregard commonly accepted preparation standards and principles, market conditions, and even the company’s ability to withstand scrutiny.  Such posturing is usually ineffective and not credible – and qualified buyers will not likely squander their time or resources considering this type of unprepared approach and resulting poor impression.

Further, it is generally unfavorable to have an otherwise good establishment “sit” because of high pricing.  The organization then runs the risk of becoming shopworn and thereby less desirable, perhaps adversely impacting its value.  Remember, your business is in competition with other selling businesses.  If your business is priced too high, buyers will move on and look for other opportunities.  

Business transfer specialists work closely with business owners to not only market their firm, but also gather and prepare the specific documents needed – organized in a decisive yet palliative format - so a qualified business valuator can then assemble their analysis proficiently and accurately.

A comprehensive valuation should accomplish the following: 1 - help determine market value and selling price of your business, 2 - identify the total fair market value of your business, showing a separate value for tangible and intangible assets of your business, 3 - help you make an educated decision regarding the sale of your business, 4 - enable you to price your establishment with confidence, 5 – provide you with information as to how a prospective buyer might expect to finance the purchase of your business, and, 6 – provide a communication device to promote discussions for the following: minority stockholders or partners, lenders and business advisors, family members for succession strategy, and retirement preparation.

Besides being a tool to value and market your organization, third-party business valuations can be used for buyouts, divorces, prenuptial agreements, divestures, acquisitions, partnership dissolution or formation, and estate planning.

Rule number three: Know where you stand.

In upcoming articles, we will discuss transition issues, the role of financing, and typical provisions of a listing agreement.  We will also present articles covering how to successfully buy a profitable business – what to look for and what to expect.