Buying or Selling a Business: The External View

There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history. The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times? The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.” Both owners … [Read more...]

Burnout: An Ever-Present Threat

Burnout is an often-used reason for an owner selling his or her business. Potential buyers may have trouble accepting this as a valid reason for sale. However, burnout is a valid reason for selling one’s business. A business owner can experience burnout even with a business that’s successful and growing. Many independent business owners feel they’ve worked hard, made their money, and now is a good time to cash out and move on, before burnout endangers the health of the business. The following warning signs should remind a business owner that cashing out beats burning out: You are overwhelmed on a daily basis. When a business owner is a one-man show, even small tasks and minor decisions can seem bigger than Mount Everest. These owners have been shouldering the burden alone for too long, and the isolation has taken its toll. You sense a failure of imagination. Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily … [Read more...]

Key Items Necessary for Selling a Business

Three years of profit and loss statements Federal taxes for the same three years Current list of fixtures and equipment The lease and related documents Franchise agreement (if applicable) List of encumbrances, loans, equipment leases, etc. Approximate amount of inventory on hand Names of outside advisors with contact information Marketing materials, catalogs, promotional pieces, etc. Operations Manual (if available) Brief history of business … [Read more...]

What Makes a Business Unique

Most business owners think that their business is unique. There are obviously many different attributes that can make a business stand out from others. However, there are some key factors that make a business both unique and, at the same time, make it more valuable in the marketplace and more desirable by prospective purchasers. Just as importantly, these unique factors also need to be generally transferable to a new owner. Here are some key ones: Intangible Assets One example of an intangible asset could be a long-term lease for a great location that is transferable to a new owner. Other examples include a mailing list of current and past customers, a popular franchise relationship, a well-known product line such as Hallmark, or a well-established mailing program designed to attract new customers or clients. Trademarks and copyrights are some other examples of intangible assets. Difficulty of Replication For example, in most jurisdictions, liquor licenses are doled out by population … [Read more...]

Are You Serious?

There are three good questions to consider before selling your business. First, "Do you really want to sell this business?" If you're really serious about selling and have a solid reason (or reasons) why you want to sell, it will most likely happen. Second, "Do you have reasonable expectations?" You increase your chances of selling if you can answer "yes" to this second question. This can include your expectations about the selling price, the time it will take to sell your business, and the amount of seller financing you are willing to offer. Third, "What will you do once your business sells?" The time to consider this is before you place your business on the market. This may seem obvious, but many transactions fall through because the business owner did not consider what he or she would do once the business was sold. A "yes" answer to the first two questions plus having an answer to the third question (other than "I don't know") means you are serious about selling. … [Read more...]

Selling Your Business? Do-It-Yourself is Risky Business!

When the owner of a business makes the decision to sell, he or she is taking a giant step that involves the emotions as well as the marketplace, each with its own set of complexities. Those sellers who are tempted to undertake the transaction on their own should understand both the process and the emotional environment that this process is set against. The steps outlined below are just some of the items for a successful sale. While these might seem daunting to the do-it-yourselfer, by engaging the help of a business intermediary, the seller can feel confident about what is often one of the major decisions of a lifetime. 1. Set the stage. What kind of impression will the business make on prospective buyers? The seller may be happy with a weathered sign (the rustic look) or weeds poking up through the pavement (the natural look), but the buyer might only think, "What a mess!" Equally problematic can be improvements planned by the seller that appeal to his or her sense of aesthetics but … [Read more...]

What Sellers Can Do

In addition to using a business broker, there are specific steps you can take to increase the chance of a successful closing. Know why you want to sell your business. Before placing your business for sale, it is important that you both know why you want to sell your business and that you are certain about this decision. Have a plan for what you will do following the closing. Make sure important parties are on board. The time to discuss the sale of your business, as well as future plans, with partners, spouses, children and other involved parties is before you list. Communicate to your outside advisors that you want the deal to work. Choose your battles. Both buyers and sellers need to be willing to compromise. It is helpful to consider in advance the areas that are most important to you so you can come to the table with a willingness to compromise in other areas. … [Read more...]

And a Letter of Intent Is…

The Letter of Intent (LOI) is a pre-contractual written instrument prepared by the buyer for the seller, which is usually the preliminary understanding of both parties. The Letter of Intent can also be called Agreement in Principle or Memorandum of Understanding. They all have the same general meaning and lay out the following: What is being purchased and what is not, how much will be paid, and the general terms. It is also meant to be non-binding (more on this a bit later) on either the sell side or buy side. In any event, most transactions are started with an LOI. The LOI precedes the Acquisition Agreement, better known as the Purchase and Sale Agreement. It is a non-binding agreement subject to the buyer obtaining satisfactory due diligence by both parties. This is how the LOI has been defined by Stanley Foster Reed, author of The Art of M&A: “A Letter of intent is a pre-contractual written instrument which defines the respective preliminary understandings of the parties … [Read more...]

Selling Your Business? Not So Fast

Most individual company owners only sell one business in their lifetime. A corporate buyer, however, may have been involved in quite a few transactions – some that worked and some that did not. What does this mean for the seller? The acquirer may have an experienced team or have been through the business transaction process more than once resulting in a lopsided contest -- the amateur (the seller) versus the professional (the acquirer). Selling a business is not like selling real estate. Confidentiality is, in most cases, critical. A seller does not want employees, suppliers, and customers/clients to be aware of a possible sale. The sales process also cannot distract the owner(s) from managing the day-to-day operation of the business. Real estate is also much easier to finance than a business purchase, unless the acquirer is a first-rate company. It is important that sellers do their own due diligence on a prospective acquirer to make sure that the acquirer can complete the … [Read more...]

Why Deals Fall Apart

There are lots of reasons why the sale of a business falls apart. The reasons can be grouped into four major categories: those caused by the buyer; those caused by the seller; those caused by a third party; and those caused by “acts of fate”. (Anything that does not fit the first three categories can be lumped into this fourth category of things that just happen.) Sellers Some sellers really don’t a valid reason for selling. Without a strong commitment to selling, a deal is very difficult to hold together. Some sellers are just testing the waters. Others are holding out for a price that is just not supportable by the numbers. Sellers who didn’t check with their tax advisors or other outside advisors may be in for some surprises forcing them to withdraw from a pending sale. An unusual, but common, reason is that the seller panics about what they will do once the business is sold. Buyers One could almost change the Seller’s information above and label it Buyers. Buyers may discover … [Read more...]

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