Thinking about selling your business? More and more owners of small- and medium-sized businesses in Colorado Springs, Denver, and throughout the state – even the country – are considering the advantages of selling their businesses these days. Of the close to one million businesses that will change hands this year, most will involve privately held companies selling for $200,000 to $30,000,000.
Yet, until business owners experience a merger or acquisition, few will know what to expect or how to proceed. In the lives of entrepreneurs, few events are more emotional – or significant – than selling their business. Entrepreneurs should always be thinking about the possibility of selling. The smart business owner should start planning for a sale and create a file labeled “Sale of the Business” years before they have any intention of selling.
Below are some questions frequently asked by existing business owners.
When is the Best Time to Sell?
The optimum time to sell is before you are forced to do so by health or financial reasons. This places you in the strongest negotiating position. Ideally, you should actively start the process at least one to two years before you want to complete the transaction, because it usually takes at least 6 to 12 months to sell a business and the buyer may ask you to stay on for a transition period.
How Do You Determine How Much a Company is Worth?
There is no simple method, and there are numerous formulas for valuing a business. Our experience has shown that there are three key components that are used in computing valuation models: 1) earning power; 2) value of the assets being sold; and 3) marketplace demand. Earning power is a function of annual earnings. For larger businesses, particularly those with audited financial statements, an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) calculation is used. For smaller businesses, the calculation is adjusted by adding back the expenses attributable to private ownership. An appropriate capitalization rate is then applied to calculate value. Most investors place extensive weight on the company’s ability to generate earnings, since the cash flow allows them to 1) pay themselves a suitable salary; 2) pay off the debt generally required to buy the business; and 3) receive a return on investment. The appraised or fair market value of the assets being transferred is also considered. These factors are overlaid on industry and market conditions to come up with a range of value for the business.
To enable us to value your business, certain data must be obtained. The first four items on our Seller Information Checklist will be needed for us to value your business.
How Do You Get the Best Price and Find the Right Buyer?
To maximize your price, you need a steady record of profits, timely and accurate financial records, a diversified customer base, and backup management that can run the business in your absence. Good accounting records are one of the most critical tools in maximizing value. Most offers don't appear out of the blue...they must be solicited. Discretion and confidentiality are usually crucial. Key employees, customers, and suppliers have been known to vanish if a company's future seems in doubt. Employees and competitors typically will value a business significantly less than a third party acquirer. An experienced Intermediary will know how to confidentially market your business and give it optimum market exposure.
Should You Seek The Assistance of a Business Broker?
Selling a company can be a long and time-consuming process. Generally, the best thing an owner can do is manage his business profitably while engaging an experienced Intermediary to prepare a presentation package, screen prospective buyers, negotiate and evaluate offers, and perform the myriad of other necessary tasks associated with the selling process. In addition, an outside party brings objectivity and can act as a buffer between the buyer and seller.
Some Sellers are initially reluctant to deal with an Intermediary in putting their business on the market. Usually, this reluctance stems from one or both of the following concerns: 1) the hope that by dealing directly with the buyer, the net sale proceeds of the business will be increased, because no brokerage commission is involved; and/or 2) the fear that the Intermediary will somehow coerce or force the Seller to enter into a transaction against the Seller’s will.
While it is true that a commission is payable when an Intermediary is involved, we believe that the value added to the transaction usually exceeds the commission fees. The structure of a transaction is often a critical factor in determining what a Seller will walk away with when the transaction has been completed. Maximizing the sale price does not necessarily guarantee maximum return. A skilled Intermediary can help negotiate the deal structure that is best for you.
A look at the process of selling a business should allay fears about pressure to accept a deal that will not be in the best interests of the Seller. Throughout the process, Sellers are encouraged to seek the help of competent professionals to ensure that their interests are protected. A skilled Business Intermediary will work with the Seller’s attorney and accountant or will recommend attorneys and accountants who are experienced in working through the various aspects of a business transaction. If the Intermediary is acting as a “Seller’s Agent,” the Intermediary has a fiduciary duty to represent the Seller’s best interests.
In addition to the financial gain generally associated with the use of an Intermediary, there are other items an experienced Intermediary will bring to the table: 1) Confidentiality; 2) Screening and pre-qualifying potential buyers; 3) A customized marketing plan; and 4) The possibility that their pre-identified and pre-qualified buyer database contains the right buyer for the business.
Confidentiality. Most Sellers have the legitimate desire to keep a pending sale confidential. How, then, does a Seller reach the people who have the interest and wherewithal to purchase the business? Do key employees leave the business when faced with the prospect of a sale, leaving the owner scrambling to fill the position or having to do the work himself while marketing the business, screening prospective buyers, answering questions from “tire-kickers,” or worse, while the competition takes away business from nervous customers?
Screening and Pre-Qualifying Potential Buyers. An experienced Business Intermediary will obtain confidentiality agreements from potential buyers, as well as a statement of financial qualifications. Their contacts with various lenders should help smooth the transaction by helping the buyer obtain acquisition financing and assisting the lender with required documentation.
It is particularly important to understand that when you work with an Intermediary as a Seller’s Agent, they are on your side, working with the buyer to negotiate details, working with lenders, attorneys, and accountants to smooth the transaction and obtain the best deal for the Seller. Like any other advisor, you must be comfortable with the professionalism and integrity of the Intermediary that is working with you.
A Customized Marketing Plan. How to market your business for sale is best answered by professionals that are experienced at getting the phone to ring and then weeding out the tire-kickers from the buyers. A comprehensive marketing plan will include a detailed presentation package.
Pre-Identified and Pre-Qualified Potential Buyer Lists. A great advantage to using a professional Intermediary is that they are already in contact with many buyers and know the buyer’s qualifications and search criteria. Often a transaction can be put together by using pre-identified, pre-screened buyers already in the Intermediary’s database.