Selling A Business

The second is a comprehensive selling prospectus or Confidential Information Memorandum to be sent to serious buyers who have signed a confidentiality agreement. It is important to include photos (a picture is worth 1,000 words) of major assets, buildings, products, etc. The business profile should provide a comprehensive overview of the business including structure of the business, opportunities for growth, competitive advantages, personnel summaries, requirements for licensing,  financial results, an equipment list, licensing requirements, reasons for selling, terms and conditions of the sale, seller financing, and potential buyer profiles.

Marketing Plan

After your marketing package is complete, you and your broker should set up a process to target and qualify buyer prospects. Buyers are said to come in two distinct types; Financial Buyers and Strategic Buyers. Your marketing plan should reflect a strategy for both types of buyers.

Financial buyers as the name implies are very focused on the numbers. Their focus is on return on investment, return on equity, and risk/reward. The higher the perceived risk, the lower the price they will be willing to pay. They are looking for a business that they believe they can buy at a good price, improve with their skills and knowledge, and generate higher returns. They are willing to invest capital if they see the opportunity for significant future growth.

Financial buyers rarely have the industry knowledge necessary to step in and run the business. As a result, they will rely heavily on your management team and other employees as they familiarize themselves with the business. It’s not uncommon for them to ask sellers to stay on for a period of time in a consulting capacity.

Financial buyers will view the purchase of a small business as an investment. They will compare the returns they will receive from your business against the returns they can receive from other investments (stocks, bonds, etc.). They will likely look for opportunities near their place of residence.

Financial buyers present themselves many ways, but tend to fall into two distinct categories; job buyers and high net worth investors.

Job buyers often come from Corporate America where they’ve recently retired or have been laid off. Their primary objective is to generate a livable income while doing something they may enjoy doing. They’ve often accumulated a small nest egg for the purchase or a down payment. They will likely rely upon financing some portion of the acquisition with a small business administration loan and/or seller financing.

High net worth investors often have previous leadership experience from corporations and/or experience with previous small business ownership. They want to have an active leadership role in the company and leverage their past business experiences. They typically have a large nest egg to invest. They’ll often have an exit strategy for the long term.

Marketing to financial buyers is best achieved by advertising on business brokerage websites. Fewer than 5% of the general population are prospective business buyers, so focus only on the established ‘business for sale’ advertising venues that this 5% is following. There are a number of websites that cater to these buyers. Don’t expect your broker to run a massive ad campaign. It isn’t required or effective. Ads should be tested carefully and slowly. They should be “blind ads” where the identity of the company is protected.

Strategic buyers typically already own a business in your industry, or in a similar industry. They are looking to find synergies between their company and yours. These may include increased sales and market share, a larger customer base, diversified service offerings, larger geographic coverage, and additional product lines.

By combining their operations with yours, they can often significantly reduce costs, by combining operational departments that overlap both organizations. Examples include finance, human resources, marketing, and customer service. Additionally, strategic buyers should benefit from larger economies of scale within their supply chains. The result will be a more streamlined and efficient organization with higher profit margins.

The company culture, reputation, and remaining management team are very important qualitative measures for the acquiring strategic buyer.  Should these qualities exist within your company, strategic buyers are frequently willing to pay a premium price.

Some common types of strategic buyers include:

Competitors looking to grow through acquisition. They may be looking to expand their geographic footprint, , expand their products and services, acquire key employees or customers, or simply eliminate you as competition.

Complementary companies can include key customers, suppliers, or industries similar but slightly different from yours (e.g. HVAC and plumbing) that utilize similar operational models to service their customer base.

Managers and employees are often strategic buyers of businesses. Management Buy Outs (MBO) and Employee Stock Ownership Plans (ESOP) are ways to transition ownership and control of your business over a period of time.

Private Equity Groups (also known as a private equity funds) pool money for the purpose of investing in and/or acquiring businesses. PE groups raise money from limited partners which often include endowments, pensions, trusts, and high net worth individuals. PE groups are managed by general partners, typically for an annual fee of 2 to 3 percent of the money under management. In exchange for these fees, the general partners run the operations of the firms they acquire.

PE groups often look to buy a company as a platform business upon which they can add additional companies, or they will look to “bolt on” companies to a platform business they’ve already acquired. The acquisitions they make become part of the groups’ portfolio. Their goals vary across geography, industry segments, etc.,  however, their key focus is to maximize the financial returns for their investors.

The long term strategy for PE groups is to grow the companies they acquire and sell them at a sizeable profit. When the sale of portfolio companies occur, the PE group’s commission is typically 20 percent to the general partners, while the limited partners recover their original investment plus the remaining 80 percent.

Marketing to strategic buyers is best achieved by doing targeted campaigns. Developing a “target list,” then launching a direct mail, email, or telemarketing campaign targeting these business owners/leaders can be an effective method to “get the word out. ” Again, be careful to use “blind ads” to protect  the identity of the company until a confidentiality agreement is in place.

The upfront costs of these targeted campaigns are most often paid for by the seller when the listing agreement is “success based.”

Qualifying Buyers

If you don’t have a process to qualify prospects, you may find yourself dealing with tire-kickers, wasting lots of time and resources trying to sell them your business. There’s no bigger waste of time than working with a buyer who will not be able to complete a transaction.

In addition, you should require buyers to submit some basic information:•

• Name and all contact information.
• Previous employment and business ownership.
• Educational background.
• Funds available to invest and sources of financing.
• Minimum monthly income requirement.
• Intended timeframe for completing a transaction.
• Reason for interest in your business.

Your business broker should have a process in place for qualifying buyers.

Site Visit

Once a buyer has been qualified, signed a confidentiality agreement, reviewed your business profile, and shows continued interest; the next step is typically a site visit.

We suggest that these visits be scheduled after hours for confidentiality and to allow you to focus on the buyer. This is your one chance to “sell your business” so it is imperative that you be on top of your game. A tour is usually the best way to start the site visit as it will generate a lot of good questions and give you an opportunity to present your business in a favorable light.

It is highly recommended that your business broker be there to document disclosures made between seller and buyer and to answer any questions relating to terms and conditions and the process should it continue.

Negotiating the Deal

After you’ve found a qualified buyer, provided a business profile and had an initial site visit, it is time to stop the flow of information and ask that an offer be presented. This can take the form of a nonbinding letter of intent or a written offer. It should spell out the terms of the deal so that all parties can move forward in good faith.

All sellers hope to get a full-price cash offer for their business. But in the real world this rarely happens. More often buyers will make a down payment and pay the remainder in installments to either you or a lender. We recommend that seller’s get pre-approval letters from banks using the Small Business Administration (SBA) whenever possible, to facilitate the loan process and expand the potential buyer pool.

Don’t be disappointed by an offer that doesn’t meet your expectations. It is not uncommon to counter-offer the original offer. A willingness to be creative with the terms of a transaction can go a long way toward a successful sale. Your business broker/intermediary can be the creative “glue” that holds the deal together. Also, be sure to enlist your accountant to help you assess the tax consequences of the terms you accept.

Once the terms have been agreed upon by both parties (offer and acceptance) it is time to open an escrow account. Your business broker/intermediary can walk you through the escrow process, costs, and timeline. Depending on the complexities of the deal, plan on allowing approximately 30 to 60 days to close escrow.

Now that escrow has been established, be prepared to furnish other documentation during the due diligence phase. This is where the buyer will likely ask you to produce insurance policies, employment agreements, customer and vendor contracts, customer lists, lists of patents issued, facility leases, equipment leases and bank statements, just to name a few.

Navigating the escrow closing process takes careful attention and daily follow up.  This is where a skilled business intermediary or broker can really help.  As the saying goes: ‘Nothing happens until the sale is final.”  Business sale transactions can easily fall apart during the escrow period unless momentum to close the transaction is sustained by careful attention to detail.

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