Tips On Selling Your Business From A Boston Business Broker
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How To Sell Small Business l Blog
Four Key Steps To Prepare Your Business For Sale
Remember when you sold your house and your real estate agent suggested steps you could take to get the best price? Selling a business is quite different, but there are some important actions you can and should take as you prepare to put it up for sale.
Here are four of the most important actions to consider (in case you were wondering, I'm not going to suggest baking bread before a buyer shows up!):
Track Add-Backs: Add-backs are an amount "added back" to EBITDA to show the true profitability of the business. Common examples include discretionary expenses that are perks for the owner (the trip with the family to Las Vegas for that "important" trade show, use of a company vehicle, country club membership, etc), as well as one-time expenses, such as expenses associated with a lawsuit. Every dollar identified delivers many dollars of value in the price of your business. So monitor these expenses carefully and create a paper trail so that they can be easily verified.
Prune Inventory: As a first step, get rid of all unusable inventory. The value of this asset in the buyer's mind is negative. You won't get paid for it and it suggests a business that's been mismanaged. Similarly, if you have excess inventory that's usable, sell it before the sale. A rough rule of thumb is the business should include an amount of inventory that enables it to continue to operate in a normal manner once it's sold. Any more or less and you're diminishing the value of the business.
Deal with Employee Matters: Your front-line management team is an important part of what's being acquired. Have you put in place safeguards to protect your interests in a sale? At the front of the list are non-compete and non-solicitation agreements. This ensures that your head of sales cannot walk out the door, move to a competitor, stealing your sales team as well as your top customers. In the absence of that, a buyer will conclude that the business is likely to erode after a sale and make a heavily discounted offer. You might also offer incentives to your key employees in the event that the business is sold. Make sure that you are up to date on employee reviews and salary adjustments.
Kill Money-Losing Products: Like the house that's filled with clutter, a company with a tangled web of products or services that deliver minimal revenue (and probably negative profits) should be quickly phased out.
Does M&A Activity On Wall Street Affect Main Street?
According to recent articles in The New York Times and Wall Street Journal, the good times may be returning for corporate M&A activity. Does this impact smaller, privately-held businesses? At the risk of being accused of being a bit of a cheerleader, I think it does impact smaller businesses, in a very beneficial way.
Here's why:
Greater Availability of Credit: A flurry of big deals suggests that large companies have access to the capital required to fund the kinds of deals that often involve a hefty amount of leverage. There's a definite trickle-down effect, with capital also more easily accessible to fund the acquisition of smaller businesses.
Strategic Acquirers Smell Value: Coming off of the brutal valuations of 2009, larger companies are now looking at potential acquisitions that are far better values than the levels seen several years ago. As the seller, that suggests that the value of your business is lower than it was a few years ago. That's true, but the flip side is that acquirers now feel comfortable that they can buy companies at reasonable prices. So the bottom line is that they're more likely to pull the trigger.
A Different Psychology: Remember the old saying that you should never try to catch a falling knife? Well, that concept also holds for economic cycles as well. Companies and individuals went into lock-down mode for much of 2009. With the financial crisis ebbing and the economy picking up, there's no question that the psychology of potential buyers has gotten much more bullish. That mindset holds whether the business for sale is a large industrial company or the corner bakery.
So my crystal ball is probably no better than yours, but as we sit here at the beginning of 2010, the fundamentals are in place for a stronger M&A environment for small, privately-held businesses.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
How Much Do Business Brokers Charge?
As I look at the web traffic to this blog, it's clear that the most popular posts seem to be those that deal with how to best work with business brokers. So I thought it might be useful to talk about fees. As many of you know, I'm a business broker in the Boston, MA area. But the fees charged by business brokers nationwide tend to fall within a fairly narrow range. So here are some typical ranges for the fees charged by business brokers:
Up-Front Fees: Most good business brokers will charge some up-front fee for the work required to prepare the business for sale. The amount charged will depend upon the work that needs to be done. For a relatively small business, requiring the preparation of a set of simple selling documents, the recasting of financials and pricing of the business, up-front fees generally start at $2,000. The fees for a larger business might be in the $5,000 range. However, not all business brokers will charge an up-front fee. Some may offer to work completely on contingency. The reality is that you truly do get what you pay for. A strong business broker puts a value on their time and the work that they do and will generally shy away from situations where the seller does not have some "skin in the game". Personally, the up-front fee is a way for me to ensure that the seller is truly serious about selling their business. The reverse is also true: beware of business brokers who may charge a hefty up-front fee. If the up-front fee goes beyond 10% of the success fee, that should probably raise a warning signal.
Success Fee: The largest part of the business broker's compensation comes from a success fee, a fee that is paid if the business broker is successful in selling your business. The fee is a percentage of the consideration being paid for the business and includes cash payments, debt assumed, stock and future payments. Although these fees vary widely, based on the circumstances, the most vanilla success fee structure for a small business is the so-called double-Lehman formula (sort of sounds like an Olympic dive). This formula is as follows:
10% of the first $1 million in consideration paid, plus
8% of the next $1 million in consideration paid, plus
6% of the next $1 million in consideration paid, plus
4% of all additional consideration paid
Are there other ways to structure the success fee? You bet. The fee can be some minimum amount, plus a percentage above some price threshold, it can increase, based on a higher price, the list goes on and on. The best way to proceed is to have an open discussion with any business broker you're considering hiring and talk about your objectives. The fees should be structured in a manner that ensure that both you and your business broker have an identical set of goals.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting business owners in the greater Boston, MA and New England areas. Also, don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Register Now For Exit Planning Seminar
If you're a business owner and starting to think about exit planning, consider attending our upcoming complementary seminar with The Rockland Group and Wells Fargo Advisors.
It will be held on February 10 at 7:30am in Braintree. We'll cover the most important steps you can take to build value in your business, as well as helping demystify the sale process.
Click here to learn more.
Questions I'd Ask Before Selling Your Business
As a business broker, my job is to sell businesses. So you'd probably assume that I'd take on all comers. That's a reasonable approach for a "Main Street" business broker who's business model is to amass as many listings as possible and see what sticks.
But the reality is that 70% of businesses put up for sale are never successfully sold. For me (and my clients), having a higher batting average is critically important. So there are some basic questions that I ask before taking on a project. I think they're really useful for sellers to think about before putting their business up for sale. The answers to these tough questions really determine whether the business owner is going to be successful in selling their business:
Are your sale price expectations realistic?: A valuation will provide the basis for what the business is worth today, based on historical cash flow. You may decide to do a formal valuation, but often a "back-of-the-envelope", range-of-value calculation done by your business broker is more than sufficient. With that in hand, think about who the buyer is likely to be. If it's a strategic buyer in your industry, a premium of 25 - 30% above that valuation is possible. If the buyer is likely to be an individual, the sale price is probably going to be at or near the valuation amount.
Will the amount you walk away with fulfill your needs?: Once the deal is done and dust settles; once your transaction costs and taxes are paid off, is the amount remaining sufficient to fullfill your financial objectives? A good financial planner can be an invaluable resource helping you through this process. Make sure you understand the math before getting started, rather than waiting until the deal is about to close. For what it's worth, I'd recommend using a fee-based financial planner, to ensure complete objectivity.
Can you define what makes your business unique?: Businesses are not commodities. Every one is unique. What's special about your business? Is it your customer base? Distribution channels? Sales team or technology? Think about where the value resides in your business and to whom it may be of greatest value. This exerise helps define who the high-priority buyers may be.
Is the value transferrable? Once you've defined the unique aspects of your business, think about if your business were sold, whether that value could be transferred to a new owner. Are your critical customer, distribution and supplier agreements assignable? Are you the essential link in your business or have you built a management team and processes ensuring that the business is not completely dependent upon you? Many of these areas should be addressed in advance of putting the business up for sale.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Be Smart About Releasing Customer Info
If you're selling a business, nothing is as stressful as disclosing information about your customers. It's probably not a big deal ifyou run a consumer or retail business and have hundreds or even thousands ofcustomers. But if you run a b2b business with a smaller number of customers, the risks are far greater.
The reality is that the sale of a business is never done till it's truly done. Translation: a purchase and sale agreement, as well as the closing documents have been executed. But well before that stage when you sell your business you'll want to highlight the value of your customer base to get the best deal possible. So how do you protect yourself when releasing customer information?
The best approach is release information in stages, as the deal progresses and you feel more comfortable with the other side. In the initial stages of the discussion, you might provide a customer list for those customers representing 80% of your sales. However, instead of naming specific customers, make sure that the documents prepared by your business broker describe them in generic terms. As an example, an IT professional services firm doing business with Fidelity, Boston University and the Boston Harbor Hotel, might describe these customers as "Financial Services Firm", "University" and "Hotel". For each company you can provide an additional amount of detail. I like to provide annual sales, tenure as a client, and any profitability measures that are readily available.
At what point should you disclose actual customer names? The best strategy is to do so as part of the due diligence process after a written offer has been accepted. In fact, if possible I'd try to defer releasing customer names until after the purchase and sale agreement has been executed, as a final due diligence item. At that stage of the game, the buyer will have spent significant time and money getting the deal completed. It's hard to believe that they'd have done so just to take a peek at your customer list. The same can't be said for a direct competitor who's only skin in the game is having signed a confidentiality agreement.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
The reality is that the sale of a business is never done till it's truly done. Translation: a purchase and sale agreement, as well as the closing documents have been executed. But well before that stage when you sell your business you'll want to highlight the value of your customer base to get the best deal possible. So how do you protect yourself when releasing customer information?
The best approach is release information in stages, as the deal progresses and you feel more comfortable with the other side. In the initial stages of the discussion, you might provide a customer list for those customers representing 80% of your sales. However, instead of naming specific customers, make sure that the documents prepared by your business broker describe them in generic terms. As an example, an IT professional services firm doing business with Fidelity, Boston University and the Boston Harbor Hotel, might describe these customers as "Financial Services Firm", "University" and "Hotel". For each company you can provide an additional amount of detail. I like to provide annual sales, tenure as a client, and any profitability measures that are readily available.
At what point should you disclose actual customer names? The best strategy is to do so as part of the due diligence process after a written offer has been accepted. In fact, if possible I'd try to defer releasing customer names until after the purchase and sale agreement has been executed, as a final due diligence item. At that stage of the game, the buyer will have spent significant time and money getting the deal completed. It's hard to believe that they'd have done so just to take a peek at your customer list. The same can't be said for a direct competitor who's only skin in the game is having signed a confidentiality agreement.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Sell A Strong Business, Off Of A Weak Year
Unless your business has managed to defy gravity, you're probably coming off of a less-than-stellar 2008. But let's say you want to sell in the near term. Perhaps it's personal reasons, health issues or maybe just purely a case of burnout. For whatever reason, you've decided that it's time to sell. So how do you do so on the best terms, coming off a bad year? Here's a few tips to keep in mind:
Focus on the right buyer: One of the most easily overlooked fundamentals is to always make sure that you're targeting the right buyer for the business. For larger businesses, it may be another company looking to expand their product line or establish a presence in the Boston area. For an individual, it may be a buyer that has the know-how and the passion to take the business to the next level. Whether it's a company or an individual, the fact remains that the absolute right buyer is in the best position to look beyond near-term results and focus on long-term opportunity.
Blend results over several years: When calculating what the business is worth, a better starting point is to take a weighted average of results for the past 3 years, rather than focusing narrowly on 2008 results. So perhaps you calculate a weighted average of profits over the past three years, giving 50% weight to 2008, 30% weight to 2007 and 20% weight to 2006. Just make sure that you're up-front with the buyer about what you're doing. Don't risk being viewed as trying to "hide the ball" and tap into the reservoir of good will that you'll need to get the deal done.
Build The Case of What It's Worth To the Buyer: Ultimately what really matters is not what's in the rear-view mirror, but what can the buyer do with this business. So work closely with the buyer to help them understand what sort of financial results they are likely to generate, if they ran it. Can costs be reduced? Can additional revenue be achieved taking advantage of their distribution channels or by selling their products to your customers? Work with the buyer to build a pro-forma income statement that quantifies the possibilities. I often do this under three scenarios (aggressive, neutral, conservative) to provide some range of outcomes.
Use Creative Deal Structure To Close The Valuation Gap: Inevitably, even if you've followed all of the above advice, you'll still be at odds over the value of the business. So use the full range of deal structures to close the gap. Perhaps you agree to have some of the price structured in an earnout tied to future performance. You might provide seller financing on highly attractive terms. Alternatively, a consulting arrangement might close the gap, while providing tax advantages.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Sell, Fix Or Liquidate: Tough Love from A Business Broker
The Boston Business Journal recently asked me to write an article on some of the special challenges of selling a business. So before you move forward on selling your business, perhaps the following article may give you a few things to think about: The Age Old Business Question: Sell, Fix or Liquidate
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Get Your House In Order Before Selling Your Business
The period leading up to the sale of your business is an incredibly valuable time to prepare and put your ducks in order. Where's the greatest payoff for your efforts? I'd start by focusing in the following areas:
Update Key Contracts: Are there agreements or contracts that are essential to the operation of your business? Perhaps it's an agreement with one of your largest clients that's up for renewal soon. It might be an agreement with a critical supplier. Put yourself in the shoes of a buyer and give some thought to which agreements are most essential. Are they assignable to a buyer? Is there an adequate term left? Develop a gameplan to refine the terms and perhaps extend the life of the contracts so that they add to the value of your business.
Eliminate Excess Inventory: The period before a sale is a great time to take a walk through your warehouse with a fresh set of eyes. Every business has outdated inventory and no buyer is going to pay you full value for it. Now's the time to get rid of it. Selling excess inventory in an orderly manner is the best way to maximize it's value. So run a clearance sale for outdated finished goods, or liquidate excess or obsolete raw materials.
Deal With Important HR Issues: Nothing can derail the sale of a business faster than the impending loss of key people. So if you've put off important HR issues, now's the time to put these issues on the front burner. Do your key managers have non-compete & non-solicitation agreements in place? Can you put in place a bonus system that provides them with incentives to help you sell the business at the best price? Are you up-to-date in providing your staff with regular salary adjustments? Don't fall into the trap of having to deal with these important issues at the last minute.
Write It Down: Every McDonalds has an operations manual that outlines each aspect of how to run that business. What about your business? Documenting key processes within your business gives a buyer confidenence that they can facilitate an orderly transition and that it's not all residing inside your head.
Freshen Up The Facilities: If you've ever sold a house, you've undoubtably been told by your real estate broker to declutter, paint, do some landscaping and generally spruce up. Well, the same is true for your business. An orderly, well-maintained business, says a great deal about how it's been managed.
The good news is that all of these suggestions are just good business practices. The period leading up to the sale of your business is a great time to make sure that you've covered all of these bases. Make sure you take advantage of this opportunity. You'll sell your business more easily and at the best possible price.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.
Don't Sell Your Business Before Understanding The Value Gap
The other day I was meeting with a local Boston CPA, Marty Croyle, of Croyle & Associates. Like me, Marty deals with many Boston business owners who are nearing retirement and are considering selling their business at some point in the future.
We talked about something both of us have observed regarding exit planning:
As Baby Boomers near retirement, they will look to exit their businesses in record numbers. However the reality is that roughly 70% of businesses put up for sale are never successfully sold. In addition, too often business owners must grapple with the "value gap": the difference between the amount of money they'll need to comfortably retire with vs what the business is truly worth.
In this situation, what are the options? Smart business owners can take practical steps to improve the value of their business. But the time to start this process is well in advance of starting the sale process. Here are some basic steps that you might consider:
Determine how much you truly need to sustain your lifestyle: Talk with a financial advisor and get your arms around how much you'd need as a nestegg to support your expenses.
Get an objective sense of how much your business is worth: The best approach is to have a valuation done to provide a realistic view of the value of your business. A good business broker, valuation firm or CPA should be able to help with the valuation. Just make sure that whomever does the valuation is an accredited valuator.
Quantify the size of the Value Gap: Is there a difference between what you need and what your business is actually worth? Not a good thing, but congratulations on arming yourself with the facts.
Focus on the points of leverage to close the Gap: Profitability drives the value of your business. Every extra dollar in profit is worth many dollars in the value of your business. So start to think about where the points of leverage are in your business. What might happen if you grew revenue by 5%? How about if you increased gross margin by 2 points? What about cutting SG&A expenses? You get the idea. But when you do this sort of "what if" analysis, it identifies where the levers are for increasing the value of your business.
Develop the plan and get to work: Once you understand the points of leverage, develop a plan to get to the level of profitability required to close the Value Gap. Easier said than done, but developing the roadmap is the first step towards achiveing the plan.
You can learn more about selling a business at The Coral Group web site. We're a business broker, assisting small business owners in the greater Boston, MA and New England areas. Also don't forget to subscribe to this blog via email or RSS. You can do so using one of the links on the left side of this page, towards the top.