If you are like most business owners, you have never sold a business before. That is ok, we have! Here are some common questions we’ve heard from owners;
Entire books have been written about business evaluation, and many variables are involved (many of them subjective), different “experts” looking at the same company could formulate different recommendations.
The value ultimately will depend on both the buyer and the seller agreeing on a price. One of the most effective methods is the cash flow method.
The cash flow method looks at your business’ true profitability. This means taking a look at your net profit plus factoring in any depreciation and interest expenses and all discretionary expenses you have as the owner of your business.
Buyers are typically comfortable with this method because, although they are buying your business, what they are really buying is its cash flow.
Once the cash flow is calculated, different multipliers can be applied to determine a fair market range of value. Multipliers vary depending upon the type of business. For example, a manufacturing facility likely would have a higher multiplier than a service business.
Of course, many other factors can affect the multiplier. For example, new products in the pipeline, strong market share and a diversified customer base (i.e no one customer representing more than 10 percent of sales) can positively affect the multiplier.
Conversely, outdated inventory, declining market share and the risk that key personnel would leave and disrupt the business could have a negative impact.
You will notice that this method contains no mention of assets – furniture, fixtures, equipment and inventory. While these items contribute to establishing cash flow, by themselves, they have limited value.
Assets are considered when a business is being sold under less-than-ideal conditions, such as when the business has no cash flow. In these cases, assets would be used to determine the value of the business.
To fully understand what your business may be worth, contact Liberty Business Brokers of Ontario for an objective pricing analysis of your business.
A qualified business broker will help you earn a fair price for your business while avoiding costly negotiating mistakes. A broker will be able to objectively evaluate your business to ensure you receive a market driven price while simultaneously helping you handle the negotiations.
Dealing with a professional business brokerage opens your business to many potential buyers. Just like most of us don’t want to limit the sale of our house or automobile to one buyer, you shouldn’t restrict your pool of buyers for your business either.
A broker will make sure that the minutiae associated with finding a buyer does not interrupt your attention from running your business, enabling you to focus on keeping the business as profitable as possible during this critical transition time.
Brokers know how to confidentially market your business to qualified buyers, possibly including some competitors, without exposing your intentions. We know how to maximize your exposure while minimizing the potential risk of having customers, employees, competitors and suppliers find out.
Selling a business requires a tremendous amount of time and knowledge. A broker can manage the whole process from the original listing through closing to make sure everything gets done properly while you continue to concentrate on running your business.
Experience is critical. A successful broker will be licensed by the Real Estate Council of Ontario, and be focused strictly on selling businesses, not residential real estate.
A great way to validate a broker’s experience is by asking for referrals. A successful, experienced broker will have a number of referrals from satisfied clients who have sold their business.
With experience comes knowledge. An experienced broker will have the ability to structure a business transaction that is mutually beneficial to both parties.
Credibility is another important trait. If a broker guarantees that he can get the seller’s asking price or more, be wary. Since owners sometimes overvalue their business, sellers must be cautious if the broker says he can meet or exceed the asking price.
Stay away from brokers who want an upfront fee. They get owners excited by telling them what they want to hear and then they have them write a check before any marketing has begun, let alone a prospect located.
Make sure your broker represents a wide selection of businesses that are profitable. Nothing diminishes a broker’s credibility faster than when they present a list of unprofitable businesses to a knowledgeable and qualified buyer.
A professional broker should have a proven method in place to closely manage the sale of your business. You need to understand how and when your broker will disclose this information with prospective buyers.
And finally, make sure your broker possesses the means to locate buyers both locally and nationally.
If your broker is unable to articulate to you what makes a successful business transaction, they’re not likely going to be able to explain it to a buyer.
Firstly, many potential buyers don’t have the necessary capital or lender resources to pay cash for a business. Even if they do, they often want to leverage it into buying a larger business with greater cash flow.
When a seller demands cash, buyers interpret this insistence as a lack of confidence in the business, the buyer’s chance to succeed, or both.
This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease making the payments, the seller would be forced to take back the business.
The seller who operates under this fear should take a hard look at the positives associated with seller financing.
Seller financing increases the chances that the business will sell. Making the terms attractive and attainable increases the pool of qualified buyers.
A seller offering terms will command a much higher price. Buyers paying cash will demand a discount.
The interest on a seller-financed deal will add to the actual total sales price.
With interest rates currently as low as they are, sellers can get a much higher rate from a buyer than they can get from any financial institution.
And finally, the tax consequences of accepting terms can be advantageous. Instead of being taxed in the year that the sale occurs, in an installment contract, the seller’s capital gain could be taxed over the life of the note.
By lending a helping hand to the buyer, you can help yourself as well.
Seller financing is an area where Liberty Business Brokers of Ontario can be of assistance. We are able to recommend a number of payment plans that will make sense for you and the buyer.
There is no simple answer to this question. We’ve seen businesses sell in less than 30 days and We’ve seen it take over 1 year. On average, I would say it typically takes between nine to eighteen months to sell a business if it is appropriately priced.
The key point to remember is that Liberty Business Brokers of Ontario will be able to sell your business if it is a good one with positive cash flow and your representations are honest and accurate.
Ask yourself if this is the right time to sell. If a business’ current financial picture doesn’t match the owner’s expectations, one or the other has to be adjusted.
As a seller, you must know your reason(s) for selling. It is one of the first questions a buyer will ask so you will need to be prepared to articulate your reason(s). Ideally, it is much better when the reason(s) are not urgent.
You will need to get your books in order. Prospective buyers will want to see at least three years of Accountant prepared Financial Statements and a current year-to-date Profit & Loss Statement.
As part of getting your books in order, you’ll need to understand your business’ true profitability or cash flow. Since most businesses claim a variety of non-operational expenses (i.e. personal auto lease, personal discretionary expenses, etc.), you must make sure that you have supporting documentation for these.
You must also make sure all of your legal commitments are in order. You need to review all of your permits, leases, client and vendor contracts, etc. and understand their impact on the business. For example, if your business’ location is key to its performance, a long term lease would be appealing to a buyer.
If you are absolutely vital to the business, efforts must be made to gradually delegate key responsibilities to various staff members, especially those related to customer relationships and revenue generation.
When a buyer is coming out to see your business for the first time, its important to make a good first impression. Buyers look for companies that show well because it can often be indicative of an orderly run business. The first impression can turn on (or off) buyers and add (or subtract) value from your business.
The common thread weaving through all of these steps is credibility. As a seller, if you want to keep buyers moving forward, you must show your respect by being open, honest and accurate about all things, both good and bad.
And finally, you should contact Liberty Business Brokers of Ontario to begin confidentially marketing your business so that you can remain focused on successfully running it.
Liberty Business Brokers of Ontario will develop a customized eight-step marketing plan for your business. Visit our Services page for more details.
This may be one of the most important concerns for a seller. For example, imagine the impact the news of a pending sale would have on your business when your competition, customers, employees and suppliers find out.
At Liberty Business Brokers of Ontario, we go to great lengths to ensure that only motivated, qualified buyers find out that your business is for sale.
Our procedures include, but are not limited to, interviewing all prospective buyers to understand their life experiences and business interests. Understanding how much capital the buyer is working with is another critical step.
When applicable, if it makes good business sense to contact a competitor of yours, we have a proven method to gauge their acquisition interests without them knowing why we’re asking. If your competitor expresses an interest in an acquisition, we will share this information with you before we talk to them about your business.
In all cases, before the name of your business is disclosed, all prospective buyers must sign a Non-Disclosure Agreement binding them to complete confidentiality.
When a buyer becomes interested in your business, it will be after Liberty Business Brokers of Ontario has already qualified them, has had them sign a Non-Disclosure Agreement, and they have been given an overview of your business.
At this point in time, we will arrange a meeting with you, the buyer and us. As a seller, you will be asked a variety of questions, both operational and historical. The most important thing you can do is to answer them honestly, accurately and completely.
Just as a buyer has a choice of which business they buy, you have a choice of who you sell it to. This meeting will also give you a chance to find out more about the buyer.
After this meeting, Liberty Business Brokers of Ontario will work closely with the buyer and encourage them to write an Offer to Purchase.
When an Offer is made, we will present and explain its contents to you. Upon acceptance, we will work diligently through closing and make sure that all the conditions of the contract are met.