Business Terms
business terms
Getting the Best Deal for your Business
You have worked hard to make your business successful and you have succeeded. Now you decide to sell the business. What should you do and how should you do it. The first suggestion is talk with the professionals that have worked with you through the years. Your accountant and lawyer would be a good place to start. If you live in a bigger city check to see if there is a local business broke you could talk with. You will need to immediately gather all pertinent information about your company. These include tax returns, P&L statements and significant bank records. Any long term lease agreements or loan obligations will have to be located for the business presentation.
Equipment leases or maintenance agreements are relevant too. If you have a union shop, the agreement with the union should also be part of the business’s full disclosure. All of this and more will be needed first to set a price and then negotiate the sale. Be prepared for an in depth look at every aspect of your business.
Get a certified evaluation from a certified business broker
To set the price, one of the choices is to use a certified evaluation broker who is in the business of valuing any type of business. These specialists in evaluation are used in court cases and IRS cases so their creditability is excellent and their proposed value for your business is very close to the mark. Many deals are based on just their number and the negotiation centers around terms of payment and if the owner will carry some paper. You can find evaluation software or your accountant could come up with a number, but you should consider an expert for this core piece of information about your business. You might want to check out our article on Evaluating your business for sale.
Check out industry prices
Another way to check out your company’s possible value is look at what other companies in your industry are worth in comparison to their sales. Industry associations and the Internet are good places to get this information. If the economy is strong, you may be able to get a better inflation rate than otherwise.
In any event find out what multiple of earnings seems to be in favor now or any other valuing method. Industry trends may be factored in to this price. Remember, industry trends are for the entire country and may need to be adjusted by a location factor. In any event the multiplier of profit can be from 10 to 1 times depending on the strength of the company.
The type of business also can be a factor. As you can see coming up with a sale price is complicated and maybe better left to an expert. This is where the CBB (certified business broker) comes into the picture. His training and experience will come into play when figuring what your business is worth.
Check out offers on the Internet
Offers in business sections of papers and trade magazines also will give some idea of a number for your business. There are many business brokers listed on the Internet. Talk to them about what a business like yours is being offered for in different parts of the country. These Internet sources are excellent places to get all kinds of information about selling a business. Reading articles on these sites will alert you to the fact that selling a business is far more difficult than selling a house. There are just more facts to deal with and probably more legal rules to worry about.
Cash price vs. terms price
Part of the deal to sell your business is setting an asking price for your business. Once this is done, then another decision must be made. Will you accept terms in order to sell the business? Terms mean you will wait for part of the purchase price to be paid at a later date. Many sellers will do this, but they sweeten the deal by asking for more money if terms are part of the purchase. So the seller has two asking prices. One price is a sale for cash and the other price is higher if terms are necessary in order for the deal to be made.
Actually this is a fairly easy negotiation as the higher price is not bothersome if the new owner is successful with running the purchased business. Both parties got what they wanted and the higher price is fair to both. Many negotiates have used this gambit for years to make deals. The old owner gets the business sold and the new owner while paying a little more for the business gets an existing business with an excellent chance of making the purchase work out over time. The actual terms of the wait and pay deal can be for one year or more.
There are some caveats that the seller should keep in mind. Where will the extra money come from in the future? This money will be needed to make the extended payment or payments. If it is going to come from the business cash flow, does the old owner believe this is possible? If not then this deal is a non-starter and must be turned down unless the old owner would not mind getting the business back through forfeiture.
Will you finance part of the purchase price
Financing part of the purchase price is common when selling a business. Many people will have a substantial down payment, but they want to keep back some money to run the business and not always be cash flow short. The old owner is an obvious source for this financing deal. They know the business to the bone and if they feel the new owner will be able to run the business, then they will seriously consider the financing deal in order to complete the sale. If you turn down this offer, then it may be a while before you get another serious buyer looking at your business. This decision is all about the feeling you have for the new owner. If they have other assets, then this is a no-brainer. If their credit checked out then this is another reason to do the deal.
Conclusions
Since an asking price has to be defended by solid information and company history, the hiring of a Certified Business Broker is a very good first step toward selling your business. This step provides a selling price that can be used with confidence and can be verified. After this price is set, it can be further used as a solid starting point for all other negotiating. Early on the owner needs to make a decision if the deal has to be all cash or terms or financing. With this in mind, this decision will speed up the discussions between the buyer and the seller or broker. If it has to be an all cash deal, the broker will know up front if the potential buyer can meet this requirement. If terms or financing are available, the deal is much easier to put together.
A clear presentation folder of all of the pertinent business information should be part of the opening discussion. If all facts are laid on the table, it makes for a better discussion situation as surprises are kept to a minimum.
If a broker is involved, let the broker handle the negotiating as they are more experienced at doing it right at either the seller or the buyer. The broker’s purpose in the deal is to expedite it and make it happen if at all possible.
All of this put together will help to get the best deal for the seller that can be obtained between this buyer and the seller. If it fails then the next negotiation will have to be played out on its own merits. Each deal has an optimum possibility and it is the job of an involved broker to help both parties come to a fair agreement.
About the Author
Bill Henthorn formerly was principal broker and owner of a resort / commercial real estate brokerage in Honolulu which specialized in representing sellers in transactions up to $50MM.He currently serves as the marketing director of http://www.acquireo.com
What is does “convenient controls” mean in business terms?
The article I am reading says welcome to the world of metrics (understood), return on investment (understood), and “convenient controls.” What does convenient controls mean in this context?
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