| "Selling A Business - How to do it, how not to do it and why the pros do what they do" PACKAGED INFORMATION A buyer will need to analyze the prospective business. One that has been packaged and made quickly accessible to the buyers’ financial people will stand out. A prospectus or Confidential Memorandum is the packaged information. The seller may have elected to use a professional, third party (broker) to qualify the buyers and position the business before the buyer markets. Before a business hits the market bankers should have been consulted to verify that the business is viable for acquisition lending with both private and SBA backed notes. This is a powerful statement. Maybe your business is quite small. Or, quite large. Acquisition lending is available for any business that makes money. As an example it says “we have banks that will lend up to 6 million for acquisition of XYZ Company on a 10 year note provided the applicant has proven experience in this industry and a solid credit background”. If you are a legitimate buyer, this will get your attention. This also limits arguments for reductions in offered price. Value has been proven with a valuation from a third party, backed up by per-qualified lending. The actual content of the packaged information (Confidential Memorandum – Prospectus) is discussed in detail in the second meeting with a business broker. Suffice it to say that the package is made of the assemblage of financial, operational and market information. Most of this info is provided by the owner. It is not audited information. An actual audit is performed by the buyer during the “Due Diligence” phase of the sale after a written offer has been made accompanied by an earnest money draft. Competition Thousands of junk businesses are for sale. Go to any website that promotes business listings and find hundreds of companies for sale. The valuation methods are “Blue Sky”, “What I need to retire” and “What I’ have got in it”. They have no packaged information. Financial, if available, will not be recanted. There may be varying levels of truth in any documents that are available. In this sea of junk there are some good businesses, but, they look the same as the junk. What is a Junk Business? Junk businesses are ones that make money by siphoning off cash transactions and cheating on sales taxes. They exist in all industries. They require cash infusions to theoretically be made profitable. Hundreds of businesses make money by paying employees under the table to avoid payroll taxes and to employ illegal aliens. 9 out of 10 failing business owners put their businesses on the market to avoid the coming collapse. Quality buyers invest in quality companies and you attract their attention with a package of information that represents a quality listing. Business buyers try to limit time wasted looking through junk. They look for short cuts in the search for good businesses by looking for eliminating factors to pare away junk listings. Any number of the issues listed here can kill or maim a buyer’s interest in a company. Once a threshold killer sin(s) is uncovered, the buyer may have to start the search all over again. Here is a partial list of what you or a buyer will observe when looking through the flotsam of business listings: No packaged information; no Confidential Memorandum – no Prospectus Blue Sky asking price Overstated financial No financial Bad leases with no ability for cancellation Overpriced real property Obsolete product lines Unworkable debt ratios IRS investigation and attachment Under the table accounting Understated cash income or two sets of books Under the table payroll – whole company run only by relatives / family members Missing or non-existent payroll tax payments Entire income based on one or two customers No contracts with customers, suppliers or employees On-going liabilities for tax and civil infractions EPA issues Falling income due to robust competition, declining markets or burn out Loss of key individuals Obsolete/inoperative equipment assets An endless parade of arrogant, egocentric sellers offering a lame plow horse with a saddle as a potential million dollar derby winner If your business exhibits one or more of these sins (except the last one) does it preclude any buyer from making an offer? No. Every business is a work in progress. Every business has issues that can be attended to make the company more stable, to be better positioned. Buyers expect to find this when they take a close look. In fact, they hope to find things to fix. But, they are not’t going to look closely if the business looks like junk from a distance. WHAT BUSINESS BROKERS DO TO FIND A BEST BUYER How can a business owner, one that has a good business, attract qualified buyers? How can this owner determine that a potential buyer is legitimate, has the money and experience to buy this business? Here is a partial list of things that professional business brokers do to qualify and package a business for sale. A seller must do the same: Review financial - learn them to the extent that they can answer detailed financial questions about a company before the prospective buyer asks the questions Recast financial – the act of adding back into the financial all of the dollars that the current owner (and maybe family members) are removing from the business that the new owner will have the use of as income. Buy a Third Party Valuation – forward the recast financial to, and pay for, a third party valuation that banks and the Small Business Administration will accept in the course of private and SBA financing approval. Meet with Bankers – this is an informal meeting where the business broker requests an informal OK for the business package (financial, Valuation and Confidential Memorandum) to meet the needs for a private note and or SBA note for purchase funds to a qualified but yet unnamed buyer. With this OK, the business is placed on the market as a professionally packaged business with recast financial and financing per-approved for qualified buyers. Write a Confidential Memorandum – a document that tells the story of the business. This includes the markets, a profile of the customers (without names), contracts, employees numbers, gross location (Midwest region as an example), financial performance and available terms from the seller. The CM does not include identifying company or individual information. It does include third party valuation company name, numbers and an asking price. This is the written part of packaging of the business. Post on Websites – Depending on the business type, a business will be posted on up to 15 different business broker web sites. These are websites that the business brokers of the world subscribe to and peruse when their buyers make requests for them to locate businesses. A typical business broker working in the market of businesses that will sell for $500,000 up to approximately 25 million dollars will require subscriptions costs of 5 to 15 thousand dollars for the websites and associations. Place Print Ads - Depending on the business, ads will typically be placed in trade journals and financial news papers like the Wall Street Journal and others’s. Sometimes, confidentiality requires making blind placements. Contact Network Qualified Buyers – Business brokers keep a large inventory of buyers who are looking for qualified businesses. Most Downsizers, Growth through Acquisition buyers and institutional buyers list with and rely on professional business brokers to locate and present good saleable businesses. Develop Likely Strategic Buyer Profiles – Consider who might be a strategic buyer by reviewing product offerings. What businesses may be in the same markets, maybe the same customer base with different, non-competing product types? These companies may have an interest in expanding into your field; they may be interested taking your products into their customer base. Buy Business Lists and Contact Potential Suitors and Strategic Buyers – business brokers rely heavily on business data bases like Dun & Brad street and have open accounts with them for purchasing lists. If the broker is listing a printer, for instance, the broker would do a D&B search within a five state area for printers that are twice as large or larger in annual revenues and send out a mailing to them and follow up with phone calls to locate potential undiscovered buyers for that market segment. The same is done for the identified Strategic Buyer profile companies. Such lists might cost $500 to $5,000. The mailings and follow up calls will typically equal the list costs. TIRE KICKERS & UNQUALIFIED BUYERS One study shows that over half of first time buyers are unable to locate a business that they want to buy within 18 months of starting the search. Some give up at this point. Others contact business brokers to streamline the search. If you assume that these first time buyers had good intentions to actually buy, why were they unsuccessful? There are three major reasons that first time buyers are unsuccessful making an acquisition. First, they have unrealistic views of what they can afford and have the experience to operate. Second, there is so much junk on the market that they frittered their time away sifting through bad listings and became disenchanted. Third, they haven’t decided what business to be in and spend much time looking at what is available for new ideas. How many owners entertained these tire kicker buyers for endless hours with no hope of a sale? How many buyers could have reduced their search to that of only good businesses? These are rhetorical questions, of course. If you want to buy a business and you have the money and experience to run one, it won’t take three years to find one. According to the U.S. Chamber of Commerce one out of five businesses change hands every year. They are out there. There are no shortages of tire kicking non- legitimate buyers. Just as “for the right price, I’ll sell anything” sellers are everywhere, there exists a buyer that is looking for the fairy tale purchase, the business equivalent of the 1959 Corvette convertible stored in a barn with 1,800 miles on it that the widow sells for $500. A buyer looking for this deal does not have the money for what they seek. They will use an owner’s time endlessly and not make a qualified offer. There will be a never ending search for, and identification of, “problems” with financial and operational details. They will insist the problems should result in vast reductions in price and terms. SECURITY In some market segments competitors look to illegitimately garner information on their competition. Recently, the term “Business Spy” has become widely known as a down market Industrial Spy. These spies try to find information about companies and sell it to the competition. Often they garner information then seek out a market for it like paparazzi photographers who take pictures of people then shop them to magazines. Industrial spies look for “notices of sale” because this is when many companies allow “free” access to internal information. It may not happen to your business. But, since outside factors can hurt the value of your business, confidentiality should rank as a high order of concern. Security and confidentiality has to be agreed to in early qualification of the potential buyer. The buyer has to posses the financial might commensurate with the business they seek. Business brokers use tough legally binding procedures and documents to qualify buyers and secure sensitive information. They obtain financial statements from potential buyers and often interview buyer’s bankers. Get things started by calling 626-673-5344 |