|"Selling A Business - How to do it, how not to do it and
why the pros do what they do"
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.
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
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
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.
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