Your First Conversation with the Seller: Making the Most of It

Your First Conversation with the Seller: Making the Most of It

By Richard Parker

– Diomo Corporation

 

Prospective business buyers often make the terrible mistake of being overzealous when talking with a seller for the first time. I get it; you’re excited. Perhaps you have spent a ton of time looking at listings and do not want to waste any time on potential businesses that fail to meet your criteria. However, what you say and how you come across when you first engage a seller is critically important and sets the tone for continued discussions.

 

Can’t We Just Get Along

Your initial goal is to introduce yourself to the seller/business and get a general idea of how it operates. Your first conversation should be to outline what you are looking for in a business, as well as to convey that you are a serious buyer. It is also the time to get a first impression of the other party. Before a seller will divulge any material information, you will be required to execute a non-disclosure agreement and moreover, it is something you should immediately offer to do for the seller. It will put them at ease that you are: a) familiar with the process, and; b) sincere about your intentions.

 

Don’t be A Bully

There is no bigger turn off than a buyer who comes across as overbearing or a know-it-all, or who acts rudely and immediately requests detailed financial or other confidential information. The process to buy a business is just that a process with specific steps along the way, including the dissemination of information pertinent to making a decision. It all comes in due time and each seller may have a different agenda for giving you that information. Be patient and sensitive to the fact that this may be new to them as well.

 

Key Questions To Ask The Seller

There are numerous key questions to ask every seller, including:

  • What is the history of the business?
  • What are their day-to-day responsibilities?
  • What challenges do they face?
  • What have they done to grow the business?
  • Why are they selling the business?
  • Are there any key customers, suppliers, or employees?
  • Can the lease be easily transferred to another party?
  • What special licenses (if any) are needed to run the business?
  • How did they arrive at their asking price?
  • Are they willing to finance part of the deal?
  • What training will they provide?
  • Who are their main competitors?

 

Do Your Research

Parallel to the seller questions is learning about the industry. The Internet is the greatest tool to come along for buyers. There is a wealth of detailed information on every industry but keep in mind that you are probably looking at a local business so do not go overboard with global trends or using billion dollar companies as a comparison that will have zero impact on the business you are evaluating.

 

The Goal Early On

In the early stages of evaluating the business, there are three key questions you should ask yourself:

  1. Do I like the business?
  2. Can I see myself running it?
  3. Do I trust the seller?

Buying a business is a huge responsibility and it will change your life. Its important to do your due diligence, get to know the seller, as well as gain a very clear understanding as to what you’re getting yourself into. Buying a business is also an exciting opportunity. This is your chance to be your own boss, grow a company and make it your own.

 

About The Author

Richard Parker is the author of How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation – The Business Buyer Resource Center.

6 Overlooked Benefits of a Company Valuation

6 Overlooked Benefits of a Company Valuation

By Meghan Daniels, Axial | July 26, 2016

 

Most business owners seek a valuation for their company when there’s an immediate need — they’re ready to sell or raise capital now, or they have a shareholder that is being bought out or gifting equity to family.

But valuations can be useful whether a deal is imminent or not. We talked to Cameron Cook, Managing Director of Business Valuations and Ryan Niermann, Manager of Business Valuations at Gordon Brothers-AccuVal, for their thoughts on some of the biggest benefits.

1. Preparing for the worst

Death of a partner, death of a fellow owner, a contentious divorce — these are possibilities most business owners would rather not confront head-on. However, in the case of these events, “it’s good to have valuation knowledge up front, rather than all of a sudden needing to scramble to get an idea of value” before talking to the deceased’s surviving spouse or estate, says Cook.

A valuation can also ensure your family is protected should you pass away. For example, if the value of your business increases significantly, you may need to increase the payout on key person life insurance policies.

2. Laying the groundwork for retirement

Ideally, Cook recommends engaging a valuation expert at least a few years before you plan to exit the business you own. A year or two prior to a transaction, a full valuation is crucial to help you better understand your options. “This scenario is becoming more common as the baby boomer generation hits retirement age,” says Cook. For example, he points to a client planning to sell his shares to the two other equity owners of his business. “They want to start thinking about how they’re going to pay him out and start to negotiate what that purchase will look like,” says Cook.

3. Benchmarking growth

“There’s a reason obtaining a valuation gets written into a shareholder agreement,” says Cook. Even if not mandated, getting a valuation “helps management and owners keep track of the value of the business and the assets they own.” As an alternative to performing a full valuation and to keep costs down, valuation firms can perform a calculation of value or an agreed upon procedures analysis on a yearly basis. This might be as limited as determining the current market EBITDA multiple and applying it to the company’s most recent EBITDA stream. “That helps owners get a feel for what the value of the company is as a whole” in the light of recent market trends. (Note that this is a limited analysis and not a full appraisal.)

4. Making the most of a hard time

It’s crucial for business owners to understand how shifts in the market might impact their company. For example, says Cook, “we have a lot of clients right now that are impacted by the oil industry. They may not want to know their value right now — but it’s important for them to know.” There are always options to make the most of a rough time — for example, says Cook, a downmarket can be a good time to gift equity so as to minimize gift taxes.

5. Revealing weaknesses

Identifying weaknesses is important whether or not a sale is on the horizon. “A valuation is all about looking at a company’s performance and assessing risk,” says Cook. It “helps a management team look at all the factors that are driving value” in a holistic sense, and develop a plan to address any weak links. Issues like customer concentration, AR turnover, working capital position, and leverage ratios will be red flags for buyers, but they will also impede growth in general. A valuation can “reveal things that may become a problem ahead of time,” says Niermann.

6. Getting beyond cocktail chatter

“We hear all the time, ‘So-and-so got X multiple, so why can’t we?’” says Niermann. “Every company is different. A valuation expert can look at the intricacies of a company’s financial health and history to figure out a realistic multiple to shoot for.” For business owners casually contemplating an exit, getting a valuation well ahead of time will help you plan and build out your case.

A valuation firm can help a business owner get a realistic expectation of a company’s current worth, and create a plan to address weaknesses. “Owners always want more and buyers always want less. An independent professional appraiser can give them a more realistic expectation and help them present the company to a potential buyer in a way that hopefully closes that valuation gap a bit.”

If You Are Truly Ready to Sell, Ask Yourself These Questions

By Murphy Business & Financial Corporation LLC

 

  • If I sell the business now, will I get enough money to satisfy my needs?
  • Will I really improve my personal financial position, or should I wait a little bit longer?
  • Define priorities: Do I want an all-cash deal, so that I can wash my hands and be done with the business? (This will generally result in a lower price the buyer will be willing to pay.)
  • Am I willing to finance part of the sales price? (This usually results in a higher price being offered by the buyer.)
  • Am I looking for a buyer to continue my business traditions and carry on in a similar style?
  • Am I looking to protect my employees and ensure they are retained by the new buyer?
  • Have I taken all of the steps necessary to make my business as attractive as possible to a new buyer?
  • What will I do after the sale? Do I want to maintain a relationship with the business (perhaps working for the new owner on a part-time basis or as a consultant)?
  • Have I thought about how much time I will give a new buyer for a transition and training period?
  • Have I done enough to ensure that the business is not dependent on me being there, so that the new owners can take over and be successful?
  • Am I willing to sign a non-compete agreement with the buyer?
  • Is this the right time to sell, and can I do it without experiencing seller’s remorse?

IS YOUR BUSINESS READY TO BE SOLD?

 
By Murphy Business Broker – Shelly Stansfield
Two recent discussions are worth considering when thinking of about selling your business. One gentleman wants to sell his business to a couple employees in a couple of years and the other wants to sell in 10 years.

TWO YEAR GOAL: A moderately successful business owner and I discussed having a business valuation completed on his business so it could be listed for sale in two years. In the meantime, his sales person discovered a new niche market and the business has exploded this summer. He is now working on expansion into new markets and will sell shortly afterward the expansion to his employees. We are working as a team with his CPA-Tax advisor, banker, and Business Attorney to develop the proper structure for both seller and buyers, and are putting the documents together for a Business Appraisal.

TEN YEAR GOAL: A business owner called to discuss the process required to sell his business in 10 years. Being well-prepared is smart. The problem is that this owner was not only the operation of the business, but the sole employee. He makes plenty to live on, cover his expenses, and would be able to provide another person a reasonable living. The reluctance is to hire an employee or two and accept the responsibility for educating them in his field of expertise. When asked if he enjoys vacation time, he immediately affirmed that he takes plenty of time off, but that he lives with the phone in his pocket 24/7. His equipment and assets are minimal, so it is his expertise and experienced service that is of value. The name of his company is his own. You get the picture.

How do you currently operate your business? Are you concerned with short-term goals or are you planning the future? Consider the above, your industry, and your succession plans. Which is salable at a premium? We at Murphy Business & Financial are here to help.

Murphy Business Broker Explains the Process of Selling Your Business Step by Step

By Business Broker Russell Cohen | Murphy Business & Financial Corporation LLC

 

Anyone selling a business should be considering the elements of the sales process. Business brokers are invaluable in each of these considerations:

Think It Through – Know What You Want
Do you want to retire completely or continue to have a hand or profit in the business? Do you want to move or stay where you live? Surprisingly, some people are not clear on these basic aims. Business brokers can help you refine these goals and the ways to achieve them.

Know What You Are Offering and Why You Are Selling
Is the business growing or declining? Is the competition getting tougher? Are the facilities and equipment in good working order or are they approaching the end of their useful commercial lives. Does the business need an infusion of capital to be profitable? Are most of your customers there just because of you (goodwill)? Are you tired of the rat race or are you ready to embrace a new chapter in life? Professional business brokers know how to express each of these circumstances to your greatest benefit.

Prepare Your Records – Orderly and Understandable
If you are trying to sell your business, you have a duty to provide honest information to your potential buyer. You make the job of your business brokers (and the sale of your business) easier if your financials, net worth statements, contracts, employment procedures, etc. are organized in such a way that the reviewer can discern clear information without having to conduct overly consuming research. Your professional may choose to reorganize your information (truthfully, of course) to your greatest benefit. Easily discernible records vastly assist in this process.

The Two Big Questions – Price and Marketing
The biggest concerns of the business seller will always be, “How much can I get?” and “How and to whom should I try to sell?” Murphy Business Brokers are the consummate experts in these areas. They work for you. Their job is to maximize what you get out of the deal and to let you know, straight up, if you have unreasonable expectations. They know where to look for customers, how to package your deal and how to advertise. Will public knowledge of a pending sale hurt the business and the chance for a sale?

Professional business brokers study and are experienced in all of these situations. It’s what they do. They optimize your benefit in terms of both asset return and expedience of sale.

What Matters Most to Business Buyers?

By Murphy Business & Financial Corporation LLC

An established business has much to offer a prospective buyer. A proven product or service exists, as well as a customer base. Typically, there are experienced employees and managers in place (and many choose to remain with the company after the sale is complete). There is a cash flow from the first day the buyer takes over the business. The company is already accustomed to paying its debt service in addition to a reasonable salary for the owner. The following are some of the things that will make your business stand out and be attractive to buyers:

  • Proven verifiable books and records, tax returns
  • Reasonable Price
  • Leverage and terms, They want to use bank financing, owner financing and as little of their own money as possible
  • Solid, verifiable cash flow
  • Furniture Fixtures and Equipment properly valued and in good condition
  • Positive appearance of facility, good reputation
  • Favorable lease and lease options
  • Training, transition period with the seller
  • Covenant not to compete, non-solicitation agreement
  • Solid Reason Why the owner wants to sell
  • Experienced Employees who will stay on
  • No last minute surprises

Small Business Seller’s Wish List

By Murphy Business & Financial Corporation LLC

Today we are offering a wish list for a typical seller of a small business. Entrepreneurs who are selling their companies, as well as those looking to purchase, generally agree on what would make the process more seamless overall.

What the seller wants:

  • A qualified buyer – This not only means someone with the financial resources to meet a down payment and secure financing, it also describes someone with experience owning or managing a business — perhaps with some knowledge of the industry itself. A qualified buyer more than likely has established ties to the geographical area and if married or in a domestic relationship, has the support of his partner.
  • An appropriate offer – A seller appreciates an offer that is solid, reasonable and timely. Sellers expect contingencies to be a part of the offer, but also anticipate these to be realistic. One of the most common contingencies is a lease transfer with equitable terms for the buyer.
  • A practical due diligence phase – Sellers are pleased to answer questions and share pertinent data during the due diligence phase; however, buyers should take care not to pose queries or make statements that may be perceived as an insult to the seller. Common sense should dictate how the buyer should best introduce discussions on past decisions the seller made or how the business is run on a daily basis. Buyers should prepare their due diligence requests in writing and as soon as possible after the offer has been accepted.
  • A smooth closing – The closing should be a time of celebration for both parties, not a time for second-guessing, bickering or hesitation. Hiring a closing attorney experienced in the business transfer process helps immensely. By the time everyone is seated at the closing table, all questions should have been answered, all pre-closing paperwork completed and the buyer and seller should be confident this is a win-win situation for everyone involved.
  • An efficient transition – Most sellers, particularly those who created the business from the ground up, truly want to see the business continue to grow and prosper. Sellers want their buyers to be successful, and most will work hard to ensure the buyer is completely comfortable with all facets of the business during the training period that begins after the closing. This transition phase often involves introducing the new owner to suppliers and customers and showing the buyer everything related to running the business, from how to operate office equipment to the best way to manage employees’ schedules.

As a business broker, I have most enjoyed working with buyers and sellers who are forthright, reasonable and agreeable. Having realistic expectations on both sides and keeping a professional and positive attitude throughout the business transfer process goes a long way toward reaching a successful closing.

Small Business Buyer’s Wish List

By Murphy Business & Financial Corporation LLC

 

We recently presented a wish list for a typical seller of a small business. Now, it’s the buyer’s turn.

Entrepreneurs – whether they are buyers or sellers – generally agree on several factors that make the business transfer process more seamless overall.

A buyer wants:

  • A solid business – Although that phrase may be somewhat subjective, buyers are searching for stable companies with a track record of success. The savvy buyer approaches the situation just as a lender would: requiring a history of financial data that is able to be verified. Filed tax returns are the preferred record for conducting due diligence. It is also important that a business be established. Most lenders require a minimum of three consecutive years of financial history and prefer that the company was under the same ownership (the current seller) for these three years.
  • Reasonable seller expectations – This comes into play at the first moment a buyer begins looking at a business for sale. Does the seller receive an adequate income from his company? Are his revenues increasing or, in this economy, at least staying consistent from year to year? Is his business priced appropriately? Will the seller consider offering some financing?
  • Disclosure during the due diligence phase – Buyers hope sellers will share the items requested in a timely fashion and be able and available to answer questions or present further information where necessary. Courtesy and common sense should prevail during this delicate phase of the business transfer process.
  • A smooth closing – Just as the seller wishes, the buyer also wants the closing to be a positive experience for both parties involved. It is a time of celebration, not a venue for uncertainty, debate or hesitation. Closing attorneys experienced in the business transfer process assist immensely with a seamless closing. By the time everyone is seated at the closing table, all questions should have been answered, all pre-closing paperwork completed and the buyer and seller should be confident this is a win-win situation for everyone involved.
  • A seller who stays involved (for a while) – While a typical buyer probably has some new ideas for the business, almost all buyers want training and initial support from the seller. Buyers want to be successful and retain employees and customers wherever possible and practical. Buyers look for sellers who will spend a week or two showing them the ropes, and buyers are especially appreciative if a seller remains available at a later date should an unexpected question arise. Buyers generally do not want sellers to be involved for a long period of time, unless they have previously presented the seller with an offer of employment. A buyer wants to feel comfortable and prepared as he assumes control of his new enterprise.

As I mentioned in Murphy’s previous blog, my experiences working with buyers and sellers who are forthright, reasonable and agreeable have been the most enjoyable and produced the most successful closings. When buyers and sellers have realistic expectations — initially and throughout the business transfer process — and maintain a professional and positive attitude, they typically find the transactions to be pleasant and seamless.

Develop a Negotiation Strategy when Selling a Business

By Murphy Business & Financial Corporation LLC

When you begin to negotiate the sale of the business, you will be much better off if you have developed a personal plan and have prioritized which items in the deal are the most important to you and which items you can compromise on and still accomplish your objectives.

  • Prioritize which items are most important in the sale. In every business sale there is negotiation where the buyer and seller have some give and take
  • Understand which things are important
  • Understand which things are not as important and where you can compromise and still get the desired results
  • Make sure to analyze what the post-sale looks like. Will you have enough money, what you will do with your time?

You Have Goodwill…Because??

By Dick Halterman
Murphy Business – Shenandoah Valley, Virginia

From time to time, I am in the unfortunate position of telling some 50-year old business owner that they “just don’t have any goodwill”. “But we have been around forever, or our name is like a household word in the community, or we literally have thousands of customers” might be the seller’s response. I am constantly amazed at how little knowledge most business owners have of what their business is actually worth. They will follow their checking account, their investments, and the value of their house but won’t think anything of whether their business value is increasing from year to year. So, what then does this have to do with goodwill? To understand whether you have goodwill, you must first know the value of the business, in total. With that number at hand, it’s simple math. Business Value minus replacement value of the assets it takes to generate the given cash flow equals goodwill, or Intangible value (in other words a value you just can’t put your fingers on or touch). This intangible can also be called “blue sky” or “intellectual property”.

It really doesn’t matter who has been there the longest or whose name is the most recognized, the proof is always in the numbers. Many times, the business with the 50-year history or a recognized name “is” the one that will generate the biggest goodwill. Why? Because those businesses have found a way to beat the competition in a myriad of ways. Better systems in place, better marketing, more productive employees, trade secrets and the list can go on and on. You have goodwill…because…you have found a way to squeeze more profits out of every sales dollar, end of sentence.