Small firms:

• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Have generated 64 percent of net new jobs over the past 15 years.
• Create more than half of the nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

Sources (see the Office of Advocacy’s Research and Statistics page):

• U.S. Dept. of Commerce, Bureau of the Census and International Trade Admin.
• Advocacy-funded research by Kathryn Kobe, 2007
• CHI Research, 2003
• U.S. Dept. of Labor, Bureau of Labor Statistics.

A wise sage once said, “All good things must come to an end”. This is especially true for the small business owner, who’d like to exit their business gracefully.  But, saying it and taking action are two entirely different propositions when it comes to making that a reality. Most small business owners are constantly consumed with the day-to-day running of their business and have precious little time for the luxuries of planning, unlike their larger corporate cousins, this activity tends to be put off till last minute or generally not done at all.

Business owners who’ve work hard all their lives may dream about that day they can be free from the everyday frustrations of running their business, but do they plan for it? Even if they are years away from moving on or retiring, do they ever think ahead and plan? A common misperception is that exit planning is only applicable when a business owner is retiring, unfortunately nothing could be further from the truth. Exit strategies aren’t just for deciding how to exit their businesses; they also lay the groundwork for growing and managing the business, so that the business-transfer process is flawless.

Some business owners might plan to take their companies public and sell their shares when they retire. Others plan to sell their businesses to individuals or other companies without ever going public. Some expect their children to assume control of the company, which is a rare situation these days. Other business owners don’t think about an exit strategy at all, and someday, just fade away and die. So, if you don’t plan your business exit, don’t worry, there’s a default strategy…but, you’re not likely to like it.

This article explores the possibilities for exiting the business and how to think about the process of preparing for the ultimate journey, as the business owner prepares to transition their business to a new owner.

Why Does a Business Owner Need an Exit Strategy?

If you have any sort of investor involved with your business, such as angel investors, venture capitalists or private equity groups who’ve invested in your business, they will most definitely demand an exit strategy. They will want to know how they will be compensated for their investment in your business. Without a viable exit strategy, they are never likely to invest in your business.

If you’d like your children to inherit your business, you will need to plan for this. On-the- other-hand, if you don’t have children or other family members interested in your business, you’ll more than likely sell it to a stranger, your employees or maybe your business partner, if you have one. Regardless of the buyer, there’s a path to tread in the years leading up to the sale to ensure the highest price and the smoothest transition.

In addition to consulting a certified business broker/intermediary, it is always advisable to consult an attorney experienced in business succession. This should be part of your trusts and estates planning with a highly competent attorney who is respected in your area. But, it would be worthwhile to gather all your professional advice experts around you, including a business broker / business intermediary, who can add value as it relates to the sale of the business, if that’s your goal.

The Early Days

No two-business owners ever run their business the same way, even if they are in an identical industry. There are many ways to run a business and they all have pros and cons. Some creative business owners drain their company on a daily basis. Now, that’s doesn’t mean they bleed the company to death and run it into the red, but they handsomely compensate themselves, along with other perks, such as preferential shares and heavy bonuses. If they were in the corporate world this would definitely be frowned upon, but in the world of small business it tends to be the norm and the business is termed a lifestyle company.

Unfortunately, what the small business owner tends to overlook is that this is not money in the business and can be harmful when it comes time to sell. The way money is extracted from the business may have serious and negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains. Without careful long-term planning, you may end up pulling out money now you may need later.

Exit planning therefore should ideally occur in the early days of a new business, but expediency dictates that generating revenue and making weekly payroll is a higher priority, rather than some seemingly esoteric exercise like exit planning. So, this task tends to be deferred to later years, when the business is in full swing and the owner may have a little more time to think of the future.

Strategies for Selling

Most small business owners are emotionally attached to what they’ve built naturally, so instead of selling to a total stranger, you can pass ownership to another like-minded soul who will preserve your legacy. Interested parties might include customers, employees, children or other family members.

But, the buyer needn’t always come from outside. You might favor selling your business to current employees or managers such as a management buyout or MBO. It could also be an ESOP, or employee stock option plan, where the owner sells to his/her employees.  In these kinds of sales, the seller would likely structure the deal very differently than a conventional stranger buying the business.

The cleanest friendly buyout occurs when the business is passed down to the family. But this has implications too if the family not quite as functional as it should be. Once the kids are in charge it’s always possible they’ll end up fighting over who received the largest share, who does or doesn’t deserve the ownership they received, and who gets the final word. When you sell your family business to the children, you may feel like you’ve never really left. You’re on-call 24 hours a day seven days as week for questions about how things work. They’ll finger-point forever while the business slowly runs into the ground, then blame you for not leaving clearer instructions. If you decide to go this route, you’ve got a lot of planning to do before transitioning out of the business.

A corporate acquisition is certainly one away to go, but it isn’t plain sailing either. However, the advantage is that in an acquisition on this nature you can sell your business and leave the kids money, maybe, but at least sparing the business from being ruined by your heirs. Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and go for it.

Businesses in public markets value your business relative to your industry. Fortunately, in an acquisition of a private held company, you negotiate price. This is good, as the sky’s the limit on your perceived value. Very often if the buyer is a larger corporate public entity the person making the acquisition decision is rarely the owner of the acquiring company, so they don’t feel the pain of acquisition cost. Convince them you’re worth a billion dollars, and they’ll gladly break out their employer’s checkbook. Joking of course, but you get the idea.

If you choose the right acquirer, your value can far exceed what would be reasonable, based on your income. How do you select the right company? Look for a strategic fit: Which acquirer can acquire you to expand into a new market, or offer a new product to their existing customers?

But acquisition has its dark side. If there’s a bad fit between the acquirer and your company, the combined companies can, and often do, self-destruct. The acquired management team may end up locked into working for the combined company, and if things go badly wrong, they get to watch their dream implode from within. If you’re thinking of acquisition as your exit strategy, make yourself attractive to the acquisition candidates, but don’t go so far as to you cut off your other options as they may be the only ones left.

Critical Elements

So, there are several ways to exit your business: your can sell it to an individual buyer; have it acquired by another company; pass it to another family member; sell to a manager, an employee, or a colleague buy-out; or, just close the doors. Unfortunately, this latter exit is all too common for the business owner who’s neglected to develop and exit plan early on in the life of the company and their transition to the new life.

For an exit strategy to be useful there are ten critical elements a business owner needs to know about exit strategies:

• Business owner must decide where they want to be in five, ten or twenty years…easier said than done, but essential as a road map to a successful transition.
• Employees must know your goals or growth plans and change behavior accordingly…without good communications employees will always make the wrong assumptions, invariably to your cost.
• Flexibility is the key…it is essential to have a backup plan, as business, life and goals will change, whether self-induced or from an external environment change.
• Continuously update your business plan, and make sure it includes an exit strategy…better to have a plan that needs massaging and updating than no plan at all.
• Keep your financials current, and have them audited yearly. It adds to their value…this is always the first port of call for a potential buyer, lack of good financials has killed more than one good deal.
• Assemble a team of experts, including a CPA, a transaction attorney, a financial advisor or other expert for valuing your business and intellectual property and a business broker / business intermediary, who has the expertise related to the sale of a business and market trends.
• Run your company every day as though it were going to be sold any day soon…as one day that may be the case. Always be cognitive of the 4 D’s business strategies for exit; divorce, disability, departing and death.
• Never ever assume it is going to be easier to exit your business than it was to create it…in fact, in many ways it is more complex, more emotional and can be a harrowing experience if there’s no formal exit plan.
• Compile a “selling my company” file and checklist for monthly and annual reviews to keep on track to meet your goals…meticulous control of expenses, uncompromising profitability, and well-trained employees will stand you in good stead.
• If it can be avoided, do not attempt to sell your business on short notice, this means that you are not in control of the sale…let the dog wag the tail not the other way around.

Finally

Never forget who your friends are and how helpful they can be….also your spouse or significant other, but don’t make the mistake of using them to advise you, as this is fraught with danger. You need to have a competent team of professionals to plan and guide you through shark infested waters when it comes to your exit plan and all that’s involved with exit planning…including disposition of your estate, wealth preservation and peace of mind, always get the best advice money can buy and you’ll never regret it…good luck.

*As coined by Patty Harty for the investment industry

Article published by permission of Jack Lyons, CEPA President of Lyons Solutions, LLC.

We’ve all heard that when you assume, you could make an ass out of you me. Let’s go one step further. When business owners make assumptions or poor decisions that could potentially kill a successful sale or transition of their business…that’s called assumicide. Coined by Patty Harty of the St. Louis Sandler Sales Institute^® franchise, first seen used in an article by Mike Lissner, CEPA and partner in Acropolis Investment Management in St. Louis.

Below are four key areas where business owners are likely to jeopardize a business sale or merger and acquisition transaction.

Assumicide #1: Lack of Information

Lack of information can take many forms. But, two of the biggest missteps are:

• Having an inflated opinion of the value of the business
• Making unreasonable demands in the negotiation process

Both of these missteps are a common form of assumicide that can prevent any and all merger and acquisition transactions from happening.

Based on lack of information, the worst case scenario for the owner when selling is:

1. He or she receives a good offer from a credible buyer
2. He or she decides to turn down the offer because it wasn’t what they felt the company was worth or they have unrealistic expectations regarding the company’s future
3. The decision is made to hold off selling until some later date
4. A negative change in the economy, the industry or their company takes place
5. The company loses a significant percentage of its value
6. The company becomes unsalable
7. The owner has to close down the company because it became unprofitable and can’t get the financing it needs to survive. That’s the worse example of assumicide I can conceive of because the lack of information is so easily preventable if the owner had realistic valuation and performance expectations to begin with. It is mind boggling as to how often this string of events happens.

Assumicide #2: Lack of Proper Representation

Lack of proper representation is another form of assumicide.  We see it all the time when a business owner wants to use his or her regular attorney and/or accountant. How can an attorney, inexperienced in mergers and acquisitions (M&A) and/or an accountant who is inexperienced in transaction taxation and due diligence be expected to make sure they represent your best interests? Using the wrong advisors is always a mistake. It will increase the likelihood that the buyer’s attorney will have a distinct advantage in the negotiation of the purchase and other agreements and perhaps even blow a great deal by negotiating inadequately. An inexperienced transaction accountant almost always slows a deal down and that could also put the transaction in jeopardy. Buyers become impatient when information isn’t right or is not received in a timely manner. In our experience, this increases the likelihood that the buyer may walk, try to renegotiate the deal terms or expose the seller to the additional risk of something in the company or economy changing that puts the deal in jeopardy.

Assumicide #3: Being too Smart for Your Own Good

Business owners are self-confident, intelligent and in many cases over-achievers. Many are visionaries, decisive and insightful. Unfortunately, many business owners are too smart for their own good when it comes to selling their company. They have little, if any, business sale, merger and acquisition experience yet look upon an M&A transaction as just another deal. It’s assumicide not to know your own limitations and to think of an M&A transaction as just another deal. It is a unique, complex and emotional type of a deal.

Given that most business owners have the majority of their wealth tied up in their company and a business sale is a one-time opportunity, I am puzzled as to why a business owner would want to sell-out without using an M&A advisor. From what I’ve read, most business owners that go it alone admit that an M&A advisor would have protected them from their lack of experience. If a business owner has little or no knowledge of M&A, how can assumptions and poor decisions not be made concerning the complexity of M&A transactions and which buyers would be interested in their company? Additionally, owners can’t foresee how the emotions and stress of the transaction process will impact their objectivity and judgment. In my experience, this is very risky — in most cases, you only get one chance to get it right when you sell your company.

Assumicide #4: Unreasonable Valuation and Deal Structure Expectations

Sometimes, a little knowledge is a dangerous thing. Perhaps this has never been more appropriate than in today’s Internet era and ease of information access. In the M&A deal-market, it’s the business owner’s presumption as to the appropriate purchase price multiple that qualifies as having the potential to wreak the most damage. Many sellers are more comparable transaction oriented than buyers. Worse yet, sellers tend to be selective with what they consider to be comparable. For instance, many sellers hear industry chatter that someone sold for X multiple of EBITDA. Or, they see that a public company sells for a certain multiple of earnings. Then, they assume that their company automatically qualifies for that multiple. This is assumicide of the worst kind because it is often based on greed. Getting greedy is a risk that you can’t afford to take in a merger and acquisition transaction. Most buyers look at the value drivers inherent in a business. They don’t begin with a multiple but tend to use multiples as a checkpoint that can supplement their view of value. We’ve all heard the expression, “Figures lie and liars figure.” This holds true for both buyers and sellers. In either case, one party can end up spinning their wheels and if there is a busted process, it can take as many as three years to clear the air before you can pursue another sale. What sellers fail to understand is that each business’ strengths, weaknesses, opportunities and threats are unique and that the acquisition market resets on every unique transaction, forcing each deal to stand on its own.

There is going to be a massive increase in the number of businesses for sale, as baby boomer entrepreneurs begin to retire. As of January 1 this year, the oldest of America’s baby boom generation started turning 65 at a whopping rate of 10,000 a day…a trend that will last for the next 10 to 15 years. Over that time there’s going to be a massive increase in the number of businesses for sale, as baby boomer entrepreneurs begin to retire. The owners of most of these businesses, now 50 years old or older, are beginning to think about retirement and that is going to have a major impact on the economy, infrastructure, business, government and peoples lives over the coming years.

In total, more than 7.7 million business owners are expected to exit their businesses and these businesses represent over $10 trillion in wealth. However, studies by Mass Mutual, Price Waterhouse Coopers, Marquette University and others show that over 75% of these business owners have no exit or transition plan or any idea how to handle what will be the single biggest financial decision of their lifetimes. This is not only an inconvenient truth, but also a recipe for disaster. An exit plan is a comprehensive, integrated plan that addresses all personal, business, legal, financial, tax and estate issues involved in exiting from a privately owned business. The plan shows business owners how to position themselves and their businesses to gain maximum leverage to accomplish all their personal, financial and business goals when they exit their business.

The American Family Business Survey sponsored by MassMutual showed that approximately 30% of these owners plan to sell their business to a third-party buyer. As a result there is likely to be a glut of businesses on the market. The possible result of this glut of available businesses will be downward price pressure for most privately owned companies, as the supply and demand curve will favor buyers. So, it will be incumbent on the business owner to focus on doing everything they can to increase the attractiveness, value, and salability of their businesses. They will need to focus on improving profitability, building a sound management team and growing revenue and profits as a key differentiator against competition.

One way for baby boomer business owners to deal with this situation is to put themselves in the drivers seat by having a strategic Exit Plan ensuring that they build value and are positioned to seize opportunities that present themselves for attracting quality buyers. The significant benefit of planning is that business owners are often able to reduce, or in many cases, eliminate capital gains taxes due at the time of sale. This increase in after-tax net proceeds can be dramatic and allows owners to keep more of their hard earned gains of a lifetimes work. Another benefit is peace of mind, often overlooked, but essential when embarking on a new phase of life. Taking charge of their future is now in the hands of the baby boomer business owner, rather than at the whim of an institution, bent on getting their pound of flesh.

Exit planning delivers very tangible benefits, as many savvy business owners sell for enhanced premiums over their contemporaries who come to market unprepared. 
An Exit Plan will include contingencies for burnout, divorce, illness, and even an owner’s untimely death. A good Exit Plan shows business owners how to maximize value of their business at the time of exit and minimize their tax burden. It ensures business owners are able to accomplish their personal and financial goals. However, with so many baby boomer businesses on the market concurrently, these objectives won’t easily be met for everyone. Without a plan, owners won’t be prepared for the tax implications related to selling a business. They won’t realize how today’s business decisions could impact on future succession and transition. There are many options that a business can execute legally and safely to minimize tax implications later.

Reasons for Doing Exit Planning Now

Important Facts In to Keep in Mind As You Plan

• Oldest of the baby boomers were born in 1945 and are now 66 years old.  The youngest baby boomers were born in 1961 and are now 50.
• By 2009, the numbers of business owners wanting to sell their businesses each year will have increased fivefold over 2004.  This trend will continue for the next 10-15 years.
• It will take 2 years of focused activity to get your business ready to sell at a reasonable price.
• We are currently experiencing the lowest capital gains tax rates in the last 60 years.

There is only one-way to get started with this process…you have to become well informed. Exit Planning is typically a “one-time” event and is not a process which is familiar or which business owners have experience. As a result, the use of an Exit Planning advisor is recommended.

Seek information from reliable sources and the best independent and objective sources possible. Talk with trusted business friends who have gone through the process, talk with trusted advisors like your attorney, accountant, financial advisor, or insurance professional or an M&A Specialist who focuses on privately held businesses. These specialists work with all variants and levels of professionals daily and are constantly helping business owner’s grapple with the vagaries of building, running, and selling their businesses.

Many people who have dreams about either starting or buying a business fail to consider all the impediments before making sound decisions. Don’t get us wrong, owning a business is one of the most satisfying things an entrepreneur can do as it meets many of our personal and primal needs.  So, it may come as a surprise, but due to downsizing and the uncertainty these days of keeping a corporate job, upwards of 70% of Americans want to own a business. Perhaps you’re one of these people, millions ready to take the plunge to pursue the “great American dream”. We salute you.

However, there are dozens of factors to consider. So, before rushing headlong into something you cannot achieve or sustain, let’s step back and consider what’s at stake. Firstly owning a business is a major life altering decision, which is not to be taken lightly. Secondly, it will cost you in time, money and relationships if you don’t choose properly. You could land up broke, divorced, and depressed or at the least downhearted. But in making the right choice, you could have fulfillment, lots of fun and greater control, and oh by the way, make a lot of money.

To help guide you in the decision-making and to consider many of the elements of your choice, here are some tips for you as you start the process of finding your dream business.

Serious Thoughts About a Business

Running a business is not like working for a corporation. It’s not an eight-hour five-day workweek, so this is something you really need to deliberate over, especially if you value your free leisure time.  Owning a small business is your life and it is highly integrated into everything you do. However, if you to choose a to buy a business that you’re truly passionate and excited about, it won’t seem like work at all. When you do something you love, you’ll stand a much better chance of success, and longer hours won’t seem like drudgery.

It’s all About What you Know?

Don’t even consider trying to buy a business for which you have neither knowledge nor experience, it will be a total struggle at best and a disaster in the worst case. Choose a business where your skills, knowledge and expertise can be applied and you feel very comfortable. For example, if you work with your hands and are very practical don’t chose a business where one-on-one activity is required, such as any type of consulting, or people oriented service business. If, you on-the-other-hand, you are an outgoing type you may want to consider these types of businesses. The key is to find a business, which will put you in the drivers seat for success, as you will have all the ingredients to meet the need.

It’s all About the Lifestyle

Choose a business that suits you and your lifestyle needs. If you came out of the corporate world you will probably need to maintain regular business hours and a an organized schedule, but for those who are much less structured irregular hours and flexibility are the key components. For example, if you’d like to work at home, consider a web-based business instead of a formal office where you are making customer sales calls and attending meetings. It’s you life and your decision to make.

Money is the Prime Mover

Nothing happens without money. It is the oil that greases the gears of a small business and the means to turn an idea into reality. You need to spend quality time addressing the financing of the new business, whether it is a start-up or you intend to acquire an existing business. The are numerous ways to raise funding for the new venture, it can be from a regular bank, a venture capitalist, a private equity group, or angel investors. On the other hand, if you can secure sufficient funds to acquire a business you may be able to grow organically without any future outside funding. If you acquire an existing profitable business, then revenue can provide the operational and growth capital as the need arises. So, it depends on the type of business you envision regarding capital investment. Some businesses are not so capital-intensive, while others are exactly the opposite. Regardless of the amount of capital requirements, the source and terms need to be carefully scrutinized, as you do not want to start off on the wrong financial foot.

It’s Like a Chess Game, all About the End

Although it sounds trite, the day you start up your new company or acquire an existing business is the day you decide to exit, at least metaphorically. Without an exit strategy you have no idea really how you would want to run the business to meet the end goals. Just because the business is running smoothly and you are making profits and growing, doesn’t mean that you have positioned it for subsequent transition, sometime down the road.  You must have an exit strategy for your new business right from the very beginning. You’ll need to decide whether you want to build it and sell it in the near future or keep it as a continuous source of income, regardless of its disposition. The exit plan helps you to choose the optimum business structure in order to avoid major legal and tax problems in future. There are numerous questions to ask, but a good business intermediary like BBNY can help you in that task.

Whatever else you do, think through everything you can before taking the plunge and investing in a small business. Don’t do as many discouraged and disheartened entrepreneurs do and fail to consider the multiplicity of factors that control all the outcomes in owning a business. Make time to carefully consider all your options and try to choose the right direction for you. It will payoff in the end.

Well according to U.S. Dept. of Commerce and a number of other reliable sources, small firms practically sustain the US economy, for example, small businesses:

•    Represent 99.7 percent of all employer firms.
•    Employ half of all private sector employees.
•    Pay 44 percent of total U.S. private payroll.
•    Generated 65 percent of net new jobs over the past 17 years.
•    Create more than half of the nonfarm private GDP.
•    Hire 43 percent of high tech workers ( scientists, engineers, computer programmers, and others).
•    Are 52 percent home-based and 2 percent franchises.
•    Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.
•    Produce 13 times more patents per employee than large patenting firms.

And still the small business owner is waiting for credit to ease, especially the business owner wishing to transition and move onto the next stage of their lives. However, according to Federal Reserve Board, Senior Loan Officer Opinion Survey, credit conditions are improving. In mid-2010, commercial banks began to ease the tight lending conditions on small businesses that had begun in early 2007. And credit has continued to flow, as loans under $1 million totalled $695 billion in FY 2009. Also, after declining over the past few years, venture capital investment dollars increased in mid-2010.

Small businesses are heavily reliant on owner investment and bank credit, averaging about $80,000 a year for young firms. Startups rely about equally on owners’ cash injections into the business and bank credit; young firms receive about three-quarters of their funds from banks via loans, credit cards, and lines of credit. One-tenth of startups and about a third of young firms do not use capital injections.

But, how do the established businesses fair?….again the U.S government departments responsible for commerce state that seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Census data report that 69 percent of new employer establishments born to new firms in 2000 survived at least 2 years, and 51 percent survived 5 or more years. Survival rates were similar across states and major industries. Bureau of Labour Statistics data on establishment age show that 49 percent of establishments survive 5 years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more. Which are sobering statistics.

Since 2005, bankcrupticies have gone from 39,201 to a whopping 60,837 in 2009…not an encouraging trend. However, the figures may be distorted somewhat, as three quarters of all U.S. business firms have no payroll. Most are self-employed persons operating unincorporated businesses, and may or may not be the owner’s principal source of income. Because nonemployers account for only about 3.4 percent of business receipts, they are not included in most business statistics, for example, most reports from the Economic Census. However, since 1997, nonemployers have grown faster than employer firms. A trend possibly due to the dissatisfaction workers have nowadays with corporations, whether small or large.

Census data show there were 5.7 million firms with employees and 17.6 million without employees in 2002 (and 18.6 million without employees in 2003). Applying the sole proprietorship growth rates to the nonemployer figures and similar Department of Labor growth rates to the employer figures produces the 24.7 million figure. Small firms with fewer than 500 employees represent 99.9 percent of the 24.7 million businesses, as the most recent data show there are 17,000 large businesses.

So, not sure what your answer is, but mine is a resounding yes to the title question…small businesses are the backbone of the country.

If you’ve been waiting for the economy to turnaround before selling your business now’s the time to start planning your transition. As bank lending eases and buyer liquidity improves, you’ll want to be ready to tap into the market and take advantage of being the early bird that catches the buyer.

There are already indications that buyers are once again searching for their dream business, along with an increase in business owner’s inquiries wanting sell their businesses. In addition, the SBA has brought their lending rules back into the rational zone, which allows a greater number of potential buyers to take advantage of the eased lending environment.

Another factor important to owners selling their businesses is availability of competent brokers. Unlike selling real estate, where the density of real estate brokers and agents in major population centers is high, the density of qualified and certified business brokers across the nation are few in number. In fact, there are only ten CBI’s (Certified Business Intermediary’s) in New York State alone. Therefore, the supply and demand curve works against business owners delaying a decision to sell, as most of the qualified brokers will soon be pre-occupied once the economy takes off.

Given this state of affairs, the first question a business owner contemplating the sale of their business should ask a broker is, “are you a certified broker by the IBBA (International Business Brokers Association” – the worlds largest professional business brokerage association). A Certified IBBA Business Broker has spent considerable time, effort and investment to ensure they meet the high standards required by their association to professionally serve business sellers and buyers alike. Very much like CPA’s (Certified Professional Accountants), a CBI has to continually sustain his/her certification with continuing education to ensure their clients interests are always catered to in a competent and effective manner.

Don’t take chances, as a long time business owner with so much to lose, why use an unqualified broker to sell your business?…go with an IBBA certified broker and get peace of mind and a successful sale.

Remember the good old TV series “Mission Impossible”, the team who always got their man, well you can get your man too…or, should I say business. It’s similar to selling your house where location, location, location is the mantra…but in the case of buying a business it’s planning, planning, and planning. Yes, it’s possible to find a pretty good business, but you’re going to expend a lot of sweat, blood and tears in the process. So, before accepting the challenge, have a clear plan of action before embarking on this mission. As with all journeys, you’ll need a comprehensive roadmap. It’s no use waking up one Monday morning and saying to your self, “Oh! I think I’ll try and find my dream business today”. This is a recipe for barrels of frustration and nothing to show for it, except a depleted bank balance.

So, how do you start the ball rolling, so to speak?  Well, first of all you’ll need to know what skills you possess and what type of business would suit you. There’s no point in looking for a business that doesn’t match your skill set, talents and innate capabilities. For example, don’t go looking for a high technology software development business if your background is as a tool and die operator, it just won’t work. If you want to buy a great business you’ll need to reconcile yourself to the fact that this is going to take time, effort and money to pull it off. But the more prepared you are, the easier it’s going to be to weed out the wheat from the chaff. Even if you do find a really great business, it won’t be perfect, as nothing in this world is perfect, so make a resolution now not drive yourself or the seller insane as you undertake all the due diligence activities required.

Next you’ll need to establish a time line and understand the personal financial consequences of your actions and decisions. If you are gainfully employed during your search this will put a strain on you and your immediate family, who after all will be impacted too.  It could take a year or even more to find exactly what you are seeking, so pace yourself and don’t forget to consult close friends, family and especially professionals, such as a financial advisor, legal expert and professional business broker, who are members of the International Business Brokers Association and Certified Business Intermediaries, they will know the small business market and can advise you in your search, but make sure you only work with high integrity brokers who are certified. I have worked with a number of prospective buyers, who in the past have come to me after a series of disasters with non-qualified business brokers, and believe me they wasted considerable time and money. In a number of cases they also lost their earnest deposits. However, if as a potential buyer you have already sold an existing business and have a financial cushion to fall back on, this will allow you a degree of luxury and possibly put you in a better bargaining position in future.

It’s going to take you a couple of months to do the necessary research to put a business search execution plan together, so spend the time wisely to do thorough research.  Don’t forget, this is a job you are probably buying, not just a business. If you do decide to venture outside your comfort zone, you had better make sure you know how to run such a business, which may not be familiar to you. Get all the information you can and even talk with owners of such businesses, if you can do this without compromising your position as a potential buyer, all well and good.  Having a handle on the financial metrics of any potential business you’d like to buy will enable you to develop a sound business plan as part of the process for financing the acquisition. Nowadays, banks will demand a business plan and expect you have a clear vision for the business you are thinking of acquiring. Since the banking crisis, lending rules have now tightened and banks are no longer willing to take anything on faith, especially for SBA type of loans. Also, keep in mind the owner of the business you may be considering buying has a vested interest in helping you flesh out your business plan, but don’t forget it’s your plan not theirs. Make sure the plan accurately reflects the facts of the business.

As part of your planning process, you’ll need to be prepared for questions from professionals, especially from the seller themselves and the seller’s business broker.  The seller will want to know how familiar you are with his type of business and your plans for the future, especially if he or she intends to offer seller financing, as their surety for repayment is tied to your competence and ability to run the business. The seller will likely demand a resume from you as a level of proof to show background knowledge and experience. High on the list will be the owners employees, as most business owners are very protective of their loyal workers. Any hint from you that you might clean house or affect their livelihood in anyway after you have acquired the business, will be grounds for rejection. On the other hand, the seller’s business broker will be more interested in your ability to pay for the business. More often than not, a down payment is required, so the broker will want proof that you have the necessary funds. Many buyers try to weasel word their way out of this question, especially if they are light on funds, but sooner or later the truth will have to come out, so be honest with your answer.

When you have a clear idea of what your needs will be and a comprehensive profile of you as the buyer, your next planning step is determining how you find businesses for sale. There are numerous industry web sites catering specifically to buying or selling a business that can save you considerable time and enable you to home in on those that meet your criteria. Sites, such as Biz Buy Sell at www.bizbuysell.com, Business for Sales at www.businesseforsale.com, and Merger Networks at www.mergernetworks.com, plus a professional association site, such as the New York Association of Business Brokers at www.nyabb.org, are good places to start. They are rich in businesses across a broad range of industries. Once you get on these sites, it is intuitive how to do a search and you will get pretty skilled after a short while.  Make sure you keep a folder of potential businesses, as you will not remember them all as you build your portfolio of the most attractive ones. Organization is the key to being efficient and effective in your search.

Good luck with your search and don’t forget, nothing happens unless you devote the time, apply your creative ideas, and put in the necessary hard work.

In our experience the majority of business owners are inadequately prepared when the time comes to sell their business and transfer ownership. But, the way to ensure that the business owner maximizes the value of their business and minimize the objections raised by a potential buyer is to have squeaky-clean financials.

When a potential buyer becomes interested in your business, their first port of call is to examine your financials. This is an opportunity for you the business owner to create a favorable impression and set the tone for the buyer’s whole experience in dealing with you as the seller.

An astute buyer will often have a cadre of professional advisor’s, the most notable in the early stages of discussions with the seller, is his accountant. Any CPA worth his salt will scrutinize your financial statements, with particular attention being paid to the balance sheet.

Many business owners we encounter, pay scant attention to their balance sheet, let alone are aware of its importance at the time of the business sale. So, a few words about the balance sheet are appropriate. A balance sheet is snapshot in time of a businesses financial condition, usually at the close of an accounting period such as a month, quarter or year. A balance sheet comprises assets, liabilities, and owners or stockholders equity. Balance sheets, in conjunction with income statements, are the most important records in a businesses financial reporting system, and required by law in many countries. In addition, well-kept financials are essential in helping to determine the value of the business.

Another area that is particularly vexing for buyers is inventory. This is another balance sheet item and can be a stumbling block for the owner to sell his business, especially in a manufacturing business with large and diverse inventories of parts, especially if the inventory records are not accurate and kept up to date.  Yes, conducting a regular inventory can be burdensome, tedious, and expensive, but will pay dividends during the due diligence phase to minimize the effort required and allay the concerns of the buyer, especially if it’s a corporation. It’s hard enough to navigate this area if the inventory is all accounted for and in good order, it is virtually impossible to reach an agreement with the buyer and his team if the reverse is true.

The “for sale by owner” approach to selling valuable property is less commonly used for sale of commercial real estate and businesses than it is even used for residential real estate. From the buyer’s point of view, this usually would be more risky than buying a business when the seller is represented by a business broker.

Why could it be more risky to deal directly with the seller? There are a number of possible reasons:

- Seller does not want to spend the money to receive advice that is needed.

- A seller may think he or she may be more persuasive than a broker.

- Seller may want not to disclose certain aspects of the business. These may be

matters of regulatory compliance, tax compliance or other issues…

- A broker if retained may insist on preparation of proper financial statements or

other customary transaction steps and the seller may not want to be bothered.

So in the situation where a sale is conducted by the business owner, the buyer should exercise a much higher degree of caution. In such cases a seller, by definition cannot be neutral and may not want to be subjected to the normal processes of buyer due diligence.  In addition, this type of seller is less likely to have prepared the business for sale in a manner that would reveal the true worth of the business. The drawback to buying a business being sold in this manner is not just that the business may be poorly managed; it’s that there usually is no easy way of knowing the true business potential. Under these circumstances buying a for sale by owner business can be very risky.

It’s a Tough Challenge, Buying a “For Sale by Owner Business”

It’s not just that a business owner may deliberately attempt to overstate his or her business profits, but with poor bookkeeping or a cash based business it can be difficult to determine and understand the true earnings. As a buyer, you certainly do not want to pay money for an unprofitable business or buy one that you thought was profitable, only to later find that poor accounting was creating the “profits”.  When buying a business that is for sale by owner, the owner may have the best of intentions, but might be truly unaware of the real circumstances and value of his business. Consequently, in such cases you would likely end up paying too much, which is not a good way to start off. Further, and a very big caution:  your own good negotiating skills could help lead you to buy a business that you would never knowingly want to buy. So obviously there are better ways to proceed…

Intermediary and Businesses for Sale By Owner

You should use an intermediary such as a business broker to assist you. An intermediary can provide strategic information regarding market timing, market conditions, market price, financing options, transaction structures and other relevant information that is critical for both buyers and sellers. You need an experienced business broker to help you see what you are not seeing, or that which is hidden from your point of view. And the business broker would guide you on what to do about it the situation. Simply put, most of us need a guide dog or a guard dog when we are travelling unfamiliar territory. Buying a business is a very time consuming task for all parties and it can take countless hours of dedicated time. For a modest price that business brokers charge, there are many advantages from providing to you protection to saving you time and unnecessary frustration.

Why You Should Not Be Without  the Services of a Business Broker

Using effective representation can make the difference between closing and losing the right deal, or alternatively walking safely away from a deal that you would never knowingly want to do.  A business broker has established relationships with the many professional organizations, which are required to appropriately complete the transfer of business ownership. These relationships prove to be invaluable to sellers and buyers alike.

There are a number of skill sets that a professional business broker uses to ensure that the transaction is managed smoothly, thus benefiting both buyer and seller. Evaluation experience, market awareness, achieving proper representation of financial condition, and use of creative deal structures are a few of these skills. A business broker operates in the marketplace daily and is current with overall business supply and demand, the types and availability of financing, etc.  No other professional is in this position.

A business broker can help find attractive businesses in which you might want to invest. In addition, business brokers usually have experience with determining the fair market value for sale by owner businesses and can help estimate the fairness of the initial offer. When issues need the attention of other experts like a forensic accountant, valuation expert, or deal savvy attorney, the business broker knows how and with whom to strengthen your team.

Lastly, a business broker often has considerable experience in dealing with the type of the businesses you are seeking. You should never allow yourself to be persuaded that you do not need a business broker because the seller does not have one. Ideally, you should look for business brokers who have already dealt with a particular industry or industries you are targeting. Not always, but in certain situations, it is advisable to seek a local business broker.

Obtain Assistance Responsibly – Ask for Certifications & Qualifications

The industry certification of a business broker is very important when making an important decision to purchase a business that is for sale by owner, as a considerable amount of experience is necessary to achieve success in this situation.

Certification serves as one of the possible ways to measure the reliability and trustworthiness of a particular business broker. The International Association of Business Brokers certifies business brokers and awards the Certified Business Intermediary (CBI) to brokers who have successfully undergone rigorous training and examination. The designation demonstrates their knowledge and experience.

Your choice of a business broker can make or break your attempt to buy a business that is for sale by owner. You are encouraged to pay attention to the experience and qualifications of the particular business broker whose services you are about to use. With this in mind, purchasing a for sale by owner business with competent due diligence and under the right terms and conditions can be a rewarding and lucrative decision.