Friendly Advice for Sellers and Buyers

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Almost daily, I encounter inadequately prepared business owners wanting to sell their business. They are totally unaware of the ordeal they face in this rather overwhelming task. Whether for emotional, financial, or operational reasons, they have given little or no thought to how they want to gracefully exit their business. Yes, there are indeed those owners who do not fit this profile and they are really a pleasure to work with. However, at least 85% are in need of help, which more often than not, they don’t realize they need…that’s our number 1 challenge…but hopefully this friendly advice will help.

Sellers and Buyer Psychology

From experience, we know it’s not easy to turn a sluggish business around and that is exactly the task we face daily. Since the banking crisis of 2008, which caused the major economic meltdown, fewer and fewer businesses are now producing the levels of profitability, that is the basis of business value. Unfortunately, the bulk of the business owner have not come to terms with the changes in buyer psychology, along with the banking institutions more onerous lending policies…then there’s the ever increasing local and federal government intervention, imposing more and more punitive taxes and legislation. As a consequence, along with their lower than average profits, small business owners still have an unrealistic expectation of what their business is worth in todays market.

Now, there’s always two sides to an equation and in this case it’s the  prospective buyer. They are not going to get off lightly either. Many respond to business for sale ad’s, having carried out little or no research or planning on exactly what business they can really afford, or even if they are adequately qualified to buy and run a business. Many prospective buyers seem to respond to ad’s on a whim and this wastes their time, the business brokers time and the sellers time. We do as much as we can to weed out the tire-kickers, but there are only so many hours in a day we can spend at this task. In the same way as there are sellers who are well prepared, so too are prospective buyers. Again, these are a pleasure to work with, as they are knowledgable and professional. They may be rather demanding, but at least their understanding of the business sales process minimizes time wastage.

Yes, It’s all About the Financials

The biggest anguish for both brokers and buyers is lack of a adequate business owner financial statements. This is especially true if there is a sophisticated buyer and an unorganized owner. Frustration mounts on both sides as the prospective buyer tries to analyze the business, with a seller whose attitude is less than understanding. Frustration is also present in reverse, with a sophisticated seller and a buyer who lacks the ability to grasp all aspects of the business. This situation is far more harmful for the intermediaries reputation, as generally the business broker is representing the seller, not the buyer….therefore, a buyer who demonstrates incompetence reflects on the broker. Yes, the broker does as much due diligence as possible with the prospective buyer, but there is a limit to how much can be found out until we are in the dynamic environment….that’s when the rubber meets the road.

Depending on the level, that is, from main-street business to mid-market business, the quality of the financial’s are either non-existent or tending to elaborately detailed…with everything else in between. As an example of competence, there’s one anecdotal story of a business owner wanting to value his business before selling. On close examination of the P&L’s statements, which incidentally were prepared by the owners wife using Quickbooks, it was noticed that the LOC (line of credit) was actually being counted as revenue.  When we brought this error to their attention, it was like trying to explain quantum physics theories to a layman. Needless, to say we never performed a valuation, as they were never able to resolve the problem and produce rational statements. I could go on and on ad-infinitum, but you get the picture. Well prepared and accurate financial statements are an essential tools in presenting the business in it best light. Trying to understand a business from faded and Xeroxed tax returns, just doesn’t cut the salt.

Inventory…the Achiles Heel of a Business

Another buyers pet peeve, is unidentified or badly recorded inventory…especially for a manufacturing company with a multitude of products and parts that have to be warehoused. Despite the availability of relatively inexpensive computer hardware and MRP and inventory software, there are still businesses doing this complex task by hand. Needless to say, this lays the foundation for plenty of arguments between buyer and seller at a later stage of the sales process, about real or imaginary inventory and its value.

Buyer and Seller Chemistry

Occasionally, a situation arises when a rather abrasive buyer meets a seller for the first time. Unfortunately, it’s always a crap shoot if people will get on or not and it turns out to be awkward and embarrassing for all the players, buyer, seller and intermediary. Another anecdotal story relates to a business owner running what we would consider to be a very well managed manufacturing business. The prospective buyer was highly qualified, both financially and experientially. The minute we all met, when we entered the firms facility…it was obvious from the rhetoric and body language, this was not going to be a good visit. It is rare that a situation like this arises, but even from the “get-go” the chemistry was not apparent. Naturally, the seller was very disappointed, as all indications on paper was that this was the perfect fit.

Main-Street Business

A pet peeve mainly for business brokers doing main-street sales is the large number of prospective buyers, who rarely if ever, talk with their bank to determine if they are credit worthy and can obtain pre-approaval for a loan. This is definitely a time waster, since the prospective buyer might make an offer contingent upon obtaining financing…then the long wait begins, as the bank turns on their lending process, which is the case of the SBA might be measured in months not weeks. Despite the fact that we demand personal financial statements from prospective buyers, this is not a good indicator that the bank will provide the prospective buyer financing.

Mid-Market Business

For businesses in this segment of the market, which typically have revenue from $2 million to $50 million range, similar challenges exist as those in Main-Street, however, the scale is different and the stakes are generally higher for both sides of the deal. Despite the duration of the process, for a whole variety of reasons, the single biggest buyer peeve is the lack of availability of due diligence data once a Letter of Intent to purchase has been filed. Now, as M&A Advisors we counsel owners regarding this process, but asking for a certain document and receiving it can be a long wait. It is highly recommended as soon as the listing has been triggered, that the owner/seller step through the due diligence list we supply and begin to compile the required data and documents, way ahead of when they are required for inspection. This takes the stress away from all concerned with the process and actually saves time and money. And who doesn’t want to save money these days…we can help.

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FSBO…Tips for Potential Buyers

bbnyThe “For Sale by owner” approach to selling valuable property is less commonly used for sale of commercial real estate and businesses than residential real estate. However, from a buyers 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 the business owner conducts a sale, 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 broker firm who has 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, expertise and years of valuable 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.

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Small Business Owners, are You Planning for the Economic Uptick?

As a small business owner, have you been waiting for the economy to turnaround before selling your business? If your answer is yes, now’s the time to start planning your transition as economic conditions improve. 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.

intermediary

Business Owner and Intermediaries

Buyers are Looking for Good Businesses

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.

Choose a Certified Business Intermediary

Another factor important to owners selling their business is availability of competent brokers. Unlike selling real estate, where 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. This is especially true since the banking crisis and economic impact in 2008. Consider this fact, there are only ten CBI’s (Certified Business Intermediaries) in New York State alone. Therefore, the supply and demand curve work against business owners delaying a decision to sell, since most of the qualified brokers will soon be pre-occupied once the economy finally takes off.

Worlds Largest Professional Brokerage Association

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”. Certified IBBA Brokers have spent considerable time, effort and significant 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. This ensures that their clients interests are always catered to in a competent and effective manner.

Business Owners Take Action Now!

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.

 

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