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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Preparation, Preparation, Preparation, it’s The Name of The Game

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I literally receive hundreds of calls in a year from small business owners who tell me they’d like to sell their business…and they are somewhat in a hurry to do so. Religiously, during our phone conversation I go through my laundry list of questions to determine their real time frame, and ask the usual stock questions about the nature of their business, it’s current revenue and profitability, along with the reason for their decision to sell. With all honesty, I have yet to come across any business owner who has really thought his or her decision through thoroughly and planned their exit well in advance. And further, knows exactly what their goals are for transitioning the business to a qualified buyer.

Misleading Information

During our face-to-face meeting with the owner, I dig deeper into the structure of their business, especially its financial state to determine its viability to be sold. As is natural, most business owners have no idea what the value of their business is and often listen to rumors from friends, brother-in-law, and acquaintances about businesses like theirs that sold for an exorbitant amount. Even when consulting with their professional advisors, such as their attorney or CPA, they receive wildly differing information, most of which is totally misleading. Most people I’m sure are well meaning when offering this advice, but once the owner has digested this sort of rumor it is difficult to change their mind, and can react negatively when confronted with the truth by a certified broker or valuation expert.

Quickbooks is Good, BUT, Garbage in Garbage Out

As my conversation progresses with the owner, their excuse for not planning their exit ranges from lack of time, to being too costly an exercise to undertake…and often they say, well you’re the broker, so this is for you to figure out, that’s why I called you. Only on very rare occasions have I been presented with current financials, which consist of exemplary P&L statements and an accurate Balance Sheet. More often than not, the P&L’s are not current, but worse still, have many inaccuracies which cast aspersions on the efficiency of their business. On one occasion, I even had an owner who was using Quickbooks for his accounting system and had counted their line of credit as revenue. However, the owner was quite oblivious to this error, which prompted my question, what was his accountant thinking when he prepared their taxes.

Accuracy and Transparency is Key

Because buyers these days tend to be better educated, it is essential that even if the business facility is not a clean and tidy as it should be, an owner who wishes to sell their business, should pay extra special attention to presenting the financial picture of the business. Accuracy and transparency is essential if the owner wishes to avoid any possible suspicion on the part of the buyer, since poorly presented financials will be red flags every time. In fact, not only financials should be well documented, but also, every aspect of the business should be committed to paper to tangiblize the business. This is especially true for a service business that has little in the way of assets, as in reality all that is being sold is the goodwill and customer list.

Have all Your Ducks in a Row

I recommend having all the salient facts about the business placed into a single binder that is sectioned and professional in appearance. This makes an incredible impression on any prospective buyer. After all, you have to be cognizant of the prospective buyers perceptions, which often influence a buyer, as this represents their reality. Younger buyers these days for example are quite sophisticated and expect a higher standard. In fact, there is a noticeable generational difference that can occasionally cause problems when a generation X buyer is talking with a baby boomer business owner. Generation Xers are arguably the best-educated generation with at least 29% obtaining a bachelor’s degree or higher. Their expectations are higher and they are much better equipped to handle the complexities of business ownership.

Owners Bad Habits

Perhaps the worst offender for creating a bad impression of any business being sold is having a disheveled balance sheet. This more than anything else can turn off any buyer instantaneously. Especially, when it comes to the accounts receivable versus the accounts payable. Many owners I have worked with were not very efficient in their invoicing and collections, consequently this resulted in poor cash flow and always having to hustle to cover weekly payroll. One owner in particular was so bad at this basic business operation, that they had maxed out their personal credit cards to cover payroll. Continuation of this habit could easily lead to bankruptcy regardless of the firms revenue…keep in mind cash (flow) is king. Of course this would be unnecessary if a well-oiled system had been in place to maintain an efficient cash flow.

Exit with Dignity

Another sin is the owner who feels that he or she is indispensible…they still make all the decisions and live at the top of their self structured pyramid. The owners employees know exactly what do at their level, but would cease to function if confronted with a decision or task in another area of the business. Any owner that can’t take a day, off let alone a week or more has an unsellable business, especially for hands-off management type buyers. There’s more to tell, but I’m going to leave that for another blog article. So, preparation is the key to a successfull exit. Suffice to say, if you’re a small business owner start planning your exit at least 2 to 5 years before the event, you’ll at least then be able to exit under your own terms and not those of the bankruptcy court, which would be an expensive and agonizing end to your business life.

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TO SELL OR NOT TO SELL – THIS IS A TIME IN HISTORY LIKE NO OTHER

This Is A Time In History Like No Other

retired_couple_rAfter WWII with the passing of the G.I. Bill a wide range of benefits were available for returning World War II veterans. These benefits included low-cost mortgages, low-interest loans to start a business, cash payments of tuition and living expenses to attend university, high school or vocational education, as well as one year of unemployment compensation.

These returning G.I.’s were welcomed home with open arms, with government incentive programs to help those returning and to spur the economy, which ultimately created the wealthiest nation with the highest standard of living on the planet.

By 1956, roughly 2.2 million veterans had used the G.I. Bill education benefits in order to attend colleges or universities, and an additional 5.6 million used these benefits for some kind of training program. A large number of those GI’s that took advantage of these government incentives to start small businesses, which ultimately became the backbone of the nation and created the fastest growing economy that ever, existed.

Small Business Challenges

Since those early days, there have been many challenges in the intervening 50 years, but not until the 2008 banking crisis, which crashed most of the global economies, had there been a significant let up in the US growth and prosperity. The wealth that had been created by so many of the baby boom generation of business owners has been seriously impacted and a large number of businesses simply went bankrupt.

Now, this baby boom generation, who built this phenomenal economic juggernaut, are picking up the pieces and contemplating retirement. Unfortunately, for the majority of them, their scorecard looks very different today than did back in the mid-fifties. Those left after the meltdown carnage, have to now rethink their strategies for transfer of ownership, which is far more complex today.

Graceful Transition

More than ever, among the Baby Boom generation of business owners, is the need for sound Exit Planning. Contrary to government statistics, the future prospects for selling a business and monetizing that sale is no longer as lucrative as it may have been 10 or 20 years ago. With increased punitive government regulations, both at the Federal and State level, as well as uncertain future tax increases triggered for example by the new healthcare legislation, it is now time for the business owner to review their options in order achieve a graceful and profitable retirement. The $64,000 question is…will they be able to sell their business in time to achieve that goal?

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