The Selling Process
1. Selling When It's Too Late
Business Owners Sell When It’s Too Late
It’s true. The majority of business owners we deal with are already on the decline and there is nothing we can do to stop it.
They falsely assume that their business can be valuated when it was at it’s peak – WRONG! Neither business buyers or lenders care what it did at it’s best – they want to see what it is doing now. And in too many cases now is too late.
Would you invest hundreds of thousands in a business based on its success 2-3 + years ago? Likely not. That’s like buying a used car at a new car price. Pretty silly don’t you think?
But, unlike vehicles, your business appreciates value as long as its integrity is kept. The best time to sell it is at its peak performance and BEFORE the owner begins easing back on it for health or age-related issues.
Let’s go back to the car analogy. Would you sell your car when it’s in good shape or after running in a demolition derby? Yes, that might sound extreme when it comes to a business, but it is exactly the situation we run into all too often.
If you are considering selling then consider SELLING
before complacency hits you!
2. Confidentiality Before, During, and After The Sale
Another major mistake we run into is that business owners whom we meet have already made the public aware of their intention to sell. This might be a for sale sign, Craigslist or KLS posting, or the owner telling his favorite bartender. The moment it becomes public knowledge, we can almost guarantee the eulogy can then be written.
You should NEVER tell anyone of your intentions to sell unless you have supreme trust in them. Just ask yourself – what would your employees do if they knew you were selling (they’d find another job). What would your customers / clients do (they’d find a new business to use). What about creditors (they’d pull credit), or competition (you can only imagine). Another major mistake we run into is that business owners whom we meet have already made the public aware of their intention to sell. This might be a for sale sign, Craigslist or KLS posting or the owner tells his favorite bartender. The moment it becomes public knowledge we can almost guarantee the the eulogy can then be written.
You should NEVER tell anyone of your intentions to sell unless you have supreme trust in them. Just ask yourself – what would your employees do if they knew you were selling (they’d find another job). What would your customers / clients do (they’d find a new business to use). What about creditors (they’d pull credit), or competition (you can only imagine).
3. Financial Records - With or Without
Let’s face the facts. To get top dollar for your business, you need formal financials, including tax returns. Tax returns are essential for several reasons. First, they are the only certified, signed financial record of your business’s past performance, almost always prepared by an outside professional. Because of this, they are the most reliable information a buyer has to base an offer on.
Second, they will also be absolutely necessary for a lender to evaluate your business and determine if it is a business they fell comfortable loaning money on (if you do not have them, see the next paragraph).
You can be comforted in knowing that when a valuation is performed (by the BROKER or the lender) all of those personal deductions you took, as well as expenses like interest and depreciation, are added back to arrive at a true Sellers Discretionary Earnings (SDE) figure, which is what we use to determine value.
We understand that there maybe situations where a businesses cannot formally present financials as referenced above. If this is the case, it will be more challenging to sell your business for top dollar. If you fall into this category, you need to be prepared for two things.
First, you need to resign yourself to the fact that you will probably need to provide significant seller financing, which will shift more of the risk onto the seller. Second, you will need to sell using a BEST OFFER scenario and/or lease the business to a buyer with an option to purchase.
4. Third Party Financing For Your Business
You must have accurate financial records to sell your business for top dollar. You will need to have the last three years of tax returns and interim financials for the current year. As we already established, it is the first thing a buyer wants to review, and they are vital to getting lender financing.
Contrary to what you may think, a lot of small business acquisition lending is going on. A properly valued quality business (see below) should be able to generate the proven financials necessary for a buyer to obtain the necessary financing to purchase your business.
However, there are limitations to financing. Those limitations deal with a QUALITY business. After reading this don’t take offense if your business is not a qualified business. It doesn’t mean your business is a failure – it just means it does not have enough value for financing. Simply put, a quality business has three things going for it. FIRST, it has been in business for at least 3 years. SECOND, it has an annual cash flow/profit of $100,000 or more; THIRD, they have tax returns to back it up.
A limited business has some profit not enough to get lender financing. The best option for a business like this are either seller financing or doing a lease to purchase option on the business.
5: Qualified Buyers
We have already discussed financing, and now it is important to understand who qualifies for financing. One of the biggest misconceptions is that small business loans are based on credit. While credit runs a distant third, more important factors are used to determine a qualified buyer.
The very first is relevant experience. The buyer must have experience in your industry or the ability to bring on a partner with experience. A Resume is one of the first things a lender will ask for when a buyer seeks financing. Ask yourself if you would provide financing to a buyer with no experience running your type of business. We didn’t think so.
The second credential is liquid capital. For a buyer to qualify for financing, they need to have at least 20% of the asking price as liquid capital ( money readily available). If they do not have the requisite liquidity, they will most likely need to bring on a partner who does.
Finally, the creditworthiness of a buyer is also a consideration. Most lenders will look at a prospect that meets the first two criteria and has at least a fair credit score (640 min.).
6. Valuation of Your Business - A Great Place to Start
If you are thinking of selling your business, one of your first questions should be what is it worth. The answer to this question is not as simple as it may seem, as each business is unique in multiple ways.
At Beehive Business Brokers, we have years of experience in estimating the value of businesses. We look at many factors, including such things as financials and profitability, type of business, employees, owner involvement (how turn-key is the business), market trends, competition, stability and longevity, etc.
We have a team of experienced business brokers and connections to valuation experts with regional and national experience and an in-depth understanding of the market. We offer a no-cost, no-obligation valuation service, enabling you to make the most informed decisions when it comes to planning the sale of your business.
As a part of our valuation process, we will also consult you on what we see as the current strengths and weaknesses of your existing business, as well as provide coaching tips on steps you can take to increase it’s value and prepare you for when it is time to sell.
Please fill out our Contact page or, better yet, give us a call!
7. Conclusion
Let Us Help You
Representing Sellers is our area of expertise
We take confidentiality seriously before, during, after
We qualify all buyers the same way lenders do
We have a lending network to get buyers financing
We are connected, able to reach almost 100% of buyers out there
We believe in working together with you in getting your business sold
We represent your business from start to finish, rather than just list it
We don’t charge upfront fees to get your business sold
All we ask is that you set up a NO OBLIGATION meeting with one of our brokers. As part of this consultation, our rep will do a COMPLIMENTARY BUSINESS MARKET VALUATION to let you know the current market value of your business. Over 90% of the time we come in higher that what the owner expected. Remember the first chapter, too many business owners wait until it is to late to sell their business. Don’t be one of them!
