There are a lot of misconceptions about selling a business. The main reason to buy a business is it’s client base. This is why a construction company is hard to sell, where a dental practice or an insurance agency has much more expectation of recurring business. An owner generally has to be willing to work with the buyer for a fair part of a year in transitioning a business especially in a personal relationship situation.
We try to help people put deals together where it makes sense, and also try to help people from under-pricing their business on a sale, or avoiding a bad purchase. However, we are best as part of a team and can’t do it all ourselves.
Here are some of the more common issues we run into:
Accounting Records – The better they are, the better the business should sell for. Don’t be cheap here. The Quickbooks statements or whatever needs to tie to the tax returns, that then need to tie to whatever else is there. The books shouldn’t have ugly accounts like “Suspense” or “Ask my Accountant”. I wouldn’t want to list a business with inconsistent or poor records, nor is a seller going to get much credit for a business with a lot of “under the table income”. In any case, it is the duty of the seller to present good numbers, and it is the duty of the buyer to perform due diligence. The buyer should consult with their attorney regarding appropriate protection against any seller misrepresentation issues.
Best Time To Buy – A business that you think has potential where you feel you can add to sales and or reduce costs. Have liberal financing in place, or be prepared to pay a premium for owner financing.
Best Time To Sell – Simply when everything is running great. No different than a well maintained car versus the one that needs a “little work”. Buyers don’t want to pay full price for all the stuff you could have done and usually discount those statements as puffery, although they will pay a premium in for potential.
Business Brokers – We have considered getting into the business brokerage area partly due to the lack of local qualified brokerages. The typical commission I see is about 10%. I am not aware of any licensing requirements in this area as long as real estate is not involved, and have seen some do more harm than good. All we can say here is check references carefully.
Contingent Purchases – This is a way for a seller to get more by assuming risk. Common clauses are based on revenue or profitability targets. We are wary of profitability targets because they are difficult to measure.
Financing – Repossessing a piece of real estate isn’t easy, but most likely it has significant retained value. Repossessing a business is often like getting a wrecked car back when you sold one in mint condition. Sometimes the repossessed business isn’t even repairable. As such, any buyer who wants terms should be willing to pay a large amount down with a relatively short loan period, and most likely with both secured asset pledges such as UCC filings (see your favorite attorney) and personal guarantees. Real estate is rarely seen inside a corporation or included as part of a sale, but if it is, we can not do anything that requires a real estate license. The interest rate on the contract is much less important than avoiding a default. Your attorney needs to be your watchdog here. As a personal aside, I have found that there are more disputes that arise in financing situations.
Owner Illness or Death – A service business will deteriorate quickly if centered on a single owner. I saw this myself first hand when I was locked out of Conover Day in January 2018. Retain and manufacturing businesses will have a longer “shelf life”. In all cases, it is unlikely that time will be on your side.
Pricing – Valuing a business is much harder than valuing real estate. Comparables are not easy to find, and adjusting a typical set of financial statements for related party transactions requires judgment. The value of a business is for the most part its expected future income and/or cash flow to the new owner. We can help advise if your price is too low or high in our opinion, but valuing a business is still not an exact science. My personal advice is to try to get the other party to toss out the first number. Its much easier to tell you if is warm or cold, that putting out the first number ourselves.
Tax – We do know a bit about tax structure, but if you have a good CPA or EA, we want them in the loop. Buyers want assets most the time, and sellers want to sell stock. Most turn out to be asset sales. The sale of some assets such as goodwill are capital gain, most other turns out to be ordinary income. A C corporation is particularly difficult if the buyer wants assets. State tax issues such as sales tax on equipment transfers also need to be considered.
Timing – Businesses can not be expected to sell quickly. I don’t think a year is out of line for many businesses. Some pretty much turn out to be unsellable. To get maximum value, allow a lot of time and be patient. Being willing to take a contract helps. Having good financial information helps. Finally, being reasonable on price and other terms helps.
Traps – From our experience, the two biggest problems for any business are lack of adequate capital, and lack of revenue.
With regard to capital, if your budget says you need $100,000, then in short, plan to have most of $200,000. Get help from your professional on budgeting, and allow for a lot of slack.
Revenue is the other big problem. We have seen a lot of projections with very precise expense allocations for postage, telephone, rent, etc. The same projection will show a wild number on the revenue side that has no logic and ties to nothing. For example, if you are open for a three hour lunch only, selling hot dogs at $1 each and your average customer orders 3, you can get information on how many customers you might have by looking at the local population and your competitors. Your revenue is unlikely to be $9,000 a day (meaning serving 3,000 customers, or one every 3 or 4 seconds in my example, talk about fast food). Be realistic and conservative.
When buying an existing business, your number one job is to keep existing customers and maintain the revenue. You won’t keep them all. You almost have to work with the old owner on the transition, and try to have her/him around. Observe the business before the sale is closed, and watch how the customers are handled. If you can’t charm the customer, make sure you have people that can. I have seen some pretty successful businesses crash after a sale where the new owner is sour, especially if things change a lot right after the sale.