Could the Red-Hot Market for Businesses Be Cooling Down

The economy is red hot, and that fact is translating over to lots of activity in businesses being sold.  However, it is possible that this record-breaking number of sales could cool down in the near future. In a recent article in Inc. entitled, “The Hot Market for Businesses is Likely to Cool, According to This New Survey,” the idea that the market for selling business is cooling down is explored in depth.  Rather dramatically, the article’s sub header states, “Entrepreneurs who are considering selling their companies say they’re worried about the future of the economy.”

The recent study conducted by Pepperdine University’s Graziadio School of Business as well as the International Business Brokers Association and the M&A Source surveyed 319 business brokers as well as mergers and acquisitions advisers.  And the results were less than rosy.

A whopping 83% of survey participants believed that the strong M&A market will come to end in just two years.  Perhaps more jarring is the fact that almost one-third of participants believe that the market would cool down before the end of 2019.

The participants believe that the economy will begin to slow down, and this change will negatively impact businesses.  As the economy slows down, businesses, in turn, will see a drop in their profits. This, of course, will serve to make them more challenging to sell.

The Inc. article quotes Laura Ward, a managing partner at M&A advisory firm Kingsbridge Capital Partners, “People are thinking about getting out before the next recession,” says Ward.  The Pepperdine survey noted that a full 80% of companies priced in the $1 million to $2 million range are now heading into retirement. In sharp contrast, 42% of companies priced in the $500,000 to $1 million range are heading into retirement.  Clearly, retirement remains a major reason why businesses are being sold.

Is now the time to sell your business?  For many, the answer is a clear “yes.” If the economy as a whole begins to slow down, then it is only logical to conclude that selling a business could become tougher as well.

The experts seem to agree that whether it is in one year or perhaps two, there will be a shift in the number of businesses being sold.  Now may very well be the right time for you to jump into the market and sell. The best way of making this conclusion is to work with a proven and experienced business broker.  Your broker will help you to analyze the various factors involved and make the best decision.

Copyright: Business Brokerage Press, Inc.

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What Kind of Buyers are You Most Likely to Meet?

Selling a business can be an exciting and rather lucrative time.  But going through the sales process means embracing the notion that you’ll have to be very prepared for whatever might be thrown your way.  A key aspect of preparing to sell your business is to know what types of buyers you’re likely to encounter.

It is only logical to anticipate the types of buyers you may be dealing with in advance.  That will allow you to plan how you might potentially work with them.  Remember that each buyer comes with his or her own unique desires and objectives.

The Business Competitor

Competitors buy each other all the time.  Frequently, when a business is looking to sell, the owner or owners quickly turn to their competitors.  Turning to one’s competitors when it comes time to sell makes a good deal of sense; after all, they are in the same business, understand the industry and are more likely to understand the value of what you are offering.  With these prospective buyers, a great confidentiality agreement is, of course, a must.

Selling to Family Members

It is not at all uncommon for businesses to be sold to family members.  These buyers are often very familiar with the business, the industry as a whole and understand what is involved in owning and operating the business in question.

Often, family members are prepared and groomed years in advance to take over the operation of a business.  These are all pluses.  But there are some potential pitfalls as well, such as family members not having enough cash to buy or not being fully prepared to run the business.

Foreign Buyers

Quite often, foreign buyers have the funds needed to buy an existing business.  However, foreign buyers may face a range of difficulties including overcoming a language barrier and licensing issues.

Individual Buyers

Dealing with an individual buyer has many benefits.  These buyers tend to be a little older, ranging in age from 40 to 60.  For these buyers, owning a business is often a dream come true, and they frequently bring with them real-world corporate experience.  Dealing with a single buyer can also help expedite the process as you will have fewer individuals to negotiate with.

Financial Buyers

Financial buyers are often the most complicated buyers to deal with, as they can come with a long list of demands.  That stated, you should not dismiss financial buyers.  But just remember that they want to buy your business strictly for financial reasons.  That means they are not looking for a job or fulfilling a lifelong dream.  For financial buyers, the key point is that your business is generating adequate revenue.

Synergistic Buyers

A synergistic buyer can be an excellent candidate.  The reason that synergistic buyers can be such a good fit is that their business in some way complements yours.  In other words, there is a synergy between the businesses.  The main idea here is that by combining the two businesses they will reap a range of benefits, such as access to a new and very much aligned customer base.

Different types of buyers bring different types of issues to the table.  The good news is that business brokers know what different types of buyers are likely to expect out of a deal.

Copyright: Business Brokerage Press, Inc.

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Confidentiality Agreements: What are the Most Important Elements?

Every business has to be concerned about maintaining confidentiality.  In fact, it is common for business owners to become somewhat obsessed with confidentiality when they are getting ready to sell their business.

It goes without saying that owners don’t want the word that they are selling to spread to the public, employees or most certainly their competitors.  Yet, there is something of a tug of war between the natural desire for confidentiality and the desire to sell a business for the highest amount possible.  At the end of the day, any business owner looking to sell his or her business will have to let prospective buyers “peek behind the curtain.”  Let’s explore some key points that any good confidentiality agreement should cover.

At the top of your confidentiality list should be the type of negotiations.  This aspect of the confidentiality agreement is, in fact, quite important as it stipulates whether the negotiations are secret or open.  Importantly, this part of the confidentiality agreement will outline what information can be revealed and what cannot be revealed.

Also consider the duration of the agreement.  Your agreement must be 100% clear as to how long the agreement is in effect.  If possible, your confidentiality agreement should be permanently binding.

You will undoubtedly want to outline what steps will be taken in the event that a breach does occur.  Having a confidentiality agreement that spells out what steps you can, and may, take if a breach does occur will help to enhance the effectiveness of your contract.  You want your prospective buyers to take the document very seriously, and this step will help make that a reality.

When it comes to “special considerations” category, this should be elements that apply to the business in question.  Patents are a good example.  A buyer could learn about inventions while “kicking the tires,” and you’ll want to be quite certain that any prospective buyer realizes that he or she must maintain confidentiality regarding any patent related information.

Of course, do not forget to include any applicable state laws.  If the prospective buyer is located outside of your state, then that is an issue that must be adequately addressed.

A confidentiality agreement is a legally binding agreement.  And it is important that all parties involved understand this critical fact.  Investing the money and time to create a professional confidentiality agreement is time and money very well spent.  An experienced business broker can prove invaluable in helping you navigate not just the confidentiality process, but also the process of buying and selling in general.

Copyright: Business Brokerage Press, Inc.

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The Sale of a Business May Actually Excite Employees

Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale.  Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business?  3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news.  Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.

Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale.  She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.”  As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.

Interestingly, Taylor points to something of a paradox.  While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case.  Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.

Here Taylor brings up an excellent point for business owners to relay to their employees.  A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.

A second reason that employees may be excited with the prospect of a new owner is their potential career advancement.  The size of your business will, to an extent, dictate the opportunities for advancement.  However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities.  As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.

Finally, selling a business could mean “new growth, energy and ideas.”  Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business.  This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.

There is no way around it, Taylor’s article definitely provides ample food for thought.  It underscores the fact that how information is presented is critical.  It is not prudent to assume that your employees may panic if you sell your business.  The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.

Copyright: Business Brokerage Press, Inc.

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Around the Web: A Month in Summary

A recent article from Divestopedia entitled “When is the Best Time to Sell My Business” explains that a business owner who is looking to sell should begin preparing for the sale three years before they plan to list their business on the market.

The state of the market matters when listing your business, but what you can’t control this as a business owner. What you can control, however, is the state of your financial records, whether the business has any litigation outstanding, and the overall appearance and wellbeing of the business. In order to sell your business at the highest value possible, there are certain things that need to be taken care of before listing. By giving yourself about three years (the number of years of clean, verifiable financial statements you should have) to prepare your business for sale, you are giving yourself and your business the best chance on the market.

Click here to read the full article.

A recent article from Inc.com entitled “Small-Business Financing 102: The Latest Updates and Options Available for Funding a Business Venture” explains what each type of startup funding entails and how it’s affecting both buyers and sellers. Currently the ways to fund a new business or to purchase an existing one include:

  • SBA Acquisition loans
  • Peer-to-Peer lenders
  • 401(k) business financing
  • Crowdfunding and angel investors

Each option presents its own set of obstacles and requirements that need to be met by the buyer, just as they each provide their own benefits. The increasing number of ways in which an aspiring entrepreneur can acquire the capital to start or buy a business is great news for sellers because it means more buyers on the market.

Click here to read the full article.

A recent article from Exit Promise entitled “Top Seven Important Deal Terms When Selling a Business” highlights the main factors, other than price, that influence a seller’s decision when considering an offer on their business. While price matters, business owners care about their businesses and generally want the best for both themselves and their business, therefore they consider these factors in the sale as well as price:

  • Speed of the sale
  • An all cash offer vs. a financed one
  • The compatibility of the potential new owner with their vision for their business
  • % of the business the new owner wishes to purchase (most prefer to sell 100%)
  • Whether or not there’s an earnout clause written into the deal
  • The tax consequences associated with the deal
  • Confidentiality of the sale

In the end, sale price is generally the primary focus of negotiations between a seller and a buyer. However, it is not uncommon for a buyer to choose to accept a lower offer, for example, if it’s a complete cash sale to a buyer whose business plan aligns well with the current owner’s dream for the company’s future.

Click here to read the full article.

A recent article from FinSMEs entitled “Raising funds to Buy a Business; What Are The Different Options?” explains the different ways to fund a business acquisition, how to approach each way and who it’s best for. The options explained include:

  • Savings
  • Traditional lenders
  • Borrowing from family and friends
  • Crowdfunding
  • Investors

Each of these options comes with its own obstacles and upsides, and some may be better options than others. Whichever option you choose to go with, be sure to do your research and prepare yourself for meeting the demands of each source of funding.

Click here to read the full article.

A recent article from Exit Promise entitled “Business Broker Fees and Other Selling a Business Expenses” explains the typical fees and expenses that a business owner can expect to come across during the process of selling their business.

Business Broker Fees:

  • Small Business:  Typical fees include a 10% commission of final sale price and upfront $1000- $2500 to market, value and sell the business.
  • Large business: Typical fees include 3-10% commission of the final sale price and upfront fees ranging from $2,500 to $25,000+.

These fees can vary from broker to broker depending on their expertise and services offered. They can also vary depending on the size of the business and specific services and time needed from your broker. It is always recommended to get multiple quotes from qualified brokers who specialize in your industry and the services you need.

Legal costs:

  • Small Businesses ( $1MM or less) : total legal fees are typically between $5,000 and $12,500
  • Large Businesses ($1MM and up): total legal fees can range from $10,000 to $50,000+.

Your broker can recommend attorneys that are experts in business sales and negotiating with your buyer’s lawyer, protecting your interests and keeping legal fees from becoming excessive.

Other hidden fees can include severance payments to employees not retained by the buyer, prepayment penalties associated with paying off indebtedness of the seller, taxes, appraisals if necessary and a CPA.

Click here to read the full article.

Copyright: Business Brokerage Press, Inc.

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What Sellers Don’t Expect When Selling Their Companies

In the proverbial “perfect world,” business owners would plan three to five years ahead to sell their companies.  But, as one industry expert has suggested, business owners very seldom plan to sell; rather, selling is “event driven.”  Partner disputes, divorce, burn-out, health, and new competition are examples of events that can force the sale of a business.

Sellers often find, after they have decided to sell, that the unexpected happens and they are “blindsided” and caught off-guard.  Here are a few of the unexpected events that can occur.

The Substantial Time Commitment

Sellers find that the time necessary to comply with the requests of not only the intermediary, but also the potential buyers can take valuable time away from the actual running of the business.  The information necessary to compile the offering memorandum takes time to collect.  Many sellers are unaware of the amount of their time necessary to gather all the documents and information required for the offering memorandum, nor of its importance to the selling process.

There is also the time necessary to meet and visit with prospective buyers.  An intermediary will play an important role in screening prospects and separating the “prospects from the suspects.”

Handling the Confidentiality Issue

Owners of many companies are also the founders and creators of them.  They can have difficulty in delegating and tend to want to make all of the decisions themselves.  When it comes time to sell, they want to be involved in everything, thus, again, taking time away from running the business.  Members of the management team, like the sales manager, have a lot of the information necessary not only for the memorandum, but also on competitive issues, possible acquirers, etc.  The owner has to allow his or her managers to be part of the selling process.  This is easier said than done.

Forgetting the Others

Many mid-sized, privately held companies also have minority stockholders or family members who have an interest in the business.  The managing owner may be the majority stockholder; but in today’s business world, minority stockholders have strong rights.  The owner has to deal with these people, first in getting an agreement to sell, then convincing them about the price and terms.  A “fairness opinion” can help resolve some of the pricing issues.  Minority stockholders and family interests have to be dealt with and not overlooked or pushed to the end of the deal.  When this happens, many times it is the end of the deal, literally speaking.

The Price is the Price is the Price

All sellers have a price in mind when it comes time to sell their companies. Most businesses go to market with a fairly aggressive price structure.  When an offer(s) is presented, it is generally, sometimes significantly, lower than the seller anticipated.  They are never prepared for this event – they are blindsided, and obviously not very happy.  They turn the deal down without even looking past the price.  Here is where an intermediary comes in, by helping structure the deal so it can work for both sides.

Not Having Their Own Way

Business owners are used to calling the shots.  When an offer is presented, they, in some cases, think that they can call all of the shots.  They have to understand that selling their company is a “give and take.”  They can stand firm on the issues most important to them, but they have to give on others.  Also, some owners want their attorneys to make all of the decisions, both legal and business.  Unfortunately, some attorneys usurp this decision.  Owners must make the business decisions.

Confidentiality Leaked

There is always the small possibility that the word will leak out that the business is for sale.  It may just be a rumor that gets started or it may be worse – the confidentiality is exposed.  Sellers must have a contingency plan in case this happens.  A simple explanation that growth capital is being considered or expansion is being explored may quell the rumor.

“Keeping Your Eye on the Ball”

With all that is involved in marketing a business for sale, the owner must still run the business – now, more than ever.  Buyers will be kept up-to-date on the progress of the business, despite the fact that it is for sale.

Copyright: Business Brokerage Press, Inc.

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Points to Ponder for Sellers

Who best understands my business?

When interviewing intermediaries to represent the sale of your firm, it is important that you discuss your decision process for selecting one. Without this discussion, an intermediary can’t respond to a prospective seller’s concerns.

Are there any potential buyers?

When dealing with intermediaries, it always helps to reveal any possible buyer, an individual or a company, that has shown an interest in the business for sale. Regardless of how far in the past the interest was expressed, all possible buyers should be contacted now that your company is available for acquisition. People who have inquired about your company are certainly top prospects.

Lack of communication?

It is critical that communication between the seller, or his or her designee, and the intermediary involved in the sale, be handled promptly. Calls should be taken by both sides. If either side is busy or out of the office, the call should be returned as quickly as possible.

Does the offering memorandum have cooperation from both sides?

This document must be as complete as possible, and some of the important sections require careful input from the seller. For example: an analysis of the competition; the company’s competitive advantages – and shortcomings; how the company can be grown and such issues as pending lawsuits and environmental, if any.

Where are the financials?

It may be easy for a seller to provide last year’s financials, but that’s just a beginning. Five years, plus current interim statements and at least one year’s projections are necessary. In addition, the current statement should be audited; although this usually presents a problem for smaller firms — better to do it now than later.

Are the attorneys deal-makers?

In most cases, transaction attorneys from reputable firms do an excellent job. However, occasionally, an attorney for one side or the other becomes a deal-breaker instead of a deal-maker. A sign of this is when an attorney attempts to take over the transaction at an early stage. Sellers, and buyers, have to take note of this and inform their attorney that they want the deal to work – or change to a counsel who is a “team player.”

Intermediaries are responsible for handling what is usually the biggest asset the owner has – and they are proud of what they do. Intermediaries realize that the sale of a business can create the financial security so important to a business owner. Even when a company is in trouble, the intermediary is committed to selling it, since by doing so, jobs will be saved – and the business salvaged.

Copyright: Business Brokerage Press, Inc.

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What Should Be in Your Partnership Agreement

Partnership agreements are essential business documents, the importance of which is difficult to overstate. No matter whether your business partner is essentially a stranger or a lifelong friend, it is prudent to have a written partnership agreement.

A good partnership agreement clearly outlines all rights and responsibilities and serves as an essential tool for dealing with fights, disagreements and unforeseen problems. With the right documentation, you can identify and eliminate a wide range of potential headaches and problems before your business even starts.

Determining the Share of Profits, Regular Draw, Contributing Cash and More

Partnership agreements will also outline the share of profits that each partner takes. Other important issues that a partnership agreement should address is determining whether or not each partner gets a regular draw. Invest considerable time to the part of the partnership agreement that outlines how money is to be distributed, as this is an area where a lot of conflict occurs.

The issue of who is contributing cash and services in order to get the business operational should also be addressed in the partnership agreement. Likewise, the percentage that each partner receives should be clearly indicated.

Partnership Agreements Outline and Prevent Potential Problem Areas

Another area of frequent problems is in the realm of who makes business decisions. Here are just a few of the types of questions that must be answered:

  • Are business decisions made by a unanimous vote or a majority vote?
  • What must take place in order to consider new partners?
  • Who will be handling managerial work?
  • How will the business continue and what changes will occur in the event of a death?
  • At what stage would you have to go to court if a conflict cannot be resolved within the framework of your partnership agreement?

You might just want to get your business running as soon as possible, but not addressing these issues in the beginning could spell disaster down the road.

The Uniform Partnership Act

One option to consider, which is offered in all states except Louisiana, is the Uniform Partnership Act or UPA. The UPA covers all the legal regulations that specifically apply to partnerships.

Reduce Conflict Via a Partnership Agreement

Forming a partnership can be great way to launch a new business, but it is also important to keep in mind that no matter how exciting the process may be it is still a business. New businesses face an array of challenges, and the last thing any new business needs is internal disruption. Mapping out via a partnership agreement the duties and expectations of all partners is an easy and logical way to reduce internal conflict within the business so that you can stay focused on building the business and making money!

Copyright: Business Brokerage Press, Inc.

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Sell Your Business and Start Your Retirement

When the day comes to sell your business, it is important that prospective buyers understand why you have made this decision. Having a valid reason why it is time for you to sell can make your business more attractive to prospective buyers. After all, it is only natural that you will have to retire at some point even if the business is thriving. In fact, it is safe to state that buying a successful business from an owner that is retiring is just the kind of the situation that most buyers like

Owning a business and retirement, of course, is far different than retiring from a job. You likely have many friends ranging from vendors and employees to customers, clients and other business owners. It is vital that your departure does not disrupt the operation of your business and that prospective buyers understand that you have taken steps to ensure a smooth transition. In short, you want to create a situation in which everyone is happy once you have sold your business.

Helping to ensure a smooth transition has many parts. One of those parts is finding a buyer who will treat your people well. Another key aspect of a smooth transition is to automate as much of your work as possible before you leave. No one knows your business as well as you do, which means that you are the best source to automate and simplify the processes of your business. Outlining what steps you’ve taken to automate and simplify your business will help make it more attractive to buyers.

A key aspect of streamlining, simplifying and organizing your business is to pick out, well in advance, your second in command. Once you have decided on which person would be the best candidate, it is important that you begin grooming that person so they can take over day-to-day operations once you leave. Having a capable person who is committed to staying is a very attractive commodity for prospective buyers. A capable second in command can prove invaluable not just during the transition period but also for the long term operation of the business.

Finally, you should have set up a retirement account on which you can draw upon. Statistics indicate that roughly 50% of business owners do not have a retirement account set up in advance. If you don’t have an account set up, don’t panic, instead set one up as soon as possible.
Working with a business broker is one of the single best ways to handle the process of selling your business and getting ready for retirement.

A business broker can help you with everything from finding qualified prospective buyers to establishing the value of your business. The sooner you begin working with a business broker, the easier your transition will be.

Copyright: Business Brokerage Press, Inc.

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Can I Buy a Business With No Collateral

At first glance the idea of buying a business with no collateral may seem impossible, but in reality it can be done. Let’s examine your options. When it comes to achieving this goal, your greatest assets are an open mind and a commitment to hanging in there despite the odds.

The Small Business Association’s 7 (a) Program is Your Friend

One possible avenue for buying a business with zero collateral is to opt for the SBA’s 7 (a) program, which works to incentivize the bank to make a loan to a prospective buyer. Under this program, the SBA guarantees 75%. The buyer still has to put in 25%; however, this money doesn’t necessarily have to be his or her money. This is where things really get interesting. The cash that the buyer uses can come from investors or even be a gift from parents in the case of young buyers. These possibilities all fall within the SBA’s guidelines.

Look into Seller Financing, You Might Be Surprised

There is a second way to buy a business with no collateral, and that comes in the form of finding a seller who is willing to finance. Again, this might seem counter intuitive at first glance. But the facts are that a large percentage of sellers do agree to offer some level of financing. So in other words, seller financing is not unheard of and stands as a viable way for a prospective buyer to buy without collateral.

Combining Seller Financing and the SBA’s 7 (a) Program

Combining the SBA’s 7 (a) program with seller financing can prove to be a powerful combination. It is important to note, however, that if you do use the SBA’s 7 (a) program the seller cannot receive his or her repayment for two years.

Persistence Pays

Ultimately, you will likely need to be rather persistent when trying to find a bank. Rejection is likely. But if you are persistent, it is possible to make the SBA’s 7 (a) program work for you.

One key way to keep yourself motivated is to constantly remember that jumping through some hurdles is all part of the process since you’re trying to circumvent the traditional route of using collateral. But working relentlessly may be worth it because if you are successful, you have acquired a tangible asset without any collateral of your own. That is no small accomplishment.

Don’t be afraid to ask for advice from S.C.O.R.E., the Small Business Administration (SBA), or an experienced business broker. While it might sound very unlikely that you’ll be able to buy a business without collateral, plenty of people have successfully done so.

Copyright: Business Brokerage Press, Inc.

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