Business owners seeking to sell their privately owned company will often retain a business intermediary based upon their expertise in the following areas:
Listing a business for sale in a quiet and discreet manner is critical as the consequences could be very negative if competitors, employees, and customers find out the owner is selling the company. In many cases a business intermediary can pre-screen a number of buyers without revealing the name and location of the business, something that would be nearly impossible for the owner to accomplish. Approaching the sale in a confidential manner will: prevent competitors from utilizing the data to influence customers or spread damaging rumors, avoid issues with key employees who might be nervous about the uncertainty a change in ownership might bring, and eliminate unwanted concerns by customers who feel their relationship might be in jeopardy. There is a delicate balance in providing the necessary information to the buyer to allow them to make a proper evaluation and protecting the sellers’ need for confidentiality. Experienced business brokers recognize the significance of the confidential nature of the business sale and generally will provide proprietary financial and business data in stages. Less information is provided upfront but will increase over time as the relationship with the buyer matures and it is confirmed that they are a serious and qualified candidate. It is important for the buyer to recognize that some highly confidential information, such as customer databases and contracts, will not be made available until after a binding DPA has been executed and the contingencies have been removed.
Valuing Your Business:
Credentialed business brokers are trained to establish a current fair market value of a business using the income, asset, and market approaches. Business brokers are skilled at evaluating and re-casting financial statements in addition to having a solid understanding of what key values buyers are seeking. These professionals have access to large business transaction databases that are used as guidelines or reference points to establish an estimated price range based upon industry, financial, and geographical data. Understanding the worth of one’s business and how that value is derived is extremely important. In some cases, there are minor changes that an owner can make that would dramatically increase the value of the business. Owners who are equipped with a business value report will be well positioned to identify those areas that will drive company value in the coming years, enabling them to fully maximize the business value and capture a higher sales price when it comes time to sell the enterprise. There are a variety of other situations where a business valuation will be important, including: obtaining additional financing, recapitalizing the business, creating buy/sell agreements, ensuring adequate insurance is in place, dissolving a marriage/partnership, and establishing an employee stock ownership plan (ESOP), to name a few. There are several different types of valuations available so it will be important to identify the purpose to ensure that the proper report is obtained.
For the majority of small business transactions, it is rare for a buyer to acquire a business without the assistance of 3rd party financing. Experienced business brokers have relationships with a variety of funding sources including SBA lenders, commercial banks, and private capital companies. While the credit market has tightened considerably over the last several years, business brokers understand which lenders are active and the type of deals, cash flow or asset based, they will finance. Business brokers are experienced in preparing and submitting the required documents to these small business lenders whereby they are reviewed and a financing “pre-approval” can be generated. Lender involvement at an early stage will enable the business owner to be well educated on the type of financing and terms that are available, the buyer down payment required for the loan, and any seller financing commitments that may be requested. Additionally, performing this work up front, before a buyer is located, will often decrease the time period in closing a transaction. Securing financial capital is one of the most critical issues for buyers pursuing a business acquisition and it is those businesses that are distinguished as being pre-qualified for financing that will be in greater demand.
Selling a privately held business is a major undertaking as it can be a long, complex, tedious, and stressful process. Business owners who have attempted to approach a sale without a transaction team are quick to realize that the process is a full-time job and can be extremely distracting for those are who are active in managing the daily business operations. A business broker will take ownership of the entire sales process allowing the business owner, who is already wearing many hats, to focus on their core competency in providing 100% of their attention to running the business to maintain or increase its value, mitigating the risk of business erosion during the sale process.
Established business brokerage firms have large databases of qualified buyers in addition to networks of business intermediaries and other professionals that have access to people who are in the market to purchase a company. Most business brokers have the tools, resources, and processes to attract and screen buyers through a structured and confidential marketing program designed to solicit interest from a wide range of buyers where they are systematically pre-qualified based upon experience, time table, and financial capacity. The broker will create a comprehensive marketing circular containing a historical summary of the business operations, personnel, products and services, adjusted financial statements, and valuation data. A marketing strategy will be developed, based upon the type and size of business, targeting either financial or strategic buyers, or in some cases, both. Financial buyers are characterized as either entrepreneurs or executives leaving corporate America, interested in pursuing their dream of owning a business. Their focus is on the earnings and cash flow that the business generates and whether it will generate sufficient funds to service debt and provide the required ‘owner financial benefit’ to support their lifestyle. Strategic buyers are typically companies who are either in a similar industry looking to acquire market share/economies of scale or a complimentary business seeking to broaden their product or service offering. Strategic buyers will often pay a premium for the business based upon anticipated synergies that the acquisition offers.
A skilled negotiator acts as a buffer between the buyer and seller and is able to diplomatically address any sensitive, confrontational, or polarizing issues without jeopardizing the chemistry that was developed between the buyer and seller. Closing a transaction is a complicated process with unique factors involved and a variety of conflicting issues and personalities from each side. The paperwork involved can be astounding and the intermediary will bring enormous value in coordinating, disseminating, and reviewing the plethora of documents involved with the buyer’s/seller’s professional advisors. There are often situations that require the delivery of unpleasant information, a retraction or modification of an offer, the untangling of red tape, or addressing sensitive financial issues. Having a third party intermediary involved in the transaction mitigates direct conflicts between the buyer and seller, preventing potential emotionally charged questions and concerns from damaging the negotiation process. The broker’s key function is to close the transaction and their involvement as a middleman will enable the owner to take a step back and approach the sale in a methodical approach that maximizes the value, minimizes the stress, and one that should address both parties’ objectives and be more likely to result in a successful transaction.
An Exit Plan is a written roadmap that is developed in conjunction with legal, accounting, and financial professionals and is designed to maximize the value an owner receives when exiting the business. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business. Proper exit planning will reduce the variability of the business control transfer, and can secure a sound financial future for their family. By establishing the current market value of the business in conjunction with a determination of the owner’s exit timetable and the income needed for retirement, the Business Intermediary will have the essential elements for the foundation of the exit plan. The longer that a business owner has to implement the exit plan, the greater the opportunities will be to maximize the business value, minimize tax liabilities, avoid key employee turnover, and eliminate emotionally charged family issues. By developing a formal business exit plan and setting out a specific timetable of actions to be taken, a business owner will have a clear plan of action and know exactly when and how they will be leaving the business.