Frequently Asked Questions
When you buy a running business, it is time tested for the income it generates, the relationships it has developed over time, the licenses and location lease it has for continuity of business, and above all, the reputation it has established with its customer base. Sale Price of the business is essentially the aggregation of what business holds as its tangible assets associated with its fixed and moving inventory and the intangible assets that make the tangible assets produce income. Oftentimes, the buyer of the business picks up where you want to leave and make it run equally good or better. When you plan to start your own business, you are placing all your money, oftentimes it is entirely your own, and risk for its success since it is going to be entirely your own adventure. After you have broken even, which may take 6 to 10 months, you may make a kill if what you planned for works well, or you may lose your shirt. Since the marketplace is ripe always with sellers, and there are buyers out there who prefer risk-averse approach, it is for you to weigh the pros and cons of risks. Remember, as a buyer, you are in charge!
The best time to sell the business is when you least want to sell. This is the stage when business is making good profits and the competition has not caught up for market share around you, and the local buying power is favorable. If you believe you are a smart entrepreneur, you will make for your next move by giving upon what you have already made it good for some other person to buy and run.
Yes, there are always buyers out there! Many of them are plain lookers and fiddlers who do not make it beyond your business broker. Your broker will be looking for a qualified and able potential buyer who must be motivated and be willing to put offer. It is for the seller to set out his or her business for sale that motivates the qualified buyer.
We obtain financial information and operating organization of the business from the seller. Based on this information, we research for commercial intelligence related to the business, and develop an Executive Summary or Confidential Sale Document. While marketing the business, we publish outlines of the business, its asking price, cash flow, and its general location without indication of specifics. The published matter generates interest of the potential buyers. When an interested buyer contacts us for more information, we get him or her to sign a Non-Disclosure Confidentiality Agreement and buyer’s disclosure of minimum resources in support of business interest. This is the beginning of filtering out between lookers and potential serious buyers. We then send an Executive Summary and pictures to this interested buyer. If a potential buyer shows interest to see the business, and may wish to talk to the seller, we get the buyer to sign a ‘Letter of Business Interest’, for the seller to accept to show the business. The rest of the process then follows. A Non-Disclosure Confidentiality Agreement is a legal document, which, if breached, is enforceable in the Court for damages. This puts the buyer on alert.
The first and most important stage before we take listing from a seller is to make the determination of the value of the business. We ask seller to make a stated Income and Expense Statement, and then support it by accountant prepared Profit and Loss Statement. This gives us sufficient information to make preliminary valuation of the business based on normalized cash flow. The technical jargon for this is ‘Seller’s Discretionary Earnings’ [SDE]. In simpler words, it is what cash flow the business generates for the seller after paying for one owner’s fair market salary, fair market rent, usual business expenses, and removing non-cash and non-business expenses.
We do valuation of a business based on a number of factors and convince the seller to set price on it. These factors are a combination of art, science, and risk level of the business. If the seller is comfortable, we help the seller to evolve terms of sale that will motivate and enable the buyer to make an offer on it. Evolving of the terms of sale can get complicated depending on the complexity of business. We take listing of the business after we convince the seller for the price and terms of sale.
Our best bet is on popular internet sites, and secondarily on multiple listing services to broaden the circulation. In the case of midsize businesses, we do confidential mailings to a select list of business owners who may get interested in acquiring or have the business merge with their business for best of mutual benefit. Confidentiality of our marketing process is extremely important to the seller, the buyer, and us. This is where we play our interface role to facilitate bringing seller and buyer on the settlement table to closure.
This is a critical process to assess the buyer. An interested buyer will disclose financial strength and experience in business. We ask pointed questions to the buyer to elicit qualifying answers for the business. A qualified buyer has seen or browsed over businesses that fall into price range. A telephonic conversation with us will show how serious the buyer is, and we invite that buyer for a meeting to gauge interest and financial strength.
Unlike most intermediary brokers, we step through meeting of minds of the seller and the buyer in three stages:
- 1st Stage: Our first stage is to get a Letter of Business Interest from the Buyer showing financial strength and experience to the seller for a meeting. If this stage goes past well, we go to next stage.
- 2nd Stage: The second stage is to prepare a Non-Binding Letter of Intent to formalize price and terms of Sale/Purchase based on the meeting of minds and have the parties to approve.
- 3rd Stage: In this stage, we prepare a Sale/Purchase Agreement in draft form, and have seller and buyer approve it by fixing their initials.
We are then ready to prepare the final version of Sale/Purchase Agreement for legally binding contract and have the buyer and the seller to approve, generally with their spouses and partners. Sale/Purchase Agreements will always carry contingencies, which prepare the seller and the buyer for due diligence on the business, verification of statements, representations, and warranties given in the Sale/Purchase Agreement. Concurrent with it, an Escrow and Settlement attorney are involved for closing of the contract and distribution of proceeds when closed.
Buyer must clear all contingencies in writing during the ‘due diligence’ stage; otherwise the deal falls through, and the buyer will get his or her earnest money deposited refunded.
You may sell your corporation with all its business assets, liabilities, gold nuggets, works of art, intellectual properties, good name, and of course, skeletons in the cupboard. You may only sell assets of the business corporation, take its liabilities to clear before or at the closing, and keep the corporate entity intact. Both methods have their pros and cons, risks and rewards, and the tax consequences associated with it. We strongly recommend that you take advice from your CPA and your attorney when you are preparing to put your business to sale to understand the tax and legal issues. Sometimes, the intangible asset like transferable lease, license, and intellectual property rights and the like may be more valuable to the buyer than the tangible assets you offer for sale. Do take advice from your broker how best to sell what you own.
You seem to be entering the stage in life where need to reduce your hours of work, teach and train the young family members how to run your business and improve on it, and formally consult with an Estate Planner if you have not done. An Estate Planner will guide you to set out a clear road map to succession for your business and other assets to protect your heirs from IRS. Remember, you cannot rely on your $69.95 Will alone. Transition of the wealth you have created and nurtured through your business is a serious matter of life for you, so much so when you do have to grow older and do want to enjoy your old age retired life. Cash must come to you regularly from your business that you can oversee and will be passing on. If you are in a situation that no one from your heirs wants to run your business, have no regrets to look for a buyer to whom you may owner-finance or collaborate with for steady income stream for you to retire. We can help you find such qualified buyer.
Congratulations, if you are about to make a Declaration of Independence and deliver your speech to your spouse, press your pause button and keep your finger there lest your impulse may release it. Remember that feminine instincts and sixth senses are far more powerful than a Harvard MBA giving you free advice to work on. We urge you to write your business plan, refine it, re-refine it, and discuss with a business plan advisor available in SCORE program of Small Business Administration. They will put brakes on your ambitions and reveal your limitations to you. Having done this much of homework, talk to us. We will be pleased to do complimentary checks on you.
In most small businesses, the owner is generally willing to finance part of purchase price, which may be as high as 30%. If the buyer puts up real estate collateral security, the financing may be higher. When you are buying a running profitable business, take your business plan and business performance to SBA lenders. Even though they ask for serious securities, they will work with you for financing the business. Remember, you will always need working capital and cash infusion into the business to grow and expand. This is where SBA loan guarantees will come handy to you.