The ABC’s of Selling a Business
I am contacted regularly by prospective sellers who have been subjected to one or more of the following:
- Retirement age has arrived
- Health issues have occurred
- A divorce settlement looms
- Prolonged downturn in business revenues and/or profits
- Significant competitive business pressures
- Owner is tired/worn-out
- Lack of access to business capital
The business owner’s goal and the reason for his call to me is to explore what is commonly called a succession plan, which provides a “road map” for a business owner to follow which will eventually allow him to exit his business. a comprehensive, well-constructed succession plan will identify several courses of action, including contemplating the sale of the business. Ideally, a succession plan should be developed before the onset of any of the above major reasons for a business sale (i.e., selling your business is a process which should begin before the thought of selling becomes a recurring event.). When you start obsessing about selling your business, you probably should sell.
Business brokerage differs from real estate brokerage in many respects, but there are two differences that set them a world apart. First, business brokerage works in an arena of strict confidentiality to prevent knowledge of a potential sale from leaking out to employees, customers and/or vendors. a qualified business broker can explain how prospective buyers are entertained while not breaching the confidential nature of a contemplated sale. Second, while the real estate industry touts “comparables,” they rarely exist in business brokerage. Each business is truly unique and has to be valued on a stand alone basis.
A successful business broker is exposed to many businesses across a wide range of industries, and as such, should have a feel for both the valuation and marketability of your business. The ultimate value of your business is unfortunately unrelated to what you, the seller, think it is worth. Similarly, the sale price is not related to the value imputed by your CPa or attorney. The real value (i.e. the eventual selling price) is determined by the marketplace.
Market valuations for successful businesses are cash flow driven. The cash flow figures that buyers want to see are “recast” statements of cash flow, called seller’s discretionary earnings (SDE), which show buyers the historical cash flow available for the owner to: a) pay himself; b) service debt; and c) pay professional fees. Your business broker should be able to prepare a confidential SDE based on your tax returns and internal financial statements.
Business valuations (not including the value of any real estate being sold with the business) are generally a multiple of the SDE. That multiple, which can range from 2.0x to 5.0x (or higher in some cases) is again determined by the marketplace and usually reflects qualitative aspects of the business such as:
- Sales/profit trends
- Untapped revenue potential
- Trained/experienced/loyal employee base
- Unique and/or branded products
- Barriers to entry
- Gross margin potential
- Real estate lease considerations
- Nature of capital equipment
- Exclusive markets/territories
- Competition
Your SDE (often a three-year weighted average) times a multiple (which your business broker will help you determine) will be instrumental in your deciding a realistic selling price for your business. Most business sales are asset purchases allowing the seller to keep the cash and accounts receivable of the business while requiring retirement of all liabilities.
Whether you are 57 and in excellent health and want to start planning to sell your business at age 60 or you are 53 and cannot face owning your business another year, a reputable business broker will meet with you at no charge to formulate the timing and strategy of an exit plan. The broker will also explore in depth the obstacles a potential buyer might encounter as he moves forward in attempting to buy your business, including discussions of financing the sale. Since august 2007, banking has become a significant challenge in business sales.
When you decide the timing is right to sell your business, your relationship with a business broker will become more formal with the seller signing a listing agreement that generally:
- provides the broker with a success fee (commission) at the closing
- spells out an exclusive listing period (generally a minimum of six months)
At that point, the broker begins the confidential marketing of the business, which requires only nominal seller involvement until solid prospects have been both identified and vetted by the broker. A seller should plan for a three- to nine-month time horizon from when the business is listed until the sale closing actually occurs.
Author Michael S. Greengard is the President of Praxis Business Brokers in Kentwood, Michigan..
Contributed by Michael Greengard, Praxis Business Brokers.