FAQ

Sellers and buyers in a business sale questions always have many questions.  Selling or buying a business, for even the most experienced business person, is often a once-in-a-lifetime experience.  Accordingly, every question deserves a patient and thorough answer.  Here are a few common questions:

How can I prevent my employees, customers, competitors, vendors, and landlord from knowing that I am considering selling my company?

The most important attribute in any business broker-client relationship is confidentiality.  At the beginning, the steps to ensure confidentiality will be explained in great detail.  If any aspects of the process make the potential seller feel uncomfortable, immediate changes are made because the client is in charge in every step of the way.  Steps to ensure confidentiality include: client review of all marketing material to ensure that nothing is said or written that may trigger identification of the company’s for sale status; a strict requirement that all prospective buyers sign Non-Disclosure Agreements (“NDAs”) before the sensitive information is disclosed; continual communication with the seller about prospective buyers so that seller can indicate whether the buyer may be a competitor just looking for information; Offsite locations are used for seller/buyer meetings so that employees don’t see strange people coming into the office; and, most important, the broker’s sense from years of experience of talking to buyers every day about who is sincere as indicated by the questions asked and the buyer information provided.

How long will it take for the business to sell?

The time frame varies considerably depending upon the state of the market and the complexity of the business.  The seller should feel that the minimum is about six months and it could take a year and a half in some instances.  One factor is the complexity and attractiveness of the business.  If the business operates in a narrow niche and a high degree of specific skill or training is required to operate the business, the time to sell may be extended.  On the other hand, if the business produces a product in broad demand and the immediate skills required are relatively common in the business community, the business may sell fairly quickly.

What is the value of my business?

This is the key questions for every owner. If you can’t sell your business for an amount that allows you to realize your financial objectives, it may be better to hold it and keep operating.  In the initial part of the process, business brokers such as John will provide the owner with an estimate of Most Probable Selling Price (“MPSP”).  This is based on several methods of estimated selling price including: the Market Approach where past sales of similar companies are examined; the Income Approach where the Seller’s Discretionary Earnings are given an appropriate multiple depending on the attractiveness of the business; and, the Asset Approach where the physical asset value and the value of the goodwill are evaluated.  The MPSP provided by the broker is the price that will most likely attract a qualified buyer.  It is not a professional appraisal.  If the seller wants a third part business appraisal, references can be provided and the business owner can pay for it separately.  However, “The Market” will make the ultimate determination of the selling price.  A proper MPSP sets a reasonable asking price and a business broker will allow The Market value to be determined by wide exposure of the business to qualified buyers over a reasonable period.

What does it cost me to sell my business?

A business broker such as John will discuss the costs of selling the business in the initial consultation.  The fee is commission based, contingent upon a successful transaction approved by the seller.  A business broker contributes value by: properly valuation; wide but confidentially marketing; directing the negotiation process; providing referrals to other professionals such as attorneys, escrow agents, environmental inspectors, financing sources and accountants; and then closing the transaction.  Most important, the business owner continues to operate the business as usual throughout the process.

I lease my premises, what should I do?

First, review your lease, especially the clauses dealing with your rights to transfer and assign the lease.  Many business sale transactions are delayed because the owner will not agree to allow the new owner assume the lease, or wants increased compensation to do so.  The lease should be discussed with the business broker during the initial consultation, and the owner may want the advice of another professional such as a real estate attorney.  Generally speaking, however, an owner should not discuss the possibility of a sale with the landlord until a buyer is in contract and all other contingencies to the sale have been removed.

If I own my premises, what should I do?

The seller has several options.  One, the business and real estate can be sold together.  But this creates a higher price that some business buyers may not be able to afford. However, financing is sometimes easier when real estate is part of the transaction.  Two, the business can be sold separately with the real estate owner retaining ownership and signing a new lease with the business buyer. Or, three, the seller may ask the business buyer to re-locate the business.  Though, this may not be possible.

As part of my regular compensation, I take a lot of unrecorded cash out of the business.  Will buyers give me credit for this?

This is a tough question.  Buyers buy business to provide a living for themselves and their families, and to provide a return on investment.  If you maintain accurate records the buyer may give you credit and figure it as part of the total return he or she can expect.  If you are not now keeping records of cash, start doing so as far ahead of the planned sale as possible.

How will the buyer finance the purchase?

This is always a critical point of negotiation and it will affect the price.  Sellers typically want all-cash because there is no risk to them.  Buyers usually want to leverage their available cash and will often make offers contingent on bank or seller financing.  Small Business Administration (“SBA”) guaranteed loans are often the only outside financing source available.  Banks providing loans under this program require that the borrower have good credit, provide real estate collateral such as the buyer’s home to support the loan, and base their loan analysis on financial data taken from the business’ federal tax returns.  The other source of credit is Seller Financing where at closing the seller receives some cash and provides a note (guaranteed by the business and the other assets of the buyer) for the remaining part of the sale price.  There is obvious risk to the seller, for if the buyer defaults the seller will foreclose on the business and the other assets provided as collateral, which may or make not be enough to equal the remaining loan balance.  However, the advantage of Seller Financing to the buyer (other than reducing the cash required to close) is that he or she is more likely to believe what the seller says about the business because the seller has a vested interest in the buyer succeeding.  The seller may have tax advantages with the receipt of the sale proceeds over time, but a qualified accountant or attorney would have to advise in this regard.

The business owes money to investors, partners and equipment suppliers.  How will this be handled in the sale?

Buyers typically buy a business on a non-leveraged basis.  In other words, they expect the seller to settle all debts before closing.  Therefore, to calculate the amount of money the buyer receives from the sale, the debt amounts should be subtracted.