Why Use A Business Broker

Any business owner who has sold a business on his or her own will tell you it’s a long, tedious and stressful process. It consumes time and distracts you from the day to day operation of the business. When your focus should be on maintaining or increasing the value of your business, all of your time and energy is directed to the sale process.
That’s where an experienced business broker can pay huge dividends. There are many areas where the business broker expertise pays off:

* Confidentiality. If you as an owner attempt to sell your own business, that process alone reveals that the business is up for sale. Employees, customers, suppliers and bankers all get nervous and competitors look to make a kill. A business broker helps maintain confidentiality by requiring confidentiality agreements from interested parties and releasing the right information at the right time.
* Business Continuity. Selling a business is time-consuming for an owner who already is probably wearing many hats for the company. By taking on the additional load of selling the business, essential functions will get less attention and possibly damage to the business. The owner can maintain a focus on running the business when a broker is working on the sale.
* Reaching potential buyers. Business brokers have the tools and resources to reach the largest possible base of buyers. They then screen these potential buyers for the wherewithal to support the potential acquisition.
* Marketing. A business broker can help present your company in the best light to maximize the sale price. He or she has an understanding of the key values that buyers are looking for and can assist in identifying changes that can lead to a better selling price.
* Valuing your Business. Putting a value on a business is far more difficult and complex than valuing a house or commercial property. Every business is different, with hundreds of variables that have an impact on the value. Business brokers have access to business transaction databases that can be used as guidelines or reference points. But the best way for a business owner to truly feel comfortable that he got the best deal is to have several financially viable parties bidding for his business, which is much more likely using the resources of a professional business broker.
* Balance of Experience. Most corporate buyers have acquired multiple businesses while sellers usually have only one sale. An experience business broker can level the playing field for a business owner making his one and only business sale.
* Closing a Deal. Since the business broker’s sole function is to sell the business, there’s a much better chance that a deal will be closed in less time. The faster the sale, the lower the risk of employee problems, customer defection and predatory competition.

Utilizing the services of an experienced, professional business broker allows the owner to focus on running the business reducing the risk of business erosion during the sale process. A sale facilitated by a business broker helps maximize sales proceeds by involving a large universe of buyers in a confidential, competitive bidding process.

Why Should I Use a Sunbelt Business Broker
When I Decide to Sell My Business?

The Sunbelt network, by its very nature, helps to ensure the quickest possible sale of your business:

Our Name: Sunbelt has the ability to support the sale of your business from the signing of a Representation Agreement through closing. Our awards recognize our achievements. Sunbelt has been rated the top business brokerage firm since 1995. The January 2008 edition of Entrepreneur Magazine ranks us as the preeminent business brokerage firm once again.

Our Exposure: The Sunbelt network places your business in front of a multitude of business brokers across the globe. Each Sunbelt office can confidentially access your listing and help promote the sale of your business at the best price possible. By using our proprietary website, our network is connected to an average of 12,000 business for sale listings.

Our Edge: A large number of brokers in Sunbelt network are former business owners or high-level managers. They understand the concerns expressed by business owners in regard to selling a business. We provide you with practical answers to the basic questions all sellers ask when considering to sell a business:

* Before I sell my business, how do I determine my business worth?
* What kind of financials do I need to provide when I sell my business?
* How do I ensure confidentiality when I sell my business?
* If I want to sell my business, what is the most effective way to find qualified buyers?
* What kind of financing is available to potential buyers?
* How do I deal with “off the books” transactions?
* How do I screen buyers?
* Will I have to carry a note when I sell my business?

Our Method: Everyone, from the Sunbelt franchisees to each individual business broker, is trained by Sunbelt in the specific business brokerage disciplines that produce results. Consultation on a variety of business issues is available at your request as your selling process evolves. Selling a business is an intricate process that requires a very specific expertise as well as the ability to solve problems in a practical yet creative manner. We do realize, however, that all businesses are unique and that applying a “cookie-cutter” approach to selling your business will not be the most effective method.

We always try to tailor our marketing and procedures to accommodate the needs of your business and your concerns. Our intent is always to keep you informed and involved in the sale of your business. We know you want the freedom to concentrate on your business while we find you the right buyer.

Questions to Ask a Business Broker

Are you a full-time business broker professional?

When selecting a business broker it is important to find one you like and trust. Ask about their education and experience. Ask the broker for references and call those references. Ask the business broker about their professional affiliations and designations. Visit the office and see if it is what you expect – a professional environment backed with all of the necessary marketing and sales resources. Ask to see the office manual of policies, procedures and forms. Ask to talk to the brokerage owner and learn if he/she spends 100% of their time managing and supporting the brokers.

How do you value my business?

There is no simple method, but to approximate the value of your business, you should consider both its assets and earning power. The earning power of a business is defined as the annual pretax earnings plus owner’s salary and perks added back, which determines the real earning power or the Seller’s Discretionary Earnings (SDE). Multiply the SDE by a risk number (multiplier) to determine value. Also, market-based data (comps) can be used in conjunction with an SDE methodology so that they can serve as a “reality check.” Most buyers and lenders place extensive weight on the company’s ability to generate earnings. Therefore, it makes sense to use earnings methodologies to determine the value of a business and then use market-based data to check the reality of the value. As with most things in life, demand and asset value will also influence the business value. Desirable businesses and businesses with a large asset value command a premium.

Do you have an active database of buyers?

Successful business brokers enjoy a large “queue” of buyers. A large brokerage with many brokers has thousands of buyers in queue. Find out if your broker has buyers looking to purchase a business like yours. In our brokerage, approximately 50% of our buyers come from the queue of buyers in the various broker’s databases. You’ll have a better chance of selling if the business broker already has buyers looking at businesses for sale.

Do you have a large number of businesses for sale?

A large number of businesses for sale attracts a large number of buyers. Ask how many businesses your broker’s office has for sale. One of the best tools to promote the sale of a business is similar businesses for sale. A good business broker should be able to expose your business to a large pool of potential buyers. Having a large quantity of businesses for sale attracts a large pool of buyers.

How accessible are you once I agree to let you sell my business?

The lines of communication should always be open. The business broker is representing you and acting on your behalf and should be available for consultation as required. It’s reasonable to expect that your business broker will return messages or emails promptly and that you will be given regular updates. It is good to inquire about a broker’s responsiveness when talking to references.

How many buyer prospects will you typically talk when selling my business?

A good business broker keeps detailed records of every active prospective buyer that has passed through their screening process. Ask to see some samples of the broker’s buyer database files. These files will show how many buyers visited other businesses for sale. These records should include the prospect’s financial status and the kind of business each is looking to buy in terms of type, size, geographic area and other pertinent information. A successful broker will have prospects ready as soon as you list your company.

Do you have a highly effective website?

In today’s global marketplace, prospective buyers are no longer limited to a small geographical area. A buyer for your business could come from anywhere in the world, if your business broker has an effective website and it is easy to find. The Internet is a powerful marketing tool. Check out your broker’s website. Is it easy to find? Is it easy to use? Does it project an efficient, professional image?

Are you a licensed or certified business broker?

Some states, like Minnesota, require business brokers to have real estate licenses. Why? A real estate license forces the broker to understand the laws of agency and understand his/her fiduciary duty to you. Also, real estate is often included with the sale of a business.

In addition, many business brokers become certified intermediaries with certifications such as a Certified Business Intermediary (CBI) or Merger & Acquisition Master Intermediary (M&AMI). These designations require many hours of coursework and continued education to maintain certification status.

Valuing Your Business

A business owner considers placing his or her company on the market, ascertaining the proper value for the company is critical. Too often the owner assigns an unrealistic and unachievable arbitrary value then proceeds into the sale process only to be disappointed with the market’s response. As a result, the asking price is reduced several times. During this unfortunate period buyer prospects and valuable time is lost.

In truth, a company’s value is determined by a compilation of factors such as the company’s sales, earnings, performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. But it can also be influenced by intangible assets like the company’s image, reputation and goodwill.

There are several approaches to valuing your business.

Balance Sheet

There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.

The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets too much to gain prior tax advantages.

Income Approach

The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.

Market Approach

The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.

Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. And don’t be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.

Adding Value to Your Business

If you’re looking to sell a business, it’s critical to look at the value of the business. But a typical business really has two values. The “academic” value is the one determined by a professional business valuation. The other is the “true market” value. The academic value is arrived at with a formula based on the firms’ hard assets, cash flow, industry averages and multiples. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay.

For many small and mid-sized businesses hard assets like equipment, vehicles, land, buildings, and inventory may be limited. For some small businesses there may be no hard assets at all. Instead, their value is based on intangibles like employees, business processes, customer lists, location and business relationships.

To maximize the fair market value of your business, it’s vital that you capitalize on those intangible assets.

• Develop key employees. Buyers generally aren’t interested in paying a premium if the business relies on you for its success. Remember to delegate responsibility to key employees and involve your key staff members in the decision making process. Demonstrating that your company’s success is reliant on your capable, well-trained employees – not just you – will pay off at the time of sale.
• Document what you do. Be sure that job descriptions, operation processes, and strategic plans are documented. Documented records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.
• Build relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships are key. Consider diversifying both supplier and customer accounts.
• Improve cash flows. A potential buyer wants to see the “true cash flow.” And, of course, in the business world cash is king. Be sure you are driving all income to the bottom line.
• Review your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
• Find and build your niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.
• Remodel, clean, and organize. What’s the first thing anyone does when they put their home on the market? They spruce things up and make sure everything is in its right place. Yet, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.

Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep your focus right until the sale is complete.

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary to name a few. Remember, you only have one chance to sell your business, so you want to do it right.

Death, Divorce, Retirement of a Business Partner: Ways to Protect the Remaining Partner

What would happen to your business if your business partner died, divorced or retired? How would you protect the business from an unknown third-party becoming your new business partner? How would you prevent a bitter ex-spouse of your partner from becoming your new partner after a divorce? If you wanted to buy-out the departing partner, what would the price be? Are you convinced that you and your partner would readily agree on the purchase price? What would the source of funds be for buying out your partner? A well-drafted buy-sell agreement can effectively resolve these issues without the enormous costs of a court battle.

What is a Buy-Sell Agreement?

A buy-sell agreement (also known as a shareholder agreement or a member control agreement) regulates the transfer of business ownership. First, it generally prohibits transfers that are not approved by all of the owners. This prevents undesirable persons from becoming co-owners in the business. Second, the agreement provides for efficient ownership transfer in the case of certain events such as death, disability, divorce and retirement. If one of these events occurs, the remaining owner and/or the business will typically have the legal option to buy-out the departing owner for a defined period of time. Frequently, in the case of death, the agreement will actually require the remaining owner to purchase the deceased owner’s shares. This helps to ensure that the financial needs of the deceased owner’s family are met.

What is the Purchase Price of the Buy-Out?

In the event that a buy-out event occurs (such as death or disability), the agreement will provide a cost-efficient way to determine the purchase price. Typically, if the owners have agreed on a purchase price at the annual shareholder meeting, that price would be used for that business year. If the owners have not agreed on or cannot agree on a purchase price, the agreement will have an appraisal process where professional business appraisers determine the value of the shares to be purchased. An out-ofcourt method for determining value is worth its weight in gold because it avoids the enormous legal and accounting costs of valuation litigation.

How is the Buy-Out Funded?

Suppose the buy-out price is $500,000 or more. How will these amounts be paid without financially crippling the business or its remaining owners? If an owner dies, the entire buy-out price is normally paid in full at death because it is funded by life insurance policies upon each of the owners. In cases of disability, divorce, or retirement, the buyout price is often paid out over a number of years from the normal cash flow of the business. The payment obligation is usually evidenced by a promissory note. Repayment is secured by a guaranty and a stock pledge agreement.

Summary

A well-drafted buy-sell agreement is necessary in a business with two or more owners. Without one, the success and value of the business is threatened by costly and time-consuming legal disputes between owners about ownership transfers and the value of the business. Koepke & Daniels provides ways to protect businesses and their owners from these problems.

The information in this newsletter is intended as a general discussion and it is not, nor is it intended to be, legal advice or the solicitation of employment. Kevin M. Koepke, the author, is the Chairperson of the Business Law department. Kevin focuses on business law and shareholder issues. You can reach Kevin with questions at: (763) 201-1201 or kkoepke@koepkedaniels.com.

If you’re thinking of selling out, keeping certain aspects of the deal secret can make or break the sale. Consider this scenario: During negotiations with a buyer, news leaks out to your employees, vital customers and competitors. Managers and customers jump ship and as a result, so does your buyer.This scenario isn’t as far-fetched as it may seem, warns Domenic Rinaldi, a managing partner at Sunbelt Business Brokers in Chicago, Ill, which specializes in helping people buy and sell companies. “The implications of leaked information during the sale of a division or company can be devastating, both internally and externally,” he says.Rinaldi recommends taking some precautions to safeguard the sale. For starters, he suggests owners insist that all potential buyers sign a nondisclosure agreement before allowing investigations into the company to begin. “These documents are not complicated, but they need to be highly restrictive,” advises Rinaldi.Clauses should include guarantees that potential buyers (a) will not attempt to hire any of your employees out from under you; (b) will not disclose in any way that sales negotiations have occurred; and (c) will have only limited access to proprietary information, such as technological secrets, during the investigation.Ed Krajcir of Sunbelt Business Brokers of Wisconsin urges owners to take control over the amount of financial information they release, especially during the early stages of negotiations. “A seller should release the right information at the right time. You don’t want too much information out there, especially if negotiations fail to result in a sale,” says Krajcir.He strongly urges owners to release only financial summaries (rather than detailed financial statements) in the beginning stages of putting together a deal.There are many other common blunders entrepreneurs make when selling a business.. In addition to letting information leak, another common mistake is setting an arbitrary price. Business brokers and mergers and acquisitions advisors recommend a careful value analysis of your business with both the business broker and your accountant. Setting realistic terms is also important.Many entrepreneurs try to go it alone in the selling process, but doing so can be a costly error. Seek out sound business and legal advice from professionals who are experienced with selling businesses. Selling a business, after all, can be a complicated process and not one to take on without expert assistance.

Financing the Sale of Your Business

If you are like many business owners a large portion of your net worth is tied up in the value of your business. When it comes time to sell your business it will likely be one of the largest financial decision you will ever make. Since such a large portion of your wealth is connected to your business you clearly want to get all cash for your business when you sell it, right?

Wrong.

Most business owners will tell you they are not interested in financing the sale of their business. They have a friend or family member who sold their business and had to take it back. They don’t want any strings tied to them after they sell. No one financed them when they started their business so why should they finance someone else. The list is long and for the most part the concerns are valid. However, when done properly seller financing is often the difference between whether a business sells at all and it can have an enormous effect on the sale price.

Seller Financing Can Increase Your Net Price

Buyers will often pay a premium for a seller financed business. Seller financing sends a strong signal to the buyer that the seller believes in the future of the business and that the investment is less risky. Buyers will pay for what they perceive as less risk.

Seller financing also creates interest earnings for the seller. For each $100,000 in seller financing interest earnings will be $35,000! This is based on $100,00 on a 10 year amortizations at 8% with a 5 year balloon.

Seller financing can also help with tax deferment. By taking a large amount of cash at closing a seller often puts themselves in a higher tax bracket. Taking the money over time can also allow the seller to find other creative tax strategies and investments for the post closing income stream. Talk to your accountant about ideas on how to minimize your taxes.

Seller Financing Increases Your Chances of Selling

Many businesses never sell. One of the most common reasons is the seller is so afraid of seller financing they demand mostly cash. Buyers with enough cash to buy their business meanwhile are leveraging their money on much larger, more profitable businesses that are willing to seller finance.

Sellers and buyers who pursue bank financing are often frustrated. Banks do not like to lend on business acquisitions. When they rarely do they often artificially cap the price with valuations and ratios that limit what it can sell for. Banks also tend to eliminate many good buyers with restrictive experience requirements. Seller financing on the other hand is incredibly flexible and is limited only by what the parties can negotiate.

By offering seller financing the seller makes their business accessible to a larger pool of buyers versus waiting for that mythical buyer that is going to cash them out. The few cash buyers that are out there often want tremendous discounts that make them unappealing to sellers.

Protecting Yourself When Seller Financing

If you decide that seller financing is something you want to explore here are some ways to protect yourself:

* Talk to multiple buyers. Carefully interview buyers and only finance the buyer you will believe has the right experience and financial wherewithal to continue the company’s success
* Demand a high enough down payment. After investing a large portion of their net worth, many months of note payments and lots of hard work a buyer will not see failure as an option.
* Perform due diligence on buyers. Financial statements, credit reports and background checks are all tools for you to consider.
* Use a broker. If a buyer gets in trouble they will often contact the broker to resell the business.
* Get a personal guarantee from the buyer when possible.
* Have an attorney file a security interest on the assets of the business. This is your collateral.
* Require regular financial statements from the buyer after closing.

At the end of the day, seller financing works because it creates confidence in buyers that what they are buying is a solid investment. Buyers will often pay a premium for seller financing. On top of the interest earnings, tax advantages and increased chance of selling, this can make seller financing a very attractive and lucrative way to successfully sell your business.

Why Sell Your Business Now?

Many business owners are considering exiting their business but are concerned about the current recession and believe it might be better to wait rather than try to sell their business now. However, if the owner has been thinking about selling their business it is likely for very good reason such as retirement, lack of capital for growth, strategic reasons, partnership issues, burn-out, health or family reasons or a myriad of other reasons that make exiting the business a smart move. Unfortunately many business owners make excuses not to act or act years after they should have. A tough economy is often not a reason to delay a sale.

Here’s why:

Low Capital Tax Gains Rate

It is not what you sell for that matters, it is what you keep. At only 15%, capital gains tax rates are at the lowest levels in 30 years. In the late 70’s the highest effective capital gains tax rate reached 49%+ and as recently as the early 1990’s the highest capital gains tax rate was still at 29%. The Obama administration has already stated its desire to raise rates, so it is not a question of if but when and how much.

Demand

There are more potential buyers right now due to massive corporate layoffs. Displaced middle managers and executives want to be their own boss but don’t want to start from scratch. They are ready to buy and have 401K money for down payments and good credit for loans. Strategic buyers are also in the market, seeking to grow through acquisitions. Even Private Equity Groups (PEG’s) are still buying as they have capital they need to invest.

Supply

Because some owners mistakenly believe they should wait to sell there is not enough supply to meet all the buyers. The business owners who do sell now stand out and can often have multiple bidders, even if company sales are down, as long as their price and terms are realistic.

Low Interest Rates

Interest rates are at historic lows. Low interest rates mean that buyers can afford to pay more for a business. Whether it is a “sophisticated” buyer using discounted cash flow analysis, or someone calculating “how much can I afford a month” the same math holds true; lower interest rates mean lower debt service payments and higher cash flows from the business. Debt payment levels and cash flow drive value.

A business owner can wait for things to change but in so doing they will likely miss a tremendous window of opportunity to sell at an attractive price. Now is perfect time to have a professional business broker or M & A Advisor review your company and see if now is the right time for you to act.

Sell With Confidence in Trying Times

The worst time to sell a business is when you absolutely have to sell. Most buyers can sense fear and desperation, so if you don’t come across as level-headed and under control, they will likely exploit every weakness to gain leverage in a transaction. Unfortunately, this is a rather common scenario in today’s market; many business owners are struggling financially and are anxious to sell their businesses, but are having a tough time doing so.

It’s equally harmful when an owner assumes a persona of empty bravado; this only masks the desperation–and not very well. This false bravado can send the owner into a state of denial, refusing to acknowledge that her business is on a downward trend and losing value. This is the most critical time for an owner to heed the advice of advisors. There’s nothing more frustrating for a professional than to see a client in a downward spiral continue to do everything that led to the state of desperation in the first place.

So if you need to sell your business, what can you do to encourage success and avoid losing leverage by appearing desperate? Here are some important strategies to follow when navigating a business sale under difficult circumstances.

Listen to your advisors

Now is the time to ask lots of questions and to seek professional advice. Your business broker, accountant, attorney and wealth manager have probably all seen your situation before and will know how to handle it for the greatest success.

Establish a plan

Much of the desperation we see from business owners could’ve been avoided with proper exit planning. Planning, even in urgent situations, can help you gain understanding and clarity about your situation. A properly formulated exit plan should involve all of your key advisors, with primary and contingent plans carefully and comprehensively laid out. The creation of the plan alone can give you the power and freedom to think clearly even when times are tough.

Maintain confidentiality

Unless your situation is dire, you should tell no one outside of your immediate family and trusted advisors that you’re seeking a third-party sale. Your instinct may be to take a shotgun approach and tell everyone in the hope that someone will come along and make you an offer. That could happen, but it’s far more likely that, once word is out, employees, clients and vendors will start to scramble for a new employer or partner. This will only make matters worse and wreak havoc on your business. Chances are you’re already under a lot of stress; there’s no need to add more. Consider the benefit of working with an experienced business broker who can help safeguard the confidentiality of your business.

Stay focused

The moment you make the decision to sell your business is exactly when you need to ensure that all your efforts are focused on running the business. It can be hard to avoid pulling back from day-to-day operations or putting all your time and energy into the sale, but it’s essential to stay committed to everyday tasks. Buyers like to see that a business has future prospects, even if the situation is dire.

Psychologically, you’ll be in a much better position if you keep yourself and your employees fully engaged. You may be surprised at what your renewed efforts might yield in the way of business performance, which will only give you leverage when a buyer does come knocking.

Understand the need for multiple buyers

A surefire way to mitigate a desperate situation when selling your business is to have multiple interested parties. Our brokers constantly remind sellers that having only one buyer is like having no buyers. A good business brokerage firm has the marketing muscle to generate heavy buyer interest even if the business and owner are not in top form. A brokerage firm should have a large, existing database of buyers who may be interested in your business, an internet presence that attracts buyers and a trained, professional staff that knows how to manage a difficult situation. Engaging multiple buyers will enable you to get the best price and terms possible.

Price the business to sell

Now is not the time to overprice your business hoping someone will take the bait. The marketplace knows what a fair price looks like and, given your situation, you should be prepared to peg the price of the business at the low end of reasonable. This may sound counter-intuitive, but the right price will actually help you attract more buyers and keep the price and terms at the highest level possible. We normally recommend a third-party valuation coupled with pre-approval from a bank so that we have as accurate a picture as possible.

Know how to meet with buyers

Business owners typically sell a business only once in their lifetime, so they’re often unfamiliar with the nuances of meeting with buyers. These meetings typically determine whether a buyer is going to submit an offer, as well as the terms of the offer. There are key questions that can either reveal your desperation to the potential buyer or, if handled properly, communicate that you’re motivated but won’t be manipulated in a negotiation. A good business brokerage firm is able to anticipate these questions and help you rehearse how to respond in a truthful, level-headed manner.

Have multiple contingency

Realize that not all business-for-sale deals close successfully, especially in distressed situations. That is why it’s important to have a thoughtful and credible plan B (and ideally, plan C) that can give you the additional confidence to maintain control. Make sure you can answer the question, “What will I do if I can’t sell my business when I need to?” An experienced team of advisors can be an invaluable help with this and give you the peace of mind of knowing there are other options.

When you’re suddenly faced with a situation that requires you to sell your business, it’s difficult to avoid appearing distressed and desperate. It’s absolutely essential that you don’t, though, both for your ability to attract buyers and close a deal, as well as for your personal well-being. Keep these points in mind and seek the help of an experienced team of professionals.

Domenic Rinaldi is president and managing partner of Chicagoland Sunbelt, a business brokerage firm that focuses on helping people buy and sell businesses. Rinaldi is a Certified Business Intermediary (CBI) from the International Business Brokers Association. He brings more than 24 years of experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena.

Sunbelt writes for Small Business Development Center on Being Financially and Emotionally Ready To Sell Your Business:

Are You Financially and Emotionally Ready To Sell Your Business?

Walking away from your life’s work is a big step that doesn’t come without its obstacles. Determining your readiness to sell your business largely comes down to two main factors. Are you financially ready to sell your company? And are you emotionally ready to sell your company?

Assessing Your Financial Readiness to Sell a Company

Your financial situation may be the easier of the two factors to consider but surprisingly, it is oftentimes the one most overlooked by sellers. The key question is whether the proceeds you receive from selling your business will give you the financial means to actually leave the business. For most people, the value of their business makes up a large chunk of their net worth. That means getting the right price is critical to reaching their post-sale goals. You’d be one of the lucky few if the proceeds from your sale are not essential for your retirement or future plans.

But selling also means cutting off the revenue source you’ve been drawing out of every year. So how much do you need
to go forward? What sale price will allow you to meet that need? And can your business currently command that price on the open market? If the answer is no, now may not be the right time to sell.

The best way to assess your financial readiness to sell a company is to find a wealth manager, an individual who can
analyze your entire portfolio and calculate your post-sale needs. But the first step is finding an experienced, knowledgeable third party to put a value on your business. Once the valuation is completed, your wealth manager will be
able to determine if a sale will yield enough money to fund your future plans. If the proceeds won’t be enough, you may have to spend the next few years working to build up the businesses’ value before you sell. Otherwise you must
consider lowering your expected spending after the sale or finding a way to supplement your income and bridge the gap.

Assessing Your Emotional Readiness to Sell a Company

The more elusive part of evaluating your readiness to sell is your emotional readiness. Can you really walk away
from the business you built for so many years? While there will be a transition period where you stay in touch for some period of time, there will still be that moment when your services are no longer needed. What are your plans when
that day arrives? It’s best if you can detail exactly how you are going to spend our time. More time with the kids/grandkids? More time for a hobby? Even starting another business? If you cannot describe post-sale life, you should
question your sale decision.

The example of a niche manufacture illustrates the importance of emotional readiness. The seller’s business attracted multiple buyers with significant offers but a deal was never made. Why? It really came down to the fact that the owner was not emotionally ready to walk away unless he received an unrealistically high offer. When the moment arrived to sell, he simply couldn’t disengage from the business. The net result was time, energy and capital wasted.

So truly ask yourself the tough questions before pursuing the difficult and long task of marketing your business for sale. Will you have the necessary funds for your desired post-sale life and are you emotionally ready to pursue a life after business ownership? If the answer is no, keep the business running – assuming you have the will and drive to remain competitive and relevant.

Article by Domenic Rinaldi, Sunbelt Business Brokers

Published by Small Business Development Center

	Down Payment	Term	Interest Rate	Collateral/Security	Underwriting	Loan Fees
Seller Financing	Typically 30% to 50%	Typically 3-7 years	Negotiable	Personal Guarantee, Assets of the Business, Additional items may be negotiated by the buyer and seller	Easy for the buyer and seller to control. Often includes a buyer credit report and financial statement.	None.
SBA Financing	20%	10 years	Prime + 2.25-2.50%	Personal Guarantee, Assets of the Business, Liens on Buyers Real Estate	Buyer and seller have little control. Lengthy and complex application process. Highly dependent on the buyer’s transferable business experience.	Loan fees may range from 1 – 3% plus other costs depending on the loan structure.

Due to the complex nature of buying and selling businesses, Sunbelt recommends that all parties seek appropriate professional, legal and accounting advice. Sunbelt does not verify, represent or warrant the above information.

If you are considering purchasing a small business it is essential
to understand the many options for financing. The majority of financing solutions are
based on the ability of the business earnings to service the debt and pay the new owner a
salary.

Define What You Are Acquiring

Before determining a financing solution you must understand the
historical earnings and current trends of the business you wish to acquire. Calculating
the true earning power of a business can be a difficult task. Most business owners maximize
tax strategies to minimize reported earnings so they pay less taxes. Therefore, when
a prospective buyer looks at the net income, or “bottom line”, of the financials they
may not be seeing the whole story. Business sellers and their advisors will often “recast”
the earnings to show the earning power of the business. This recast number is commonly
referred to as Seller’s Discretionary Earnings (SDE). SDE is calculated by “adding
back” certain expenses to the earnings:

Earnings: Net Income of the business after all expenses

+ Interest Expense: Interest is added back
assuming the new owner will pay off all liens and encumbrances of the business

+ Taxes

+ Depreciation and Amortization

+ Current Owner’s Salary

+ Current Owner’s Benefits: e.g. retirement
contributions, medical insurance, owner’s automobile

+ Nonrecurring Expenses: Large equipment
purchases or improvements that are not part of normal expenses

+ Nonoperating Expenses: Salaries or benefits
paid to the current owner’s family members who are not working in the
business

= Seller’s Discretionary
Earnings (SDE)

Once SDE is calculated you know how much cash flow is available to
service the debt associated with acquiring the business as well any salary and/or
return-on-investment you expect the business to pay you.

Debt Service Coverage Ratios

Lenders want to know where the cash flow is coming from to cover
the debt. They will look at the SDE of the business and first subtract the proposed
new owner’s salary to see how much remains to service the annual debt of the proposed loan.
So let’s say the business reports an annual SDE of $200,000. You indicate to the
bank that you will be taking a salary of $100,000 out of the business. That leaves
$100,000 to cover debt. The bank will divide this remaining net amount by the debt. In the
below example we will assume the annual debt is $7,000/month or $84,000/year. $100,000
divided by $84,000 in debt equals 1.19. This is called the Debt Service Coverage
Ratio.

$200,000 Seller’s Discretionary Earnings

-$100,000 New Owner’s Salary

=$100,000 Net (After New Owner’s Salary)

$100,000/$84,000 Annual Debt = 1.19 Debt Service
Coverage Ratio

Banks not only require the Net to cover the Annual Debt but to
also provide for a cushion. This cushion, or Ratio, gives the business the ability to
cover debt in the event future revenues or profits decline. Many lenders like to see a
Debt Service Coverage Ratio of 1.10 – 1.20 or higher. They also want to see that these
ratios work on the last three years of SDE and that the SDE trends in the current year
also look positive. Although lenders look at many factors in making a business
acquisition loan, if the earnings of the business will not pay the new owner a salary and
service the debt, they will not make the loan.

SBA Loans

The Small Business Administration (SBA) guarantees billions of
dollars in loans to America’s small businesses through approved SBA lenders. Many of
these loans are made to existing businesses looking to expand. Getting approval
for a business acquisition loan is often more difficult because a new owner is
stepping in. SBA lenders have a rigorous underwriting process that will examine the buyer’s
net worth, credit history and experience in the industry. SBA underwriters are very
concerned with the ability of the new owner to run the business so communicating your
direct or indirect experience, or transferable skills, is very important.

The lender will also require a minimum injection of capital from
the buyer, typically 20% of the purchase price. Although the bank may even allow the buyer
to use borrowed money for the down payment (such as home equity), they will
include any debt related to it in the Debt Service Coverage Ratio calculation above. If this
additional debt is too high it will cause the deal to fail the Debt Service Coverage
Ratio test.

Because SBA loan requirements are complex it is best to deal with
a SBA Preferred Lender. Essentially most banks have access to SBA financing but
unfortunately very few have the experience or focus to do business acquisition loans. You
can find more information on SBA lenders at www.sba.gov or through a local business broker who knows the lenders in your area.

If the business you wish to acquire meets the Debt Service
Coverage Ratio test, and you have transferable experience, SBA financing can be an excellent
financing option. It allows the Seller to maximize the cash at closing while allowing the
Buyer to lower the down payment percentage and retain more cash for working capital.
Again, working with a SBA Preferred Lender who regularly does business
acquisition projects is essential.

Seller Financing

Because SBA financing is complex, hard to secure and often has
high closing costs, seller financing is quite common in business acquisitions. Seller
financing has the unique ability to be as flexible as the buyer and seller need it to be
and is only limited to what the buyer and seller can agree on. The seller, like a bank, will still
be concerned about the buyer’s net worth, credit history and experience in the industry.
The seller is also likely to want a higher percentage in down payment from the buyer since a
loan on the sale of their own business is probably their only loan so they are at more
risk than a bank. Most buyers like the idea of the seller financing since it
simplifies the financing and keeps the seller vested in the businesses future success.

Sellers often prefer to cash out if they can, but the right down
payment, a more favorable price, the right buyer, sufficient buyer guarantees, security
agreements and interest earnings often ranging between 6 – 10% can generate more interest.

The terms of the financing are totally negotiable. However, a
seller and buyer would do well to consider the same Debt Service Coverage Ratio guidelines
that the SBA uses. Do the terms allow the new owner to take a salary, service the debt
and still have a “cushion”? If not, the buyer and seller have put together a deal
that will never make it to the closing table.

Sources of Down Payment Capital

The buyer’s available capital for a down payment is an enormous
factor in how large of a business they can buy. Since most businesses are sold for
multiples of earnings (SDE), the more business you can afford, the more earning power it
probably has. Therefore, most buyers seek to maximize their down payment money.
Most buyers know that real estate equity, securities and savings are sources for
down payment capital. Many do not know that programs exist to use retirement funds to
start or buy a business without penalties and taxes. A business broker can refer you to
firms who specialize in these programs.

Working Capital

Don’t forget about working capital! When small businesses sell
they typically deliver the business free of all debts but they also keep the cash in the bank
as well as the accounts receivable. So even though you are buying a business that has
customers walking in the door on day one, you need to have enough working capital to cover
the immediate operating expenses such as payroll, supplies and rent. A retail
establishment with mostly cash sales will need much less working capital than a manufacturer
that has 30 day terms with vendors but does not get paid by customers for 60 days. Start
out by calculating the historical monthly expenses of the business and then calculate how
much working capital you need in reserves to cover these expenses.

Summary

There are many options for financing a business. A professional
business broker can assist you in understanding which ones may work for you. Remember
these important points:

1. Define the Seller’s Discretionary Earnings (SDE) of
the business

2. Subtract from the SDE what you need as a salary or
return on investment. The Net amount is what you have left to service any debt.

3. Is the seller offering financing? Do the terms
allow you to take a salary and service the debt?

4. Do you have enough down payment capital for the
size business you are looking at? Examine all sources of down payment capital. Are
your salary or return-oninvestment expectations in line with your down payment?

5. Is SBA financing available which may allow you to
leverage less money down? Do you understand all the closing costs?

6. Have you allowed for working capital?

Chris Jones is a business broker and Vice President of Sunbelt
Business Brokers of the Midwest, with offices in Minnesota, Wisconsin and Illinois.

Rethinking Your Retirement Funds

You are interested in buying a business. You have adequate capital to fund the 20% requirement that the Small Business Administration (SBA) requires. You have decided you are ready to meet with a business broker to find a business that matches your finances and personal goals.

While you are sitting down with your business broker, the two of you review your finances. He or she discovers that you also have $100,000 in your 401(k) retirement plan. Your business broker informs you that these funds can be used to buy a business.

Your business broker continues to explain that this can be the best investment opportunity for your retirement funds. Most retirement funds, if invested in the equity market, will never be sufficient to provide adequate retirement benefits. However, investing retirement funds in your own business gives the maximum potential of providing future financial security.

Additionally, using a 401(k) or IRA to fund your business purchase increases the size of the business you can acquire. For example, using your $100,000 401(k) fund can potentially allow you to purchase a business with a fair market value of $500,000 more than you could afford with your savings alone.

Your business broker also explains that both the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 specifically permit a retirement plan participant to invest in employee stock without penalty. Subsequently, this is an IRS-approved transaction.

Buying a business with your retirement funds does require a specific structure to avoid any penalties. The structure of the transaction is as follows:

1. A C-Corporation is established.
2. The Corporation establishes a profit-sharing plan.

3. The retirement funds are rolled over into that new profit-sharing plan.

4. You, the participant, direct the funds to be invested as company stock.

The process of establishing the new company structure is quick and is designed not to delay the closing of the transaction. Additionally, you may be able to defer up to $200,000 annually, on a fully tax-deductible basis, into your new retirement plan.

For more information, Contact Us and we’ll send you information on providers of this financing solution.

So You Want to Be Your Own Boss? Buy an Existing Business!

The boomer generation spans many years creating a unique situation in the business world. Aging boomers are looking toward retirement, while many younger boomers find they’re ready to be their own boss. For those younger boomers, and others looking to be a business owner, buying an existing business is a great option.

But be aware that buying a business is a timely process. Some buyers never find the right opportunity, while others spend too much time exploring too many options. Consider a step-by-step approach to get you where you want to be – owning your own business.

Ask yourself some important questions

Why do I want to be an owner? What types of activities do I like? What lifestyle is important for me? You’ll also want to be sure to include your family as part of the assessment.

Line up a team of professional advisors

Alert your attorney, accountant and financial advisors that you are looking for a business.

Consider your financial situation

Be sure to carefully consider how much money you need and how much you want to earn. Your expectations need to be realistic and something that can be achieved by the type of business you are searching for.

Develop a personal financial statement

The personal financial statement should show your assets and liabilities and possibly include a supporting statement from your banker or accountant. Be prepared to share this document with the business intermediary who is working with the seller. If you are planning to work with other investors, identify them and create a group financial statement.

Create a profile

Sellers want to be sure their business will continue to be successful. They want to find a buyer who has experience and will take care of the company’s employees. Really, you are selling yourself to the current business owner(s) and the professional team that represents the seller.

Establish your criteria for acquisition

It’s important to define the parameters of your search. Include geographic requirements and criteria on the transaction size. Having set criteria will help you demonstrate your commitment to finding the right business for you.

If you are interested in buying an existing business, you want the business intermediary to be selling you to the seller. It’s important that you demonstrate that you’re a qualified, motivated buyer. Being prepared and serious about your search is an important initial step.

The Benefits of Buying a Business versus Starting a New Business

So you want to be your own boss. Consider the options – work as an independent contractor… start your own business… buy an existing company.

Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered… the risk-to-reward ratio is tipped in your favor when you purchase an existing business.

Admittedly, as an independent contractor, your risk is minimal. The up front investment and overhead costs are limited. However, without the ability to leverage the work of an employee base, the returns are limited by your own personal capacity.

Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.

On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.

There are a number of reasons to consider the purchase of an existing business rather that starting one:

* Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections.
* Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.

* Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.

* Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.

* People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.

* Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start up owners, on the other hand, often “starve” at first. Some experts say start-ups aren’t expected to make money for the first three years.

* Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.

Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.