KEY GUIDELINES IN SELLING A BUSINESS (PART 2)
Many business owners eventually decide to sell their companies, though the reasons for such divestment vary widely from individual to individual. Some owners may simply wish to retire, while others are impatient to investigate new challenges – whether in business or some other area – or tired of the frustrations of the business in which they find themselves. Others decide to sell for reasons more closely associated with the health of the business itself; dispute with partners; incapacitation or death of principals; or downturns in the company’s financial performance can all spur business owners to ponder putting their business on the block. Whatever their ultimate reason for selling, though, business owners can get the most out of their company by carefully considering a number of factors.
LOCATING PROSPECTIVE BUYERS
Most business owners sell their company to external buyers – buyers who are not current partners or employees in the organization. There are four primary routes that sellers can take to notify these buyers of the availability of their companies: print advertisement, social media, industry sources, and intermediaries.
Many people hoping to sell their business make arrangements for advertising in journals, and popular newspapers around the country. The journal is a particularly popular option for owners of large, privately held businesses. Owners of smaller businesses, meanwhile, often turn to the classified sections of their own local newspapers to advertise the availability of the company for acquisition.
When submitting a “business opportunity” advertisement for publication in the newspaper, however, sellers need to take the sensible approach. There is a delicate balance to be struck in any kind of advertising between the need for confidentiality and giving enough information to attract potential buyers. When your ads describe too much, competitors and others can deduce who you are and find out information you don’t want them to know. Give too little information and you won’t attract any interest.
Advertising should provide a brief description of the type of business for sale, its primary assets (location, popularity, etc.), and a way for interested buyers to make contact. Sellers who wish to maintain some degree of anonymity while looking for a buyer may wish to arrange for a post-office box rather than include their telephone number.
The emergence of social media platforms has become a veritable avenue to reach out to a wide network of potential buyers. Owners can place adverts on Facebook, Instagram, Twitter, LinkedIn, and other social media outlets to attract potential buyers for consideration.
Industry sources can also be valuable when a business owner decides to sell his or her business. Suppliers, for instance, may know of potential buyers lurking elsewhere in the industry or community. In addition, trade associations and trade journals can be used to get the word out about a company’s availability.
A fourth option that many sellers use is to secure the services of a business broker or merger and acquisition consultant to sell their business. Business brokers, who generally handle the sale of smaller companies, (though this is by no means an absolute rule), typically charge the seller a fee of about 10 percent of the final purchase price.
Business brokers are exactly what the name implies – firms that list businesses for sale, then advertise them for sale to the public. They are very similar to estate brokers but not licensed. A business broker will not usually investigate the businesses he lists but will rely entirely on data given to him by you, the Seller. Valuation of the business is usually left completely up to you, and although a reputable broker will make suggestions, he is generally not qualified or not interested in spending much time in analyzing the business to determine marketability.
Merger and acquisition consultants, on the other hand, typically specialize in handling larger middle-market companies. Their coverage of the entrepreneurial market is virtually very broad and they generally know, within specialized industries or regions, which larger companies are actively searching for additions to their product lines or industry groupings. Payments to M&A consultants are usually less than 10 percent, but this is in part because of the larger scale of the deals in which they are typically involved. In addition, many consultants ask for a monthly retainer fee. One of the benefits of securing the services of a merger and acquisition consultant is that he or she will typically provide help in preparing presentation packages, valuing businesses, and negotiating with prospective buyers.`
A well-chosen business broker or merger and acquisition consultant can save the seller of a business considerable amount of time and effort. However, both groups include hucksters who prey on unwary business owners, so it is important for sellers to conduct the appropriate background research before soliciting services in these areas.
Another option sometimes available to business owners is to sell their company to “internal” buyers – employees, business partners, or family members. Selling to employees through employee stock ownership plans (ESOPs) or other arrangements are particularly attractive for business owners because they accrue significant tax advantages through such sales. Employees interested in assuming ownership of the company via a management buyout (MBO) could range from a single key employee, such as a general manager who already has a good grasp on many aspects of the enterprise, to a group of employees (or even all of the company’s employees). This is a fertile territory. Most employees yearn to have their own business. All employees are concerned about someone else buying the company and either being fired, or not been able to work for the new boss. Employee convictions that they could improve on their owner’s performance often play a part as well.
Finally, when it comes time to finance the sale, bankers will bend over backwards to assist a (management buyout), although they might not be interested at all in an outside buyer. MBOs that rely on external financing, however, typically require that one or members of the purchasing group have management training in all aspects of the business: if such expertise is lacking, the seller will need to implement a training schedule for one or more employees to fulfill this requirement.
Business partners, meanwhile, are often ideal business buyers when an owner is ready to get out. Indeed, many business owners – especially in professional practices – bring in partners for this express purpose. The advantages of selling to a partner are numerous: the need to search for a buyer – or to use an intermediary- is obviated; terms of payment are often easier to arrange; and the business transition is eased because of the familiarity that already exists between the partner and the enterprise’s suppliers, clients, and customers. Small business owners looking to hand over the reins of a company to a partner, however, need to adequately prepare for such a step. Locating a suitable partner, structuring a partnership buyout, and financing a partnership buyout are all important and complex issues that require care and attention.
Finally, business owners also groom people within their organization to take over the business upon their retirement (or death or disability). Family-owned businesses often hand over the reins from generation to generation in this fashion. In many cases, this transfer of ownership is made as a gift or included as part of the owner’s estate.
MAKING THE SALE
Once the seller has found a buyer for his or her company, the next step is to arrange the structure of the transition. In addition to determining whether to make a stock or asset sale (in the case of a corporation), the seller and the buyer need to reach agreement on their terms of the sale as well.
EARN-OUTS
An earn out is an agreement wherein the seller takes a portion of the selling price each year for a fixed period of time out of the earnings of the company under its new ownership. These arrangements are sometimes employed when a seller cannot get his or her full asking price because of buyer concerns about some aspects of the business.
Most earn out plans are contingent on the level of profits a company earns. No profits, no payments. As a result, some sellers insist on minimum payments. In addition, since the seller’s total compensation under this arrangement depends on the company’s performance during the specified earn-out period, sellers often require that they be involved in management decisions during this period. Earn-outs can be calculated as a percentage of gross profit, sales, or some other mutually agreed-upon figure. Sellers, however, need to make sure that the measurement used is fair and easily verifiable. Profit is a very difficult word to define. A shrewd purchaser could allocate costs in such a way that profit expectations are repeatedly dashed.
INSTALLMENT SALES
Under this common arrangement, the seller of the business receives some cash, but the majority of the purchase price is received over a period of years. The down payment for small business may range from as little as 10 percent to as much as 40 percent or more, with the rest paid out, with interest, over a period of 3 – 15 years.
LEVERAGED BUYOUT
A leveraged buyout or LBO is the purchase of a company through a loan secured by using the assets of the business as collateral. This option, however, places a greater debt burden on the company than do other types of financing.
STOCK EXCHANGES
In instances where a large, publicly held company is the purchaser, business owners sometimes ask to be compensated with stock in the purchasing corporation. In such cases, the seller is usually required to hold on to the stock for a certain period of time – usually two years – before he or she has the option of reselling it.
Buyers sometimes insist on a noncompetition clause as well. The non-compete agreement is a fair clause in any sales contract because it prevents the seller from opening across the street (or town) and winning back the customers. This convenient not to compete with the buyer, which can be incorporated into the purchase and sale agreement or created as a separate document, usually stipulates a market area and/or a period of time (three to five years is common) in which the seller may not open a business that would compete with the enterprise that he or she previously sold.
CLOSING THE DEAL
Once a deal has been struck between the seller and the buyer of the business, various conditions of sale often have to be addressed before the deal is closed. These include verification of financial statements, transfer of licenses, obtaining financing, and other conditions. Most contracts call for these conditions of sale to be addressed by a specified date; if one of these conditions is not taken care of by that time, the agreement is no longer valid.
Provided that these conditions have been attended to, however, the parties can move on to the closing. Closings are generally done either via an escrow settlement or via an attorney-performs settlement. In an escrow settlement, the money to be deposited, the bill of sale, and other relevant documents are placed with a neutral third party known as an escrow agent until all conditions of the sale have been met. The escrow agent then distributes the held documents and funds in accordance with the terms of the contract.
In an attorney-performs settlement, meanwhile an attorney – acting on behalf of both buyer and seller or for the buyer – draws up a contract and acts as an escrow agent until all stipulated conditions of sale have been met. Whereas escrow settlements do not require the buyer and the seller to get together to sign the final documents, attorney-performed settlements do not include this step.
Several documents are required to complete the transaction between business seller and business buyer. The purchase and sale agreement is the most important of these, but other documents often used in the closing include the escrow agreement; bill of sale; promissory note; security agreement; settlement sheet; financing statement; and employment agreement.
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