Q. “Selling Your Business – What You Need To Know” is the title of a talk you’re giving May 5 at The Hartford Club. What’s the biggest mistake people make when selling a business?
A. There are really three mistakes people make: the first is that in the year or two leading up to the decision to sell the business, they often don’t run the business in an optimal way so that when they speak to us about selling, they’re showing declining sales and earnings, but want a price based on what they’ve always done in the past. Buyers want businesses that are increasing sales and earnings or the very least showing stable sales and earnings. They only pay on recent performance. Second, it is very important to be able to provide timely financial information such as monthly profit and loss statements or at least quarterly financial statements. Too often we work with businesses where the only time of year they generate one is when they file their tax returns. Buyers want to know what’s happening in real time. If owners don’t do it themselves, they should consider paying an outside book keeping service to maintain financial reporting. It’s relatively inexpensive and more than pays for itself when you sell your business. Third, for transactions that are valued at more than $500,000, owners should consider working with a financial planner and/or good transaction attorney to understand how the deal should be structured in order to minimize tax liabilities. This often should be done two to three years in advance of a planned sale. Â
Q. Let’s look at it from the other side. What do you perceive as mistakes people make when buying a business?
A. Don’t rush into it and make sure that the business is one you will enjoy running and that will make a healthy return on your investment. To ensure this result, you need to spend as much time as possible performing due diligence on the business, understanding the market and competition, and analyzing your own finances so that when you make the investment you’ll have sufficient working capital to support the business and your own lifestyle. Â
Q. What’s the best way to set a value on your business? Is it like putting a value on your real estate or a used car?
A. Generally speaking, the value of your business is determined by three things: the earnings and revenues of the business, the assets of the business and the type of business it is. Of these three, valuations are mostly contingent upon sales and earnings. Having said that, we take a look at all these issues and compare them to past sales of similar business with similar earnings, revenues and asset profile and then attach a valuation to it. In the end though, the market determines what the business will sell for. These days with economy in recession and credit tight, valuations have been lower than historical averages
Q. Price obviously isn’t the only factor in selling a business. What are other important considerations that have to be factored in?
A. Owners should be prepared to offer a seller’s note as a part of the transaction. Many owners would prefer not do this, but by dong so, you can usually command a higher sell price and have greater likelihood of transacting a sale. Additionally, over the last year, the SBA has become very active in guaranteeing loans for business acquisitions and they are much more likely to approve a loan if they know the seller has “skin the in game” in the form of a note. Part of the key in closing a sale is to remain open to alternative forms of financing, particularly in this economy. If the seller agrees to this route, then they should have a good transaction attorney that understands how best to secure the note. Â
Q. Do you offer advice for people for what to do after selling a business? After all, it must take some adjustment, especially for people who owned a small business like a hair salon and suddenly find themselves with nothing to do.
A. More often than not, new owners like to have old owners stay on for a transition period that can last anywhere for 1 month to 2 years depending upon the business. If you’re not ready to play golf full time, then you may want to work out an employment contract that will allow you to do this. Alternatively, we’ll find you a new business venture.
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