Selling Your Business: How Important is the Buyer?

Successfully selling your business is a full-time job. While finding a buyer is essential, determining that a buyer is qualified, willing and able to purchase your business is another matter.  Convincing the buyer to buy your business through careful negotiation, due diligence, financing, deal structure, funding and closing is the value that a business broker brings to the transaction.  A former client said afterward, “At first, I didn’t think I needed a business broker but after going through this process, I realized that the transaction wouldn’t have happened if you weren’t involved”.

 

If your business is priced right, has adequate cash flow to service the acquisition debt, and you are willing to finance a portion of the goodwill , then finding a qualified buyer is usually not a challenge. This is especially true if you, as seller, have business Seller’s Discretionary Earnings (SDE) in the six-figure range. (Remember: Discretionary earnings are the sum of net profit + depreciation + interest + owner salary + owner perquisites less market-rate buyer salary).

As your business broker, I represent your interests to market and sell your business.  To do that, I dive deep to understand your business operation, your financial statements and tax returns, determine your Seller’s Discretionary Earnings, “walk-away number” requirements, hopes and dreams.  The SDE drives the value of your business and is the most critical number for the broker’s opinion of value or third party valuation or appraisal.  The valuation provides “proof” that your business is priced appropriately.  One of the biggest reasons that businesses don’t sell is because the price is too high. 

 A comment about goodwill or intangible assets: Goodwill includes intangible assets such as customer lists, patents, copyrights, trademarks, agreements-not- to-compete and so on.  Many times, especially in a profitable service business, the value of the goodwill is higher than the value of the “hard” or tangible (physical) assets.  If the intangible asset portion of the sales price exceeds $500,000, then the buyer and/or seller must provide an equity injection of 25% per SBA (Small Business Administration) financing rules.  For example, the seller could provide 15% of the required equity through a seller carry-back note and the buyer could provide 10% in cash down for the remainder of the upfront down-payment needed.

 

Once the business valuation is prepared, the next step to sell your business is preparing the Confidential Information Memorandum (CIM).  This detailed multi-page document contains the financial, competitive and market analysis including price justification to the buyer, banker, CPA and other advisors to determine if yours is the right business for a particular buyer.  Preparing the valuation or appraisal and the CIM requires a significant time investment on my part to research, write, and analyze your business.  However, this time investment, while critical to selling your business, represents approximately 20% of my work activity during the business sale process. I’ve estimated that selling a properly priced business takes approximately 750 to 1,000 hours of focused work on my part. This is roughly equivalent to working 40 hours per week for four to five months.

As a business broker, my job includes finding qualified buyers who can and will buy your business.   What is a qualified buyer?  A qualified buyer is someone who has the cash, credit score, business experience and acumen to convince you and the lender that they have the right skills to purchase your business.  Who determines if a buyer is “qualified” to buy?  Initially, I do by interviewing the buyer and obtaining a personal financial statement, and proof of ability to purchase.  If the buyer meets the criteria and signs a non-disclosure agreement, I will provide them a copy of the Confidential Information Memorandum (CIM). 

If after reading the CIM, the buyer is interested meeting you and “touring” the business, I set up a confidential meeting for you to meet and interview them.  After the meeting, if the buyer wants to make an offer, I work with him or her to structure that offer.  This requires the completion of a purchase and sale agreement.  Once complete, I meet with you to present the offer.  If acceptable, I obtain your signature and work with the buyer to start the financing and due diligence process. If not acceptable, I work with you to create a counter-offer, or a decline, and present that to the buyer.  This process continues with me as the “go-between” until there is a meeting of the minds to either move forward or pass.

Once a signed purchase and sale agreement has been executed between the buyer and seller, the most important and difficult work begins for me as your business broker.  During this critical time, I must build and maintain the relationship between you and the buyer while managing the financing process, due diligence, and advisors. During due diligence, I stay close to the buyer to make sure he or she understands your business financials, tax returns, cash flow, valuation, and deal structure.  I coordinate the critical dates timeline to keep the due diligence and financing process on schedule.  In most situations, I introduce the buyer to the right banker, provide the financial information and explain the transaction to the banker.  Quite often, I assist the buyer in completing the loan application package. I prefer to do this because that allows me to build even more trust with the buyer.  And as the old truism says, “People do business with those they know, like and trust”. 

  

Often the buy/sell process is a completely new experience for you as seller and the buyer.  I keep the transaction moving forward.     I work with the buyer’s advisors to make sure they understand the transaction.  Many times a CPA or attorney is inexperienced in business sale transactions and valuations and can say and do things to add confusion and incorrect information to cause a transaction to halt.  As a professional intermediary, I help alleviate communication issues that often arise due to buyer and seller emotions.  Buying and selling a business a big, life-changing decision for both you and the buyer.  There are questions.  There are doubts.  Tempers get short.  There can be confusion and lack of understanding.  There is much to do in a quick time frame.  I anticipate questions and get the answers. I handle the documentation and provide the required information.  I am available and keep communication lines open for both you and the buyer.  I address lender concerns, due diligence, financing, deal structure issues, CPA and attorney questions, and more.   

There is much to do to in selling a business successfully. While finding a buyer is essential, determining that a buyer is qualified, willing and able to purchase your business while keeping the transaction together through the closing and funding is the most important part of the business sale process.  An experienced knowledgeable business broker provides this value to you.

If you are thinking about selling your business, want to know what it’s worth or how the business transfer process works to maximize your "walk-away number", talk to a professional business broker.   There is no cost or obligation for a complimentary consultation. You can reach me at s.spangler@murphybusiness.com or phone 208-286-2300.