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WHAT TO LOOK FOR WHEN YOU BUY OR SELL A BUSINESS

Written by: MIchael Otto

Article Overview: Many business owners try to sell their business when it is not ready to be sold which makes it almost impossible for a buyer to see the real value of the business. The following article will provide guidelines on how to sell a business and how to buy a business.

WHAT TO LOOK FOR WHEN YOU BUY OR SELL A BUSINESS

Almost one third of business owners are considering selling their business

The process of selling a business and valuing a business in the US is so outdated that the people who buy a business based on this outdated methodology have only a 50% chance of making a "go" of it. My point is this; most businesses on the market to be sold are not ready to be managed successfully by a new owner.

However, if your business is ready to be sold (set-up for the new owner to be successful) you will get a premium for your company.

Not only will you get a premium, but you will also sell the business within weeks instead of months.
The first question you should ask yourself though, is when is the right time to sell my business?
Before that question can be answered, lets find out why you are selling in the first place.
When is the right time to sell your business?

The right time to sell your business is when you think you are ready and when you believe you have a very, VERY good reason for selling your business.

Some reasons why businesses are sold:

There are an increasing number of buyers because:
Many managers are looking to get out of the “rat race” and start their own business.

Business owners “have had it” (burn out) they like to get out and enjoy the fruits of their labor before it is too late to enjoy life.

The competition is getting too much and too difficult to deal with
To stay competitive often requires a great deal of capital and a much more sophisticated organization.

Managing the company is becoming a problem
When a business grows it requires organizational, operational, and financial controls. Systems methods and procedures need to be documented and monitored. For many entrepreneurs this can be a problem too difficult to deal with

No longer enjoyable
When you are not having as much fun as you used to, it might be time to either get out of the business or make some major changes (like re-engineering your company).

Too much work and not enough play
If the business starts to manage you instead of you managing the business you have two choices; get out (sell) or reorganize the company and put in absentee management controls.

THE EIGHT STEPS OF SELLING YOUR BUSINESS

1) YOUR COMMITMENT TO SELLING YOUR BUSINESS
The first step is a commitment from you that you are serious about selling your business.
Make sure you are selling for the right reasons.
Make sure that is what you really want.

2) HAVE YOU BUSINESS PROFESSIONALLY ANALYZED AND VALUED
The second step in selling your business is very important and often overlooked by brokers.
Have your business analyzed by a specialist who understands what it takes to sell and buy a business like yours.
The analysis of the business will evaluate your organizational, operational, financial strengths and weaknesses.
The strengths you can merchandise for the potential buyer and the weaknesses you can fix before you sell the business.
Do the valuation of your business only -after- the analysis.
Always have at least two different valuation methods performed (make sure they are IRS approved)


3) ADVERTISE AND MARKET YOUR BUSINESS
Now is the time to "showcase" your business.
Use brokers.
The internet.
Industry publications.
Direct mail.
Be creative and let potential buyers know that your business is for sale and that it is a great opportunity for the right buyer.


4) QUALIFY POTENTIAL BUYERS
It is important for you to eliminate the "tire kickers" and spend only time with serious buyers.
When you get a call from a prospect ask a few questions before you get into the price of your business.
The first question you should ask is if the caller is or represents a broker. If he/she represents a broker, get the name of the broker and checkout the company on the Internet WWW.Google.COM
If the caller is not a broker, ask why he/she is interested in buying a business. Make it a friendly chat to get to know the potential buyer better.
Selling your business is all about developing a relationship with the potential buyer. If you develop a relationship (professional relationship though), it makes life so much easier for both you and the buyer.
When you are satisfied that the buyer is genuine (sort of) ask the next question "how much do you have available to invest?” If the caller is reluctant to talk about it, that will be a "red flag" and you should back off.
After a few calls, you get a feel for who is serious or who is not. Try not to waste a lot of time with prospects that don't have the money to buy a business.
Make the caller sell you on them, do not try to sell the business.
The business must sell itself.
Never try to sell the business or the buyer will run the other way; let the business sell itself.


5) LET THE POTENTIAL BUYER KNOW YOUR PRICE
Letting a buyer know the price of a business is a process.
Have all the documentation ready, like:
Financial (balance sheet, operating statement, ratio analysis)
Use four years of financial statements to show a trend (if the trend is good)
Have a break even chart (actual break even and projected break even)
What documentation you show depends your company's strength and your industry.
Whatever you show MUST hold up under close examination (by an accountant).
Whatever documentation you show must justify the price you are asking.
The documentation you show must make the asking price a bargain.


6) GET A LETTER OF INTENT FROM THE BUYER
When the buyer is ready, to buy you'll get a letter of intent (signed by the buyer) and you can expect a down payment (about 10%).
The buyer now will do his/her due diligence (kind of like to make sure the business is real).
After the buyer's due diligence the purchase and sale contract can be drawn.


7) BUYER AND SELLER SIGN A CONTRACT (SALE)
After you come to an agreement with the buyer and the contract looks good to both parties (it will never look good to your attorney or your accountant, so don't worry about it) you sign it and set a closing date.


8) THE FINAL STEP IS WHEN YOU CLOSE THE DEAL
The final step is a short meeting to sign everything and to get the money.
When you sell your business, make sure it is a WIN-WIN situation for all parties (attorneys and accountants excluded).
____________________________________________________________________

Expect to feel depressed after you have sold your business, it will pass after a few days (treat yourself to something you enjoy, like a long trip).

Note:
To get your business ready to be sold could take a year or two. Do not wait until the last minute to prepare your business.


BUYING A BUSINESS GUIDE

WHEN YOU BUY A BUSINESS UNDERSTANDING HOW A BUSINESS IS VALUED (PRICED) CAN SAVE YOU HUNDREDS OF THOUSANDS


RULES TO FOLLOW WHEN YOU BUY A BUSINESS
1) Get at least three years of financial statements (tax returns) including a balance sheet.
2) Find out the value of the equipment at replacement cost.
3) Check the value of the inventory at cost (look at the invoices) and not at retail value.
4) Have a professional estimate the value of the real property (if included in the sale)
5) Always get a copy of the lease agreement (if property is leased) and make sure the property owner will agree to the new terms.
6) Get a written agreement that the seller will maintain the business in good condition.
7) When you do your do diligence the seller will provide you will all requested information and documentation.
8) Make sure you can provide the seller with some form of documentation to show that you have the funds available to buy the business (proof of funds). Often a letter form your accountant can do the job.


WHEN YOU BUY A BUSINESS UNDERSTANDING HOW A BUSINESS IS VALUED (PRICED) CAN SAVE YOU HUNDREDS OF THOUSANDS

The accepted business valuation formula is:

CASH FLOW TIMES INDUSTRY MULTIPLIERS (usually 2 to 4 times)
Cash Flow is the bottom line profit of the company (usually before taxes):
Plus all depreciation,
plus amortization and interest,
plus all expenses of personal nature (from the owner),
plus the owner’s income/salary,
plus all expenses that are not necessary to do business (extra expenses the owners manage to run through the business).
Total all of this and you have what is called CASH FLOW
THIS NUMBER (CASH FLOW) IS MULTIPLIED (2 TO AS MUCH AS 6 TIMES (DEPENDING ON THE INDUSTRY) TO DETERMINE THE PRICE OF A BUSINESS
So, the key to setting a price for a business is the CASH FLOW.

WHAT IS WRONG WITH THIS BUSINESS-VALUATION IS THAT IT INFLATES THE PRICE OF THE BUSINESS
HERE IS HOW

This method of business-valuation includes DEPRECIATION in the CASH FLOW analysis.
What is wrong with that is:
Depreciation is a fixed expenses and not part of working capital (cash flow).

Here why:
The IRS allows us to depreciate assets, like equipment (deduct from our taxable income) so we can replace the equipment (assets) when it wears out.
If we use the depreciation money as working capital (and spend it) we won't have the money available when it comes time to replace the equipment (which means we have to borrow the money).
The idea is to fund the depreciation money (treat it like an expense and take it out of the business to invest it) so you have the money available when you need it (to replace the equipment).
When you buy a business, you will have a lot of assets to depreciate. DO NOT USE THAT MONEY AS WORKING CAPITAL AND SPEND IT. Instead, fund (invest) the money, unless you want to plan for early bankruptcy.

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Article Tags: business business, business owners, fruits, good reason, methodology, own business, rat race, right time, selling a business, selling your business, sophisticated organization, valuing a business



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