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SELLING YOUR BUSINESS: MORE THAN A PRICE TAG
You've spent years -- maybe a lifetime -- build-
ing a business, and now you're ready to move on.
With so much time, money and energy invested, you
want to ensure that the fruits of your labor are
Before you take the plunge, take stock of
the marketplace. Is the economy too sluggish or
credit too tight? Decide if this is the most op-
portune time to sell and if your company is ready.
Put yourself in the buyer's seat to determine
the saleability of your business. It is important
to realistically assess its value and strategical-
ly target prospective buyers who can benefit from
Pay close attention to how the sale may affect
your financial and personal situation, and what im-
pact it will have on your employees, suppliers and
family. The implications may run the gamut from
legal to moral to financial. The sale is bound to
take an emotional toll on you.
Look very closely at your reasons for selling,
the most common of which are health, boredom, work
load, business problems and money. Consider alter-
natives that may be better for you -- franchising;
developing a partnership; merging with a similar
company; going public; and absentee ownership or
partial retirement, two situations which would en-
able you to devote less time to the business. Per-
haps one of these is the solution.
If after careful soul-searching and analysis,
the motives for selling your company appear to be
genuine, then carefully develop a comprehensive
selling plan. It should include the evaluation,
preparation, pricing, marketing and actual selling
of the business; negotiations; and closing the
sale. Following your plan and surrounding your-
self with competent advisors can help you avoid
common pitfalls and unpleasant surprises, and re-
sult in a smooth transition of ownership.
A Little Objectivity Never Hurts
Selling a business is a complex undertaking. As
most of your assets may be wrapped up in the ven-
ture, you want to ensure you can sell it for what
it's worth. Consider using a professional con-
sultant to eliminate some of the worry and provide
expertise you do not possess.
"A professional can bring to bear the objec-
tivity often missing in your own analysis," em-
phasizes Bill Markus of Ellmark Associates, a
Investment bankers, merger and acquisition
firms and business brokers can provide the needed
services; business brokers generally deal with
businesses worth $1 million or less. It is wise
to get references for intermediaries and to se-
lect someone who is familiar with small busines-
ses overall, and particularly with firms similar
to your own.
Fred Selinger, managing director of corporate
finance for Richard C. Blum & Associates Inc., be-
lieves that most sellers retain an investment bank-
er to help them find a buyer, but cautions that
"identifying a buyer is only 10 to 20 percent of
the reason for securing a consultant.
"Sellers need help in identifying and negoti-
ating with a potential buyer and in posturing the
business for sale -- cleaning up law suits, updat-
ing financials, ensuring that records reflect the
true nature of the company, and maintaining key
personnel through the negotiation period and long-
er," Selinger says. "It is far more difficult to
sell a business than to buy one."
He also stresses the importance of using at-
torneys. "They are able to handle issues which,
if ignored, can nullify the transaction. Profes-
sional legal counsel is critical to completing
the deal at a fair price with reasonable condi-
tions and terms and a minimum amount of business
Selinger offers one more salient piece of
advice: "If you are going to sell your business
and then continue to run it, never negotiate on
your own because at the end of the day, the buy-
er will be your boss."
It is also a good idea to engage the ser-
vices of an accountant to provide tax advice and
address the tax repercussions of the sale.
Consultants not only help identify prospec-
tive buyers and orchestrate the transaction, but
they can serve as intermediaries protecting your
confidentiality, and help arrange financing.
These services, however, do not come cheaply. Be
prepared to pay a fixed fee, hourly rate, out-of-
pocket expenses, a percentage of the sales price,
or some combination.
Marketing 101 Stands its Ground
The four P's of marketing -- product, price, pro-
motion and packaging -- make sense even when you
are selling a business. But before concentrating
on these areas, take into account two other P's:
be prepared to invest time in selling your busi-
ness, and remember that patience will become one
of your greatest virtues. Realistically, the pro-
cess will take anywhere from six months to two-
and-a-half years, so don't be lured into thinking
that a deal will materialize overnight. The nego-
tiations themselves may take as long as six months.
Also make sure your expectations and objec-
tives are realistic or you are bound to encounter
Key Selling Factors
Similar to anything else on the market, the pro-
duct has to be attractive to potential buyers.
And in the case of a business, the less risk at-
tached to it, the more a buyer is apt to be in-
terested. In his book, How to Sell Your Business
for the Best Price, Vaughn Cox makes a popular
suggestion based on the law of supply and demand
-- buy when everyone else is selling and sell
when everyone else is buying. He also outlines
the less strategic times to sell -- when the busi-
ness is doing poorly; is involved in a lawsuit; is
expecting an increase in revenue or profits, mak-
ing postponement more advantageous; and when the
economy is in a recession or the particular in-
dustry is experiencing a downturn. He believes
it is a sound economic decision to sell if you
can net seven or eight times your annual compen-
Robert L. Hulett, a St. Louis-based merger
and acquisition specialist, reminds sellers to
always negotiate from a position of strength,
"which is much easier to do if your company is
prosperous. The best time to sell is when you
don't have to."
Designing an informal rating scale for key
selling factors, as suggested by C. D. Peterson
in his book, How to Sell Your Business, will give
you an idea of how well your business may fare
in the marketplace.
Your company's history -- how long you have
successfully run the business and how effectively
the business has met objectives -- will influence
potential buyers. The more solidly you present
the firm, the more appealing it will be. Don't
forget that the goodwill your company has built
up also counts for some points.
People are the core of the business. You
need to rate your staff's competence, their
morale, and whether or not they will remain once
the venture is sold. If the business is overly
reliant on you as the owner, it may be necessary
to train or hire a successor or offer to stay on,
at least temporarily.
Products and services are often the business.
Consider quality, price, reputation, delivery,
service and competitiveness. Be realistic about
this evaluation, basing the rating on how prospec-
tive buyers would objectively perceive your pro-
ducts and services.
Undoubtedly, a potential buyer will want to
know how well the enterprise has performed finan-
cially. Take into consideration the firm's capa-
bilities, history, potential and the objectives
achieved. Above all, ensure you can substantiate
the performance you claim. (This area will be
covered in more depth in the section on "So What's
It Really Worth?")
Lee Munson of A.L. Munson & Co., a management
consulting firm, stresses the importance of clean-
ing up debt. "Raise capital in order to get the
company out from under any financial burdens," he
Munson also warns sellers not to sell a busi-
ness in a distressed state, because "it's difficult
to pull off a fast sale at a fair price."
Keeping orderly records and books instills
confidence in a prospective buyer. It's not worth
trying to hide financial details. Very likely they
will come to light and endanger your own credibili-
ty and chances of selling.
The condition of facilities and equipment cer-
tainly influences the sale of your operation. In
rating them, consider their functionality, competi-
tiveness and ability to move the business into the
future. Just as if you were selling a house,
strive to make the work environment as attractive
and comfortable as possible to potential buyers.
This may entail repainting; cleaning windows, fur-
niture and equipment; or even making repairs.
Existing long-term agreements with customers
and vendors are also a selling point, as they in-
still confidence in your consistent ability to pro-
vide high quality products or services, and pay
Your relationship with lenders is an important
criterion in the analysis of your business. Finan-
cial strength with lenders is an indication of the
security and profitability of the company.
Very similar to the considerations involved
in buying a house, location, location, location
is important to potential buyers. A prime loca-
tion -- with available parking, accessibility,
well-maintained surroundings and nearby trans-
portation -- can be a strong drawing card, as
well as agreeable terms for leasing space, op-
tions to buy and opportunities to expand. A
prospective buyer wants to feel assured that the
business is suitably situated to help ensure its
continued efficient operation.
Will your business survive the decade or
will its products and services be replaced by
tomorrow's Pet Rock and next year's environmental-
ly correct garbage bag? If long-term growth looks
more like short-term life, then you may be in
trouble. On the other hand, if your industry and
specific marketplace are healthy, these growth op-
portunities can become strong selling points.
It is necessary to rate your competitive ad-
vantage in terms of price, products and service.
This may well be the time to develop a new com-
"If you find a buyer for whom you serve as
a critical resource in his growth strategy, then
you have found a highly motivated buyer," Munson
Play off the strengths of your venture, take
the weaknesses under consideration, and decide if
it is worth making changes that may pay off when
the business is on the market. Identical to any
other commodity, a company has to be attractive
to both a buyer's pocketbook and entrepreneurial
So What's It Really Worth?
Based on a thorough analysis of your assets, you
now need to place a price tag on your enterprise.
Make sure you have clarified in your mind precise-
ly what you plan to sell. That can include as-
sets, stock, real estate, franchises, a part of
the business, and your time as measured through
employment, training or consulting.
Unfortunately, establishing a fair market
value for your business is not always an easy
task. There is often a discrepancy between what
you think the company is worth and the price at
which it will actually sell.
The appraisal process can be approached in
a variety of ways. Methods of evaluation run the
gamut from the following informal guidelines to
rigid mathematical calculations made by profes-
"When selling a business, you have to sell
the steak, not the sizzle," advises Don Nolan of
Phoenix Consultants, a business broker. "Pro-
spective buyers want the facts -- including bal-
ance sheets, and profit and loss statements."
In determining the value of a company, Nolan
recommends focusing on four aspects: the condi-
tion of the existing lease ("A 10-year lease with
an option is ideal; it can help owners make a pro-
fit and recoup their investments."); the location
of the business; the replacement value of its
equipment, fixtures and furniture; and the actual
numbers on the books. "Often multiples of income
and earnings, about three to five times, can gen-
erate a realistic selling price. You have to
sell what's really there," he warns.
"Buyers don't want to pay so much that they
only buy themselves a job," says Bill Haynes,
owner of The Business Mart which matches business
buyers and sellers, appraises businesses and of-
fers consulting services. "They want to be able
to recover their investment."
He suggests that small firms undertake a
self-appraisal of assets -- lease, location, phy-
sical equipment and inventory (at wholesale
prices); consider the amount of receivables and
the value of the business based on three to six
months of business income; and finally, take a
look at comparable companies. Munson concurs on
the importance of studying similar businesses,
but also recommends a professional appraisal of
assets, especially if they are highly marketable.
If not, he prefers a discounted cash flow anal-
ysis -- based on a realistic projection of sales,
expenses, investment needed for growth, and work-
ing capital requirements.
"Many sellers have grandiose notions about
the selling price," Munson says. "As a small
business owner, you must be careful not to have
rigid ideas about the company's worth."
Markus of Ellmark Associates has seen some
owners assume an inflated view of their enter-
prises, but has also worked with owners who have
erred in the other direction by initially under-
Selinger of Richard C. Blum & Associates
Inc. emphasizes that "today it's cash flow, cash
flow, cash flow because the credit market is
tight. Acquisitions are becoming more strategic
In more of a textbook approach, financial
records and a calculation of assets can provide
a good foundation for an evaluation. (The guide-
lines here offer the basics and do not discuss
all considerations which may affect the numbers.)
First determine the adjusted tangible net
worth of your business by placing a dollar value
on tangible assets minus liabilities.
Then calculate your company's net income --
the difference between earnings taken over several
years and your expenses, including costs of goods
and services, wages and operating costs.
Estimating the value of your business as an
investment is the third step in determining value.
In short, this number represents the return on
your adjusted tangible net worth if it were in-
vested in something else of comparable risk at
prevailing interest rates.
The fourth step in this pricing procedure
involves calculating your firm's excess earning
power. This number is net income minus earning
power (which is the investment worth plus your
salary as the owner).
All of these calculations -- adjusted tan-
gible net worth, net income and excess earning
power -- produce a net base value or the value
of all of the business' tangible assets.
The evaluation of intangible assets is a
subjective and more difficult task. Intangible
factors include location; technological resources
and special skills; trademarks, patents and copy-
rights; new products and services; earnings
trends within your industry; growth potential;
personnel; competition in the marketplace; and
Although it is hard to place a monetary
value on intangibles, one suggestion is to mul-
tiply the excess earning power figure explained
above by a factor of three. Add this to your
net base value, and you have just placed a price
tag on your business.
Now the question is whether or not a pro-
spective buyer can afford your company, and
here, effective marketing is crucial to cutting
Packaging/Promotion Prescribe Perception
As in the case of successfully selling any other
product, it is crucial to define your potential
market and develop a plan for targeting it. The
marketing plan should encompass packaging to
make your business look as appealing as possible
and promotion so prospective buyers will perceive
your business as you desire them to.
First, define your market. There are a
variety of potential buyers in the marketplace --
individuals, vendors or suppliers, employees, com-
petitors, companies and investment firms. Qualify
these buyers to determine which are most valid,
and whose objectives you can best satisfy. Clearly
identifying the needs of qualified buyers will en-
able you to emphasize the appropriate features and
benefits of your business that best match these
Hulett recommends focusing on buyers "who
already know your business. This could lead to a
higher selling price, as well as reduce the time
involved in selling it."
Remember that while prospective buyers are
analyzing you and your company, it is equally key
for you to research their abilities, business and
personal qualifications, and financial situations
Once you have preliminarily qualified a buyer,
provide a brief description of the business (in-
cluding general financial highlights, the benefits
that would accrue the buyer, and an indiciation
of the financial requirements a buyer should ex-
pect to meet). It is important at this point to
maintain confidentiality through a formal agree-
ment. News about the impending sale of your busi-
ness can stir up rumors, fragment your relation-
ships with customers and suppliers, and destroy
the morale of employees.
A more comprehensive analysis of the firm
should follow if a prospective buyer turns out to
be really interested and can afford to buy the
business. This is your company's packaging, and
as with other packages, needs to distinguish your
enterprise from the competition. Preliminary dis-
cussions often accompany the business analysis.
The analysis should include an introduction;
a description of the proposed transaction; an
overview of the business, including its history,
products and services, facilities and equipment,
operations, markets and competition; a review of
the organizational structure, management and
staff; a financial analysis; and growth expecta-
tions and marketing strategies.
Promotion goes hand in hand with targeting
potential buyers, and is the vehicle for gaining
Advertising in the business opportunity sec-
tion of a local newspaper or in The Wall Street
Journal, or placing blind ads in the classifieds,
will reach the general public. Advertising in
specific trade publications can narrow down your
audience. Direct mail, telemarketing (especially
when an intermediary is used to maintain confi-
dentiality) and networking are other possible
channels of promotion.
In addition, an astute consultant should be
able to provide names of potential buyers who
have previously indicated interest in a business
in your specific industry.
Structuring the Deal
Prior to an offer being made, you and the prospec-
tive buyer must establish a structure for the deal
-- the amount of payments, when they are paid and
in what form they are made. As the owner, you can
affect affordability, which is a key issue at this
Methods of payment may include cash; stock;
notes payable, in which the seller agrees to carry
back a note for part of the purchase price which
is repaid, with interest, by the buyer; an earn-out
situation, in which the buyer agrees to pay addi-
tional money if the company earns a certain amount
of predetermined profit; and consulting and employ-
ment contracts. A non-compete clause may also be
part of the deal, in which the seller agrees not
to compete within some appropriate geographic
limits for some reasonable period of time.
"Present a deal that is structured the way
you think will make the most sense to a prospec-
tive buyer while achieving your own objectives as
well," stresses Hulett, the St. Louis merger and
When you feel it's time to push for an offer,
remember to make it easy for the buyer to transact
the deal. An official offer should contain a
description of what the buyer intends to purchase;
the date, expiration date and closing date of the
offer; the price; the terms; the repayment sched-
ule; down payment, if applicable; and any con-
tingencies. A non-refundable deposit usually ac-
companies the offer.
It's a Matter of Compromise
The negotiation stage can be a tricky one. "When
a deal is on the table, an agreement will happen
somewhere in the middle but not without a lot of
stress and strain," Selinger says. "The more
sellers think about their businesses, the higher
a value they place on them, which is often un-
realistic. Their expectations are too high.
Buyers, on the other hand, who are facing a
credit crunch, want to make a wise investment
without overpaying. So the dilemma becomes how
to bridge the gap."
Selinger believes the answer is compromise.
"Given the current economic climate, the posture
of banks toward financing such transactions is
tight, so you need more creative ways of financ-
ing than in the past." He suggests an earn out
or a note payable.
As you move into the negotiation process,
be prepared to counter any buyer objections such
as too high an asking price or an unsuitable
location. Based on your previous analysis of
your company's strengths and weaknesses, you
should be able to anticipate some of these objec-
tions, and make reasonable concessions, if neces-
sary, to keep the negotiations moving.
Establish credibility, maintain integrity,
persuasively play up the returns of the trans-
action, and reduce any perceived risk associated
with buying your business. Negotiations can be
a win-win situation if both parties benefit from
By keeping things in perspective, you are
bound to come close to meeting your expectations.
At the same time, realize that if the deal doesn't
go through, other prospective buyers exist in the
Signing on the Dotted Line
Once an acceptable offer has been made, your at-
torney will begin drawing up the final documents.
Additional deposit money may be put up at this
time. Under what is termed the "due diligence"
process, the buyer now has an opportunity to re-
view all the company's records, books, facilities,
contracts and, if the offer contained such contin-
gencies, to talk with employees, customers, sup-
pliers and others. At this point, you must re-
frain from entertaining any other offers.
Unfortunately, closing the transaction does
not always run smoothly. A checklist of what
needs to be done -- such as transfer of banking
arrangements and utilities, customer lists, a
breakdown of funds to be disbursed, and clearance
of outstanding liens -- and who is responsible can
often mitigate any problems that may arise.
When the final papers are signed, you now
have time to pursue other interests or take that
long-awaited, three-month vacation in Hawaii.
But if you still have the entrepreneurial spirit
that initially motivated you to start up a company,
you may well find yourself on the other side of the
table -- as the prospective buyer of a business.
"Using a broker for the right reasons -- such as
sales visibility, thorough canvasing of the market,
and scouting for qualified buyers -- makes good
sense when selling a business. However, it's im-
portant not to abdicate your position as the prin-
cipal voice during negotiations. No one is better
prepared to represent your interests, particularly
if you clearly understand your own needs." John
Faubion, now managing director for the health care
practice of The Zivic Group (a nationally respected
executive search firm with offices in San Francisco
and Glendale that operates exclusively under re-
tainer), speaks from experience. After buying and
managing a small travel agency, while working as a
health care administrator at a large Los Angeles
teaching hospital, Faubion decided it was time to
sell. "I realized that the agency, which had
tripled in size in five years, needed full-time
management to continue to thrive." His advice to
sellers is to "be realistic in your expectations
as to what the business is worth. It's also criti-
cal not to sell under pressure. A mutually satis-
factory sale requires both time and patience."
Faubion, who brought in a broker at the start,
feels "the money was well spent."
A Sample Short Business Write-up
A beautifully appointed French restaurant in Fair-
field County is available for sale. The restau-
rant seats 70 people and is open for dinner 6 days
a week. The chef and the restaurant's cuisine have
received numerous awards. An excellent lease has
5 years to run.
The owner is sacrificing her restaurant be-
cause of illness. The owner's cash flow has aver-
aged more than $70,000 for the last 2 years.
Picture yourself greeting your guests and wel-
coming them into your own establishment. Every-
thing is in place, ready for you. You can expand
your business to provide luncheons, and add sub-
stantially to your income.
The buyer should be able to provide at least
half of the $200,000 asking price in cash.
A Sample Business Opportunity Ad
Beautiful French Dinner Restaurant for Sale
Seats 70. Profitable. Everything ready for your
touch. You can add lunch for even more volume.
Long lease makes you secure to build your business.
Priced fairly, terms available to qualified buyer.
The Steps of Marketing and Selling a Business
(Time in Months: Low to High)
Prospecting, qualifying, initial visit (1-3)
Negotiations to letter of intent (1-6)
Due diligence (1-3)
Drawing final contracts, preparation for closing,
final closing (2-3)