Price or Terms: The Structure of the Deal
An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”
Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”
It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.
Sellers should understand that both what they hope to accomplish in the sale of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.
Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.
These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price. During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.
Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.
• Buyer Qualifications
• Full Price
• Amount of Cash Involved
• Financing
• Confidentiality
• Commission/Selling Fees
• Closing Costs
• Exclusive Listing
• How the Business is Shown
• Advertising/Marketing
• How a New Owner Continues the Business
By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.
Copyright: Business Brokerage Press, Inc.
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Comprehensive Business Reviews Should Establish Trust
When you are selling a business, your business broker or M&A Advisor will likely create a Comprehensive Business Review, or CBR. This comprehensive document can then be presented to prospective buyers once they have signed all necessary confidentiality documentation. It is essential that this document builds trust between both parties, as this will go a long way towards achieving a successful deal.
Be Honest
The bottom line is that your CBR will be 95% positive. The majority of the document will be dedicated towards selling and promoting your business. Therefore, it only makes sense to disclose some potential problems. When handled correctly, the disclosure of problems can actually be a strong asset.
For example, current weaknesses of your business could become strengths in the mind of the buyer. For example, a business with a very poor online presence represents a substantial opportunity for a buyer to improve marketing and communications. Summed up another way, don’t be afraid to include negative information, especially if that information represents an opportunity.
Sharing Information
It is important that there is an element of trust between the parties. Creating that sense of trust begins with the CBR’s seller section.
Buying a business is radically different from buying a home. When someone buys a home, they usually don’t care too much about the person who they are buying the home from. But buying a business is usually a different experience. Your buyer will want to feel as though they have a fairly clear understanding of who you are and what you are about.
In the seller’s section, the buyer should get a decent idea of who you are. Your broker or M&A Advisor will want to interview you to gain ample information to include in your CBR. Your broker may even want to find out about your family, hobbies, interests and more. You may even want to consider including photos of yourself and your family.
The bottom line is that a potential buyer should be able to pick up the CBR and get a good feel for what you are like. If no level of trust is ever established between the buyer and seller, then it will be much more challenging for the deal to be successful.
Copyright: Business Brokerage Press, Inc.
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Considering Generational Strategies
When you are buying or selling a business, you might very well end up making a deal with someone from another generation. Therefore, it only makes sense to take the time to understand that individual’s background and how that might cause behavioral differences. It is important to understand and reflect upon where many of them are coming from and the collective experiences and trends that shaped their identities and perspectives. At the same time, you can identify your own biases, strengths and weaknesses that may be caused by your own upbringing.
The strategies in this article originated from Chuck Underwood who is considered a leading expert in the diversity of communication styles between generations. He is the author of a major book on the subject as well as host of the long-running “America’s Generations with Chuck Underwood” on PBS.
Generational Sensitivity
Underwood’s perspective is that people of each generation were molded by their unique formative years. The decisions that buyers and sellers make will be impacted by their generation. Mostly likely, the buyers or sellers you will be coming into contact with will be either Baby Boomers, Generation Xers and Millennials.
Working with Baby Boomers
Baby Boomers (those born between 1946 and 1964) are a major force in the business world. While they often possess a patriotic passion to improve the country, they were also witness to a time of great change via many movements including the civil rights and women’s movement.
When you’re dealing with Baby Boomers, it is important to remember that they will want to build relationships and get to know you. Common courtesy is very important to Baby Boomers. That means they’ll expect you to show up on time and turn your phone off during meetings.
You’ll want to keep in mind that older Baby Boomers may be experiencing hearing and eyesight loss. As a result, you’ll want to keep your type and font size larger, and make text easy to read.
When you’re working with your clients, it only makes sense to pay attention to the generation during which they were raised and adapt your approach accordingly. Understanding generational differences will help you get a leg up on the competition while at the same time helping your clients achieve their goals.
What is Generation X?
Generation X (or Gen X) had a wildly different formative experience than the Baby Boomers. Generation X is generally defined as being born from 1965 to 1980. This generation spent its formative years from the 1970’s through the 1990’s. In stark contrast the relatively more pleasant and optimistic childhoods of the Baby Boomers, Gen X had a rougher ride.
America became more mobile during the time period during which Generation Xers grew up. As a result, many children were uprooted and separated from their friends, family and hometown roots. Growing up, these individuals witnessed a variety of scandals ranging from political and religious figures to sports figures. Gen Xers witnessed the systematic dismantling of the American middle class and with it a general lowering of quality of life, opportunities and confidence in corporations. In the end, Gen X was quite literally left home alone and lived as “latch key kids.” It is no wonder that this neglected generation has some issues.
Individuals growing up during this time learned early on that they had to be ready to fend for themselves. Since Gen Xers have been met with consistent and systematic disappointment and even wide scale institutional betrayal, this generation, on average, is more distrustful of organizations.
Gen Xers are self-reliant and independent and one of their core values is survival of the fittest. In his view, Gen Xers are self-focused, individualistic and want everyone to skip the nonsense and get to the point. They have no real interest in getting to know you or playing a round of golf.
Working with Millennials
Millennials spent their formative years in the 1980s and early 90s. They are a very optimistic and tech savvy generation. They are also the most classroom educated generation in history.
It is also very important to note that Millennials are the most adult supervised generation in history. So-called “helicopter parents” who work to protect their children from setbacks are the norm. Employers find that Millennials are entering adulthood, but are still relying upon their parents to help them make decisions and even career choices.
Where Gen Xers are distrustful of the “wisdom of their elders,” Millennials actively seek out such advice. Likewise, Millennials tend to volunteer a good deal and look for ways to solve the world’s largest problems.
You will find that Millennials will enjoy building a relationship with you. Keep in mind these individuals tend to be quite socially conscious and they may very well expect you to agree with their views. Additionally, there is a chance that they will have their parents involved in their business dealings.
Keep in mind that the de facto tech addiction, or at the very least acute overreliance on technology, has led to issues with Millennials’ soft skills. They can often lack the ability to read another person’s body language and adjust accordingly.
In the end, regardless of what generation you are working with, it is important that you continually adapt. This will greatly increase the odds of cementing a successful deal.
Copyright: Business Brokerage Press, Inc.
The post Considering Generational Strategies appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent article from Business Transition Academy entitled “How to Find the Right Buyer for Your Business, Part 1” discusses how business owners can properly prepare to sell their business and how to decide who the right buyer is. Some think it’s all about who will write the biggest check, but there’s more to it.
The first consideration when it comes to choosing a buyer is whether you plan to sell internally or externally, and what options exist within each of these strategies. As you consider potential buyers, it is important to consider how each can affect value, fees, taxes, the business and you.
Internal buyers may include a manager, employee, family member or shareholder.
External buyers may include a customer, competitor, supplier, financial buyer or private equity group.
Click here to read the full article.
A recent blog post from Viking Mergers & Acquisitions entitled “What is the Effect of COVID-19 on Business Valuations?” discusses how COVID-19 can impact business valuations in different ways. With the economic effects of COVID-19, this question is top of mind for many business owners, especially those who plan to sell in the next few years.
One consideration is the timing of the business valuation relative to when COVID-19 was considered known or knowable in the U.S. Valuations dated prior to when COVID-19 was known or knowable may not be impacted at all, whereas valuations dated after are more likely to be impacted.
Another consideration is if COVID-19 is considered a subsequent event, meaning even if the valuation was dated prior to when COVID-19 was known or knowable there may need to be explanation of the effects of COVID-19 since the valuation.
It is also important to consider the valuation method being used. The Discounted Cash Flow method may allow for year-by-year modeling to show how the business will normalize over time. The Market method may require analysis and adjustments of similar past transactions relative to COVID-19.
Click here to read the full article.
A recent article from Chief Executive entitled “M&A During Covid-19: Another “New Normal” or Back to Business?” discusses the impact of COVID-19 on mergers and acquisitions, and what CEOs can do about it.
COVID-19 has brought great economic uncertainty, negatively impacting valuations and making it very difficult to prepare accurate financial projections. M&A activity saw a sudden drop in activity in the early months of the pandemic, however deal activity has started to slowly pick back up as companies with cash have begun to make moves.
CEOs can respond to these shifts by making sure communication with key shareholders is strong, assessing corporate preparedness, evaluating ways to bridge gaps in value, and expecting a longer deal process.
Click here to read the full article.
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Around the Web: A Week in Summary
The following information has been sourced by Business Brokerage Press for the benefit of the business brokerage community. The views of these articles do not necessarily represent the views of Business Brokerage Press. We hope you find this information helpful.
A recent article from Axial entitled “Preserving Value After the Deal” explores how a company can foster long term success after acquiring another company. This acquisition was made for a specific reason, so it is important to keep this reason top of mind in order to realize the intended outcome.
Buyers can take the following 3 steps to help increase their chances of success after purchase:
- Create and implement a comprehensive action plan to guide the integration process
- Effectively communicate with all employees of the acquired company regarding how they fit into the plan and why you value them
- Put a project manager with M&A experience in place to oversee the integration of the two companies
Click here to read the full article.
A recent article from CEOWORLD Magazine entitled “Buying Or Selling A Business? Why The Pandemic May Be The Right Time” discusses how the COVID-19 pandemic has created opportunities for sellers and buyers. Interest rates are low which gives buyers the chance for a more financially favorable deal and which creates motivated buyers for sellers.
Tips for buyers include:
- Be ready to look at lots of opportunities before finding the right one
- Gather as much information as you can about any businesses for sale that you are considering
- Look into seller financing
- Be thorough with due diligence
Tips for sellers include:
- Thoroughly prepare for the sale
- Get specific with what you are selling
- Have a business valuation done so you know what the business is worth
Click here to read the full article.
A recent article from Divestopedia entitled “Turning Over a New Leaf: Life After Selling Your Business” discusses the importance of business owners thinking about what life will look like after they sell their business well before they actually sell.
The business owner should have honest conversations with their closest confidants to make sure they aren’t surprised about post-sale life and so they start to identify a new purpose. Will the owner start a new business, invest in an existing business, continue to work for the business, or retire?
It is also important to consider how the owner will use their new found time and capital, and how that ties to their new purpose, their post-sale goals, and their financial future. Creating a wealth management plan is key.
Click here to read the full article.
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