Selling a Business

Many business owners probably have asked themselves this question. There are many unique and different types of business. Some fill very small niches while others have carved out a unique product or service while still others require a unique or very specialized talent, knowledge or experience. An owner of a “unique” or at least unusual business may feel that there is no one out there who would buy it.

Almost all businesses are saleable, but the big question is: Is the seller willing to sell? Because of Internet marketing and other new technologies, business brokerage professionals know how to reach potential buyers world-wide. Somewhere there is a buyer for almost every business. Locating the right buyer is the job of the business broker professional, who recognizes that the seller’s willingness to sell is the key. Why is a seller selling; what is important and what is not. If a business owner just wants to see what the market might pay for the business; or hopes to “make a killing” on a sale – it most likely won’t sell.

Gauging what is most important in the selling process is very important. Following are some critical factors that every seller or would-be seller should assess:

• Full price
• Down payment
• Keeping existing employees
• New owner’s plans for the business
• Confidentiality
• Selling costs
• Buyer qualifications
• Keeping the business locally
• Providing jobs for children/relatives
• Structure of the sale

There may be other factors that are important. Keep in mind that every one comes with a string attached. What are the most important ones? Will you bend on them? Will you lose a sale over it? Businesses with a broad appeal and a successful track record are in a much better position to stand firm on the important factors. The unique or niche businesses or those with a less stellar track record may have to be willing to bend on any or all.

Sellers should tell their business broker professional what is really important – and take note of the one or two factors that could be “deal-breakers.”  Remember: almost all business can be sold, but every sale requires a willing buyer – and a willing seller.

This is often a prospective buyer’s first response when given the price of a seller’s business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price as “blue sky.” Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an “arm and a leg” for the business. Goodwill has been called many things – very few of them good.

However, today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think “Google,” which by now may have achieved the same name recognition as Kleenex. If another search engine company could use that name, the business could be worth millions – even billions. The technology behind the name has a lot of value, but it’s important to remember that the name recognition or brand name, which is known all over the world, is also where the big bucks lie.

How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (What is the value of the secret recipe for Coke?), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included.

Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald’s just mentioned, it may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of “for sale” stainless steel equipment. The real value is the name and what it represents to the dining public.

For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected,  product and specific service names should be trademarked, inventions patented. There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.

Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.

For those who are considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is still hung up on buying the stainless steel equipment, we have a warehouse full of it for sale!

How does someone else, for example, a potential buyer, rate your business on the issues listed below?   Rate your business and yourself on the time-honored “A” to “F” scale.  You can even use a plus or minus.  What’s your average? Too many business owners operate on gut feel or “from the heart.”  Nothing wrong with that; many people start or buy their own business and operate it successfully with nothing more tangible than this kind of factor. But, every now and then, perhaps once a year, seize the moment and take a more realistic look at your business.  Grade yourself, using the following business report card as yardstick:

1.    Difficulty or the lack of competitive entry
2.    Stature of the business or product . . . exciting/glamorous
3.    Perceived level of required expertise – or licensing
4.    Ability of the business to secure funding — seller carry-back
5.    Volatility of business/customer loyalty
6.    Diversity of customers and/or suppliers. Exclusives?
7.    Length of business – history
8.    Reliability or fuzziness of financial records
9.    Key-man syndrome
10.    Severity of business seasonality
11.    The people factor
12.    Hours of operation
13.    Hazardous work, work place, products, or neighborhoods
14.    Bad lease – no lease
15.    Owner to stay
16.    Trend or erratic numbers –non recurring
17.    Goodwill (Blue Sky) as percentage of price
18.    Sparkling physical appearance or needing upgrade
19.    Regular or home office
20.    Remote location
21.    Contemporary and ship-shape equipment
22.    Franchised or Independent
23.    Visible expansion opportunity
24.    Loyal key employees in place
25.    Broker involved with deal
26.    Potential
27.    Name and reputation

One of the major advantages of small and mid-sized businesses is that it is much easier to make changes with this category of business than it is with the larger kind. The larger company can become so  mired in bureaucracy that it can’t turn on a dollar much less on a dime.  Changes can be a new product or service, expansion into new markets or focusing on existing markets, or a change in direction or positioning.

If your business is small or mid-sized, this might be the time to consider whether change, no matter how minor, might  increase business.  For example, if you’re in a retail business, would a new product or product line increase sales without increasing costs?  If you’re in a service business, are there some new services that can be offered, or existing ones expanded?  It is better to attempt a change rather than not to try one, because in the small and mid-sized business, strategies for change usually can be withdrawn or modified without inordinate damage to the existing business.

One change increasing in popularity is co-branding.  It movement manifests itself in a variety of business combinations, one of the most common being the gas station and convenience store or mini-mart.  Food franchises are also co-branding because one company may own or franchise several brands.  KFC and Taco Bell may share the same premises and kitchens.   Many of the travel plazas will have, for example, a Burger King, a Popeye’s Chicken and a Cinnabon’s (cinnamon rolls) joined together. There are coin laundries that also house espresso bars, tanning salons, and there are small convenience stores that sell soaps and other laundry items for use in washers and dryers, right along with snacks and other products.

Many other small businesses are adding other products and/or services to their existing business.  Even some movie theatres are adding fine dining as a complement to the traditional movie to create a whole entertainment experience.  Perhaps your business would profit by adding something else to the mix. All it takes is a little imagination, some homework, perhaps a trial run, and the courage to give it a try.

When the time comes to sell your business, what makes up the selling price. What is it that you are selling and the buyer is buying? It is important that the selling price be defined in such a way to avoid any confusion. Below you will find some sample wording used by business intermediaries to define the selling price. Keep in mind that this is sample wording only and is presented here merely for informational purposes.

• The term “selling price” shall include (a) the selling price of the assets acquired plus any obligations assumed by the purchaser, (b) if the sale becomes one of stock, then the selling price will be all of the assets plus all of the liabilities of the corporation plus the value of any covenants not to compete, employment and/or consulting agreements plus the value of any allocations for goodwill and/or intangible assets.

• The total sale price shall consist of all consideration received by the owner and/or the company including the sum of the following:

(a)    The total amount of cash received by the company and/or owner in connection with the sale, lease, or other transfer of the company, or any interest therein.  Such cash consideration shall include but not be limited to purchase price, lease consideration, non-competition payments, consulting payments, license fees, royalties, retained cash, and other consideration received at or subsequent to the consummation of the sale transaction.

(b)    All future, contingent or undetermined amounts in whole, such as an “earnout.” The commission shall be based on the actual amount of such future or contingent payments as and when they are received.

(c)    The current fair market value of all non-cash items such as securities, notes or other property.

(d)    Any amounts retained by the company for ultimate distribution to the owner, including any salaries, bonuses, deferred compensation, liquidation proceeds, or other amounts (in excess of the owner’s historic salary) received, retained or withdrawn by or for the benefit of the owner (including profits generated prior to closing) from and after the date of execution of this Listing Contract.

(e)    The amount of any liabilities assumed by a purchaser (except for unsecured liabilities shown on the company’s financial statement or unsecured liabilities which arise hereafter in the ordinary course of the company’s business; i.e., any secured debt assumed by a purchaser shall be part of the sale price.