Business Sales On The Rise

The following article from Fortune Small Business discusses the increase in the sales of small businesses. Although I agree that during economic downturns the sale of “main street” business tend to rise, the article fails to point out several very important factors. First and most important is it does not discuss how the sale of the businesses was financed. Given the current commercial lending conditions for business purchases, it is my belief that there is a tremendous amount of seller financing that is occurring. This alone may explain why the median sale price has gone up. Traditionally, businesses sell for a higher price when the owner is willing to carry the debt service. This important factor is key for a Seller to understand so that they do not have an unrealistic expectation of the value of their business, and so they do not believe they will be able to sell their business for all cash since “business sales are on the rise”. The other problem I have with the article is that the information they are relying on is dependent upon one source. Despite the fact that this alone is not a good way to make sweeping generalizations about an economic indicator, the method of data collection by BizBuySell is totally reliant on brokers who also derive an economic benefit from reporting business sales are on the rise. In addition,the information from the brokers is not verified. There are many other limitations in the articles methodology but even given those, I do believe that this is a good time to buy a business when corporate jobs are not as secure, and because “main street” businesses will always be necessary for our country to operate. If you are interested in selling your business, make sure you work with an experienced business broker who understands both valuation and the business sales process. For more information on selling or buying a business, please visit www.empiresandiego.com. Enjoy the article below.

Sales of small businesses on the rise
The economy is struggling, but sales and valuations of small companies are up,
(Fortune Small Business) -- It's time to spruce up the window displays and organize your accounting records: Despite the economic downtown, sales of small businesses are starting to boom.
Business marketplace BizBuySell's latest quarterly Insight Report on nationwide sales trends shows a 48% jump in the number of businesses listed on its network that sold during the first half of 2008, compared to the year-earlier period. A total of 3,894 businesses found buyers, up from 2,640 in the first half of 2007.
Listing rose in tandem: BizBuySell.com had 41,674 active listings on its site in 2008's second quarter, up from 29,468 during the same period last year, a 41% increase. Most promisingly for business owners, the prices buyers are paying have also increased. The median sale price for businesses tracked by BizBuySell was $200,000 in this year's second quarter, up from $186,000 during the same period last year.
BizBuySell, the largest nationwide marketplace for buying and selling small companies, compiles its sales data from closed-transaction reports sent in by brokers. For-sale-by-owner deals closed directly are not included in the totals.
BizBuySell General Manager Mike Handelsman was surprised by the listings jump, considering the slumping economy. "We expected to see a decline, but all metrics are on the rise," he said.
But to William Bruce, president of the American Business Brokers Association, an inverse trend between small-business sales and the health of the overall economy isn't unusual.
"When the economy slows, business executives want to downsize and employees have a fear of being transferred, outsourced or fired," he said. "As a result, these employees see small-business ownership as an attractive and viable opportunity." Plus, layoffs often bring with them severance packages - a good source of capital for people considering launching their own ventures.
Another promising sign for business owners: Valuations are also increasing. The average multiple of revenue for businesses sold in the second quarter was 0.69, according to BizBuySell's data, up from 0.64 a year ago. That means that a business with $395,000 in annual revenue (the median for BizBuySell's second-quarter data) would sell for an average of $272,550.
At the high end of the market, sales are shakier. Two years ago, a feeding frenzy of small business sales was driven in part by the easy availability of credit and financing for acquisitions. Today, banks are warier about lending.
Private equity network NVST, which gathers information on merger and acquisition market activity, is having a hard time finding completed transactions. "I attribute this to the downturn of economy and lack of available credit for financing deals," said NVST editor Andrew Dolbeck.
Indeed, according to FactSet Mergerstat the number of deals valued at $100 million or less started plummeting in 2007. In the first two quarters of 2008, FactSet tracked 3,106 companies sold, down from 4,433 companies in the same quarters last year.
But while Wall Street struggles, buyers and sellers sticking to Main Street are still seeing a robust market.
"It's a good time to buy if you have the resources

Using Earnouts In The Sale Of A Business

An earnout is a contractual arrangement in which the purchase price is stated in terms of a minimum, but where the Seller will be entitled to more money if the business reaches certain pre-agreed upon goals in the future. These goals are typically stated in terms of percentages of gross sales, rather than net sales, because expenses are easy to manipulate and thus net sales are too easily distorted.
Earnouts are a powerful tool that can be used in negotiations as a contingent element, which help the Seller and the Buyer reach a mutually agreeable value of the business. However, this is a very complicated contractual arrangement and should be prepared by an attorney who has expertise in setting up earnouts. In addition, the buyer and seller would be wise to have an experienced attorney review the document before entering into the agreement.
An earnout can be designed and written many different ways. For example:
1. An earnout may pertain to only specific products or services that were part of the business prior to the acquisition.
2. The earnout may only be applicable to revenue after the business surpasses a specified sales amount.
3. An earnout can also be based on units sold.
For the Seller, there are significant risks they must address when considering entering into an earnout agreement.
First, the Seller needs to be able to verify the numbers that the buyer submits once he or she has taken over the business. In addition, the Seller must also make sure that the buyer does not manipulate the sales of a particular product in order to avoid paying the earnout. Or, there is always the risk that the buyer will not report cash sales, or encourage customers to pay in cash so they can hide the income.
Using earnouts can be advantageous to getting a deal done. However, proper controls need to be in place to ensure nobody takes unfair advantage of the opportunity.

What Are Banks Looking For in the Business Purchase Loan Package

A frequent question asked by both buyers and sellers of a business is what is a bank looking for in the loan package. Harlan Friedman of Lightning Commercial Funding recently sent out an excellent summary that answers this question:

The Loan Package

An underwriter while viewing a loan package needs to get a true feel for the deal, they have certain questions and criterions that need to be met. Below are some of the important issues that are raised in the underwriters mind and the corresponding sections of the professionally prepared loan package.

A properly prepared package should answer the following inquiries by the review underwriter.

Does the business in question have a positive cash flow that is supported by historical documentation?
This is answered by including the appropriate financial statements and tax returns

Can the business support additional debt?
This is answered by taking a comprehensive look at the current as well as the future cash flows. Also it can be determined by the seller’s discretionary income at the end of the day.

Is the individual that is attempting to secure the loan qualified to run this business?
This is answered by the inclusion of his current resume, as well as any supporting documentation.

Does the prospective purchaser have marketing and business plan to demonstrate knowledge of the business as well as their plans for repayment and future growth?

What are the projected revenues for the new business?

What is the current financial situation of the borrower?

If a buyer of a business just walks into their local bank, and does not have an individual who knows and understands the process the loan will definitely take longer. But a professionally prepared package answers all the above questions that an underwriter needs to have handled and thus makes the time frame for approval and ultimately closing much faster. For more information on business loans, please visit Harlan's website at www.loanforbiz.com

If you are thinking about selling your business, or need more information on the process, please visit our website at www.empiresandiego.com

What Are the Responsibilities of a Business Broker?

As a business owner, it is important to understand the role and services provided by a business broker or business intermediary. A qualified broker should be responsible for the following:
• Advise the seller on how to prepare the business for sale
• Furnish the seller and buyer with current market information
• Help the seller establish the selling price
• Discuss and educate both the buyer and seller on financing options and how financing can effect the sales price
• Create a confidential business review (CBR)
• Promote the business for sale
• Work with other agents
• Analyze market feedback and present this to the seller
• Help maintain confidentiality of the business
• Qualify buyers
• Introduce qualified buyers to the business
• Follow up with prospects
• Solicit offers for the business
• Orchestrate the negotiations
• Manage the due diligence process
• Maintain a marketing effort so there are back-up offers
• Supervise the close of escrow
• Help with any post-sale matters.
As you can see, there is a lot of work to be done if the broker is providing the highest levels of service. Make sure when choosing a broker, they are both qualified and committed to performing the above responsibilities. This will not only increase your likelihood of finding a qualified buyer, but it will also increase your chances of having a successful closing.

Working With Landlords

Landlords play a very important role in the process of selling a business. If not dealt with properly, a landlord can cause a deal to fall apart that would have otherwise closed. If you are considering selling your business, it is important to review your lease and understand the terms that you agreed to. Most leases have a clause that allows you to assign the lease, but it is subject to the approval of the landlord which cannot be unreasonably withheld. Landlords understand that business sell and are usually prepared to deal with this event. Once you have decided to sell, you should consider approaching your landlord to find out what requirements they are going to have for a new owner. Landlords are usually looking for a minimum credit score, net worth, as well as the experience of the new owner in the industry. You can save a lot of time, money and energy by not dealing with potential buyers that do not meet the minimum requirements of the landlord. Remember, the landlord does not want vacant stores in their centers, so they are going to do what is best for their property when making a decision. Another important thing to know is that most landlords are going to require you to stay on the lease as a guarantor until the term you are assigning is completed. Therefore, you as the seller want to make sure you have a buyer that is strong enough to stay in business and pay the rent. Sometimes when there is only a short amount of time on the lease, the landlord may be willing to negotiate a new lease with the buyer where you will not have to stay on as a guarantor. It is important to discuss all options regarding the best way to deal with your landlord with your business broker, commercial broker or attorney. These professionals should have the experience necessary that can help get your deal done, protect you, and reduce your liability. If you are thinking about selling your business, and want more information about dealing with your landlord, don't hesitate to consult one of the professionals above.

Pricing a Business - Factoring in Market Conditions

There are many methods used to value a business. However, most business intermediary's use published multiples (Rules of Thumb) when determining the selling price of a business. An excellent source for these multiples is The Business Reference Guide, published by the Business Brokerage Press, Inc. These multiples are published yearly and are based upon historical selling information within a particular industry. For example, an electrical manufacturing company should be priced at 5 times EBITDA. However, when pricing a business, a broker cannot just rely on these rules of thumb. An experienced broker will know that there are many other factors that must be taken into consideration. Currently, there is a significant factor that is forcing sellers to price their business for less than the rule of thumb for their industry would suggest. The tightening of commercial credit is making it more difficult for buyers to obtain financing. Banks are requiring buyers to have collateral to put up for the value of the loan. However, because of the mortgage crisis, buyers no longer have the equity necessary in their homes to secure the financing. The result, if a business owner wants to sell their business, in many cases they are being forced to lower their price. For more information on current happenings in commercial financing, I strongly recommend you visit Harlan Friedman's blog at http://commercialloanbroker.blogspot.com/. When selling your business, make sure you use a broker that takes all factors into consideration when determining the price. This will help ensure that you business sells in a timely manner.

Your Selling Team

Great point Harlan. I absolutely should have included a financial broker as part of the selling team when selling your business.
As a business intermediary I am so use to recommending Lightning Commercial Funding to all of my buyers, I forget that not all brokers will recommend a top notch financing expert. Having all of the pieces for a business sale in place and then losing a deal because funding can not be obtained is a waste of time, money and energy by a lot of people. Don't forget to add to your team a financing pro.

Putting Together A Winning Team To Sell Your Business

Who are the primary players you need when selling your business?
Just like in sports, the players on your team will make a big difference on whether you win or lose. If you were putting together a baseball team, you would not draft Wayne Gretzky to be your pitcher just because he has a well know name in sports. The same is true when building a team to help you sell your business. There are some important players you are going to need:

1. Attorney: Make sure your attorney has experience in business transactions. Even if an attorney has a well known name such as F. Lee Baily, Robert Shapiro, or Alan Dershowitz, that does not mean they are going to have the expertise you need for your transaction. You should interview several attorneys before making a decision. Find out how much experience they have in business sales transactions. Ask if they have worked on transactions similar to yours. Also, find out how much they think it is going to cost for their services. I have seen a lot of attorney's create documents that are much "thicker" than necessary at a high cost to the client. Good sources for attorney referrals with an expertise in business transactions are: escrow officers that specialize in bulk sales; business brokers; and former business owners that have sold their business.
2. Accountant: Just like with the attorney you choose, you need to make sure you are using an accountant with an expertise in business sales transactions. You may know an accountant who is great at preparing a tax return, but that does not mean they will understand the intricacies of a business sale. Using the wrong accountant can literally costs you thousands of dollars. The above mentioned referral sources in the attorney section would also be good for finding an experienced accountant.
3. Business Broker or Business Intermediary: When choosing a business broker, you want to make sure that they have specialized training in business sales. Also, it is important that the brokers primary business is business sales, not a real estate agent that also sometimes sell businesses. Discount brokers are also a red flag when choosing someone to represent you. Business brokers only have a limited amount of funds to advertise a business. When using a discount broker there is usually less money available for marketing, and/or the broker is only going to promote businesses they negotiated a higher rate with. Also, many brokers charge an upfront fee. However, I am a firm believer that a broker should only get paid if they close a deal. Paying an upfront fee takes away the motivation for the broker. Finally, choose a brokerage company that is not just a "listing machine", that signs up as many business as possible to represent knowing they will only be able to sell a limited amount of them. When a company has more then 7 -10 listings per agent, they are not able to give the attention necessary to effectively represent the business.
   
   For more information about selling a business, please visit my website at www.empiresandiego.com
   
   

Five Important Things to Do Before You Put Your Business Up For Sale

1. Preparation of Financial Documents: Typically, a buyer and lending institutions will require three years of financial information, including profit and loss statements, balance sheets and tax returns. Also, a business broker or valuation company will need this information in order to determine how much your business is worth. It is very important to assess these documents for accuracy and completeness. Accountant reviewed or audited financial statements will make the due diligence process a lot easier and will increase the likelihood of the deal closing. If you have time, and don’t need to sell your business right away, start cleaning up your books to reflect an accurate picture of the business at least three years before putting the business on the market. Remember, besides being illegal, most buyers will not pay for cash that an owner does not report.

2. Organize your Company Books and Legal Paperwork: Review the Company books to make sure that all corporate records are up to date. If necessary, take any corrective measures necessary to become current. Have copies of all your permits, licensees, vendor contracts, leases and employee contracts available. A buyer will most certainly want to review these documents during the due diligence process.

3. Understand the Tax Consequences: Many tax planning strategies to save you money when you sell your business need to be in place several years before you sell your business. However, if you didn’t plan in advance, it is still important to speak with your accountant or a tax expert to understand the financial tax consequences of selling your business. How the deal is structured can have a significant impact on how much taxes you will owe.

4. Clean up the Business: There is an old saying, “Don’t judge a book by its cover.” However, many people do, and a business that shows poorly may turn off a potential buyer. A clean, orderly business shows a potential buyer that the business is well managed and the owner takes pride in the Company.

5. Put a Sales Team in Place: Selling a business takes special skills and knowledge. Using an experienced business broker can not only increase the likelihood of a finding a buyer, but history has indicated that you will get a higher selling price. Also, you will need to find an attorney and accountant experienced in business transactions. An attorney or accountant who does not specialize in business transactions can cost you money or even kill a deal that should have closed.


To learn more about selling a business, please visit my website at http://www.empiresandiego.com/