Professionals who are experienced in the sales of businesses believe there are common concerns that almost every prospective buyer has before he or she is willing to sign on the dotted line.
If you can anticipate their concerns in advance and then satisfy these questions, you’re going to sell your business.
Is the Business the Right Fit for the Buyer?
This is a factor you cannot really influence. It’s a personal thing with the buyer. It is something the buyer must decide on his or her own, however; you can clearly assist them in reaching their decision. You must decide before you bring the business to market what the ideal buyer profile is, and this is not just someone who has a bag full of cash. Even if they do, if the business is not suited to them, there’s going to be no deal. If you have a good idea of the skill sets a new owner should possess then you should let any prospects know that when they first contact you. If they don’t possess the key skills to operate the business, tell them upfront and you’ll avoid wasting a lot of time meeting with the wrong prospects, especially if you are going to do seller financing.
Unless there are specific professional licenses required to operate the business, a prospect with basic business skills and (perhaps) a specialty in one area (i.e. sales, marketing, operations, product design, etc.) will be enough for a new owner to be successful.
Are the Numbers Provable?
If you can’t prove the numbers you will not sell! So, your strategy should be simple: Only represent what you can back up – end of story!
If you have unreported income in the business, don’t expect to get paid for it. You already received a benefit from the IRS and NJ Division of Taxation.
The importance of your books and records cannot be over emphasized. Take the time to organize them properly and you will help the buyer to make a realistic offer.
Is Your Business Priced Right?
Some buyers (but not many) will pay a premium for a good business, but virtually nobody overpays. Buyers will not assume that the revenue and profits will continue, that they can service the debt, pay themselves a reasonable salary, and have enough cash left over to grow the business unless it is clearly self-evident to a chimpanzee. No matter how good your business may be, the price and terms must fit within the provable income and expenses of the business minus some room for unforeseen downturns.
Will You Be the Bank? Is Your Business Financeable?
Cash purchases of businesses are the exception, not the rule. Most often a cash purchase comes with a major discount to the buyer. Serious buyers understand they will have to put down a substantial deposit but everyone wants leverage. Your options for financing include:
- Traditional lenders like a bank
- Government backed programs such as the SBA loan program
- Seller financing
Most business buyers are first-timers. They are cautious and optimistic and as a rule. At the beginning, they believe a bank will lend them money to buy your business. It is simply not the case. Know this in advance and accept this in advance. You are likely to be the buyer’s bank. However, a serious buyer knows and the inexperienced buyer soon learns that they will have to put their own money down on a business.
SBA type programs have extensive grueling criteria that the business and the business buyer must possess, and therefore by extension the seller. These qualifications limit the number of sales to under ten percent of small business purchases. Seller financing is the most common means of financing for purchasers and you must seriously consider offering it. While there is always a risk, offering financing for part of the deal will not only drastically increase the number of interested buyers, it will often allow you to get a better price and provide some added assurances to your buyer that you too have “skin in the game”.
What Does the Future Hold?
A business is going to be valued in part based upon its past, and upon what the buyer believes to be its future potential when they take over. While some buyers consider future growth as their main focus, most buyers want reasonable certainty that gross income will likely not go down. They are rightly cautious of future threats that could alter the finances of the business or impact it negatively after they purchase it.
Will Customers and Employees Remain?
The last thing a buyer wants is to lose an important customer or group of customers or a key employee. In the case of key employees, a buyer will likely want to meet with them prior to closing. In response, put yourself in the buyer’s position for a moment to understand. For example, they may only meet a key employee after all other deal contingencies are satisfied.
If you are participating in the financing, you will want your purchaser to be successful for your own financial benefit and especially important, it’s simply the right thing for you to do.
If the Business Relies on Location, Will the Lease Be Assigned?
Landlords can sometimes kill your deal. I’ve seen it go several different ways. There are times when a landlord may want to alter the existing lease or want personal guarantees from a new owner or may just be difficult when it comes to assigning the lease.
Before putting your business on the market, check your lease and confirm the existence of a clause to see if there is a right to assign a lease that is “not to be unreasonably withheld”. If you have less than three to five years on your lease, and the business needs to be where it is, you will want to get a lease extension from your landlord before taking it to market.
Avoid the Deadly Traps NJ Landlords and Tenants Make in Their Commercial Leases
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Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Selling a Business Attorney