Discover how to sell your business for maximum profit. Attract premium buyers Create a competitive environment Negotiate your terms
Sunday, October 29, 2017
Sunday, October 15, 2017
What have you done lately to prepare your business for sale?
One of the biggest reasons business owners leave large sums of money on the table when they sell (or are unable to sell) is lack of preparation.
You prepared to start your business. You went through the required licensing processes, obtained a CPA, and began selling a product or service. You prepared your business for growth each year and you prepared your business for downturns when needed.
Selling your business requires preparation as well. Documents such as your tax returns and income statements for the previous 5 years are needed. Contracts such as lease agreements, agreements with suppliers, employees, and customers will need to be presented to the potential buyer(s). Insurance policies will also need to be presented.
A business valuation revealing the market price for your business will help you understand the starting point for negotiations.
The sales memorandum will clearly identify reasons someone should buy your business.
Your replacement will need to be identified in most cases. You may be asked to stay on board for a period of 6 months to a year in order to help transition the new owner(s) but in the event the owners are "absentee owners", someone will need to be trained in order to run the operation as you have done over the years.
A list of potential buyers will need to be created in order to ensure the successful sale of your business. One potential buyer is not enough. As a matter of fact, when there is only one potential buyer, a number of issues arise. Typically the buyer is in control of the negotiations. The buyer can use tactics like dragging out the process in order to beat you down on price. The buyer can threaten to back out in order to get his terms or his price. It is ideal to have at least 5 potential buyers who will compete against each other, rather than you, for the purchase of your business.
Consider what you would need to review if you were buying a business and have those items in place at the very least. To sell for maximum profit, you will want to create a plan much like the business plan you created when starting your business. Your plan, otherwise known as an exit strategy, will keep you on track through each step of the selling process.
You prepared to start your business. You went through the required licensing processes, obtained a CPA, and began selling a product or service. You prepared your business for growth each year and you prepared your business for downturns when needed.
Selling your business requires preparation as well. Documents such as your tax returns and income statements for the previous 5 years are needed. Contracts such as lease agreements, agreements with suppliers, employees, and customers will need to be presented to the potential buyer(s). Insurance policies will also need to be presented.
A business valuation revealing the market price for your business will help you understand the starting point for negotiations.
The sales memorandum will clearly identify reasons someone should buy your business.
Your replacement will need to be identified in most cases. You may be asked to stay on board for a period of 6 months to a year in order to help transition the new owner(s) but in the event the owners are "absentee owners", someone will need to be trained in order to run the operation as you have done over the years.
A list of potential buyers will need to be created in order to ensure the successful sale of your business. One potential buyer is not enough. As a matter of fact, when there is only one potential buyer, a number of issues arise. Typically the buyer is in control of the negotiations. The buyer can use tactics like dragging out the process in order to beat you down on price. The buyer can threaten to back out in order to get his terms or his price. It is ideal to have at least 5 potential buyers who will compete against each other, rather than you, for the purchase of your business.
Consider what you would need to review if you were buying a business and have those items in place at the very least. To sell for maximum profit, you will want to create a plan much like the business plan you created when starting your business. Your plan, otherwise known as an exit strategy, will keep you on track through each step of the selling process.
Discover what business brokers and M&A firms don't want you to know
Ever wonder why sales commissions are so high?
Below are reasons business brokers and M&A firms charge steep commissions:
1. Financial compensation for selling broker or M&A team.
2. Overhead - travel, lodging, meals, entertainment, "business meetings", office expenses, legal fees
3. Marketing materials and advertising expenses
4. Referral payouts
5. Holiday parties
6. Bonuses
7. Training (travel, meals, lodging, entertainment)
8. Medical benefits for employee(s)
9. Retirement accounts for employee(s)
10. Other miscellaneous expenses
There are many times a business broker or a M&A firm will be the best option for selling your business. You want the best resources if the sale of your business is extremely complex. There are many businesses that can be sold by the owner without the services of a business or a M&A firm as well.
Below are reasons business brokers and M&A firms charge steep commissions:
1. Financial compensation for selling broker or M&A team.
2. Overhead - travel, lodging, meals, entertainment, "business meetings", office expenses, legal fees
3. Marketing materials and advertising expenses
4. Referral payouts
5. Holiday parties
6. Bonuses
7. Training (travel, meals, lodging, entertainment)
8. Medical benefits for employee(s)
9. Retirement accounts for employee(s)
10. Other miscellaneous expenses
There are many times a business broker or a M&A firm will be the best option for selling your business. You want the best resources if the sale of your business is extremely complex. There are many businesses that can be sold by the owner without the services of a business or a M&A firm as well.
Business BrokerageThere is no law or regulation that sets pricing, but business brokers typically charge a 10% commission (also called a “success fee”) on the value of the business and 6% on any associated real estate. The exceptions are gas stations, grocery stores and hotels which can be less. We have heard of some brokers charging 12% and others readily dropping a few points in order to get a deal, but most hold firm at 10%. If another broker is involved in finding a buyer, the fee is split between the listing-side broker and the sell-side broker. That is if they agree to work together (cooperate), which not all business brokers do. Some states are better than others (Florida is among the best, California among the worst).
I know 10% seems like an awful lot. I have started and built businesses, and to give up 10% of all that hard work that it took to build the business hurts. I wish it were different, but the reality is that this is what it takes to keep brokers in business and 10% is what the standard in the industry is. Indeed, it is a lot of work, and often the seller will comment on that towards the end of the deal. I just wish that they could see that at the front end when the 10% seems so steep.
M&A Commissions
It is standard practice to provide a discount above a $1 million selling price, and many M&A firms will say they use the Lehman Scale although in reality they probably use the Double Lehman Scale. The Double Lehman Scale pays a commission of 10% on the first million, 8% on the second million, 6% on the third million on down to 4% for the remainder.
It is standard practice to provide a discount above a $1 million selling price, and many M&A firms will say they use the Lehman Scale although in reality they probably use the Double Lehman Scale. The Double Lehman Scale pays a commission of 10% on the first million, 8% on the second million, 6% on the third million on down to 4% for the remainder.
I’ve seen business brokers that don’t normally do larger deals charge 10% total commission for a selling price above a million. They didn’t do that on purpose (I don’t think), they just didn’t know it is standard to use the Double Lehman. Obviously the seller didn’t know that either.
Smaller deals often have a clearly defined value and a success-fee is fairly easy to determine. Not so with larger more complex deals, and it is often up to the seller and the broker to sit down at some point and figure out a fair commission. As an example, a recent deal we closed had a contingent payment based on the future performance of the company – therefore the full purchase price would not be known for a number of years. This is commonly called an “earnout”. The “expected” purchase price used for commission calculation ended up being above the base price but below the maximum price.
As a general rule, business brokers don’t charge an upfront fee, while M&A advisors do. It makes sense too. A business broker is operating essentially alone much like a real estate agent, while an M&A firm applies a team of writers, analysts and dealmakers on your project and also must pay for a marketing campaign. At Woodbridge, we pay substantial out of pocket costs for each client for first class mail, telemarketing and advertising and we charge an upfront fee to help pay for it.
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