Answers to Sellers’ Common Questions
Q: Is this a good time to sell a business?
Absolutely. Buyers are active and optimistic about the economy. Senior debt is available at reasonable rates. Most private equity groups have idle funds to deploy and mezzanine lenders are aggressively seeking opportunities. Corporate buyers are cash rich and actively making strategic acquisitions. If the time is right for you personally and your business is good shape, this is an excellent time to be on the market. As of this writing, the U.S. economic expansion that started in 2009 is the third longest since 1854. The question is, how long will it last?
Q: Why is confidentiality important?
Buyers want to buy stable businesses. If employees learn that their employer is for sale, they may seek other employment to protect their income. Customers may begin to favor other sources for your products or services. Key suppliers may seek alternate channels to the market. These events can quickly erode financial performance and destabilize a business, which translates to increased risk and less value. It is important that your constituents stay committed at this time when your business needs to look its best.
A lot of time, professional skill and nuance is involved in consummating successful business sales. Often, owners who try to sell a business on their own get side tracked with the process and neglect their business. The result is a decline in business performance which turns off buyers and lenders. Also, business brokers have extensive databases of qualified financial and strategic buyers. Many owners who sell a business on their own sell for a lower price because they don’t attract multiple buyers. Protect your interests by getting expert help and letting us negotiate and work on your behalf while you focus on making the business look its very best.
Q: How does Exit Strategies maintain confidentiality?
Exit Strategies has the industry-best practices and vigilance to carefully manage confidentiality. Our clients’ line employees, customers, suppliers and competitors nearly always learn of the sale when announced by our client at the appropriate time. We incorporate some or all of the following into our process to maintain confidentiality:
- We are the market’s point of contact and gatekeeper for sensitive information.
- You approve “blind” ads and summaries sent to buyer prospects.
- Buyer prospects sign confidentiality agreements and answer qualifying questions. Only screened buyers receive confidential details.
- You pre-approve contact with industry buyers.
- You approve Confidential Business Review content.
- You approve the timing and format of ultra-sensitive (e.g. client) details.
- Certain buyers may be required to submit non-refundable deposits before having access to key stakeholders or ultra-sensitive information.
- You choose the timing of announcements to key constituents and the public.
- We reinforce confidentiality with the parties throughout the process.
- We keep the sale process moving, which minimizes the opportunity for leaks.
Q: When should we tell our employees?
We assist you in selecting the best time to notify employees and other constituents. In our experience, it is usually best to notify them just before transaction closing. Of course, if there are key employees whose employment is required by the buyer, they may need to be introduced earlier in the process.
Q: Is there one best strategy for exiting a business?
No. The right strategy depends on your goals and circumstances. Your best strategy may be to transfer to family, management buy out, an Employee Stock Ownership Plan, private equity investor, industry player, consolidator, or an individual or investment group not involved in your industry. These options have advantages and disadvantages, based on your personal and financial goals, and timing needs.
Q: When should I create a succession plan?
Usually, the sooner exit planning begins the more options available to you to meet your objectives. Timing often depends on a) the condition of the business in terms of transferability and value relative to your needs, and b) how you wish to transfer the business. If your succession plan involves a third party sale, ideally you will start preparing 3 or more years in advance. However, any preparation time is better than none at all.
Q: Is there an optimum time to maximize value?
From a business valuation perspective the best timing is usually when the business is solidly profitable and trending upward, and future growth is expected. This places you in the strongest negotiating position. Selling during a period of economic growth can increase selling price. If your industry is consolidating and strategic buyers are making acquisitions, it may be time to sell. Selling during a time of low interest rates and good credit availability allows buyers to borrow and pay more. Lastly, it is always better to sell a business before you are forced to do so for health, personal or financial reasons.
Q: When should we begin the selling process?
Generally, you should start 1-2 years before you want to be completely out. It can take a month to a year or more, depending on the business, to properly prepare a business for sale. On average, it takes 6-9 months to sell a business with Exit Strategies. Plus, the buyer may want you to stay on for a transition period.
Q: We want the highest price, right?
Usually, but not always. Business sale transactions involve many elements of value to a seller. The selling price is often only a part of the overall value received. It is important to understand the total financial package when evaluating a deal. The financial elements of a transaction can include cash down payment; principal and interest on notes; liabilities assumed by the buyer; the sale or lease of premises if you own them; employment contracts and consulting fees; non-compete agreements; retained current assets; royalties and licensing agreements; a percentage of retained ownership; and “perks” for you or your family. This total financial package is the true measure of a transaction’s value to you.
Q: Why would we consider an installment sale; isn’t that risky? With seller financing and other forms of consideration that are received after a sale, there is always some risk of not being paid. Among the benefits of an installment sale to a seller are:
- Attracts more buyers (in fact, some buyers refuse to purchase any business that a seller won’t at least partially finance)
- Demonstrates your confidence in the business under new ownership
- Earn interest (say 7%) on the amount financed
- Can lower your tax liability by spreading the consideration over multiple tax years
- On average, results in higher selling prices than all-cash deals
- Strengthens your negotiating stance on other terms
- Faster closing, when third-party financing is eliminated
There can be risk associated with seller financing, but proper due diligence and deal structuring lowers the risk substantially.
Q: How long will it take to sell my business?
There is no way of knowing exactly, but on average businesses sell in 9 months from initial marketing to a transaction closing. We usually ask clients to be prepared for a sale to take from 3 to 18 months. Once the parties agree on terms, the process usually takes 60-90 days. This time-frame assumes your asking price is supported by the market. If you price your business for sale at $5 million and the market is paying $3-4 million for similar businesses, your business probably won’t sell. Money goes where it will generate appropriate returns for the risk involved. Some sellers overprice their businesses for sale, operating under the premise that they can always come down. This strategy often backfires, since most serious and capable buyers don’t look at overpriced businesses for sale.
Q: What are my chances of selling?
You will exit your business only once, so you need to get it right. Yet it is well known that 75-80% of businesses for sale by business brokers don’t sell. Fortunately, Exit Strategies turns that percentage completely around. We help business owners sell 2-3 times more often, for more money, with less stress and aggravation. Our success rate is the result of doing many things right, which we would be pleased to discuss with you.
Q: How long should I expect to stay on board?
The length of time sellers stay involved with the new owner varies greatly, from a few weeks to a few years. Factors include the nature of the business and the seller’s role, other management left in place, the buyer’s and seller’s needs, the seller’s abilities, etc. Ask your Exit Strategies advisor what to expect given your circumstances.
Q: What can I do to help sell my business?
Here are three ideas:
- Buyers want businesses that are stable and well run. The #1 way you can help is to stay committed to running the business while we lead the sale process. Keep normal hours, build order backlog, maintain important relationships, and meet or beat your financial projections. Keep the facility and equipment in good condition.
- Be candid with buyers — if they like and trust you, they might buy from you! Represent your company enthusiastically, but not to the point of covering up. Resolve issues uncovered during the evaluation phase. If the company has deficiencies, address them early on, with solutions in hand.
- Buyers need sensible, up-to-date financial statements and information. Involve your CPA before and during the selling process, and respond to our information requests in a timely manner.
Q: What is the difference between an asset sale and a stock sale?
In an asset sale, the company transfers the assets of the business to the buyer. These assets may include inventory, equipment, real estate, goodwill, copyrights, patents, leases, customer lists, etc. In a stock sale, shares of company stock are transferred to the buyer. Asset sales are most common; however in some cases it is advantageous to consummate a stock sale for tax reasons, transfer of key contracts and licenses, or other considerations.
Q: Does Exit Strategies specialize in one industry?
Yes and no. Our expertise is in the process of selling companies ranging from $1-50 million revenue; and our seasoned advisors and effective M&A brokerage practices regularly produce successful transactions in a wide range of industries. Each of ESGI’s advisors has industries in which they concentrate, and we have completed many deals in manufacturing, services, wholesale distribution, tech, e-commerce and construction sectors. We also have green-business, renewable energy, retail and food service specialists on staff.
Q: I understand what business brokers do, but what can’t business brokers do?
First, business intermediaries (M&A brokers, business brokers, investment bankers, et al) are not magicians! Most businesses are sell-able if they are prepared, priced and marketed appropriately; however business brokers can’t create demand for unrealistically priced businesses. Any business broker who says they can sell your business for an extraordinary sum will likely waste your time and risk overexposing your business.
Also, business brokers are not qualified to give legal or tax advice. While we are well-versed in the tax and legal implications related to our work, clients must have experienced professional counsel in these areas. When necessary, we can refer you to outstanding transaction attorneys and CPA’s. Part of an M&A broker’s job is to coordinate the work of accountants, attorneys, financial advisors, estate planners, lenders, landlords, insurance brokers, appraisers, escrow officers, and others who are involved in your transaction. We can provide our perspective on the optimal timing to engage outside counsel to maximize benefit and manage costs.
Q: What is buyer due diligence and when does it occur?
Due diligence usually occurs after a letter of intent or purchase agreement is executed by both parties. Agreements usually have due diligence contingencies that allow the buyer to validate facts and assumptions, and assure the seller that they are dealing with a qualified party. If the parties are satisfied with the information received, they release these contingencies and proceed with the purchase. If not, the deal may be renegotiated or cancelled. Buyer due diligence requests vary by transaction, but often include (listed alphabetically):
- Bank statements
- Corporate Documents (if selling company Stock)
- Customer base
- Financial Statements
- Fixed Assets
- Human Resources
- Intangible Assets & IP
- Leases and other Operating Agreements
- Legal Proceedings
- Licenses, Permits, Regulatory
- Marketing programs
- Other Financial Reports
- Real Estate disclosures (if sale includes Real Property)
- Sales history
- Seller Disclosures
- Tax Returns
Unlike real estate, businesses often sell without 100 percent cash at closing. Therefore, your due diligence on the buyer can be just as important. The due diligence period is also usually a time to secure third-party financing and approvals, and formulate strategies to transfer operations.
While due diligence is a lot of work, it need not be complicated or stressful. Exit Strategies facilitates this process for the parties.
Q: What is an ESOP?
An Employee Stock Ownership Plan (ESOP) is a defined contribution employee benefit plan, technically a stock bonus plan that can borrow money to acquire company stock. ESOPs can give employees as a group 30% to 100% ownership of a company. Certain government rules are intended to protect the interests of the plan participants. In return, an ESOP is granted certain tax benefits. Owners can use an ESOP to exit their company at fair market value, assure on-going management and reward employees – all without paying capital gains tax. To establish an ESOP, a company establishes a trust, into which it contributes new shares of its own stock or cash to buy existing shares. The ESOP trust is governed by trustee(s), selected by the company’s Board of Directors. ESOPs take considerable time and money to set up and maintain, and are not the answer for every business or business owner.
Q: What information is needed to evaluate our company before selling?
Many factors affect business value, marketability and transfer-ability. In our initial discussion with you, we seek to understand the basic business model, high-level income figures, trends and future prospects, key strengths and weaknesses, and major assets and liabilities. Then we’ll need details. The list of documents varies from business to business, but the following is often a good start:
- Financial statements and tax returns going back 4-5 years
- Current year-to-date financial statements, plus AR and AP aging
- Fixed asset register or depreciation schedule
- Information on the company’s services/products, staff, clientele and markets
- Business plans and projections if available
- Copies of leases and significant operating agreements
- Debt schedule
- List of intangible assets and any off balance sheet liabilities
- Schedule of owner benefit expenses
We invite you to contact us with any questions or to schedule a confidential, complementary consultation.