Business owners looking to sell their businesses often make some common errors when communicating with potential buyers, which can be a significant hindrance in successfully closing a deal. If you’re ready to put your business on the market, knowing what buyers want and need will help you to make the most of your business sale and attract the best offers. In these trying economic times, this knowledge is essential. Many seller difficulties result from not being sufficiently aware of the following tricks of the trade:

Get Your Business in Shape
Potential buyers want to know that your business has good characteristics, such as location, a pleasing office space, high revenue stream, strong management, loyal client base, and a growing market base. Likewise, if you can convince your potential buyer that there are few risks incurred by buying your business, you’re on the right track. That said, make sure your accounting books and financial statements are in order. If you’re organized enough to present them with all the required information upfront, your potential buyer will feel more secure in knowing the business is well-kept and offers great potential.

Make sure that you run your business in a steady manner well before considering a sale, without making any drastic changes that could result in revenue surprises. Nothing will make a buyer more hesitant than seeing an unexpected earnings reversal or irregular profitability that aligns with your for-sale listing date.

Be Forthcoming
Knowledgeable buyers will conduct due diligence before making a business purchase, so don’t hide any problems that your business has had, or currently faces. The buyer will eventually find out, I guarantee you. And when they uncover problems that you did not reveal upfront, they’ll likely think you’re hiding other things from them. And don’t assume that you’re in the clear if the sale has already been secured. If such problems are discovered after the purchase, you can be sued for fraud. So, be honest about the businesses risks and liabilities, as well as the real reason you’re selling.

Don’t Be Greedy
Price is usually the first factor a buyer uses to decide how interested they are in a business, much more so when access to credit is tight. If they deem the price too high, they’ll typically dismiss your listing rather quickly, and focus on other businesses with more realistic prices. Buyers know negotiation is always an option, but initial price makes a big impression. Online valuation reports are a cost-effective alternative to a professional on-site valuation, and comparable businesses will give you a good idea about a suitable price point for your services and market area. BizBuySell.com has a Valuation Report that starts at $19.95, priced by number of local comparables available in our database.

If you’re adamant about an all-cash sale, buyers will likely shy away. All-cash sales are very rarely to your benefit, mainly because they can put you in the position of having to pay unnecessarily high taxes for collecting all sale proceeds as income in a single year. It’s in your best interest to accept a loan or deferred payments.

Establish a Business Transition Plan
Make sure the potential buyer can clearly visualize owning the business. If they think clients, day-to-day functions and even the business location prove unstable, they’ll assume it’s too much of a risk. Make sure that transferable agreements commit clients to the business, and non-compete agreements are recognized for key managers. It also doesn’t hurt to present your business and marketing plan, were you to continue the business. While you should never promise the buyer a certain level of prospective sales or profit, presenting a plan can assure them you have the interests of the business in mind and are willing to offer your best prediction.

It is important, especially for those who own a retail business, that you have a lease that extends for a minimum of five years. If not, buyers will be hesitant to buy and financial institutions will think twice before giving out loans. A short lease signals that the business may prove unstable, so it is essential that you try to secure a transferable lease and lengthen the term, if possible.

Also, at the appropriate time, it’s important to notify key management and employees that you will be selling the business. Being honest with them upfront will help to encourage them to stick around with a new owner. In turn, you can ensure the buyer that they will continue to have strong and experienced leadership on-board right from the start.

Make Sure the Buyer Qualifies
Don’t wait forever to qualify a buyer. Giving out business details without doing so will sometimes make the buyer think you are too eager for the sale, and not adequately making sure the business is transferred to a competent owner. Screen and request a confidentiality agreement and financial background info as soon as possible. The only buyers who will balk at buyer-qualification requests will be the ones who aren’t qualified buyers.

Communicate With Buyers Early & Often
In an age where instant gratification is widespread – in everything from e-mail to fast food – buyers expect immediate replies to their questions. In fact, 90 percent of initial sales inquiries are derived from online searches. If they can send a quick inquiry, they expect a quick response. Make sure you don’t disappoint, as delaying will often kill deals, even if it’s just a quick note to say: “I’ll get back to you with that information next Tuesday.” Postponing your response often gives buyers the impression that you’re stalling to come up with a satisfactory answer to hide a business inadequacy, even though that may not be the case. They want assurance that you can answer any of their questions honestly and succinctly.

Make sure to give buyers what they need to fully assess their purchase decision. If the potential buyer becomes frustrated with you, they’ll likely think it’s an early indication of how they’ll become frustrated with the business itself. Individuals new to buying a business often do not know how or when to buy, what the business is worth, and have fear over making a mistake. Open communication and honesty will help put them at ease. Answer any questions, and build a relationship of trust.

Realize Negotiation is Necessary
According to our database of more than 30,000 small business transactions nationwide, sale prices end up at around 80 percent of the asking price, so know that you will be expected to negotiate. While some potential buyers will give you a low-ball offer of 50 percent of the asking price, don’t be alarmed. Make a counterproposal. Offering seller financing will also help to entice them into the purchase. This way, you assume some of the responsibility for the buyer’s investment.

While the current economy may suggest that now isn’t the right time to sell, those that prepare adequately and act carefully can still get a deal done at a good price. Preparation, communication, and flexibility are increasingly important in tough economic times.

Many recently laid off individuals are deciding to become small-business entrepreneurs to gain more control over their future, and buying an existing business is top of mind for most of them. In a time of great economic uncertainty, however, many of these aspiring entrepreneurs are now dealing with a difficult decision: Should I buy a business now or wait until the economy turns around?

Without question, the recent economic downturn is making many entrepreneurs hesitant to enter into a marketplace filled with higher risk and lower profit margins. Many prospective business buyers are heading to the sidelines, deciding to hold off until we make it through this recession, and, to a certain extent, that's completely understandable.

After all, buyers have so far taken significant hits to traditional sources of financing, such as their home equity and mutual fund investment accounts. This, combined with a general lack of accessible credit, would suggest that it's a tough time to pull together a deal to buy a company.

Common wisdom fails in one critical dimension -- it's dead wrong. In my mind, it's actually a great time to buy a business.

Here are four reasons why now is not the time to be gun-shy about buying a business:

1. Prices are low

While many of the indicators that are used to track business valuations suggest that sellers can command a premium for good businesses in this market, there is at the same time strong evidence that there are quite a few distressed sellers out there who are willing to sell at a lower price than they might otherwise get in a booming economy.

For many businesses that are selling now, there is a need to sell. Those businesses that have decided not to sell can wait until the economy turns around, but a significant number of businesses for sale that are available right now have a higher sense of urgency.

For would-be buyers, this means there are deals out there. If you wait until the economy improves and credit eases, you will miss this window of opportunity. Prices will rise during economic recovery and more buyers enter the market.

2. Seller financing is available

I know what you are thinking: "I'd love to buy a business, but it doesn't seem like I can borrow the money to do it." The answer to this conundrum is seller financing. As you might know, seller financing is when a seller, rather than a professional lender, assumes responsibility for a percentage of the buyer’s investment.

Historically, seller financing typically comes into play when a buyer is unable to secure financing at the owner’s asking price. The business owner then has two options: he can either lower the asking price, or work with the buyer and provide seller financing to overcome a potential deal-breaker.

These days, many sellers are offering seller financing before they even meet a buyer. Sellers know that banks are not lending, so many are willing to finance the deal themselves. This means you can buy a business right now even if you cannot get bank financing. So why wait until the economy turns around?

Believe it or not, you can usually get a better rate from a seller than you can from a bank. You have considerably more leeway to negotiate the right down payment, the length of the loan, monthly payments and interest rates. Plus, if you pay the loan off early, many sellers also often accept a discounted balance.

One of the most productive avenues for finding a seller-financed company is through online resources like BizBuySell.com. Business listings often contain information about the possibility of owner financing. You should get professional legal and financial advice, however, to ensure that your financing agreement is airtight.

3. SBA loans are coming back

We all know the Small Business Administration backs loans available for start-ups. It's also been widely reported that the SBA loan program has stagnated over the last few months. That's because, unfortunately, SBA lending has become unprofitable for many lenders.

What you may not know is that the agency recently took steps to make SBA loans more profitable for banks, and they have eliminated a variety of other obstacles to government-backed lending. In theory, this should mean that your local banker will now be more willing to sit down and discuss the SBA's 7(a) loan program with you. So, credit may quickly become more available than it has been recently. That’s one more reason I think buyers should be actively looking for businesses to buy.

4. There is no time like the present

Finally, I recommend that buyers not wait for the economy to turn around simply because the best entrepreneurs don't wait for perfect market timing. Firms like Microsoft and Apple were started in the midst of the recession in the 1970s.

In fact, there are many reasons that businesses that start in a down economy do better than those that don't. Market share is up for grabs because buyers of products and services are scrutinizing expenses. That gives new business owners a big opportunity. Furthermore, suppliers may be willing to offer great prices because, in this downturn, they are hungry for business. It’s also a great time to bring on employees. There are many talented individuals looking for work now, and they may be available at more reasonable rates. That's not going to be the case after the economy turns around. Buyers who learn how to focus on revenue growth and to closely manage expenses during tough economic times can leverage those skills for greater business success as conditions improve.

Remember, when shopping for a business to buy, you are under no obligation to make an offer. So there's really no harm in browsing. And, with a little luck, you may find your dream business at a great price.

With the presidential election rapidly approaching and the recent turmoil in the stock market, it’s safe to say that thousands of business owners are wondering how these events will affect the valuation of their businesses and their ability to sell.

While it’s true that some business owners are holding on to the business until conditions improve, you would think there would still be legions of baby boomers and other owners who want to sell -- and want to do it soon. That may not be the case, however.

Last month, BizBuySell.com conducted a survey of 288 business brokers, and the results indicate the majority of brokers haven’t seen an increase in the number of businesses for sale. In fact, 42 percent said they have been seeing fewer listings than one year ago, and 26 percent said listings have stalled.

“Our listing base is down 50 percent from normal,” said one broker. “Business owners are not sure they want to sell in this down market.”

In addition to the overall finding of decreased listings, brokers weighed in on the availability of small business loans and the presidential candidates. Nearly 90 percent of business brokers who responded to the survey said they have been finding it difficult for client business owners and buyers to get access to business loans, accounting for much of the challenging conditions in the business-for-sale space. Sixty-eight percent of surveyed brokers said they began to notice access to loans decreasing in early-to-mid 2008.

In late September, the majority of business brokers polled felt that Republican candidate John McCain is much more likely than Democrat Barack Obama to provide relief to the small business economy. In fact, 56 percent favored McCain, 24 percent chose Obama, and the remainder had no opinion or believed neither was an ideal option for the small business community.

Another September survey, this one by online payroll service SurePayroll, indicates how small-business owners likewise favor McCain. That survey found that 64 percent of small-business owners believed McCain is better suited to benefit small business.

It seems McCain’s messaging, which has focused on protecting the earnings of small-business owners -- made even more prominent by this month’s spotlight on “Joe the Plumber” -- is resonating within the small business community.

While the current state of the economy might indicate a bleak outlook for small-business owners looking to sell, third quarter 2008 BizBuySell.com listing and sales data points toward good news for sellers. The data, based on a representative sampling of more than 50,000 business-for-sale listings on the site and 1,400 closed transactions reported by business brokers across the country, suggests that business valuations are actually on the rise. This means a seller can get more money today for each dollar of revenue or cash flow than they could one year ago.

One reason why this is the case is that weaker businesses are waiting for a change in the economy to sell, while strong businesses are being put up for sale in greater numbers because they still command good prices. In addition, as unemployment numbers grow, more people are looking to buy businesses and control their own destiny.

“Even though it is more challenging for businesses in most sectors to maintain an increasing, or at least stable positive cash flow, those that do are positioning and differentiating themselves much easier,” said one broker. “With such businesses that we are representing, we are also seeing a stronger field of qualified buyers than we have seen in a long time.”

It's not uncommon to hear about the adverse impact the current down economy is having on business exit strategies. Don't believe everything you hear. Data we recently collected at BizBuySell.com, based on business-for-sale listings and transactions in the second quarter of 2008, tells a different story.

According to our data, small-business valuations are actually on the rise nationally. The median asking price for small businesses in the U.S. has jumped to $255,000, a $5,000 increase from the same time last year. Revenue and cash flow multiples for sold businesses are also up from last year, suggesting that it is indeed a seller's market.

So what does this mean for a small-business owner setting out to sell independently?

Many people who have recently been laid-off are looking to become entrepreneurs, and are the very people who are helping keep businesses-for-sale in high demand. This means for-sale-by-owner, or FSBO, sellers have more leverage than you might think. Although many sellers are initially intimidated by the apparent complexity of listing a business without the professional guidance of a business broker, FSBO listings certainly have a niche in the market that is not going away any time soon.

It's not that there's widespread dissatisfaction with traditional brokerage. Business brokers play an invaluable role in assisting would-be sellers, and that's never going to change. However, we are seeing that more and more sellers want to handle their business sales themselves. The trend is similar to what has happened in the real estate market where many intrepid sellers have opted to go it alone.

Sure, there are often added unanticipated hurdles with a FSBO listing, but those who choose to go the independent route have more resources than ever before.

Selling a business through a professional broker is still a valued and effective method, but for businesses that want to take a DIY approach, here are a few tips for achieving the greatest results:

Go Online

With today's technology, individuals are now able to market their companies like never before. Online business-for-sale Web sites allow business owners a chance to get that "hands-on" connection to their business sale. It serves as a preexisting conduit that links sellers with potential buyers, thus helping to eliminate the need for some of the services provided by a broker. Of course, a broker comes equipped with additional marketing and negotiation expertise, but DIY-friendly Internet resources offer multiple listing options, valuation resources and advanced search features that enable a FSBO seller to obtain many necessary real-time tools.

Recognize Your Limitations

FSBO sales are perfect for sellers who feel they best know the strengths and limitations of their company and can effectively facilitate its sale. Plus, these sellers avoid having to pay a broker's commission. Still, it's important not to feel too sure of your expertise, as a business sale is a specialized transaction that demands a certain level of know-how. It may be helpful to consult with a lawyer and an accountant to enhance your strategies and ultimately arrive at the best deal for your business.

Keep Your Emotions in Check

FSBO selling can also come with emotional risk. Some business owners are apt to become so emotionally involved in the deal in that they cannot offer an objective perspective when negotiations escalate. If managing your emotions isn’t possible, it might be time to bring in a qualified broker to act as a buffer between you and the buyer.

What does the future hold for independent sellers? It’s difficult to say, but one thing is for sure: Greater numbers of buyers and sellers alike will turn to the Internet as a valuable resource in facilitating business sales. FSBO sellers must realize the potential of new technology and utilize the Internet to its full potential in order to succeed on their own.

It's also a safe bet that business brokers will maintain an active role in small business sales, as not all business owners are ready, or willing, to handle the process on their own.

Properly making or evaluating an offer to buy a business starts with understanding the basic components involved. From there, negotiations can begin.

An offer to purchase a business can come in many forms, from simple oral offers, to presentations, term sheets or letters of intent. To effectively negotiate an offer, owners and buyers must first understand the various forms it can take, the general processes and procedures that usually follow, and other basic components.

The most common method for presenting and documenting a proposed deal is by using a Letter of Intent (LOI) or Term Sheet. A Term Sheet is typically a bullet list of terms and is often written in the third person. A Letter of Intent is usually written from the buyer to the seller. Often, an LOI is more detailed than a Term Sheet, but this is not always the case. A good example of where a Term Sheet is more appropriate than an LOI is where the principal deal terms have already been agreed upon by the parties, and the purpose is to document those terms. Often, an M&A advisor or other third-party representative drafts the Term Sheet as a memorial of the terms that have already been discussed and agreed upon. By contrast, an LOI is often used as a proposal, usually from the buyer to the seller, which is meant to start negotiations.

Other methods of making an initial offer include oral offers and strawman offers. A strawman offer, whether oral or written, is a simple list of a few items that are often used to determine if the parties are in the same ballpark with regard to valuation. A Letter of Interest is also used on occasion to precede a Letter of Intent, and is simply a more formal version of a strawman offer.

Continue reading "Making and Sizing Up an Offer"

Whether on your own or with an adviser, finding the right buyer requires planning, negotiation, and flexibility.

Putting your company on the market should not be taken lightly. The process involves many steps and requires a well thought-out plan. Unlike real estate or the stock market, there is no single listing of businesses for sale. So, how do you reach potential buyers without the whole world, especially competitors and customers, knowing that your company is for sale? How do you set yourself up for effective negotiations? How do you present your business effectively? What steps are involved?

Continue reading "Taking Your Business to Market"