12 Point Checklist: How to Attract the Right Buyer
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
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When considering selling your business, every buyer expects a business of great value as an investment. Depending upon the qualified candidate, it could be an entrepreneur with a specific set of needs that motivates them to invest in an established business or it could be a private equity group that sees the benefit in acquiring a business based on their strategy for future growth. Whatever the reasoning might be, the challenge is what can you do to attract the right buyer?
Here are 12 steps to take in order to reel in the best buyer during the selling process:
1. Provable Books and Records - In the purchase of a business, every buyer expects to verify the information given to them by the seller and the seller's broker. This is done during the due diligence period after a written contract has been agreed to by both the buyer and seller. Typically this is done by a qualified financial advisor or CPA.
2. Reasonable Price and Terms - When a business is to be purchased, a reasonable price at fair market value is determined by other businesses in a similar industry to the one available for sale. The terms commonly referred to as seller or third-party financing determine the desirability of the business listing. The return on investment (ROI) establishes if the price and terms are reasonable, based on the amount of time it takes to recoup the investment.
3. Financial Leverage- The financial leverage it is gained by utilizing the down payment and suitable loan to maximize the investment level of buyers capital. The leverages are gained by a formula of borrowing from the seller or third-party lender to maximize the investment potential. Thus a business offer financing is more desirable than a business with the same asking price and does not have terms.
4. Discretionary Earnings (DE) - Discretionary Earnings is also referred to as "Owners Benefit" and also "Adjusted Net", which is a term to reflect the salary and net profit of the business. It also contains other items that are at the discretion of the owner to purchase for or not for business purposes. It is also common practice to add back any interest paid and depreciation on the equipment during the period of time being analyzed.
5. Furniture, Fixtures, and Equipment (FF&E) - FF&E is the value of these items that are included in the purchase on either a Stock Transfer or Asset Purchase agreement. Typically they are valued at today's marketplace conditions and not when they were originally purchased.
6. Transferable Lease - In the sale of a business the property leased must have an assignable lease at the current operating cost of the tenant. If this lease is not assignable, then a new lease must be negotiated and typically is at a higher rate than the current lease.
7. Training After The Acquisition - In most cases, after the sale occurs, the owner and seller of the business will help to acquaint the buyer with a reasonable time, typically two weeks. During this time period, the seller will train the buyer with all facets of the business, be introduced to employees and vendors as well as customers. This helps to make the transition a smoother period so as to not impact the business in a negative way.
8. Good Appearance - The overall appearance of the exterior, as well as the interior of any business, is a strong selling feature. The curb appeal has a lot to do with the value of the purchase of a business.
9. Covenant Not To Compete - It is always the desire of a buyer to not have the seller compete for a restricted number of miles surrounding the business and for a stated time period. In this agreement, it helps to ensure the seller will not compete with the buyer and take the customers away from the future.
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Preparing An Offer Presentation Between The Buyer And The Seller
While writing an offer may seem like the final or ultimate step to the buyer, it is really just the first step in the process. It starts the negotiations process and sets the groundwork to determine how flexible a seller might be. If a buyer, writing an offer should be relatively straight forward. The key is to constantly address fears and concerns with a solution. There are very few concerns that cannot be handled with a contingency, a condition, or an adjustment in price and terms.
Prepare the Seller
Prior to preparing an offer, you should have educated your seller about offers and their presentation. Let the seller know about the offer form and the rest of the ancillary forms that go with it so that at the time of an offer presentation, he is not afraid or confused by the offer or its content. In the process of contacting the seller on a weekly basis, you have probably acquired any current financial information from them about the current position of the business, such as a big change in inventory, personnel, or the most recent gross figures. Prepare the seller for the fact that if the volume has gone down, an offer is not going to be as large.
Before an offer is prepared, it is advisable to call the seller to verify various points in the listing. (If it’s not your listing, call the listing associate or his/her owner first.) This ensures that there will be no problems during the offer preparation such as the amount of inventory in the business and how it will be valued, determining whether there have been any major changes in inventory or personnel or any big changes in the sales volume. In any of these cases, contingencies may have to be added to the offer. During this phone call, also ask the seller whether our chase price or the down payment is more important to him. Knowing this, you have a better chance of making the offer fit the seller’s requirements and, therefore, have a better chance of success. (It is also a good idea to find out where the seller will be for the rest of the day in case you need to contact him.)
Prepare Yourself
Have all of the necessary materials on hand prior to the preparation of the offer. Have an amortization schedule along with the Offer to Purchase and addendum forms. Also, have a calculator handy to do your computations. Use the time you have prior to actually writing the offer to prepare for all of the things you’ll need to effectively construct the offer. Discuss it with your owner and manager and/or the listing associate. Plan strategies to address the seller’s and buyer’s concerns.
Next, review the likely contingencies that you'll need to incorporate in the offer. Contingencies are a part of most offers. They are included to help make deals, not lose deals. Many intermediaries have found that it is quite simple to put contingencies into an offer if you know when and how you will be able to remove them. There is nothing wrong with saying that a sale is a contingent upon the seller proving a gross in excess of $300,000 for the previous year if you have a copy of the financial records from the business in your files stating last year's gross was $304,000. That way, you know that you can remove the contingency because you know that figure is provable. It can be very dangerous to put contingencies into an offer when you do not know when or how to remove them when the time comes.
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Start Your Exit Planning Today (Part 2)
By Ryan Jordan, Owner of VR Business Brokers Office in Calgary, Canada
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As business brokers, we often meet new clients who have made up their mind that they’d like to sell in the next two years, however, they’ve done little to no planning on how to get there. Our expertise in assisting them through every stage of this process is why they’ve called us to begin with. Our first few conversations with a potential seller involve us trying to determine what this business owner needs, what the business itself needs, and understanding what level of planning they’ve done to this point.
It’s not difficult to explain the benefits or describe the potential consequences of a lack of planning. Every experienced broker can relate personal stories of clients that have either done, or not done planning, and what the results were for each. This experience helps us engage with the business owner from their own point of view and how they’d be impacted personally.
I advocate very strongly with the lenders, accountants, lawyers, and financial advisors that are engaging with their small and medium-sized enterprise (SME) clients on a regular basis to start the conversation with their clients now. I don’t want small business owners coming to me to assist with a sale when it’s already too late. I want them planning years in advance so they’re ready for everything.
Thankfully, succession or exit planning seems to be an issue that is picking up steam as the baby boomers continue their wave of retirement. The banks and financial advisors are increasingly on board and promoting the importance of this crucial step because they know they’ve lost a major asset if a business owner’s retirement is mishandled.
Small business owners that have already met with these professionals for an educated conversation will benefit more from the sale of their business than those who haven’t. This is because they will already understand the benefits of planning, and the costs of failing to do so, long before they’ve brought a trusted broker into the process.
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Riding the eCommerce M&A Wave
The growth trajectory of the eCommerce industry has only gone up and to the right since the dawn of the 90s. Currently valued at about $800B, that trend is showing no signs of slowing down. According to eMarketer, eCommerce sales are expected to increase by 18% in 2021, achieving sales milestones that were only projected to come to fruition by 2025.
There are a number of factors driving this growth, which we’ll cover throughout the course of this article:
- Millennials and baby boomers spending more, across longer periods of time
- Significant technological advances leading to an improved online user experience
- Increased prevalence and ease of mobile-based purchasing
- New social media-based shopping platforms with highly sophisticated advertising capabilities
- Covid-19
Where there is growth, capital follows. Private equity investors have increasingly targeted the eCommerce space, driving industry consolidation in what remains a highly fragmented, target-rich market.
Riding the Consumption Wave
The Covid-19 pandemic forced consumers of all age groups to experiment with eCommerce-based shopping. While most things in life continue to trend towards normalcy, shopping habits developed during the pandemic are not likely to change. Millennials, with their increased disposable income and comfortability with technology, are entering their peak consumption years, driving a significant amount of growth. Baby Boomers are living longer and are therefore extending their shopping years. Add these trends to the large selection and quick product fulfillment of online ordering, and it becomes clear that the eCommerce wave will only continue to rise. Online shopping as preferred method of consumption is here to stay.
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Mosquito Control Biz - Million Dollar Revenue for Sale in New Jersey Area
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Mosquito control business. No direct experience is necessary - this is a business with few moving parts, simple training, and minimal office space required. Most of the franchise owners successfully work out of their homes. The business works on a recurring revenue model and has very impressive customer retention rates. The business offers seasonality – the opportunity for winters off! The business is projecting sales of over $1 million for 2021.
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VR Located in Charlotte, NC Sold a Kitchen & Bath Tile Showroom.
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When the previous owners purchased this company many years ago, they saw an opportunity to provide homeowners and commercial clients a vast selection of the world's most beautiful tile and related products. With superior service through the highly educated kitchen and bath design professionals and installation guidance through a beautiful 5,000 sq. ft. + showroom, they worked with clients throughout the Raleigh metro area, coastal areas, and the NC mountains.
Their showroom features some of the most unique tiles available from handmade tiles to natural stone products for kitchens and baths walls and floors, fireplaces, and outdoor living areas. Clients find inspiration through hundreds of samples and a variety of products including glass, metal, and glazed tile along with slates, marbles, travertine, and limestone. The business has grown to be one of the area’s largest stocking distributors buying directly from domestic and international tile manufacturers with some of the world's top tile and stone brands represented in the showroom.
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Thinking of selling your business or looking for an established
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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