Selling Your Business? Learn to Think Like a Buyer
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You’ve built a great business with love and care. It has grown larger than you’d ever imagined. It generates a nice profit. As a result, this has allowed you and your family to live comfortably.
Now, you’re ready to sell. You assume there’s a buyer out there. You want someone to pay you a fair price and nurture the company with the same attention you have. Most importantly, selling the business is a major part of your retirement plan. Buyers look at businesses differently than sellers. So, to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.
Knowing What Buyers Want
There are many types of buyers: strategic and financial, individuals, companies and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
1.Cost and terms. What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions?
There’s one standout issue: the amount of cash required to make the deal. By decreasing the cash requirement and increasing the acceptable debt portion, a seller can make its company more attractive— and perhaps even increase its selling price.
The biggest factor directly affecting a deal’s attractiveness is the asset base. Simply put, the more the buyer can borrow against (or for post- transaction capital), the less cash it needs upfront. As collateral, banks usually accept land, buildings, equipment, inventory and accounts receivable.
Many entrepreneurs have purchased the land their business resides on and leased it to the company. An often-unanticipated side effect is this structure reduces the company’s asset base. As a result, this decreases the amount of debt leverage the seller can obtain.
Another way sellers can reduce the buyer’s initial cash requirement is by accepting part of the purchase price over time. Commonly known as “seller paper,” this can do a great deal to lubricate a sale.
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Existing Over Starting Fresh
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
Buying an Established Business Gives You the Best Chance for Success
There are many reasons why you should buy an existing business over starting up one. As a business owner, you are able to have the advantages of job security, financial independence and controlling your own destiny – professionally and creatively.
Reaping the Benefits of an Established Business
Buying an established business has allowed someone else to take the initial high risks and investment with the start-up process. Only through buying an existing business will you be able to reap the benefits such as having:
- An established location and customer base;
- Existing cash flow;
- Already proven product-line;
- Surplus of inventory; and
- In-house workforce.
Why Avoid Starting a Business from Scratch?
According to a recent survey, 75% of new businesses fail within the first 3 years due to a variety of different elements:
- Opened in a highly-competitive area;
- Lack of working capital;
- Poor-quality product;
- No management skills;
- Inability to develop an established customer base
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The Business Owner's Guide to a Successful Exit
The sale of a business is typically the most important transaction an owner will ever complete, making it paramount to transact with the right acquirer, at the right time, for the best price. The article below outlines key steps and tips for a successful transaction.
Identify the Right Buyer
When a business owner begins to explore the exit process, identifying the key differences between strategic and financial buyers is a great first step. Understanding the different firms’ decision-making processes will help clarify what each type of buyer seeks and can help the owner decide which is the best fit for their specific situation.
Identify Your Goals
Success may depend on current industry multiples or other market factors outside of the owner’s control. But in some cases, ownership and the business’s executives can play an instrumental role in increasing the probability of success, by:
a) valuing their company at or near a realistic number
b) employing a diligent and thorough process in marketing the company
Several Exogenous Factors That May Impact Your Planning
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Specialty Chemical Importer and Distributer in North America
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The business imports a line of Specialty Chemicals from China and sells these products to a select few Fortune 500 companies across North America. The business has operated for 30+ years and has strong relationships with its suppliers abroad and clients in North America. The clients use specialty chemicals in a variety of industries, including glass manufacturing, colorants and paints manufacturing, and sewer treatment, among others.
The owner is in retirement age and wishes to sell the business to a professional operator that will serve its current clients and grow the business into new industries.
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VR Office in Tampa, FL Sold an established Pizza Restaurant for $999,000
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This Pizza Restaurant is an exceptional Italian restaurant that offers a fast-casual dining experience with a New York flair in northern Florida. Known for its delectable Long Island-style pizza, classic Italian pasta dishes, and mouth-watering heroes, it's a perfect destination for anyone looking to indulge in authentic Italian cuisine. With a focus on quality ingredients and expert preparation, every dish is crafted with excellence.
Congratulations to Tim Bellon for your successful closing.
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Thinking of selling your business or looking for an established
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Purchase Price Clauses in Share Purchase Agreements: Concepts and Trends in a Downturn Market
by Steven De Schrijver, Partner and head of International M&A at Belgium Law Firm, and Associate of CBA Cross Border Associates
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Purchase price clauses are amongst the most important clauses in a share purchase agreement. Without purchase price there is no transaction. The target's purchase price in a share deal is usually determined based on closing accounts or a locked-box price mechanism.
In many transactions part of the purchase price is deferred, e.g., escrow amount, deferred payment, vendor loans or earnout mechanisms.
In a downturn market deferred pricing and earnout mechanisms are on the rise. Sometimes buyers will acquire only the majority shares instead of conducting a full buy-out. In this short contribution we will set out the most important concepts and examine the current trends in a downturn market.
Constitutive Element
From a contract law perspective, the transfer of shares is nothing more than a special application of a common law buy-sell agreement. The sale-purchase of shares is therefore consummated as soon as the buyer and the seller reach an agreement of will on the price and the object (i.e., the shares). Therefore, parties need to make sure that in the letter of intent they indicate clearly which clauses are binding and which are not binding (e.g., the price clause).
The price is thus a constitutive element of the buy-sell agreement, where it can be fixed or variable. Without price, the buy-sell is without cause and accordingly there is no transfer.
Fixed or Determinable Price
Parties are fundamentally free to determine the amount, structure, and modalities of the price. The only restriction is the fact that the acquisition price must be determined or determinable. The price is determined when the parties have explicitly set it, for example by stipulating that "the consideration to be paid by the buyer for the acquisition of the shares will be € X". All components of the purchase price should be clearly defined in the agreement. Similarly, payment conditions (including the terms, conditions, amount, bank account receiving the payment, payer, and beneficiary) should be clearly stated.
However, it is not necessary for the price to be determined; it is sufficient if the price is determinable. This is the case if the price can be determined on the basis of objective criteria abstracted from the will of the parties. The price is determinable if the acquisition agreement includes a valuation method that will determine the price based on normalized EBITDA (e.g., calculated over three previous financial years) multiplied by a multiple. Once the parties have reached a consensus on the price, the mere consensus is sufficient to produce the intended legal effects between the parties.
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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