Frequently asked Questions about
Selling Your Business

What’s my business worth?

Depends on the buyer. Some buyers bring synergy to the table (strategic buyers). Usually such buyers can afford to pay more than a non-strategic (financial) buyer.

Consider getting an appraisal. An appraisal gives indication of the range of value you could expect to receive. Except for those companies that have the story or numbers to go public, most middle market companies appraised value falls into the range of three to six times the annual cash flow (after adjustments to view the company as a professionally managed company).

Of the twenty-odd textbook ways to value a business, a buyer is looking at only one: return on investment (ROI). How much cash down, versus the expected cash return. The buyer’s target ROI depends on the perceived risk of that future return. (top)
I’ve had an appraisal done and the value doesn’t meet my needs. What do I do now?

You have three choices:

a. You can make the decision to go to market with the commitment to accept the appraised value as your target price. (Your intermediary will try to get more, but you should only make your decision to go ahead with the process if you are willing to accept the appraised value.)

b. You can do nothing and realize that the longer you keep the business, the less money you will need for the rest of your life, so just keep the business until your needs catch up with its value.

You can make it worth what your needs are. This means you will have to do something different than what you are doing now. I recommend you put together and execute a strategic plan.
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Buyer Questions

1. Who would buy my company?

There are a myriad of categories of buyers out there: strategic, financial, private equity groups, individuals, small corporations, employees, customers, suppliers, family members, bottom fishers, and friends. Selling your stock in an IPO is selling to public buyers. Even liquidation or bankruptcy is a sale with buyers.

So who would buy your specific company can only be answered by looking at the specifics of your company.

Since every privately held company will be sold or transferred at some time, it behooves every owner to have an exit plan. See our newsletter on the subject . (top)

2. Should I sell to a competitor?

Selling to a competitor is fraught with potholes. How do you know the competitor isn’t feigning interest to learn what you are doing and who your key customers are? Even if the competitor suitor is legit, what happens when the deal falls apart? Now your competitor knows you are for sale and may use that against you competitively.

Typically a competitor has little incentive to pay you for your goodwill. They always have the option to spend money to enhance their own sales and marketing rather than paying it to you.

Selling to a company in a business similar to yours that competes in a different geographic area makes sense and has limited risk. However, you must be aware that the reason they are talking with you is that they are interested in your market area. They could use the information you share with them to open up in your area.

Competitors are probably not your best buyer candidates. (top)

3. Should I sell to an employee?

Employees seldom have the money to buy your business. This means you will be the chief financing source—and you may be OK with that. Just remember while you are the financing source, you still are responsible for the business, since if you don’t get paid, you have to take it back.

ESOPs (Employee Stock Ownership Plans) can be used in certain circumstances to buy a business. There are tax deferral advantages to a seller, and the company can be sold over a period of time. The key to a successful ESOP is have strong successor management in place (and the numbers have to work according to the ESOP rules). (top)

4. Should I sell to a customer or supplier?

Customers or suppliers are unlikely candidates unless the individual customer or supplier represents a large portion of your business.

Your customers and suppliers other than the buyer candidate are competitors to the buyer candidate. Chances are that competitors will not deal with such a buyer after the sale. This reduces the value of your company to this buyer candidate.

If you are in the position of having a large share of your business related to one customer or supplier, that customer or supplier is in the driver’s seat when negotiating with you for the sale of your business. Your business could be worth very little if they go away—they are in control.

Most buyers will shy away from a seller candidate that has a large share of business with one customer. If you are dependent on one customer for 10% or more of your business, you need to put a plan in place to get the number below 10%. (top)

5. Should I do an IPO (Initial Public Offering)?

Public companies have significant higher valuations than private companies. This is because of the liquidity the public market gives to publicly traded stock.

To be successful in the public market, a company has to have a story that captures the public investor’s eye.

Some mundane companies have successful IPOs without the story, but they have the financial performance (numbers) to support the valuations.

The threshold for a successful IPO is a market capitalization (stock price times shares outstanding) of at least $250,000,000. Below that capitalization, the mutual funds and market analysts are not interested, and thus the stock doesn’t get support in the marketplace.

The up front costs to go public are significant—in the $400,000 to $700,000 range. And it takes significant management time for a significant period.

There are cheaper ways to go public, such as, merging with a shell public company or using one of the short cut methods allowed by the Security and Exchange Commission. Using one of these methods for a small company lets you enjoy all of the negatives of being public without the benefits. And you don’t get the support of the mutual funds and the analysts in the marketplace.

I am personally familiar with several companies that took a shortcut methods to go public. One went out at $5.00 ($18,000,000 capitalization) three years ago and is now trading at $0.15, and the business is essentially the same from a profitability standpoint that it was three years ago. Big mistake—too low capitalization and no mutual fund and no analysts’ support.

Don’t go public unless you have the story to support a $250,000,000 capitalization. (top)

Motivation Questions

1. When should I sell?

The short answer is, “When you have some reason other than money to sell.” Unless your business is an IPO candidate, you will always make more money by keeping the business rather than selling it.

Some of the reasons that owners give me are: burnout, retirement, health failing, family considerations, investment and estate planning, and I have enough money so why am I still running it. (top)

2. What should I say when the buyer asks, “Why are you selling?”

A buyer always asks this! You need a sincere, convincing reason to entice the potential buyer to move forward with you to the closing.

If you say, “Anything is for sale at a price,” the buyer will not be convinced. The buyer knows you will always make more money by keeping the business rather than selling it.

The potential buyer’s greatest fear is that he/she will go through the expensive due diligence process and you refuse to sign at the closing.
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Intermediary Questions

1. Should I get an intermediary to help me?

Selling your business is probably the most important transaction of your lifetime. An intermediary will add much more value than the fees charged. Surgeons don’t operate on themselves, dentists don’t drill their own teeth, lawyers don’t try their own cases and you shouldn’t try to sell your business yourself.

In addition, selling a business is a time consuming process. Even with an intermediary, the preparation, showing and document review will take a portion of your time. You can off-load all of the marketing, buyer qualifying and yeoman work to your intermediary.

During the time of all times while offering your business for sale, you should be concentrating on producing peak results. (top)

2.      What should I expect the intermediary to do?

The intermediary should do what is necessary to get you the optimum buyer and value. You should expect your intermediary to:

a.      Prepare a valuation report.
b.      Give recommendations on enhancement of value.
c.      Review business plan.
d.      Prepare marketing plan.
e.      Perform buyer search.
f.      Qualify buyers.
g.      Conduct auction to get best value.
h.   Act as chief negotiator for you (power of limited authority).
i.    Act as yeoman in managing documentation and in expediting the process.
j.      Aggressively manage the due diligence process.
k.   Act as confidant and advisor.
l.      Lead the participants through the process.
m. Act as buffer when emotions run high.
n.      Bring experience to table to head off deal breaking conditions.
o.      Offset knowledge deficit when dealing with sophisticated buyers.
p.      Regularly report progress against plan.
q.      Design and recommend deal structure.
r.      Review and comment on all transaction documents.
s.      Maintain confidentiality.
t.    Get the transaction closed.
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3. How do I find a good intermediary?

It is difficult to select any professional. It is hard to get quantifiable, objective evaluations of past activities and project those to future performance on your project. This is true whether it is a dentist, accountant, lawyer or merger and acquisition intermediary.

Items to consider are experience, references, chemistry between you and the candidate, intermediary’s office location (local is better), control of confidentiality, intermediary’s current project load, conflicts of interest, business of the intermediary (do they concentrate on the intermediary business or are they also a CPA, financial planner, attorney, banker and/or consultant), fee arrangement and fee exclusivity.

This question is discussed thoroughly in our newsletter, selecting the intermediary newsletter. (top)

4. Should I sign an exclusive intermediary agreement?

You will not get a top-notch experienced intermediary without an exclusive fee arrangement.

The name of a potential buyer is a small part of the process. Each buyer has to be qualified, presented with profiles, descriptive reports, coerced to make the best bid and hand-held through the due diligence and closing process. Even though the buyer may come from a source other than your intermediary, your intermediary adds value because of the buyer competition that is inherent in the process. Your exclusive intermediary is dedicated to getting you the best price no matter where the names of the buyer prospect comes from.

Non-exclusive intermediaries only get paid if you sell to their buyer. This means these intermediaries have incentive to “sell” you their buyer to you, not find the best buyer for you. The result is you end up negotiating with the intermediary who, in effect, represents the buyer, not you, even though you will still pay this intermediary’s fee. (top)

5. How do I know the intermediary won’t just sit on the listing, waiting for a buyer to come over the transom?

As a part of your interview and qualification process, you should check references and ask the candidate this specific question.

More importantly, request a formal, written marketing plan including a schedule. Insist on periodic progress reports comparing actual activities performed vs. plan and schedule. Make the marketing plan a part of your intermediary contract and if the performance is unsatisfactory, have the right to cancel. (top)

Transaction Structure Questions

1. What is “transaction structure”?

It is the component parts of the deal and how they relate to each other with regards to price, payments and allocation. For example, an asset sale structure could include all of the items on the balance sheet (except the cash and receivables), no liabilities, a non-compete agreement, a consulting agreement, and goodwill. Each of the items could be allocated separate prices and payment terms. Proper structure is the key to minimizing taxes on the transaction. (top)

2. What is better for the seller, an asset sale or a stock sale?

Most sellers are better off tax wise with a stock sale. (I could conjure up an example that would favor an asset sale, but it happens infrequently.) Let me hasten to add that all sole proprietorships and partnerships are asset sales since such enterprises have no stock.

Most buyers want an asset sale. The main reason is because of the potential hidden or unknown corporate liabilities the buyer assumes in a stock sale.(top)

3. How do I minimize taxes?

You minimize taxes by having the proper structure. Recognize that many tax minimization techniques for you will add to the buyer’s taxes. That is why allocation is so important. Both the buyer and seller have to use the same allocation.

There other tax minimization and deferral techniques that you should have your advisors investigate. A couple the come to mind are Employee Stock Ownership Plans (ESOP) and Charitable Remainder Trusts (CRT). One financial planner I work with says that in evaluating the tax optimization plan for his business selling clients, he goes through a checklist of over 100 tax strategies. (top)

Financing Questions

1. Should I demand all cash?

For most sellers, the issue isn’t all cash, it’s getting paid. Don’t make any demands up front. See what the offer says. I’ve seen deals where all cash is not the best deal.

There are three financial categories to be handled in any transaction: price, terms and allocation. Price is the total consideration for the assets or stock being sold; terms is how you get paid and the security for any non-cash payments; and allocation is how the purchase price is distributed among the items and services transferred. Allocation is the key to minimizing taxes so it must be tied down up front. (top)

2. Will I have to finance part of the purchase price?

Depends on the offer. Many transactions are all cash to the seller. Sometimes this cash comes from the buyer and sometimes it comes from the combination of the buyer and a third party lender such as a bank. (top)

     3.    What kind of security can I expect to receive for the financing I         provide?

            It’s all negotiable. You want to get paid, but the buyer may feel that
            you should assume part of the risk. In general, the more the risk
            you assume, the higher the purchase price.

            Security devices range all over the map. I’ve seen every thing from
             the stock of the buying entity to stripped US Government Bonds.
             Again, it’s all negotiable. (top)

4. Will I need audited statements?

Some buyers will require audited statements, particularly public companies. In many cases, a satisfactory audit can be conducted during the due diligence period.

I had a buyer tell me once that audited statements were worth 5% added to the purchase price. That may not be true with other buyers, but if you think you will be selling in the next two or three years, paying the extra tab for the audit may be money well spent. In any event, you get a financial check-up from your auditor when you have an audit, and the auditor may give you ideas as to how to improve profits and thus the potential value of the business. (top)

Selling Process Questions

1. What is the process to sell my business?

On this web site, we describe the “Thirteen Critical Steps to the Successful Sale of Your Business.” You can review those here. In addition our free electronic newsletter series, Selling Your Business, treats each step in detail <subscribe here>.
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2. What is “due diligence”?

Due diligence describes the process where the buyer does a detailed evaluation of the target business, making sure everything buyer assumed to be true (based on the information the seller disclosed) is actually true. Sellers also perform their due diligence on the buyer to make sure the buying entity can perform as promised. (top)

3. How long does it typically take to sell a business?

Average is 11 months in our shop for middle market companies. The shortest ever was 38 days and the longest over 3 years. (top)

4. How can I keep the fact that I am selling confidential?

It is not easy. A major security measure is to have an experienced intermediary under an exclusive contract. Non-exclusive intermediaries have no incentive to keep the information confidential.

You can introduce the intermediary to your people as a consultant who is looking at financing alternatives for you (which is true).

It is a rare closing where the announcement is made to employees and other stakeholders as a fiat accompli at closing. At some point in the process you are probably going to disclose to your people what is going on, since you will probably need their cooperation in the due diligence process. Each situation is different and there is no general answer as to when you do this. Work out your strategy with the buyer and your team of advisors. (Confidentiality is as important to the buyer as to the seller and the buyer will enthusiastically cooperate in working out the strategy.)

There is always the chance someone will guess what is going on and may ask if you are selling. Your answer should be, “Of course, I’ve been for sale since I opened the doors. Anything is for sale at the right price. Do you want to make me an offer?” The inquirer will usually accept this approach and drop the matter. (top)

Frequently asked Questions about Selling Your Business