Sellers

1. Unrealistic Expectations. Why would you expect to sell your business for more than you would pay for it? We have often asked business owners, who have asked us to appraise their business, will they accept the same valuation methodology on the next business they buy? Universally the answer is a resounding NO! The cliché “A business is worth what a purchaser is willing to pay for it” may hold true in normal market conditions but this, I feel, has changed in our Bank-led recession to “A business is worth what a Bank is willing to finance.” So, if this is the case and a business owner wants more than he is willing to pay, how can any purchaser complete the purchase, because their friendly banker will have an even more conservative view?
2. Timing. Business owners hang on too long. The famous line from Kenny Rogers song The Gambler says it all. “You have to know when to fold them” If you have asked yourself whether it is time for you to get out, it probably is. Also selling when you have the choice to sell is always less stressful than having to sell for health, family or financial reasons later on. We dealt with a business owner a year or so ago who decided at the last minute of the transaction to hold on for 5 more years; a month later he died on his Exercycle! His wife was lucky we were able to resurrect the deal with the buyer and she was able to move on with her life. You only get one shot at life and there is no point being the richest guy in the graveyard.
3. Verifiable Records. To help achieve the best price for your business, all information provided must be able to be verified. The Due Diligence investigation a purchaser will complete on your business will only succeed if his/her accountant and financiers can verify financial performance. Also Customer Contracts, Agency Agreements, Leases, Employment contracts etc all have to be current. A handshake will not cut it. So anything that can’t be verified is discounted and the discount is applied to the sales price.
4. Preparation. The business needs to be prepared for sale but also the business owner has to prepare him/herself for the sale. Your accountant and your broker can help you get the business in prime condition for sale. Financials are in place, normalised from non business related costs, the records we noted in point 3 are together in a logical format, a team is in place (Accountant, Commercial Lawyer, Banker and an Experienced Broker), the site is clean & tidy, your team has agreed to a value, the process & sales documentation is in place then you are ready to go. The business owner then has to ready him/herself for the process, you can’t take anything personally, it may be your baby but it is time to let go.
5. Attitude. The possible sale of your business can be a stressful time for a business owner. In a lot of cases this has been your baby and as a baby boomer now, the proceeds from the sale will provide you with a comfortable retirement. Purchasers and their advisers are going to be looking for the cracks in your business and you can’t take this personally. They are going to be looking at the business’ past performance, management, IT, systems, staffing, customer relations, supplier relations, stock levels, site lease and more, looking to see what you did well and what could have been improved so they can avoid making the same mistakes and build on what you did well when building the business. None of this is personal, one of the reasons they are looking to purchase your company is the fact that your business has more in the “pro” than the “con” side of the ledger.

Buyers

1. Preparation. Put together a team that will be able to guide you through the transaction. You will need a good accountant, a commercial lawyer and a banker that has pre-approved your ability to complete a transaction. Talk to your bank manager and accountant about what size business you can afford – the days of 100% finance are long gone. You need to have the buy-in of your spouse/family before you start the process and hopefully some guidance on what you are looking for.
2. Screwing every cent out of the transaction. Most purchasers focus is rightly on the final price that they pay for their target business. But how much of the goodwill you as the new owner are able to transition to the new entity is often reflected in how well you treat the outgoing owner. We often have to council a purchaser who wants to feel like they have a bargain because the bargain comes at the owner’s expense and as such offers him/her little motivation to go the extra mile and help you achieve a successful transition. The numbers only tell part of the story, often a large part of the IP of a business sits between the owner’s ears and your ability to access it will be reflected in how well you treat the owner and whether the deal is fair to both parties.
3. “Buyers are liars”. A common saying in our industry, obviously an exaggeration, but the saying comes from owner’s frustrations with buyers exaggerating their ability to complete a transaction and the fact that the standard Sale & Purchase agreement is generally written in favour of the buyer. Other areas of concern are a buyer entering into a S&P agreement at full price, thereby taking it off the market for a period of due diligence, knowing that they are going to grind the owner on price in the last days of the DD period, when the owner is at his/her weakest. This can happen whether or not the purchaser finds any material issues with the business and often is because the purchaser either never intended or could never meet the list price.
4. Make your own decisions. As we note in point 3 a purchaser needs to have a team of professionals to guide them through the process. But, and it is a big but, they are paid to offer you advice, not to make the final decision. Your lawyer or accountant has your best interests at heart and will offer you advice so you can cover your a**e, and as important to them to cover their a**e, but the final decision has to be yours. Business is about mitigating risk, your advisers will offer advice to minimize your risk, you are able to negotiate terms to achieve the least risk, but there are no guarantees in business and unless you are comfortable making the final decision on whether you can live with the risk probably selects or deselects your suitably for Business ownership.
5. Looking for the perfect business. This coincides with Point 1 on the seller’s side of this blog, Unrealistic Expectations. A large portion of buyers that we deal with are looking for a business opportunity that doesn’t exist. There is no such thing as a perfect business, they all have challenges and expecting anything less is nonsensical. We are still hearing from purchasers who are still looking for businesses after 5 years and still haven’t found the right one. When you ask them if they regret not purchasing something that they have been offered that they were close too, they generally admit to a couple. So if all businesses have challenges then you have to look for a business that the challenges are such that you can add value too.

Broker

1. The Basics. The complaint we hear more than any about our industry is brokers not completing the basics required. Following up messages, forwarding information, following up on that information, giving owners regular feedback, organising meetings and being on-time for meetings all seem reasonable requirements for any business person, but on the whole are not well handled by business brokers. We all have occasions when we may fail in one of these areas but it is the way that you handle it with your client is the way you will be remembered. Some of the reasons for these can also be found in the way a brokerage is set up, and I will go into that in the next point.
2. Bulk listing methodology. Some brokerages follow the Real Estate methodology of listing any/all opportunities that they come across. Some of these companies can have 20-30 opportunities per broker, and if you follow the 80/20 rule and factor in that all brokers are on a success fee for remuneration, then a large number of these businesses opportunities will fall by the wayside, as brokers have to concentrate on what they believe will sell next. As we mention in point 1, this leads to an inability to offer the basic service expected.
3. Making a business fit your methodology. Most brokerages have a tried and true methodology for appraising businesses and this is fine in good market conditions. When we enter an economic downturn then a large number of businesses no longer fit in the accepted valuation models adopted by the majority of brokerages. When this happens inexperienced brokers have only the company’s “tried and true” to appraise businesses they see, and in a lot of cases they turn them away because they don’t meet the brokerage’s criteria. In a difficult market a broker or brokerage need to be nimble enough to look at other methods of appraising value than their standard.
4. Not asking the hard questions up front. A business sale is a very complex process involving 2 sets of Accountants, 2 sets of Lawyers, Financiers, Landlords and their lawyers, consultants and family on both sides. So any business that is going to be sold has to be presented in a way that gives the transaction a chance of success. Asking the hard questions of the owner to be able to find out all the good and the bad of his/her business ensures that the opportunity can be presented in a way that a purchaser and his/her advisers understands completely the opportunity they are being presented with. If you don’t ask the hard questions up front and a purchaser or his/her advisors find the owner has been hiding something, intentionally or not, then the transaction either fails or the owner is forced to greatly reduce the price.
5. Buying the listing. Point 1 in the seller’s above creates a dilemma for brokers and brokerages. Having good businesses to sell is always the challenge for any company, so if a broker meets a vendor and the vendor’s expectation on the value of the business exceeds what the market value would normally be for that business, the temptation is to take it on anyway. This also pops up its head when brokerages are competing to list a business, the temptation is to either tell the vendor what he/she wishes to hear or inflate the value of your appraisal so you can demonstrate to the owner that you are able to sell the business for a higher price than your competition. This is fraught with danger for any owner. An overpriced business is the same as any overpriced product on the market, it usually won’t sell.

Hopefully this is not too negative a piece, if you are a business owner thinking of selling, or a purchaser wishing to buy, this might help identify some of the traps and challenges in your process whichever side of the transaction you are involved in. Talk soon.