TEN questions you ask anyone who offers to sell your business for you.
1. How many businesses have you sold?
VR Business Brokers has sold over 80,000 businesses, what you want to find out is how active the office is in marketing and closing in the sale of businesses. It is less about the particular industry and more about the experience. Some transactions involve large dollar amounts and are very complicated; a good business intermediary team may only handle a few closings per year. On the other hand, if the team primarily represents small main-street companies that sell in the range of $150 - $250,000.00, you should expect that the team will handle at least fifteen closings annually. If you expect your business to sell for more than $500,000.00 then it's not likely that the brokerage team who has never closed a deal over a hundred fifty thousand would be right for you. Due to the complexity of most business sales, even the small ones, it is usually better that you retain a team of professionals who would be working synergistically and have closed deals in all ranges so that you benefit from their experience. The last thing you want is for a situation to come up that they have not dealt with before due to lack of experience. Some of these teams charge slightly higher fees and their level of sophistication, experience and services easily make up for it by getting the deal done at a higher selling price for your company.
2.How would you go about valuing my business and determining the selling price?
Now that you are going to rely on the professional business broker team to assist you in establishing the value of your business, you will want to find out want business valuation method they intend to use. Be AWARE, if someone offers you an 'business appraisal', that they are qualified to provide that service with the 5 year certification process after a MBA degree. Even an Opinion of Value Report should be no less than 60 to 100 pages in length and include the reverse math to justify the viability of the purchase price. Anything else carries little to no value with a potential buyer or their advisors. There are several legitimate and defendable ways to value a business. The simplest method is market-based valuation. In this method, your intermediary would recommend an asking price based on the sales price of similar businesses in your area and industry. This is not a comprehensive evaluation tool nor will it be adequate for a smart buyer. Because it is so easy, quick and cheap, it is common practice when listing with real estate agents, attorneys, or smaller 1 to 3 man business brokers. Their tendency is to look at comparable business sales and adjust to reflect your annual revenues but they seldom figure in other things that make the deal much more attractive. There is seller financing, a long-term lease at extremely reasonable rates, intellectual property, and other potential growth drivers that have yet to be exploited. All of these when presented properly by an experienced team, lead to secure a higher selling price and more $$ in your pocket. Asset based valuations take into account figures such as the book value the liquidated value of the business. These are considered bare minimums in business appraisals and are not generally used as a sole path to an asking price. Earning based valuations take into account historical financial figures including debt payments, cash flows, past, present and projected and revenues. The only true way to value your business and have that paper mean something to your buyer is to have a comprehensive 3rd party valuation completed. The appraiser has no vested interest in skewing the numbers therefore adds credibility & a greater level of security in the mind of the buyer. In this way, your experienced team of consultants will make your business very attractive to more buyers and secure a faster closing. You should expect this report to be 60 - 100 pages in length and a valuable asset for Banker pre-approval & price negotiations. Bottom line, although many realtors and small business brokers have developed 'rules of thumb' or 'shots in the dark' for arriving at a ballpark estimation for the value of a business. A business value and therefore its asking price should never be based on such a crude estimate.
3. How will you protect my confidentiality in this whole process?
As they should be, many business owners are very nervous about letting it be known to anyone that their business is for sale. There are many good reasons for this, and the ability to maintain confidentiality of the planned sale is an important capability of your team of professional intermediaries. And maintaining the confidentiality of the sale is one of the hardest things to do when selling an operating business. Although no reputable intermediary can ever guarantee complete confidentiality there are many things they can do to maximize the chances that your business will remain discreet. The most important thing is touring and showing the business to buyers. Your team of professional intermediaries MUST BE willing to personally escort buyers and show the premises after normal business hours or will be willing to pose as a banker or some other professional having legitimate interest in touring the business during normal hours. Employees, clients, customers and competition can easily destroy a transaction by finding out your company is for sale. Two other most important things are using discretion in the details that are included in any advertising of your business and using confidentiality agreements prior to releasing any detail about the sale. Requiring legally binding documentation signed by potential buyers which requires them not to disclose any of the details they may learn about your business or even that it is for sale. Your professional team of business intermediaries uses a specifically designed confidentiality agreement with potential buyers. This form should have a PROVEN track record as an off-the-shelf version will not offer you adequate protection should it need to be enforced.
4.What marketing methods do you use to target potential buyers for my business?
Marketing methods are extremely important to the successful sale of the business. If the intermediary simply replies with a list of places they will advertise, they are not likely to serve you very well. Your team of skillful and experienced intermediaries will instead talk about targeted marketing for your business, beginning with the packaging of your company information, into a form of a well-developed offering statement or package. The most experienced intermediaries often have a substantial backlog of potential buyers that we can present your business to without ever having to expose your business to the general marketplace. Being the most established intermediaries, we have a extensive business community contacts we use to discreetly seek a potential buyer without having to advertise. We also use sophisticated advertising in local periodicals, broker newsletters, and the internet when those approaches are appropriate for your company. When you have employees, confidentiality is vital. In this case, you certainly don't want to be represented by someone whose primary method of marketing is advertising without serious safeguards to maintain your privacy. Often the biggest challenge for buyers, sellers, and brokers of small businesses is to efficiently find each other and close the deal. Many would be business buyers are willing to relocate to anywhere in the country for the right business. Many business themselves are not geographic specific and can be relocated to the buyers area. Small local or out of state brokers will not have the resources to easily connect with the wealth of potential buyers outside of the region. Often their only tool consists of internet listings which often sacrifice some level of confidentiality. Having over 100 offices in USA and 6 other countries, your VR team offers the best and most confidential solution & is able to take advantage of inter-network advertising and securely attracting your buyer from any state and many countries.
5. How do you keep from wasting my time with unqualified buyers?
A qualified prospective buyer is someone who is ready, willing and able to buy a business such as the one being offered for sale. A ready and able or qualified buyer is someone who is honestly looking for a business to purchase, has the motivation and personal commitment to purchase a business and has the financial resources or access to them to consummate the purchase. Out team of professional business intermediaries know how to use a series of questionnaires such a buyers financial qualification statement to qualify the buyer & sort through the many non-qualified buyers to get to the few who actually do have the means and motivation to buy your business. We know the current financing qualifications that the buyer must be able to meet. Once the un-qualified buyers have been culled out, a very high percentage of the qualified buyers do buy a business. We have a training class to educate the buyers on how to buy your business and what to expect along the way. This often thwarts last minute misunderstandings that can kill the deal, wasting everyone's time and resources.
6. Do you have an office?
Hard to believe that you would need to ask this question isn't it? But you'll find that most business brokers do NOT have their own office. They work from an executive suite or worse - their home or a coffee shop and a laptop!!! Do you want to turn over your future and the sale of your business to someone who can't even afford a full-time office and staff? What kind of impression does this leave on a prospective buyer? What kind of offer will they make for your business? Think about it this way, if a business broker is working from home, how the broker presents your tax returns and other confidential information is critical to YOUR success. It's sad to say but many brokers think nothing of faxing or emailing your financial information to prospective purchasers without protecting your confidentiality. Do you want your most confidential documents faxed or emailed across the country to buyers or worse yet your competitors? At VR in Lynwood, Washington we have office space designed and used exclusively as a Due Diligence conference room AND we don't send out confidential information until after we have a firm agreement in place with earnest money.
7. Do you have multiple brokers and agents in your office?
Why settle for just one business broker? An office with multiple agents allows your broker to take advantage of the knowledge and expertise of his fellow brokers in order to deliver the best possible deal for your business. The synergy of our multiple associate office is a powerful combination that benefits you buying pocketing more money faster than any one, especially the 1 or 2 man laptop and a coffee shop.
8. Will I need to finance any portion of the sale? Whether or not you like the idea, in this current economy, it is most common that a seller will have to finance a part of the transaction to complete the sale of the business. I know most sellers just want to sell their business and be done with it. It often doesn't work like that. Unless your business is extremely profitable, very well established, has a strong consistent and loyal customer base in a growing market, most banks and other lending institutions will only lend a portion of the business value. This is especially true if a significant portion of the business value is in good will. In fact, as of late, some leading institutions won't lend more than seventy percent of the fair market value of the tangible assets, and won't loan any portion of the good will at all. So, unless the buyer has the entire amount of the purchase price in cash, you might want to think about how much and under what conditions you will take back a promissory note against the sale of your business. Here are some other thoughts you should consider on the topic of seller financing. Historically, most sales of closely held businesses have been primarily financed by the seller. Unless you are selling to another company that has ample credit facilities, most business buyers don't have the entire amount of the business selling price in cash. There are also many other demands for the buyers money and at the time of transfer of ownership such as professional advisor fees, transfer taxes and related expenses and operating cash requirements to name a few. The buyer will also want to hold a certain amount of ready cash in reserve to cover any surprises expenditures and contingencies. Even if the buyer has the available cash at their disposal or is able to obtain outside financing, they will usually want to see a continued financial involvement on the part of the seller. This serves to establish some confidence on the part of the buyer that the sales and profitability claims made by the seller are all true. It can be very difficult to obtain third party financing for the sale of an operating business. Commercial banks venture capitalists and other sources of funds are very wary of financing a transaction of this nature because of the many things that can go wrong under a new owner. Most of the potential problems are extremely difficult to evaluate before the sale of the business. Accordingly, any outside financing might carry such high interest rate to cover the risks involved that the debt load may make the purchase impossible. A seller will usually receive the highest price for the business if they provide the financing for the buyer because they can provide the best terms. The seller has a great deal more latitude in selecting the interest rate and a payoff period than a conventional lender. Consequently, the seller will be better able to ensure that a successful sale of a business takes place at the highest reasonable price. Bank financing only became common in the early 90's, so if your broker has only been in business for less than 20 years, their experience with structuring the transaction in this new seller financed economy will be minimal. The only one who will pay for their inexperience is you. Because our firm and the people in it have been working this industry since 1982, we are the most experienced and have closed hundreds of seller financed transactions. We have alternate sources of financing that can be made available to qualified buyers as well as good contacts for sources of capital from SBA participating banks or venture capital funds.
9. What are your fees? Many business intermediaries have a standard fee they charge which is usually a set percentage of the total value of a business sale up to a set value after which percentage declines on a scale known as the Leymans Scale. Often the total value includes tangible and intangible assets including the accounts receivable and inventory are part of the transaction. A typical business arrangement for a business intermediary may have a set percentage for all business valued up to two million dollars followed by a lower percentage for the next million. Then continuing on with a lower percentage for each million dollars of value up to the lowest percentage for anything over ten million dollars in value. In many cases, the professional intermediary will require an up front fee to be paid to represent a business for sale. The amount paid will most often be deducted from the sales commission at the time of the sale. However, if no closing takes place the fee is not refundable. Many of the more successful and highly qualified intermediaries are requiring this arrangement, and it can easily be argued that you will receive more competent professional representation with this fee arrangement. The most important thing to remember when valuating your chosen professional's fee structure is that the lower percentages don't always equate to a lower cost of the sale. For instance, when a professional intermediary who knows how to properly package and market your business to a qualified audience can secure a higher selling price, this more than makes up the for the few percentage points difference.
10. How long will it take to sell my business? What are the terms of the listing agreement? Basically, there are three types of listing agreements or authorizations to sell that you can enter into. The open agency listing gives the broker the right to sell the business but without any specified performance requirements for either the seller or the broker. The sellers still have the right to sell the business themselves and also the right to enter into other open listing agreements with other brokers. The broker in turn does not have any obligation to use any effort in marketing that business. In general, open listings are the least desirable to the broker and they will avoid them if possible because they are competing against too many others including the seller. The broker could do a fine job with marketing a business and then lose out on a commission because some other broker or the seller themselves sells the situation first. Without an exclusive right to sell, the seller has a strong competitive advantage over the broker, which is price. The owner can sell the business for less if there does not have to be a broker's commission paid. Brokers may decide to accept an open listing on a business if they feel the price terms and some other conditions will make the business very hard to sell and they do not want to spend much time or money marketing it. A typical seller problem with an open listing scenario is that it is virtually impossible to keep matters confidential. If there is any concern along the lines of confidentiality, this is not the way to go. Additionally, no serious intermediary who is planning to aggressively market your company would agree to an open listing. The only reason they might entertain it is to have the business as part of their on-the-shelf inventory in case they run across a buyer who would be interested in it. The exclusive agency listing gives the broker the exclusive right to sell the business as an agency brokerage firm. The seller retains the right to sell the business but cannot give a listing to any other agency during the term of the agreement. The broker is required to exert their full and best efforts to market that business. Although, this is not the most desirable listing for all concerned, it is many times an acceptable compromise over the open listing. In general, the seller won't be able to sell the business without the broker and in most cases won't even make the attempt if there is an aggressive approach taken by the broker. However, the broker may be competing with the seller if the seller decides to actively pursue selling the business. Again the seller will have an advantage over the broker in that the business can be sold for less than the broker can sell it for. With both these prior two listing types the reason why a seller would desire them is a lack of trust that the broker will do what they can and said they would do. So they are tempting to test the waters while keeping their options open. I would advise that this is the attitude you have about the person you are trusting in the sale of your business that you need to keep looking further. It is much more advantageous for the seller and the broker to work together to accomplish a sale and any competition between them can actually be counterproductive.
Finally, there is the exclusive right to sell listing, which is the best arrangement for the business seller and the business intermediary. Most businesses that are sold are done so under the exclusive right to sell agreements. This listing gives the intermediary the sole and exclusive right to sell the business. Even if the present owner sells the business the agreed upon commission must be paid to the intermediary but this rarely happens. Marketing requirements for the intermediary are the same as for an exclusive agency and they must use their best efforts to sell that business. The advantage to the intermediary with this listing is they can feel much more secure in investing their time effort, and advertising money in promoting the sale of the business without fear that the owner or anyone else will cut them out by finding another buyer. The advantage to the seller is that the best service is received from the protected and thereby highly motivated business intermediary. The only potential disadvantage from this type of listing is the risk the business owner takes relative to whether an agent or broker will provide their best efforts. The seller will be unable to sell the business themselves without owing the broker commission, or to give the listing to a more qualified intermediary until the term of the listing agreement has expired. The best solution to this disadvantage is to make sure at the start that you are using a professional reputable business intermediary to represent you and your business. Another point to consider on the subject of listing agreements is the length of time. It is unreasonable to expect to sell a business in less than six months with twelve months being a better estimate given the complicated nature of the transaction. Therefore, the most qualified intermediary is being reasonable when they expect a one year term for both parties.
I have presented you with our view of the TEN most important questions a business seller should ask an intermediary before they consider trusting them with the sale of their business. These questions should have given you a solid track to run on for interviewing a potential representative or advisor to help you sell your business. These questions and related answers and discussion are no substitute for more extensive information and professional advice on the complicated topic. I encourage anyone considering the sale of their business to seek competent legal and accounting advice during all phases of the business sales process. It is a good idea to read and listen to as much as you can on the process and learn how you can effectively help your professional team of business intermediaries represent sell your business for top dollar.
Specializing in privately owned and closely held mid market companies, our experienced team of highly trained intermediaries powerfully represent you throughout a merger, acquisition or divestiture process. As your advocate we provide a discreet consultative approach to each and every business transaction that is unrivaled in the industry. Because our team is built of the most seasoned and experienced professionals and we continue our ongoing training, you can rely on every one of our intermediaries to bring to you exactly the same level of service and professional resources that a much larger company would receive from the finest top tier investment bank. We invite you to call this number 1-888-400-8722, and find out why VR has sold more businesses in the world than anyone and more importantly how we can help you.
The professionals of VR Business Brokers' Seattle office are ambitious and have dedicated themselves to the continuation of excellence and readily embrace the expansion of its new services. The clients of this firm will receive the best advice and service available in assisting them in exiting either business ownership.