News & Events
Relevant Questions When Selling A Business
ENLIGN DEAL TEAM | 12/14/2022
Choosing to sell your company is a big decision! You have invested a lot of time, money, and effort into starting, maintaining, and growing your company. It might define your entire life's effort. You've determined that this is the correct moment to sell, and you want the best possible professional advice. At this point, dealing with a qualified business broker might mean the difference between closing the doors and selling it for the highest price with favorable conditions. Some of the most typical queries posed by sellers are listed below. The comments are based on knowledge and experience. Ask your business broker expert any additional questions you may have.
What are the limits of what business brokers can and cannot do? The experts that can help you sell your business successfully are business brokers. It's critical that you comprehend both the capabilities and limitations of a professional business broker. Business brokers can assist sellers in determining how to value their company and how to structure the sale so that it meets the expectations of both the seller and the buyer. They can locate the ideal buyer for your company, assist you and the buyer in the negotiation process, and be there for you at every turn until the deal is finally completed. A broker also manages the process and allows you to focus on continuing to operate the company which is critical when selling the business.
Additionally, they can help the buyer with some aspects of the business purchase process and refer them qualified professionals for legal, accounting and lending needs.
However, a skilled business broker is not a magician with the ability to sell an overpriced company. Most companies can be sold if they are priced and marketed correctly. Sellers need to be aware that the market alone determines the price at which a firm will sell. What a seller "wants" or what a seller "needs" has zero relevance and the best brokers will decline engagements with sellers with unrealistic expectations.
The amount of the down payment a seller is prepared to accept and the conditions of the seller financing can have a significant impact on both the final selling price and the success of the transaction.
What is the time frame for selling my business? The majority typically take between six and nine months to sell. Larger businesses generally sell faster than smaller businesses. Independent businesses generally sell faster than franchises. Properly priced business generally sell faster than over priced businesses.
Remember that an average is just that: an average. While some firms take longer to sell than others, an overpriced, poorly packaged, or businesses with regulatory issues, toxic assets, customer concentration, key man concentration, non-transferable agreements or tax liabilities may never sell.
It's crucial that the company is properly priced from the beginning. When a seller demands an above market asking price and says "let's see what happens" there is no need to wait. What is going to happen is qualified buyers will never bother to inquire because they know it's priced incorrectly and only those who don't understand will inquire and waste your time because no lender is going to approve the borrowers loan for an overpriced acquisition.
If the buyers commercial lender is requiring an SBA loan guarantee (which is virtually universal in main street transactions) the down payment is almost always 10%.
If there is no lender or SBA guarantee generally the higher buyer down payment the more flexible the seller can be on other terms and conditions. Buyers who can't qualify for an SBA guaranteed commercial loan should not expect sellers to be their banker. This is the definition of an unqualified buyer and they should be excluded from consideration. Remember that sellers of quality businesses don't need to concede non-standard terms and conditions as there are plenty of buyers in the market. He with the gold makes the rules does not apply in business transactions. Conversely, if you are a buyer and the seller is offering a high percentage of seller financing that likely indicates a business or industry in trouble and they are dumping it.
Why is seller finance so crucial in business sales? Answer: It's not. The SBA removed the guideline requirement for seller financing in December of 2018. After running default statistics on loans with varying down payment percentages they found that there was not a correlation between down payment percentage and default rate and therefore eliminated the absolute requirement for qualified buyers and sellers.
Seller financing is simply a transaction structuring tool that can be used to assist a buyer in being able to financially complete the transaction.
What happens when an offer is received? The business broker should refer a qualified transaction attorney who can draft an offer (letter of Intent [LOI] or Indication of Interest [IOI]). A business broker should never draft legal documents as that would be practicing law without a license which is a misdemeanor offense in many states as is North Carolina.
The offer should include at minimum, total transaction value, payment terms and conditions, transition assistance, non-compete details and anticipated closing date. After execution of an LOI or IOI and a non-disclosure agreement (NDA) due diligence commences which involves a thorough examination of your financial records, physical inspection of furniture, fixtures & equipment, inventory as well as other relevant documents such as lease agreements, employee contracts, customer contracts and tax returns.
Proposals will be presented to you by your broker for evaluation. You might not be happy with a particular offer upon first review, but it is crucial to carefully consider all offers. Expect each offer to have some pro's and con's. In most cases only one offer is presented and you will have to make a 'go' or 'no go' decision. One of my early seller clients told me "Your first offer is your best offer" and that's because it IS an offer. A pessimistic seller might say "one buyer is no buyer" but I have sold hundreds of businesses that did not have competing offers.
The business broker will work with your attorneys to fulfill and remove the contingencies in the offer once you and the buyer are in agreement. You should participate actively in this process. Full transparency is important from all parties. At this point, the buyer may hire outside consultants to review the data with them. Often a definitive agreement is fully executed then once all of the contingencies are cleared a closing date is determined.
The closing attorney will release transaction proceeds per the bill of sale at which time the new owner will then gain ownership of the stock or assets of the company.
What will buyers expect from me as the seller? Potential buyers
current and accurate
financial data. If you employ accountants, you can collaborate with them.
Buyers will expect you continue operating the company in the "ordinary course" meaning that you will not make any business decisions you wouldn't otherwise just because it is being sold.
The buyer will expect a no-shop or exclusive period where the seller can only negotiate with the buyer and the broker can only escrow additional inquiries.
The buyer will expect complete confidentiality which includes the very fact that the business is being offered for sale.
Conclusion As you can see the process of selling a business is complex and each transaction is somewhat unique. It is important to have a team of transaction professionals at your side throughout the process.
Copyright: ENLIGN Business Brokers, Inc.