5 Tips When Selling A Business

A business that is available for sale is often handled like selling a residential property or house – except they are totally different. In some states in the United States, for a professional third party or a broker to represent the seller of the house they are required to have a real estate license. That real estate license allows that person to sell a house, a commercial property, and in some cases, provide mortgage loans and assist in the transaction of selling a business.

As I mentioned above, however, all have similarities but there are major differences. When selling a house both seller and their broker want everyone to know the house is for sale whereas with a business, the sale is kept confidential to protect the business, the employees and other parties.

Here are 5 tips to help an owner thinking of selling their business.

First, most businesses rent their facility. However, if the business includes commercial real estate it should have a separate value and not be included in the purchase price of the business. It doesn’t mean the same buyer cannot buy both, it means that a separate value should be struck for the real estate in its own right and a separate value done for the business taking into account the fair market value of renting or leasing the real estate. It is wrong logic to value the real estate, value the business and not allow for fair market rent and then add both together to arrive at one listing price for everything.

Second, bring together a team of advisors or at least have them identified in case they are needed. The team should include an accountant and attorney while there is room for a personal financial planner.

Third, the most important components to a buyer are cash flow and potential. If the business doesn’t have a cash flow, the buyer may as well start the business from scratch and do things their way. The exception would be where the assets of the business are already in place such as for a restaurant, manufacturing site or other asset dependent business.

Fourth, an extension of the above point is to make sure that whatever price is asked, it has been properly valued. Most businesses being sold by the business owner are overpriced. A business owner becomes attached to the business and what it took to get it where it is. They therefore think it’s worth more than it is. The best approach is to have the business or its assets valued by a professional independent third party. There are different professional appraisers for different types of valuation. For example, there are different appraisers that specialize in valuing a business as opposed to valuing hard assets such as machinery and equipment versus someone who appraises intellectual property or commercial real estate.

Fifth and finally, make sure it’s clear who the buyer is and any down payment they are bringing. If the buyer says they are buying the business and have an investor, the first thing to do is ask to meet the investor. As a matter of course, it should be the investor making the inquiry as they have the money and will therefore make any final decision. Be careful how much you share until its clear the buyer has the potential to buy the business; not just dream about it.

Selling a business comes with complications. It is rarely a simple and straight forward process. One of the most important things to do is for the seller to put themselves in the shoes of the buyer. Being able to do this will greatly improve the chances of success in selling the business.

Importance of Terms When Buying or Selling A Business

In the initial stages of listing a business for sale, all the attention is placed on getting the business in shape so it presents as strongly as possible, sometimes doing a business valuation to arrive at the most appropriate listing price for the business and discussing the tax implications to the seller of the business. Tom West is the owner of Business Brokerage Press and he has a great saying that most sellers and buyers don’t understand until they get into the negotiations of the transaction and it is – You name the price and I’ll name the terms.

In other words, price is important but the terms of the deal are much more important. And here are some thoughts why.

If a buyer made an offer for all cash and to close the sale in 30 days and another buyer made the offer subject to getting a loan and to close the sale in 60 to 75 days and you are the seller of the business, which offer would you want to accept? If they are both offering the same price for the business it would be a no-brainer to accept the cash offer.

Using the same scenario as above, but the cash offer was 5% less than the offer from the second buyer and you are the seller, which offer would you accept? Your answer would probably be – it depends. Some sellers may be willing to accept the cash offer and close the sale. Some sellers may be willing to accept the higher offer as the price difference of 5% could be more than enough to offset waiting 60 to 75 days to close the sale. Most sellers, I would think though, would include other factors into their decision. Which buyer do they think is more qualified to buy and operate the business? Which buyer would be able to get approval from the landlord to take over the lease? Probably the most important question the seller would want to know, however, if they accepted the offer from the second buyer, is what are the chances the buyer will get their loan application approved? If the seller is not sure the buyer would be qualified, taking the cash offer at a 5% discount may be much more attractive.

In the current economy, the seller must be willing to carry a note for part of the purchase price. Very few buyers have the capacity to pay cash for a business. Also, in simple terms, it’s ‘good business’ for the buyer to use cash as a down payment on the business but then leverage the rest of the purchase price via loans as any interest paid is tax deductible. This also allows the buyer to buy ‘more business’ which means if the business is performing well and throwing off the right cash flow, the buyer can get more cash flow for each dollar of down payment. This is obviously attractive to the buyer.

The terms of a deal don’t just swing on the price and whether or not the seller will carry a note. These are both very critical questions but whether a deal works or doesn’t work can include many things. These include how much free training the seller is willing to provide, if the seller is needed to provide paid training after the free training, what costs are incurred for the business to change ownership and who pays them. For example, using a title company to handle the escrow will incur fees, the landlord may charge a fee to process an assignment of the lease, if the business involves a franchise there may be a franchise transfer fee, how long should the covenant not to compete be in terms of distance and time, and there are many other items.

Buying and selling a business involves many complexities. The longer both parties take to reach agreement on the complexities the greater the chance the negotiations will fail as one or both parties burn out from the inability to reach an agreement.

Is Your Home Business Properly Insured For Business Security?

Do You Run Your Business From A Home Office?

There is a growing trend with small enterprises today. Many small business owners choose to run their business out of their homes. There are a lot advantages to using a home office as a base. It can be a very convenient and affordable solution. All sort of business owners, from sales people to business consultants to lawyers, are deciding to skip the commute and extra office rent in favor of working from home.

For example, if you spend part of your year selling pottery at crafts fairs, it may make sense to actually set up your office and studio in your garage. If you do book keeping at client offices a few days a week, it makes sense for you to have a home office for offsite work. If you spend a lot of time on airplanes hopping from city to city as a business consultant or sales person, why not spend your other time in the comfort of your own house?

Home Business Risks

The practice of working from home has become acceptable for all sorts of different types of businesses. In my opinion, the biggest risk is that business owners may skip some of the important details they would not skip if they worked in an outside office building. This may not seem like a big deal, but it can be very risky.

Business Property Insurance

Do you rely on your old home owners insurance policy to also cover your business property. A typical home insurance policy does have some home contents protection. However, if you need a lot of equipment or supplies, it may not be enough protection.

If your supplies computers, records, or equipment were damaged or stolen, how hard would it be for you to recover? If you think it would put you in a tough situation, you had better make sure you have proper coverage!

Business Liability Insurance

As with your property, you may figure that your home liability coverage will also cover you for your business. A home policy is meant to protect you in case a visitor to your house claims that they were injured or had a property loss in your home. But that was not meant to cover business liability. By ignoring this risk, you may put your business at a huge risk.

Commercial Vehicle Insurance

It is very common for home business owners to use their personal cars for work. This is sensible a lot of times. But it is not sensible to rely upon a personal car insurance policy to cover all business use. If you transport inventory, supplies, or equipment in your car or truck, you may be taking a big risk if you are counting upon your personal auto insurance policy to cover the risk of loss, theft or damage!

Home Business Insurance Solutions

You have some simple ways to explore business insurance. Sometimes you can add riders (options) to your personal policies in order to cover business use. This is probably the easiest solution if you can do this. One common small business solution is called a Business Owners Policy (BOP). It is a package of protection that covers many types of small businesses. Otherwise, you may want to find an experienced business insurance agent who can help you find affordable protection so you do not risk your business!