Only a small percentage of the population is able to go through life without using some form of financing at some point. Most people have little choice but to finance everything from their home and car purchases to their college education. Now, with that stated, most business owners would love to receive an all-cash offer for their business. But the reality of the situation is quite different. The facts are that owner financing is very common, and it is sometimes the only way to put a deal together.
Sellers have to be ready and willing to entertain the idea that they may, ultimately, be called upon to handle some aspect of financing if they want to sell their business. It surprises many to learn that if a seller is not willing to finance the sale, then buyers begin to worry and may even see this as something of a “red flag.” The reason for this is that many buyers feel that if a business is a solid investment, then the business will be profitable and repaying the seller should be no problem.
Buyers may worry that if a seller isn’t willing to help with financing there could be a “hidden” problem with the business. It might occur to them that sellers are “jumping from a sinking ship.” It is important that sellers keep this important aspect of buyer psychology in mind when addressing whether or not they are willing to finance.
Buyer psychology plays a major role in another aspect of seller financing and that comes in the form of collateral. Sellers may want to have some form of outside collateral to secure the loan on their business. While this may seem perfectly understandable to the seller, buyers can have something of a nervous response to this issue as well. As much as buyers worry that a seller’s refusal to provide financing is a red flag, the same holds true for sellers who seek collateral. Once again, the concern is that if the business was healthy and thriving there should be no need for collateral. The buyer is left wondering, “What is going on here? How worried should I be? Why do they need collateral if this business is so great?”
Typically, buyers are “maxed out” when buying a main street business. They are allocating most of their available funds to the down payment on the business. That means they will be unlikely to “push all their chips in” and gamble everything by also putting up the home, retirement funds or other collateral in the process. Sellers need to see the situation from the buyer’s perspective and remember that a collateral requirement could mean that if the business fails, the buyer could be left with nothing.
Navigating the complex interaction between buyers and sellers is no easy feat. It requires a careful balancing of several different skills, ranging from understanding finance to psychology. Working with an experienced business broker can help buyers and sellers connect and find workable agreements so deals can get made.
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Sellers are just like everyone else in that they can make mistakes. In this article, we’ll explore some of the most common mistakes that we see along with some of the repercussions.
1. Not Seeing the Buyer’s Point of View
The first major mistake that sellers make is that they simply fail to look at the situation from the buyer’s perspective. One of the smartest moves any seller can make is to step back and ask themselves two key questions.
“What information would I expect to see if I was thinking about buying this business?
“Would I trust the information being presented to me if I was the buyer?”
While there are many other questions sellers can ask to help reframe their thinking, these two simple questions can orient a seller’s thinking towards a buyer’s perspective. Additionally, investing the time to understand the buyer’s position can help avoid a range of problems and help smooth out the negotiation process.
2. Neglecting the Business During the Sales Process
Another seller mistake we see is that the seller neglects the business during the sales process. This can have significant negative long-term consequences. Sellers must understand that they must maintain the day-to-day operations as though the business is still theirs. The old saying, “Don’t count your chickens before they’ve hatched,” most definitely applies to selling any business. Business deals fall apart all the time. This is true from small deals to corporate acquisitions.
3. Overall Lack of Preparation
Any seller who is truly serious about selling his or her business will have all of their documentation available and well organized. This list would include financial records, environmental studies, business forecasts and more. It is important to make a good impression and convey to prospective buyers that a business is well organized and ready to be sold. Disorganization on any level could make prospective buyers worry that the business isn’t being operated in a professional manner.
4. Holding Misconceptions Around a Business’ Value
Finally, a real “deal killer” can be when sellers don’t understand (or have a mental block) concerning the real value of their business. This issue can lead many business owners to set a price that is simply too high or even completely unrealistic. Many sellers have put years of blood, sweat and tears into a business. Learning that their business isn’t as valuable as they had hoped can be an emotional, psychological and financial blow all in one. But sellers also have to adjust to the realities of what the market will bear.
Avoiding seller pitfalls is incredibly important. Working with a skilled and proven business broker or M&A advisor is a way for buyers and sellers alike to avoid an array of significant problems that could otherwise arise.
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Selling a business isn’t always 100% about the price. It is not like selling a house where typically the most important factor is who places the highest offer. In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered.
The idea of selling to a competitor is one that seems attractive to many business owners. After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider. But while this point is quite valid, selling to a competitor comes with its own problems. Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.
A second avenue that sellers will often explore is selling to a financial buyer. A financial buyer is likely not to be a competitor. But on the downside, a financial buyer may be unwilling to pay the seller’s price. It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.
The highest selling price may come from a strategic acquirer. But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller. A strategic acquirer may not have the best interests of the company at heart. When a strategic acquirer takes ownership, key employees and management may be replaced. The company may even be moved. Many owners are unprepared for the shock that may come along with a strategic acquisition.
There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business. It is possible that the best buyer for a company could be one of its employees. However, this option comes with risks as well. Key employees and management may leave if the deal falls through, as they now know that the company is for sale.
Finding overlooked buyers is what business brokers do best. Matching the right buyer with the right business is both a science and an art. Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.
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It is safe to state that Howard Brownstein, President of The Brownstein Corporation, is a true expert in providing turnaround management and advisory services to companies, as well as their stakeholders. Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits. During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter. He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation. He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton. Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.
Mr. Brownstein is considered to be one of the world’s top experts in distressed businesses. He believes it is essential to remember that not all distressed businesses are, in fact, the same. There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath.
Brownstein firmly believes that distressed businesses can represent a real and often overlooked opportunity for buyers. The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years.
Why is a Given Business Distressed?
Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses. Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future. It is essential to be able to convey “what went wrong” and how the problems can be fixed.
Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list. The first is cash flow issues and the second issue relates to management. Often it turns out that the management was simply not rigorous enough. He also notes that companies will tend to gravitate to external issues as a way to explain away their failure.
Of course, no two distressed businesses are failing from 100% identical causes. Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.
- What is the business’ potential value?
- Is there something of value under the problems?
- Under better or different circumstances, could the business be viable?
These are all questions that your business broker or M&A advisor can assist with. It’s important to gain a clear understanding of the business’ past, present and future.
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Keeping a product or service around that isn’t pulling its weight might prove to not be a very good idea. You may have invested a good deal of time and resources into its development, but if that product or service is no longer contributing to your bottom line, it might be time to cut it loose. Even if your product is pulling its weight, but doesn’t fit into your overall core business, then you should still consider getting rid of this “orphaned product.” Let’s take a look at some of the reasons you might want to keep or remove, an orphan product from your company.
There are four main reasons why a company might want to divest itself of a product line or service completely:
- An orphaned product line can be a distraction that takes away from core business operations.
- Funds allocated to an orphaned product could be used instead to build the core business or make improvements that are not in the current budget.
- Another good reason to remove an orphaned product from your lineup is that while it could ultimately be profitable with increased resources, the funds would be better allocated elsewhere.
- Your orphaned product could be profitable. Some buyers, companies and private equity groups are looking for product lines they can use to augment their existing ones. In fact, some buyers may even want to build a new business around a given product line.
Of course, it isn’t always as simple as “pulling the plug” and moving on. It is important to step back and consider the negative impacts of jettisoning an orphaned product, such as the fact that the product line could have key employees attached to it. Or there could be company culture issues related to removing the product, such as causing disruption within your company. You must also consider if the orphaned product could ultimately play a role in the sale of your company.
At the end of the day, an acquiring company may feel that the orphaned product line is a great fit for their existing distribution chain. Additionally, your offering might fit into a new product line that the acquiring company has launched. It is important that you evaluate every aspect of an orphaned product before making the decision to remove it from your company.
Understanding the needs and goals of your most likely buyers should play a role in your decision making. Working with an experienced business broker is an easy way to increase your chances of making the right decision.
An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”
Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”
It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.
Sellers should understand that both what they hope to accomplish in the sale of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.
Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.
These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price. During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.
Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.
• Buyer Qualifications
• Full Price
• Amount of Cash Involved
• Commission/Selling Fees
• Closing Costs
• Exclusive Listing
• How the Business is Shown
• How a New Owner Continues the Business
By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.
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When you are buying or selling a business, you might very well end up making a deal with someone from another generation. Therefore, it only makes sense to take the time to understand that individual’s background and how that might cause behavioral differences. It is important to understand and reflect upon where many of them are coming from and the collective experiences and trends that shaped their identities and perspectives. At the same time, you can identify your own biases, strengths and weaknesses that may be caused by your own upbringing.
The strategies in this article originated from Chuck Underwood who is considered a leading expert in the diversity of communication styles between generations. He is the author of a major book on the subject as well as host of the long-running “America’s Generations with Chuck Underwood” on PBS.
Underwood’s perspective is that people of each generation were molded by their unique formative years. The decisions that buyers and sellers make will be impacted by their generation. Mostly likely, the buyers or sellers you will be coming into contact with will be either Baby Boomers, Generation Xers and Millennials.
Working with Baby Boomers
Baby Boomers (those born between 1946 and 1964) are a major force in the business world. While they often possess a patriotic passion to improve the country, they were also witness to a time of great change via many movements including the civil rights and women’s movement.
When you’re dealing with Baby Boomers, it is important to remember that they will want to build relationships and get to know you. Common courtesy is very important to Baby Boomers. That means they’ll expect you to show up on time and turn your phone off during meetings.
You’ll want to keep in mind that older Baby Boomers may be experiencing hearing and eyesight loss. As a result, you’ll want to keep your type and font size larger, and make text easy to read.
When you’re working with your clients, it only makes sense to pay attention to the generation during which they were raised and adapt your approach accordingly. Understanding generational differences will help you get a leg up on the competition while at the same time helping your clients achieve their goals.
What is Generation X?
Generation X (or Gen X) had a wildly different formative experience than the Baby Boomers. Generation X is generally defined as being born from 1965 to 1980. This generation spent its formative years from the 1970’s through the 1990’s. In stark contrast the relatively more pleasant and optimistic childhoods of the Baby Boomers, Gen X had a rougher ride.
America became more mobile during the time period during which Generation Xers grew up. As a result, many children were uprooted and separated from their friends, family and hometown roots. Growing up, these individuals witnessed a variety of scandals ranging from political and religious figures to sports figures. Gen Xers witnessed the systematic dismantling of the American middle class and with it a general lowering of quality of life, opportunities and confidence in corporations. In the end, Gen X was quite literally left home alone and lived as “latch key kids.” It is no wonder that this neglected generation has some issues.
Individuals growing up during this time learned early on that they had to be ready to fend for themselves. Since Gen Xers have been met with consistent and systematic disappointment and even wide scale institutional betrayal, this generation, on average, is more distrustful of organizations.
Gen Xers are self-reliant and independent and one of their core values is survival of the fittest. In his view, Gen Xers are self-focused, individualistic and want everyone to skip the nonsense and get to the point. They have no real interest in getting to know you or playing a round of golf.
Working with Millennials
Millennials spent their formative years in the 1980s and early 90s. They are a very optimistic and tech savvy generation. They are also the most classroom educated generation in history.
It is also very important to note that Millennials are the most adult supervised generation in history. So-called “helicopter parents” who work to protect their children from setbacks are the norm. Employers find that Millennials are entering adulthood, but are still relying upon their parents to help them make decisions and even career choices.
Where Gen Xers are distrustful of the “wisdom of their elders,” Millennials actively seek out such advice. Likewise, Millennials tend to volunteer a good deal and look for ways to solve the world’s largest problems.
You will find that Millennials will enjoy building a relationship with you. Keep in mind these individuals tend to be quite socially conscious and they may very well expect you to agree with their views. Additionally, there is a chance that they will have their parents involved in their business dealings.
Keep in mind that the de facto tech addiction, or at the very least acute overreliance on technology, has led to issues with Millennials’ soft skills. They can often lack the ability to read another person’s body language and adjust accordingly.
In the end, regardless of what generation you are working with, it is important that you continually adapt. This will greatly increase the odds of cementing a successful deal.
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When you are selling a business, your business broker or M&A Advisor will likely create a Comprehensive Business Review, or CBR. This comprehensive document can then be presented to prospective buyers once they have signed all necessary confidentiality documentation. It is essential that this document builds trust between both parties, as this will go a long way towards achieving a successful deal.
The bottom line is that your CBR will be 95% positive. The majority of the document will be dedicated towards selling and promoting your business. Therefore, it only makes sense to disclose some potential problems. When handled correctly, the disclosure of problems can actually be a strong asset.
For example, current weaknesses of your business could become strengths in the mind of the buyer. For example, a business with a very poor online presence represents a substantial opportunity for a buyer to improve marketing and communications. Summed up another way, don’t be afraid to include negative information, especially if that information represents an opportunity.
It is important that there is an element of trust between the parties. Creating that sense of trust begins with the CBR’s seller section.
Buying a business is radically different from buying a home. When someone buys a home, they usually don’t care too much about the person who they are buying the home from. But buying a business is usually a different experience. Your buyer will want to feel as though they have a fairly clear understanding of who you are and what you are about.
In the seller’s section, the buyer should get a decent idea of who you are. Your broker or M&A Advisor will want to interview you to gain ample information to include in your CBR. Your broker may even want to find out about your family, hobbies, interests and more. You may even want to consider including photos of yourself and your family.
The bottom line is that a potential buyer should be able to pick up the CBR and get a good feel for what you are like. If no level of trust is ever established between the buyer and seller, then it will be much more challenging for the deal to be successful.
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There is a potentially lucrative group of buyers that many sellers don’t initially think about. We are talking about foreign buyers. While there are some hurdles to working with these types of buyers, it is important to note that there are many huge advantages as well. Let’s take a closer look.
How Are Foreign Buyers Different?
At the top of the list of ways in which foreign buyers are different is that they are often seeking a visa. Another commonality among foreign buyers, one that will surprise many, is that they may want access to the U.S. educational system.
It is common for foreign buyers to want to buy a business so that they can get their children into a particular U.S. school district or college. Sometimes the desire to be eligible for state tuition also plays a role in the selection of a business and the decision-making process. In this sense, business location takes on a level of importance that it might not have for domestic buyers.
It is important to keep in mind that there are cultural and business differences that play a role with foreign buyers. Everything from a different use of business terminology to expectations can play a role. This could impact negotiations.
What About Visas and Immigration?
One of the most important things to remember is that foreign buyers are often navigating the complex world of visas and immigration. Whether or not a visa is issued can dramatically impact whether or not a deal ultimately takes place. This fact is often built into agreements. For example, a purchase condition may be conditional upon visa approval. Nonrefundable deposits may also play a role in the process.
What Do Foreign Buyers Really Want?
Foreign buyers have been impacted by the pandemic too. Yet, some factors remain unchanged. Not too surprisingly, they will want to see that a business is profitable. In this regard, you should be able to showcase profitability in a clear fashion. You can expect foreign buyers to want to see tax returns and all the typical documentation that you’d need to provide to any buyer.
A second factor that foreign buyers are interested in is longevity. If your business has successfully operated for decades, this will be a major advantage.
Ultimately, most of what domestic buyers are looking for in a business will translate over to what foreign buyers are seeking as well. With that stated, however, there are factors that are often unique to foreign buyers. As mentioned above, navigating the often-complex visa process can add a wrinkle to the entire process.
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The buyer-seller meeting is quite often a “make or break” meeting. Your business broker or M&A Advisor will do everything possible to ensure that this meeting goes as well as possible.
It is vitally important to realize that rarely is there an offer before buyers and sellers actually meet. The all-important offer usually comes directly after this all-important meeting. As a result, you want to ensure that meetings are as positive and productive as possible.
Buyers need to understand how the process of selling a business works and what is expected of them from the process. Buyers also need to understand that following their broker’s advice will increase the chances of a successful outcome.
Sellers should be ready to be honest and forthcoming during the meeting. They also want to be sure to not say or do anything that could come across as a strong-armed sales tactic.
Asking the Right Questions
If you are a buyer preparing to meet a business owner for the first time, you’ll want to make sure any questions you ask are appropriate and logical. It is important for buyers to place themselves in the shoes of the other party.
Buyers also shouldn’t show up to the buyer-seller meeting without having done their homework. So be sure to do a little planning ahead so that you are ready to go with good questions that show you understand the business.
Building a Positive Relationship
Buyers should, of course, plan to be polite and respectful. They should also be prepared to avoid discussing politics and religion, which often can be flashpoints for confrontation. When sellers don’t like prospective buyers, then the odds are good that they will also not place trust in them.
For most sellers, their business is a legacy. It quite often represents years, or even decades, of hard work. Needless to say, sellers value their businesses. Many will feel as though it reflects them personally, at least in some fashion. Buyers should keep these facts in mind when dealing with sellers. A failure to follow these guidelines could lead to ill will between buyers and sellers and negatively impact the chances of success.
Sellers Should Be Truthful
Sellers also have a significant role in the process. While it is true that sellers are trying to sell their business, they don’t want to come across as a salesperson. Instead, sellers should try to be as real and honest as possible.
Every business has some level of competition. With this in mind, sellers should not pretend that there is zero competition. A savvy buyer will be more than a little skeptical.
The key to a successful outcome is for business brokers and M&A Advisors to work with their buyers and sellers well in advance and make sure that they understand what is expected and how best to approach the buyer-seller meeting. With the right preparation, the odds of success will skyrocket.
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