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Price or
Terms – The Structure of the Deal
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 sell 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
• Financing
• Confidentiality
•
Commission/Selling Fees
• Closing Costs
• Exclusive
Listing
• How the Business is Shown
•
Advertising/Marketing
• 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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Thinking About
Selling?
Here are some tasks business
owners should consider completing before going to market to
help their
businesses sell.
• Remove any items not
included in the sale. That family heirloom portrait behind the
counter of Grandfather William, founder of the business,
should be removed.
• Remove or repair any non-functioning
equipment.
• Prepare an operations manual to show a new
owner all the functions of the business, how things are done,
the major customers and suppliers, samples of advertising, and
any other information that would help a new owner manage and
operate the business.
• Take care of any outstanding bills
and resolve any legal, tax, or governmental issues.
• Bring
your financial statements up to date, and have your accounting
professional prepare them for a
buyer’s inspection.
•
Clean up the business inside and out. Fill the shelves, clean
up the inventory, and paint the interior if
necessary.
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The Numbers Don’t Tell
the Whole Story |
You’re considering selling your business. Your accountant or
financial advisor has reviewed your profit and loss statement, and
told you what he or she thinks your business is worth. Is this a
valid figure? Do the numbers reflect the real value of your
business? Below are some other factors to consider regarding the
true value of your business. These factors may not have a specific
dollar amount attached to them, but they certainly influence value
and the price a business maysell for.
• Are you serious about
selling, and is it the right time? (Use this only if selling is the
reason for the valuing.)
• What are the two or three biggest
obstacles to growing
the business?
• Why is your business
different than the competition?
• If you don’t own the real
estate, what is the status of your lease?
• What is the
short-term and long-term trend of your business and the
industry?
• Does, or can, international competition
impact
your business?
• Why do customers patronize your
business, or why do clients use your services?
• Have you
increased prices recently, and if not, why not?
• How much
will you need to invest in your business over the next three to five
years to maintain your customer/client base? How much to increase
it? How will you spend it?
• Are there any legal or
governmental issues facing
the business?
• If you got hit
by the proverbial truck, is there someone who could run the
business?
• Can the business be relocated? Should it
be
relocated?
• What are the secrets to the current success
of
the business?
• What prevents the business from
growing?
• If the business is based on your personal goodwill
with customers, knowledge of the product or services, etc., are you
willing to stay for a fairly long period of time to assist in
transferring this personal goodwill?
• If you were given an
additional $100,000, and you were much younger, what would you do to
grow the business?
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Personal Goodwill – Who Owns It? |
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Personal Goodwill has always been a
fascinating subject, impacting the sale of many small to
medium-sized businesses – and possibly even some larger
companies. How is personal goodwill developed? An individual
starts a business and during the process builds one or more of
the following:
• A positive personal
reputation
• A personal relationship with many of the
largest customers and/or suppliers
• Company products,
publications, etc., as the sole author, designer, or
inventor
The creation of personal goodwill occurs far
beyond just customers and suppliers. Over the years, personal
goodwill has been established through relationships with tax
advisors, doctors, dentists, attorneys, and other personal
service providers.
While these relationships are
wonderful benefits, they are, unfortunately, non-transferable.
There is an old saying: In businesses built around
personal goodwill, the goodwill goes home at
night.
It can be difficult to sell a business,
regardless of size, where personal goodwill plays an integral
role in the business’ success. The larger the business, the
less likely that one person holds the key to its
profitability. In small to medium-sized businesses, personal
goodwill can be a crucial ingredient. A buyer certainly has to
consider it when deciding whether to buy such a
business.
In the case of the sale of a medical,
accounting, or legal practice, existing clients/patients may
visit a new owner of the same
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practice; they are used to
coming to that location, they have an immediate problem, or
they have some other practical reason for staying with the
same practice. However, if existing clients or patients don’t
like the new owner, or they don’t feel that their needs were
handled the way the old owner cared for them, they may look
for a new provider. The new owner might be as competent as, or
more competent than, his predecessor, but chemistry, or the
lack of it, can supersede competency in the eyes of a
customer.
Businesses centered on the goodwill of the
owner can certainly be sold, but usually the buyer will want
some protection in case business is lost with the departure of
the seller. One simple method requires the seller to stay for
a sufficient period after the sale to allow him or her to work
with the new owner and slowly transfer the goodwill. No doubt,
some goodwill will be lost, but that expectation should be
built into the price. Another approach uses some form of
“earnout.” At the end of the year, the lost business that can
be attributed to the goodwill of the seller is tallied. A
percentage is then subtracted from monies owed to the seller,
or funds from the down payment are placed in escrow and
adjustments made from that source.
In some cases, the
sale of goodwill may offer some favorable tax benefits for the
seller. If the seller of the business is also the owner of the
personal goodwill, the sale can essentially be two taxable
events. The tax courts have ruled that the business doesn’t
own the goodwill, the owner of the business does. The seller
thus sells the business and then also sells his or her
personal goodwill. The seller’s tax professional will be able
to give further advice on this matter. |
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This newsletter is not intended
to render accounting, legal or other professional service; the
publisher and sponsors assume no liability for a reader’s use of the
information herein. |
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Copyright © 2007 Business Brokerage Press, inc. |
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