THE GUIDE to SELLING
YOUR BUSINESS
SUCCESSFULLY
Jey Arul BA, MBA
Tel: 780-469-4769; Fax: 1-866-301-6297 Email: info@vralta.com www.vralta.com © VR Business Brokers 2014
Copyright Š Jey Arul 2014 All rights reserved. No part of this publication may be reproduced, transmitted, or stored in a retrieval system, in any form or by any means, without permission in writing from the publisher, nor be otherwise circulated in any form of binding or cover other than that in which it is published and without a similar condition being imposed on the subsequent purchaser.
Book Design by : Shariar Ahmed Momo Kunjo 1st Floor, Suit No 3, 376/D Agrabad Access Road, Chittagong 4100, Bangladesh. www.shariarahmed.com
Table of Contents About this Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 About Jey Arul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 About VR Business Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Preparing Your Business For Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 What You Should Be Prepared For . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Importance of Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Importance of Qualified Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Importance of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Placing Market Value on Your Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Who are Business Brokers / Advisors? . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Interviewing Business Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 How do Business Brokers and Advisors Get Paid? . . . . . . . . . . . . . . . . . . . 15 How to Choose a Business Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 The Engagement Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 How we can help you‌ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 VR Method of Selling your Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
About this Guide
The Guide To Selling Your Business is a comprehensive guide designed for owners of small and mid size businesses. There is a major lack of information and instruction on selling small to mid size businesses, which makes it very difficult for business owners to confidently decide on how to go about the process of selling the most important sale that they will ever make and how to achieve the most value from their business. We have made this guide book in such a way that you will find the concepts and principles discussed here are laid out in simple and easy to understand language and have been proven time over time applicable to businesses of all sizes.
The Guide to Selling Your Business Successfully
Jey Arul
1
About Jey Arul The Guide To Selling Your Business was developed by Jey Arul who is the Managing Director of VR Business Brokers in Alberta. Jey introduced VR Business Brokers to Alberta in 2010, after spending 9 years in Commercial Banking and Corporate Finance. Jey established VR after identifying an unmet need for small and mid size companies when it comes to buying, selling and valuations. Since that time, Jey has assisted business owners in Alberta execute acquisitions, sale of their businesses, and joint-ventures, often helping them effect transactions with buyers from across Canada and the United States. Since 2010, Jey has personally transacted over 60 companies in Alberta in a number of industries including, manufacturing, medical, service, oil and gas, transportation, retail, etc. During his free time, Jey has always been an active member of the community as well. He has volunteered for a number of organizations including The United Way, The Canadian Bankers Association and Junior Achievement. Presently Jey is also the President of the International Business Brokers Association (IBBA) Canadian Chapter, an international association for people and firms engaged in business brokerage and mergers and acquisitions. Jey is also fluent in three languages (English, Malay and Tamil) and value diversity. He graduated from the University of Alberta with a BA in Psychology and completed the MBA program from Athabasca University-Center for Innovative Management. In addition, he has also completed the Canadian Securities Course, and holds a Real Estate Brokers’ license through the Real Estate Council of Alberta. Jey also earned his Certified Business Intermediary (CBI) designation, which is a prestigious designation exclusive to the IBBA that identifies experienced and dedicated business brokers. It is awarded to intermediaries who have proven professional excellence through verified education as well as exemplary commitment to our industry. This reference demonstrates the power and recognition of the services that Jey and his team offers business owners. In addition, Jey Arul has authored several articles, newsletters and Internet Blogs on the subject of Buying and Selling Businesses, Business Valuations and Business Financing. His popular Blog Site – How to Acquire, Grow and Sell a Business receives on average over 200 visits a day. “If you have thought about selling your business then read this guide. We will educate you on what it takes to sell your business and what you probably did not know about the selling process”.
- Jey Arul, BA, MBA
Principal
The Guide to Selling Your Business Successfully
Jey Arul
2
About VR Business Brokers VR Business Brokers is the world’s premier business brokerage firm. With a combination of global strength and local experience, VR’s 32 years of successful business sales through Valued Representation, is the reason more and more business buyers and sellers demand our proven skills and resources to help them succeed in an increasingly complex market.
The Guide to Selling Your Business Successfully
Jey Arul
3
Preparing Your Business For Sale Deciding to sell your business is an emotional decision. Once you think about selling then it is time to make the move – assuming all decision makers are on board with this decision. Marv Levy, the NFL Hall Of Fame Coach once said that, “Once a player thinks about retiring then he has already retired.” This statement by the former Buffalo Bills Head Coach and General Manager applies to business owners as well. Once you think about selling then you are already making an emotional move towards selling. The first area to understand is that financial books and records are important. A business needs to be able to justify a price through financial statements, equipment and inventory values. A pure “cash business” with no substantiating data is very difficult to sell. The second area to understand is that you should keep the business operating as if you just started the business and NEVER, NEVER tell anyone that you are selling. Any hint or leak that you are selling could be catastrophic to the business and the businesses’ future. Employees and customers are very good at noticing changes that may indicate a business is for sale. This will have a devastating result on the business. Once the decision has been made to sell, you have to prepare various facets of your business before taking the step towards selling. Here is a general list that you need to prepare… 1. Up to 3 – 5 years of accountant prepared financial statements – Income Statement and Balance Sheet; 2. A detail asset lists consisting of all the equipment, furniture & fixtures that are to be included in the sale; 3. Value of all non-obsolete inventory at costs; 4. Description of business real estate (if any and if part of the sale); 5. Copy of the lease if business is on leased space. Here is what you DO NOT want to do… 1. Tell anyone that you are going to sell – confidentiality is of utmost importance 2. Change the business focus or daily operations 3. Take cash out of the business that will alter subsequent financial statements
The Guide to Selling Your Business Successfully
Jey Arul
4
What You Should Be Prepared For Be prepared to work hard on selling your business while experiencing various pitfalls that may seriously stress you. There is “FAILURE TO BE PREPARED no perfect business to sell so the work COULD RESULT IN A FAILED involved in selling your business is intensive CLOSING” and consists of a number of legal issues and agreements. Business owners who try to sell his or herself eventually find that they get in too deep into areas where they have no knowledge or experience. At this point this business is almost surely suffering because not only has the confidentiality not been protected but the owner’s time has been taken away from running the business and placed on trying to sell their business. For your information – Advisors and business brokers generally work anywhere from 40-50 hours total on the businesses they have sold. And this time has been streamlined and reduced because of their expertise. So it goes without saying that business owners trying to sell on their own will spend more than 40-50 hours – do you really have that time to dedicate in a short period of time? Next you should be prepared to consider all reasonable offers. The reality is that full offers would be nice but happens less than 5% of the time. If you want your business to sell then you may have to consider taking slightly less than what it was originally valued at. This is also why a detailed market value analysis – covered elsewhere herein – is so beneficial. The ability to fully detail the price is a key to getting offers close to or at listing price. We should assume that buyers are also going to negotiate with the asking price, which means that they may start low and look for you to negotiate back as well. So negotiation expertise is important to deal with buyers. Without it – buyers will drive you crazy! Next be prepared to meet with buyers frequently. A typical buyer will want to observe the business and talk to you at least 2 – 3 times before making an offer. Most buyers of small businesses are also first time buyers and while they have to be qualified, they do experience fears of the unknown. Buyers will want to meet with you – frequently more than once – prior to placing an offer. Having the expertise to assist and guide the buyer from presentation of the business to writing an offer is another key ingredient in getting offers for your business. Last but not least you have to be prepared to manage in upwards of 20+ of the buyers conditions / contingencies before and after the offer process. Failure to understand these conditions / contingencies will almost surely result in a damaged or failed transaction.
The Guide to Selling Your Business Successfully
Jey Arul
5
The Importance of Confidentiality The importance of confidentiality at all times during the sales process is the most important ingredient in the successful sale “FAILURE TO PROTECT of an existing business. This IS NOT a real CONFIDENTIALITY WILL estate transaction where real estate is RUIN YOUR BUSINESS” posted on public MLS services for everyone to find. This is a business with employees, customers, suppliers, competition and possibly landlords and creditors. By making a business for sale public, all of the above mentioned entities associated with the business for sale will be thrown into a “cause and effect” flow that will permanently harm the business being sold. Ask yourself the following questions relating to confidentiality… 1. How would your employees react if you told them that you are selling? 2. How would your customers and clients react to you selling? 3. What would your immediate competition do if they knew that you were selling? 4. If you have a landlord – how would they react to you selling while under lease? 5. If you have suppliers, etc. extending credit – how would they react? If your answers are close to the following, then confidentiality should be vital to you… 1. They would leave and/or have a negative attitude worried about job security. 2. They would go elsewhere worried about the quality of the product or service. 3. They would use in their marketing/advertising/sales to sway business to them. 4. They would not be happy and in the worst case could terminate the lease. 5. If they are extending credit then they may pull credit and go to COD The extent to which confidentiality is applied goes well beyond what most business owners have knowledge of and access to. There are specific forms and agreements that protect confidentiality. There are entire processes that protect confidentiality. If the engine on your vehicle broke down, would you start replacing parts yourself or would you take it to a reputable mechanic? This is no different than a business owner attempting to protect his or her confidentiality. Let an expert protect confidentiality at all times. – Jey Arul
The Guide to Selling Your Business Successfully
Jey Arul
6
The Importance of Qualified Buyers Confidentiality is vital, so is having qualified buyers to purchase your business. A buyer who is not qualified will only destroy a deal somewhere down in the process. A non-qualified buyer has no ability to follow through even after an offer has been accepted. This is the single greatest “deal killer” among business owners attempting to sell their own business. Just because a buyer wants to buy a business does not mean that they can and are able to buy a business. There are two types of buyers – the qualified buyer and the dream seeker. Unfortunately, with owners selling their own business - the dream seekers do not exit the closet until it’s too late. Qualified buyers are so important for the successful sale of the business and at AJS Capital we spend almost 70% of our time qualifying a buyer. A buyer should be qualified in a specific way thereby allowing for the real possibility of the buyer being able to obtain financing either through the owner or by other financial institutions. A buyer with 100% cash is rare. A buyer wanting 100% financing is dreaming as there is no such thing as 100% financing on a business – anyone who tells you that there is 100% financing is dreaming! There are five factors that determine a buyer’s qualification… 1. Relevant Experience 2. Liquid Capital 3. Source of Liquid Capital 4. Credit Standing 5. Motivation The variables regarding these qualification standards are endless depending on the type of business and the type of buyer. Business owners selling their business on their own underestimate the importance of buyer qualification and are frequently left holding an empty transaction where the sale did not take place and the confidentiality has been broken – and the business is now potentially suffering. Think about it from your own perspective. If you were going to hold a note or mortgage on the business would you do it for anyone or would you want to feel confident that this person would be able to succeed and make payments on time? Third party lending sources feel the same way so qualification is another key component in a successful transaction.
The Guide to Selling Your Business Successfully
Jey Arul
7
The Importance of Financing As mentioned in Section 3 above, a buyer with 100% cash is rare. A buyer wanting 100% financing is dreaming as there is no such thing as 100% financing on a business – anyone who tells you that there is 100% financing is dreaming!
“THE ABILITY OF THE BUYER IN OBTAINING FINANCING IS KEY TO A SUCCESSFUL SALE OF THE BUSINESS”
So it goes without argument that some sort of financing will be needed to close the deal. There are various options for financing that are covered below with the understanding that buyer qualification is the key ingredient to obtaining financing for the buyer. You as the seller want to close the transaction and get paid. The ability to finance a buyer is one of the major milestone stages in closing the sale. Before jumping into the three main financing categories, let us dispel one myth and that is the misconception that the owner HAS TO provide financing or mortgage on the business to get a deal closed. This is not true and it totally rests with the individual owner’s preference. We will advise that selling a business with some amount of owner held financing does make it slightly easier to sell. Historically, we have seen sellers being able to receive between 12% – 20% higher price if they were willing to provide some sort of financing to the buyer. But we always advise owners to speak with their accountant about the pros and cons to holding the loan on their business.
Three Types of financing… 1. Owner held financing is one option but refer to the above paragraph to dispel the myth that an owner has to hold financing. We always advise owners to speak with an accountant about the pros and cons to holding the loan on their business. There may be some tax benefits to doing it this way depending on the owners’ personal financial position. 2. Local bank financing is getting harder for a buyer to secure due to the financial crisis and current economic conditions. Banks typically do not finance the goodwill portion of the purchase price. When they do provide financing, it is often times approximately 50% of the purchase price and secured again some real hard assets of the business and/ or buyer. This is also the primary reason why there is the misconception that lender financing is difficult to obtain. At AJS we have established relationships with over 40 lenders in Canada and USA and we often assist buyers with their financing needs. 3. There is also a third and viable option – Acquisition financing. Acquisition financing from third party lending sources is the primary lending source used to fund buyers of small and mid-size businesses. These sources are specifically in business for small business lending. Most business owners – and business buyers - do not know of these types of lenders nor do they have the contacts to use them successfully.
The Guide to Selling Your Business Successfully
Jey Arul
8
Placing Market Value on Your Business One of the truly confusing aspects of a business owner trying to sell his or her own business is in trying to determine what value to place on the business. Such thoughts as “It is what I need to retire on” or “It’s what I put into it” are not methods for determining what a business is worth on the market.
“A GOOD BUSINESS BROKER WILL ALWAYS PROVIDE YOU WITH A DETAILED ANALYSIS OF HOW THEY PRICED YOUR BUSINESS FOR SALE”
Too many business owners concentrate on gross sales as an indicator of value without proper knowledge of the basic operating profit on their business (cash flow). Operating cash flow is the true profit of the business and the asking price should be a variable on cash flow. Cash Flow - not gross sales - determines the profitability of the business.
What is Cash Flow? Cash flow in terms of business valuation is often regarded as profit before taxes. It is what the business generates in true cash. Cash Flow is determined by taking the Net Profit or Loss from the income statement then “adding back” to the Net Profit or Loss any non-essential, non-business related or paper expenses such as amortization, depreciation and interest. There could also be additional “add backs” that could be used to adjust the Net Profit or Loss figure. Some typical add backs would include items such as: Automobile expenses, Donations, Season tickets, Life insurance on the Seller, one-time expenses or payroll expenses on an employee no longer with the business, etc - just to name a couple. For example - we have a sample business named Widgets Inc. In looking at their latest Income statement, we see that it has a Net Profit of $168,787. Typical “add backs” to profit from the income statement will include the following… 1. $16,424 Depreciation expense 2. $13,178 Amortization expense 3. $11,674 Interest expense In addition to the above, Discretionary “add backs” to profit from the income statement includes the following… A. $12,676 expense for “insurance” was all personal on the owner and wife
The Guide to Selling Your Business Successfully
Jey Arul
9
B. $18,900 expense was a one-time expense for redesigning the interior space of the premises C. $5,323 expense was for the owner’s personal vehicle not made part of the sale and considered not needed to operate the business. D. $4,568 expense was for the owner’s annual dues for Oilers Season Tickets – considered not required to operate the business. So in determining the cash flow... • Take the Net Profit of $168,787 • then “add back” 1-3 above (cumulative $41,276) • then “add back” A-D above (cumulative $41,467) _____________________________________
TOTAL ADJUSTED CASH FLOW = $251,530
So while the Income statement shows only $168,787 of net profit – the true profit or CASH FLOW was $251,530. Some businesses will show a loss on their income statement but a good and positive cash flow. The actual market value of the business should be determined by using a market multiplier of the cash flow plus the operating assets of the business. If you read terms like EBIT or EBITA and do not understand it. Don’t panic. Here is a simplified explanation... • EBIT (Earnings Before Interest and Taxes), which is really the same as Cash Flow Above less Interest • EBITA (Earnings Before Interest, Taxes and Amortization), which is really the same as Cash Flow Above less Interest & Amortization
The EBIT for Widgets Inc would be $241,856 (cash flow less the $11,674 Interest Expense) The EBITA for Widgets Inc would be $226,678 (cash flow less the $11,674 Interest Expense & $13,178 Amortization Expense) One of the main problems of owners selling their own business is that they grossly undervalue their business. This results in far less proceeds from the sale than what they could have sold for by using a professional intermediary or business broker to assist them.
The Guide to Selling Your Business Successfully
Jey Arul
10
FYI – back to qualified buyers needing financing (Section 4
above). The comprehensive cash flow analysis to market value is the primary method used by the acquisition lenders to qualify a transaction and provide financing to buyers.
There are also Third Party Valuation options to get a detailed value on your business. These valuations can be quite expensive but do provide a concrete and detailed “book” on the value of your business. Improper market value methods will result in you getting less money for your business. So before hiring and paying someone to do a business valuation make sure you ask them if they have sold any business and what methods they will be using to derive a “market value” of your business.
The Guide to Selling Your Business Successfully
Jey Arul
11
Who are Business Brokers / Advisors? Good advisors and business brokers are trained and experienced in the confidential sale of privately owned businesses to qualified buyers. They usually work for and are compensated by the seller, though some brokers do represent the buyers exclusively. Some brokers even choose to represent both the buyer and seller, which is commonly known dual agency representation. Ask the intermediary / business broker who he or she represents. The benefits of using a good business broker includes the following… 1. Confidentiality. Business brokers are obligated by the nature of their engagement to maintain confidentiality and protect the identity of the seller at all times 2. Qualified Buyer. Business brokers will screen all prospective buyers and weed out the “tire-kickers” and utilize processes to ensure that only qualified buyers are introduced to the seller. 3. Financing. Business brokers are able to assist buyers with the financing of the business in order to ensure that the transaction completes. 4. Valuation. Good business brokers are able to complete a valuation of the business to ensure that the Seller receives top dollars. 5. Marketing. Advisors often utilize various channels to seek out qualified buyers. 6. Systematic Process. Advisors use a systematic process in getting offers and closing the sale of the business, which results in a much quicker process, less costs and more time for the seller to operate the business as opposed to selling the business.
“A GOOD BUSINESS BROKER IS LIKE A SPORTS REFEREE WHO DOES A GREAT JOB – NOBODY KNOWS HE OR SHE IS THERE. THE SAME CAN BE SAID FOR A GOOD BUSINESS BROKER – THEY WORK IN THE SHADOWS AND NOBODY KNOWS THAT THE BUSINESS IS FOR SALE OR SOLD”.
A good business broker represents the seller from the time of valuing the business to closing the sale so that the business owner can operate his or her business while the business broker manages the entire sales process. Business brokers are needed to protect the integrity of a business that is for sale. Confidentiality is the KEY COMPONENT. A good business broker not only finds and brings qualified buyers but he or she is also an expert at taking the process from Offer to Closing.
VR Business Brokers in Alberta has completed over 60 transactions since 2010. We were primarily successful because we implement our proprietary twenty-step process of successfully selling a business on each transaction.
The Guide to Selling Your Business Successfully
Jey Arul
12
Interviewing Business Brokers It
is very important that you thoroughly interview your business broker before signing an engagement agreement with him or her.
10 Recommended Interview questions to ask Business Brokers… 1. How does the business broker protect confidentiality and can they demonstrate the confidentiality processes? They should have all written materials including the confidentiality documents to present to you for review.
“SELECTING A PROFESSIONAL AND TRAINED BUSINESS BROKER WILL ASSIST IN SELLING YOUR BUSINESS FASTER FOR THE MAXIMUM MARKET VALUE”
2. How does the business broker qualify buyers and can they demonstrate it? They should have all written materials such as confidentiality agreements, buyer profile forms to present to you for review. 3. What types and how many lending sources does the business broker have that are readily available to finance the buyers? What is the level of experience of the business broker in assisting a buyer with Business Financing? They should have multiple levels of lending sources and should be able to name a couple of them. They should also have the ability to pre-qualify your business for financing. They should demonstrate some experience in dealing with lenders and structuring a business financing transaction. 4. What is the educational qualification of the business broker and can they verify it? It helps to know that the business broker has some University level education and some working knowledge in accounting and finance. Are they a member of the International Business Brokers Association (IBBA), what sort of training have they obtained in valuing a business, etc. 5. Is the business broker willing to leave you full disclosure materials on their entire process and philosophy? They should have all written materials including the buyer and seller agreements for your review. 6. How diversified is the business broker as far as networking affiliations to find qualified buyers for the businesses they sell. They should be able to list at least a half a dozen affiliations and networking sources – THESE ARE NOT proprietary. 7. How many listing does the business broker take? If it is more than 10-12 listings per broker then how could they possibly give your business the time and resources it needs. 8. Ask the Business Broker who they work for - you or the buyer? This should always be YOU unless dual-agency is a requirement and you are comfortable providing it.
The Guide to Selling Your Business Successfully
Jey Arul
13
9. Is the business broker willing to co-broker? (Co-brokering is an agreement where the listing business Broker offers to split the fees with the buyer’s business broker). If the business broker DOES NOT, then you are not dealing with a reputable business broker you are dealing with someone who has his or her best interest before yours. 10. How does the Business Broker get paid? Always at closing and never before, except for the commitment or retainer fee at the time of engagement. If a business broker requests or does any of the following – WALK AWAY! 1. Wants you to sign an agreement on the first meeting- It cannot be done this way. There is no way the broker could accurately place a market value on your business at the first meeting. This is a pressure approach used by unethical brokers and is generally associated with an up front fee or retainer. 2. Discourages you from talking to your attorney or accountant – this happens too often and is done by business brokers who have something to hide – a good business broker should encourage you to talk to your Attorney and Accountant AND be willing to meet with them upon your request. 3. Requires you to agree to hold a note (seller financing) to take the listing – this should be your decision and this type of activity is generally associated with business brokers who feel that the only way to sell a business is with owner financing. Usually these business brokers do not have the financing sources to finance buyers and lack the knowledge about business financing. The moral of this section is that if you feel uncomfortable or you feel pressured then walk away. Remember that a business broker should work for you NOT vice versa.
The Guide to Selling Your Business Successfully
Jey Arul
14
How do Business Brokers and Advisors Get Paid? A good business broker earns their fee through expertise, hard work, networking and sales. They are experts at getting your business sold! Reputable business brokers also limit the number of business listings that they take on so that they can concentrate on selling their existing listings as opposed to continually taking on new listings and spend less time on existing listings. There is no law or regulation that sets pricing, but business brokers typically charge a 10% - 12% commission (also called a “success fee”) on the value of the business and 3% -6% on any associated real estate. If another broker is involved in finding a buyer, the fee is split between the listing-side broker and the sell-side broker. That is if they agree to work together (cooperate), which not all business brokers do. It is standard practice to provide a discount above a $1 million selling price, and many M&A firms will say they use the Lehman Scale although in reality they probably use the Double Lehman Scale. The Double Lehman Scale pays a commission of 10% on the first million, 8% on the second million, 6% on the third million on down to 4% for the remainder. The Tail - Engagement agreements vary a lot, from real estate type canned agreements for business brokers to custom agreements for M&A firms, but you’ll find a “Tail” on each one. The tail on an agreement means that once the agreement has ended, there is still a clause that says if you sell to anyone within 18 to 24 months that the intermediary introduced to you, you still owe a commission. So don’t let it surprise you, it is standard. What isn’t standard is what “introduced” means. We define that as anyone that signed a confidentiality agreement during the time our agreement was in affect. Negotiable? - Well, as you know everything is negotiable, but a quality broker or M&A firm probably isn’t going to move on the fee. However, it is common to change various parts of an agreement depending on the situation. BEFORE agreeing to any fee – make sure that the business broker has outlined exactly what they will be doing for you and should include the following… 1. Determination and completion of a market value assessment 2. Preparing and completing the engagement agreement 3. Preparation of all marketing plans 4. Preparation of all teasers and advertising information 5. Advertise and network with various sources in order to locate qualified buyers 6. Preparation of the confidential Business Sales Memorandum 7. Obtain qualified buyers under confidentiality agreement 8. Present qualified buyers with full disclosure of the business
The Guide to Selling Your Business Successfully
Jey Arul
15
9. Tour business with the qualified buyer and you 10. Assist with the preparation of the Offer to Purchase agreement 11. Assist with the negotiations and various contingencies and conditions 12. Complete the final offer to purchase and forward same to lawyer(s) 13. Assist with Due Diligence to ensure that all contingencies are met 14. Ensure that financing is available and put in place 15. Assist in other due diligence like Lease or Real Estate 16. Coordinate with bankers, lawyers and landlord on closing and dispersal of funds As a general rule, business brokers don’t charge an upfront fee, while M&A advisors do. It makes sense too. A business broker is operating essentially alone much like a real estate agent, while an M&A firm applies a team of writers, analysts and dealmakers on your project and also must pay for a marketing campaign. At Woodbridge, we pay substantial out of pocket costs for each client for first class mail, telemarketing and advertising and we charge an upfront fee to help pay for it. Up Front Fee -versus- No Up Front Fee charged by Business Brokers - what’s better? Really there is no right or wrong answer when it comes to retainer or “up front fees”. We do not recommend these fees for a business that is listed for less than $1million, though we do charge a small up front fee for larger businesses. NOTE: A Retainer or Listing Fee charged by business brokers should only be used for expenses and services rendered. A retainer should not be used as a revenue source for the business broker. UNFORTUNATELY, most business brokers charging retainer or listing fees tend to use this fee as their primary source of revenue.
The Guide to Selling Your Business Successfully
Jey Arul
16
How to Choose a Business Broker A good and qualified business broker is instrumental in the sale of your business. There are very few business brokers in practice because the work is difficult and requires a great deal of knowledge in many areas. Some of the areas that a Business Broker needs to be knowledgeable include…. – Business Valuation – Accounting & Finance – Negotiations
“HIRING A GOOD BUSINESS BROKER IS THE MOST IMPORTANT THING YOU CAN DO IN SELLING YOUR BUSINESS. LIKE ALL OTHER BUSINESSES, THERE ARE GOOD AND BAD BUSINESS BROKERS. YOU SHOULD FEEL COMFORTABLE WITH THE BROKER YOU CHOOSE TO HIRE”.
– Sales and Marketing – Business Law – Business Financing – Management and Operations – Real Estate – Human Resource
How to Choose a Business Broker: Industry Qualifications The first criteria you should judge in a business broker is his or her industry qualifications. You don’t want to use a business broker who has only assisted in the purchasing of fast food franchises if you are looking at buying an Internet business. The business broker’s qualifications should include several successful clients in the same industry for which you are looking to buy.
How to Choose a Business Broker: Don’t Be Rushed Most business brokers realize that buying a business is an enormous investment, and they will respect your need to take your time. Talk to as many business brokers as possible to get a feel for how the system will work and how much they charge. If you feel pressured into using one particular business broker, it might be a good idea to run the other way. If he or she is rushing you to choose their services, they might also try to rush you into buying a business, which is the last thing you should do.
The Guide to Selling Your Business Successfully
Jey Arul
17
How to Choose a Business Broker: Memberships & Affiliations Although business brokers are not regulated by the Alberta government, many do belong to associations, while others are affiliated with big-name companies. These are the ones you want to use. Find out if the business brokers you are considering belong to the Chambers of Commerce, a brokerage association or any other type of trade body. This means that they are dedicated to providing quality service, and might also indicate a better grasp of the market.
How to Choose a Business Broker: References Ask if you can speak to previous clients. If they decline, that might mean they are hiding something, and you should probably go with someone else. If references are provided, make sure you actually make the call; some professionals rely on the fact that many people don’t check references even when they’re requested. When you talk with references, ask about the overall experience as well as any details about which you might be concerned.
How to Choose a Business Broker: Professionalism As a rule, business brokers are highly professional individuals who do whatever they can to facilitate the needs of their clients. A broker who is always late, who never returns phone calls and who cannot answer questions is probably not the broker you are looking for. A professional business broker will be familiar with your industry and will be available quickly when needed.
The Guide to Selling Your Business Successfully
Jey Arul
18
The Engagement Process Once you have found a reputable and professional business broker, the next step should always be to complete a written agreement with the business broker - commonly referred to as an Exclusive Business Listing Agreement similar to a Real Estate Listing Agreement. There are a number terms and stipulations in a Business Listing Agreement that you should understand. The exclusivity of the agreement. An exclusive agreement provides that the business broker under contract is the only person authorized to sell your business for the time period allotted. Yes, this protects the business broker but it also protects you. A business owner under Non-Exclusive agreements opens himself up for litigation should two different business brokers work the same buyer – assuming both business brokers have followed proper disclosure processes. More so, a business broker with an exclusive agreement will work harder on the listing than a business broker with a non-exclusive agreement. The length of the agreement. The normal length of a listing agreement ranges between 9-12 months. Some agreements can be reduced to 6 months provided there are extenuating circumstances. BEWARE of the business broker offering you a short-term agreement with a retainer or other up-front fee. This allows them to collect the money from you without having to obligate to a long -term agreement. The Fee for selling the business. See above for a break down of fees. The business broker’s fee is negotiable under typical listing agreements. BEWARE of the broker who offers NOT to negotiate their fee – this type of business broker tends to be rigid on their approach, offers less flexibility and may lack the drive to sell your business. Business Broker Office. Make sure that the business broker has a decent office space and area to meet with you and your potential buyer. Look at the quality of their marketing materials, business brochures, etc. Ask to review a copy of the previous few Business Profile and Business Sales Memorandums they have created. Ask to review a copy of their Confidentiality Agreement, Business Buyer Profiles, etc. This are important since if you want the business broker to represent your business you want to ensure that they use quality materials and presents your business professionally to a prospective buyer. If they refuse FULL DISLOSURE – that is they do not provide written materials to back up their services then walk away! Understand and review ALL other contingencies built into the listing agreement. Have the business broker explain it thoroughly and – if in doubt – have your lawyer review the document.
The Guide to Selling Your Business Successfully
Jey Arul
19
How we can help you‌
We are trained and professional business brokers and M&A advisors. We are hired by business owners to sell his or her business in a confidential manner to qualified buyers. We represent you - the Seller - from buyer qualification right through to the successful closing of the transaction.
The Guide to Selling Your Business Successfully
Jey Arul
20
VR Method of Selling your Business At VR we have developed very effective and comprehensive processes to find and qualify the most appropriate buyers of medium and small businesses.
A dedicated, experienced team We have a team of 7 professionals with expertise in a variety of industries, with a wide range of skills that deliver consistent success combined with excellent client service.
Valuation is crucial At VR we believe a business is worth as much as a buyer is prepared to pay. Buyers will base their decision on future potential and what they can do with the business, not just its current performance.
Typical clients Most of our clients own small to medium sized businesses with sales ranging from $1 million to $25 million. VR method is proven to be the most effective way to achieve the best price.
Act today If you are considering selling your business and want the best price and terms, talk to VR Business Brokers. It can be an emotional process and you might get only one chance to sell your business, so call AJS Capital at 780-469-4769 for a free confidential meeting with one of our business advisors or email us at info@vralta.com At VR Business Brokers we sell businesses ‌ we bring opportunities!
The Guide to Selling Your Business Successfully
Jey Arul
21