Guide To Selling a Business

You need to have a well thought out plan to effectively present your business for sale. Business owners often don't consider the fact that the prospective buyer knows little about the business being offered. Most of the information will come from you. You are far more likely to interest a buyer if you have a solid oral and written presentation. A sales presentation should cover the key points including strengths as well as weaknesses of the business. When weaknesses are addressed right upfront, their effects are far less damaging than if they are discovered later by the prospective buyer.

Moral issues aside, consider the fact that a prospective buyer will go through your business very carefully. If down the road he or she discovers that you either lied or did not fully disclose information, the natural tendency will be to suspect more lies and omissions.

Protecting Confidentiality

In presenting your business for sale, you will be asked to provide a lot of sensitive and heretofore private information to prospective buyers. This is an uncomfortable position to be in. However, the buyer does have a legitimate need to have the information. In deciding what to release, consider the following factors:

Why Is The Information Needed? -- Will the information help the prospect to make an informed decision? Don't be afraid to ask a prospect why he needs requested information if the need is not obvious.

What Is The Potential Harm? -- If the requested information was provided, and the prospect did not buy the business, what is the potential harm? Would it cause significant damage if, for example, word got out that you are 60 days overdue on a bank note, you lost a major contract, or one of your suppliers is in financial difficulty? Balance the potential harm of disclosing the information against the potential harm of not releasing it (i.e., the likelihood that not releasing it would cause the prospect to not go forward). If releasing the information would not cause great harm, don't be afraid to provide it.

Confidentiality Agreements

Insist that each and every prospect sign a confidentiality agreement. By signing such an agreement, the prospect essentially agrees to keep the information confidential and to use it only for evaluation purposes. While such an agreement does not provide a guarantee of confidentiality or misuse of information, it at least offers some degree of protection. If a prospect will not sign a confidentiality agreement, do not release any information. By refusing to sign, the prospect is all but telling you that he or she is not really looking to buy your business but is looking for information at your expense.

Most business brokers have confidentiality forms. If you are selling on your own you can purchase the forms on the Internet.

Customer Lists and Proprietary Information

There is never a justification to release your customer list before closing a sale. In many cases this is most of what you have to sell. While it is usually appropriate to release a few sample names, it is never appropriate to release the full list.

Likewise, don't release specific details on other information that falls under the realm of proprietary information, or information that offers you a competitive advantage. Unusual and effective marketing techniques, secret formulas, secret manufacturing processes, and important business contacts should be kept secret until a deal is closed. You can certainly refer to the fact that you have proprietary information, but stop short of releasing details that would enable a competitor to acquire the same advantage that you possess.

In summary, you need to strike a balance between providing the information necessary for a buyer to make a decision and providing information that could be used by others to the detriment of your company. Most sellers tend to hold back too much rather than too little. There are few hard and fast rules, other than to be sure that a buyer has signed a confidentiality agreement and that in your judgment, the prospect is a serious one. Section IX offers more details on screening and evaluating potential buyers.

Written Elements

One Page Overview

A very brief description of the vital facts about the offering should be prepared. Elements to include in this write up are:

• Name of business*
• Asking price
• Type of business (for example, restaurant, importer, manufacturer, etc.)
• Description-- one or two sentences
• Gross Sales for most recent year
• Approximate compensation to owner
• Approximate number of hours worked by owner each week
• EBITDA
• Year founded
• An indication of growth rate (either in sales or EBITDA – alternatively you can provide 3-5 years of Sales and EBITDA information)
• Size of facilities in square feet
• Basic Lease Terms
• Business Structure (Sole proprietorship, Partnership, corporation, S-Corporation)
• Miscellaneous or Other-- Special terms or considerations

The purpose of this brief write up is to let the prospective buyer decide if there is interest beyond initial curiosity. It can be used roughly the way a job seeker uses a resume; show it to

*It is advisable to use clearly fictitious names such as XYZ Manufacturing Co. or ABC Auto parts. This protects confidentiality while providing a way to reference the firm through the fictitious name.

An example of a one page write up appears in appendix I.

Detailed Business Description

A more detailed write up (sometimes called a prospectus or overview) should also be prepared. This document (typically 5-10 pages in length) will go into more detail on the company's past, present, and future. It will also detail the specific opportunity(s) that the company offers such as synergies, transferable customer base, etc. A sample description appears in appendix II.

In preparing this overview, it is important to stress the elements that buyers are looking for that you have to offer (see section II for a discussion of what buyers are looking for). If you have a "locked in" customer base, stress that fact. If you have hard to get licenses, proprietary technology, or a "turnkey operation", stress those elements.

For a smaller business, this business description should contain the following items:

• Summary Description
• Current Opportunity
• Current Management
• Labor
• Markets
• Marketing
• Product
• Price
• Distribution
• Market Niche
• Competition
• Price and Terms
• Highlights of Financial Performance and Projections

Be careful when providing projections. If you optimistically project 10% growth over the next year and 4 months later a buyer who is considering buying your business sees that you are on track to grow sales 2%, you will have a lot of explaining to do. Deals have fallen apart because sellers cannot meet their own projections.

For a larger business, the overview should contain:

• Cover Page (with photograph)
• Notice of Confidential Enclosure
• Table of Contents
• Opportunity Summary
• Financial Summary
• Offering Price
• Company History
• Ownership & Legal Structure
• Management and Organization
• Management personnel plans after sale
• Personnel
• Certifications and Licenses (if applicable)
• Products (if applicable)
• Services (if applicable)
• Software and Management Systems (if important to the business)
• Business Management Software
• Technical Software
• QA programs
• Other Management Systems
• Major Customers (use pseudonyms)
• Competition
• Marketing & Sales
• Geographic Scope of Operations
• Growth & Improvement Opportunities
• Organic Growth
• New Customers
• Geographic Expansion
• New Products and/or Services
• Facility
• Appendices
• Appendix A - Recast Financial Reports
• Notes to Appendix A
• Appendix B - Proposed Balance Sheet at Closing
• Appendix C - EBITDA Calculations and Recasting
• Appendix D - Year to Date Financial Information (if more than 4 months into the fiscal year)
• Appendix E - Organization Chart (optional, titles only)
• Appendix F - Certifications, Licenses and Registrations Held by Personnel (if applicable)
• Appendix G — Complete Product and Service List or catalog (if applicable)
• Appendix H — Other Marketing materials (optional)

This document should only be provided after the prospective buyer signs a confidentiality agreement.

This description will serve as a detailed overview from which buyer and seller can hold discussions. Expect the prospect to have many questions about the write up. However, the description should point the prospect in the direction of the questions that you want to be asked-- those for which you have good solid positive answers.

Recast Financial Statements

Current and historical financial statements are an integral part of nearly all business sales. You need to have available current statements (for a period ending no more than three months ago) and past statements going back at least two but preferably three to five years.

Statements need to be recast to show a true picture of compensation to the owner. It is less important to categorize compensation as salary, profit, or benefits, than it is to clearly show all compensation that the company is earning for its owner.

Further, certain items should be added back for buy/sell purposes. For example, some of depreciation should be added back to adjust for accelerated depreciation methods that are used for tax purposes. Other items such as interest, contributions, and rents paid to another entity owned by the seller should in some cases be added back, not necessarily on the financial statement itself, but on a separate sheet prepared for the prospective buyer.

The statements should be prepared by a CPA. Even if you are capable of preparing your own financials, buyers are highly suspicious of statements not prepared by a CPA. A business broker or appraiser could advise you in terms of appropriate add backs and other items that can enhance your financial presentation. If you are not retaining a broker to sell your company, you might want to pay a broker to advise you on add backs and other factors regarding the presentation of your company.

Don't offer your financial statements before you have a signed confidentiality agreement from the prospect. In fact, don't show your financial statements until you have shown the prospect your overview description and sized him or her up as a serious prospect. Some brokers go so far as to ask the prospect for a deposit (fully refundable) before showing any statements.

I like the idea of making the security deposit “go hard” (become non-refundable) after the buyer and seller have signed an LOI (agreed on terms of the deal) and the buyer has completed due diligence (found that the business was as represented).

List of Tangible Assets

Prepare a list of all tangible assets owned by the company. Be sure to include items that may have been expensed for financial reporting and that have been fully depreciated for financial reporting purposes. Include your estimate of fair market value and price paid if available. If there is a lot of equipment owned, you might need to have it appraised by a qualified independent appraiser. This is a more detailed list than your firm's balance sheet. The balance sheet will group equipment together, not list the details. Further, a balance sheet will not provide an accurate picture of the true value of items that are fully depreciated and of items that may have been expensed (not capitalized) but are actually tangible business items that will become the property of the new owner.

Verbal Discussion Elements

Be Ready To Explain Why You Are Selling

Buyers are very suspicious of any business for sale. They always want to know why a seller is selling a business, and they often suspect that the reason is because the business is in trouble. It is up to you to explain (and often prove) that there is another reason for the sale. Retirement of the owners is probably the most trusted explanation, as long as the sellers are of traditional retirement age.

Whatever the reason for selling, don't be vague. Be prepared to answer the question head on without discomfort or hesitation. Other business opportunities, "burn out", illness, and divorce settlements are some of the more common reasons people have for selling their businesses.

Anticipate Problems and Objections

As with any selling situation, you need to anticipate likely objections and to be prepared to deal with them. The old saying of No objections, No Sale applies in selling a business.

I ask clients right up front for a list of problems and facts that will detract from the salability of the firm. I want to be ready for them when a prospect raises the points. There are an infinite number of possible objections. Some of the more typical objections include:

• Decreasing Sales
• Industry Condition
• General Economic Conditions
• New Competition
• Incomplete financial information
• Fear of losing customers in an ownership transfer
• Deteriorating Location (i.e., neighborhood deteriorating, construction projects, etc.)

Conclusion

In selling a business, a good solid written and oral presentation is essential. The presentation needs to include written narrative descriptions, financial statements recast for selling (rather than tax) purposes, ready answers for objections, and a clear reason as to why you are selling. In preparing a presentation, always keep in mind those elements that the buyer is looking for-- that which you have to sell that a buyer wants to buy.

It is highly recommended that you have an outsider prepare your presentation for you, or at least help with the presentation. This recommendation holds even if you intend to sell the business without a broker. A good business broker or consultant can look at your business from a more objective perspective than you can, and size up its strengths and weaknesses. A qualified broker or consultant will also have a handle on what buyers are looking for and can integrate this into a presentation.

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