The Language of Business Selling
It can be tough and confusing for many business owners to know all the answers to questions from buyers and the meaning behind commonly used business selling buzzwords..
Here is a quick guide to some terms and questions that are important for you to familiarize yourself with as you start and work through your business sale.
Is my business saleable?
Most businesses are saleable if they are priced correctly and are presented to enough people in the right sectors. Even if the business shows a loss.
Unfortunately, many business owners make the mistake of feeling that their business has a higher value than it does, without any actual data or information to support the selling price.
How do you value a business?
In both my roles as a business selling owner and business broker I have scoured the market and interviewed hundreds of Brokers and Lenders for useful information/tips on the topic.
I discovered that most of the information available was conflicting, and was all over the map.
What I found online was from lawyers, accountants, and financial planners who in fact have never sold a business and much of how they valued a business did not make sense, to the end user, buyers and their lenders.
If you own a small business with less than $2 million in annual revenue, then most of the advice available online or in books will not be useful to you and again in many cases written by people who do not have firsthand experience in selling a business.
Valuing a business takes some initial calculations, but for the most part it is straightforward. In the end a business selling price must make sense on two fronts.
1. Will the buyer be able to service a loan over a specified time period.
2. Will the buyer also be able to earn a strong income.
What role does a Lender have in a business sale?
Many business owners think that once they find a buyer interested in buying their business and eventually agreeing to a price, the business is on track to being sold. Unfortunately, their lender, the one writing the cheque, might not see things the same way.
Unless the selling price/valuation makes sense to a lender, chances are, funding for the sale will not be approved.
When is the best time to sell my business?
Since on average it takes between 8-10 months to sell a business, no one can predict when the right buyer will come along. Once a business owner has properly prepared the business for sale, and the valuations make sense, a consistent marketing campaign should begin.
** Whether you are considering selling your business yourself, or using the services of a broker, if you are too busy operating your business to properly prepare and focus on its sale, it might not be the best time to sell your business.
Selling the shares in a limited company or assets and good will. Which is best?
For shareholders of a limited company, there is a choice in how their business can be sold. The company (a separate legal entity) can sell its assets and goodwill, or the shareholders can sell their shares in a share transfer.
Following the money is a good start to illustrate the difference. For an asset and goodwill sale, the sales proceeds are paid to the company. For a share transfer, the consideration will come directly to you as the shareholder.
An asset and goodwill sale is a quicker legal process, avoiding many of the legal issues associated with a share sale.
There are pros and cons to each type of sale for both buyers and sellers. The tax treatment for both is different too, and careful consideration should be given as to which is the best route for your circumstances.
You can keep your options open until drafting the sale terms. Yours and the buyer's objectives will dictate which is the best course to follow and keeping an open mind can often create a better deal structure.
What tax will I have to pay on selling my business?
The tax implications of selling a business will depend on your personal circumstances.
Some form of tax is inevitable, and it is vital you get advice on the tax regime applicable to you. Ideally you should get this advice at the outset, as it can have an impact on how best to structure a deal/sale.
Specialist tax advice is highly recommended as part of your preparation for the sale process.
What is a Business Purchase Agreement
A Business Purchase Agreement is a legally binding contract outlining the agreed-upon conditions of the buyer and seller of a business or corporation.
It is the main legal document in the business selling process.
It sets out the agreed elements of the deal, includes a number of important protections to all the parties involved, and provides the legal framework to complete the sale.
Should I use a business broker?
There are pros and cons in deciding if to use the services of a broker. Business owners need to do their homework.
Since the business owner will be responsible for preparing and providing all the information needed by a buyer during the due diligence process, as well as being the person, a buyer wants to speak with directly, how & what value does a broker provide during the overall process is important to understand before signing any contracts.
Understanding a Listing Contract and the role of the broker before signing.
Business owners should know.
· How long does the contract last for?
· Are there any fees owed/earned after the contract expires?
· Breakdown of the commission charged, and how it is earned?
· Can the contract be canceled without penalties?
· What happens if I find the buyer?
· How are buyers found?
· How are buyers vetted?
· How is the business sale kept confidential?
· How is the selling price for my business established?
· What is the selling plan. How am I involved?
Do you have buyers?
Many times, when speaking with business owners I am asked if I have any buyers in mind for their business. The answer is maybe. In the business selling world there is a difference between buyers and qualified buyers.
Part of the marketing that is included with BizPlanSell is our clients businesses being featured in The 3 Minute Read a bi-weekly Newsletter, with a subscription base of over 10,000.
Ads are also placed on many business for sale sites, social media sites and online classified sites as well.
Truth be told, there are many steps that need to be taken before knowing the true seriousness of any buyer.
How do I know if a buyer is qualified
Unfortunately, 95% of these inquiries are from “unserious buyers” In most cases they do not have the financial capacity to buy a business, are competitors or brokers. See Vetting
What is vetting?
Vetting is the process of asking an individual or company to supply certain information prior to deciding whether to go forward with supplying information regarding the business operation.
How do you keep my business sale confidential?
The processes used in BizPlanSell have been designed to safeguard the confidentiality of our clients. It uses a tried-and-tested process of maintaining confidentiality.
All sensitive and confidential information is provided by the business’s owner directly.
This allows the business owner to move forward with a buyer at their own pace before identifying the business.
What is Due Diligence?
The process where a purchaser will carry out a comprehensive appraisal of the business.
In layman terms this is when the buyer gets to look under the hood.
Typically a due diligence process will cover commercial, legal, financial and other information – such as tax, IT or intellectual property.
It is the buyers chance to understand and explore exactly what they are buying.
What is a Letter of Intent (LOI)
A letter of intent is a letter from a buyer to the seller of the business that lets them know that they are seriously considering submitting a formal bid to purchase the business.
It includes the terms and conditions of the sale and as well as what a buyer is willing to pay for the business. Generally speaking a Letter of Intent is not a legal binding agreement. It is used to start the process of trying to negotiate a business sale
What are Warranties in a (LOI)?
Warranties are a part of the legal process for a business sale. They are a statement made by the seller covering certain facts about the business the seller believes to be true.
If any warranty is deemed not to be true, it could lead to a claim for breach of warranty and then open a case for damages.
Warranties can often appear to look onerous. However, your lawyer will talk you through the process which should be straightforward.
What are the Terms and Conditions in a LOI?
Two of the most common items within the paperwork of a business sale are 'Conditions' and 'Terms'.
A Condition is a clause the buyer needs to waive or fulfill by an agreed time in order for the sale to be finalized.
A Term is used to clarify what the buyer expects to be done or included in the property. They explain, in detail, the exact agreement for a sale: cost, amount, delivery, payment method, payment timing, trade credit, credit terms, and more.
What is a Business Purchase Agreement
A Business Purchase Agreement is a legally binding contract outlining the agreed-upon conditions between the buyer and seller of a business or corporation.
It is the main legal document in a business sale.
It sets out the agreed elements of the deal, includes a number of important protections to all the parties involved, and provides the legal framework to complete the business sale.
What is Vendor Financing ( VTB)
Vendor financing is sometimes called a vendor note or vendor takeback. It's effectively a loan that the business owner gives the buyer to cover part of the sale price.
The seller typically agrees to be repaid over time with interest.
I tried to sell my business before, and nothing happened.
This is a very common problem.
There are many different reasons why most businesses do not sell but some of the more common reasons are:
- Poor marketing
- Over ambitious selling price. Asking price is not backed by facts
- Lenders qualifications
- Poor preparation
- Inexperienced sellers
- Small buyer pool who have the financial capacity to purchase a business
- Poor overall interaction with buyers
- Poor or no planning in place
How easy is for buyers to qualify for financing.
Getting financing for a business purchase is difficult. 67% of buyers who apply for financing are turned down.
What are the chances of selling my business?
Most businesses don’t sell. Most business selling stats show the likely hood of a business owner/professional business seller completing a successful sale roughly 25%-30%. This number alone should underline the importance of proper planning for business owners wanting to sell their business.
Buyers have changed
Unfortunately many of the methods used when selling an business have changed little over the last 40 years. These same old antiquated, old-school processes simply are not relevant today.
Sign an NDA. Here are the financials. Make a decision. Next. Doesn’t cut it anymore.
Today's business buyers are better prepared, sophisticated and want to know that their best interests are being served. They want a personal and well thought out succession plan and want to work directly with the owners of the business (not a third party), to execute that plan.
I have had several buyers for my business who seemed interested, but all disappeared.
Only 1 out of 15 buyers who start the Due Diligence process cross the finish line. This is why having a Buyer Vetting Process is important.
It helps to minimize wasted time for business owners
What does Seller Discretionary Earnings (SDE) mean?
Seller's discretionary earnings is a cash-flow based measure of business earnings in an owner-operated business.
It includes the profit before tax and interest of a business before the owner's benefits, non-cash expenses, extraordinary one-time investments, and other non-related business incomes and expenses.
In a nutshell, it provides insight into how much income/benefits a buyer would expect to see if purchasing a business.
What does EBITDA mean?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
EBITDA is useful when comparing companies with different capital investment, debt, and tax profiles.
What is a teaser document?
This is usually a short, one-page document which describes some initial business details and the opportunity it represents. It should provide enough information to create interest while being anonymous and confidential.
What is a Client Information Memorandum (CIM)
A Client Information Memorandum is a working document provided to potential acquirers once vetted, and an NDA has been signed. The CIM describes the business and operations and often includes limited financial information.
Care must be taken to get the balance right between disclosure of information and protecting sensitive details. It should not contain employee or customer names for example.
Typical information included is a brief history, industry background, current operations, property and locations, employee numbers/key staff, financial summary, SWOT analysis, current trading, and opportunities for growth.
It is important to get this document right as it is one of the main selling tools used to elicit interest. Also, any information provided must be accurate.
What is an NDA?
An NDA, or non-disclosure agreement (often referred to as a confidentiality agreement) is a document given to an interested party to sign before the release or disclosure of any information about your business or sale.
An NDA authorizes and restricts the use of information solely for the consideration of acquiring the business. It allows the flow of information to an acquirer and their advisers. NDAs are typically legally binding but can be very difficult to enforce.
Thinking of Selling Your Business?
How do I learn if BizPlanSell is for me?
Learning is the key to continuous success
To help you decide if BizPlanSell is the right fit for you, let’s schedule a Discovery Call
During our call I would like to learn:
• A little about you and the history of your business.
• Your thoughts on selling your business and where you are in the process.
• Why you are selling your business
• Answer any of your business selling questions
A Discovery Call will provide you with value and help you start your business sale off on the right foot.
To schedule your Free Discovery Call please complete the information box below.