It can be challenging, when interviewing business brokers and agents about helping to sell your business, to know who really will do the best job. You may find that the professionals you meet have years of experience and good references from happy clients. And you may like them. (Of course, it's an important part of their job to be likable). So how do you scrutinize them a little more in order to determine which of the candidates for listing broker might do the best job?
One solution is to ask five difficult questions that will be answered well by only the most qualified of the candidates to represent you in the campaign to sell your business. Those questions are:
1. What's the right price for my business? The best answer requires that the person being questioned knows three important things. One is the correct earnings multiple to be used in determining the value. A fast food restaurant, for example, is likely to bring a price that uses a multiple of 2.5 times average annual discretionary earnings for the owner. Stated another way, the accepted industry figure sets the price so that the return on investment is anticipated to be forty percent. That means the owner who has taken out an average of $100,000 in discretionary earnings over the past few years, can expect buyers to pay about $250,000 for the operation.
The second concept a smart and capable business broker understands is how to adjust that figure for specific characteristics of the offering. Is the lease about to run out? Is the equipment in need of replacement? Has the revenue and discretionary earnings figures been declining over the past few years? These factors might call for a reduction of the asking price from the figure arrived at by using the multiple of earnings formula. On the other hand, a long-term, below market rate lease, the seller's willingness to carry back at least thirty percent of the asking price, population expansion in f the neighborhood where the business is located could mean that sale of the business will bring more than the total calculated in the multiples formula.
The third part of the answer that is challenging has to do with the correct determination of the seller's discretionary earnings. The skilled business sales professional knows which of the business expense items should be added back to the profit figure in order to arrive at the correct discretionary earnings total. A less knowledgeable business sales person may not know how to conduct that calculation to arrive at the right answer.
2. Should employees and customers be told that the business is for sale? After all, maybe they want to buy it, or know of a possible buyer who would be interested and qualified. It might be tempting to let people know what you have planned. It certainly is easier than having to schedule showings when no employees or customers are around. But in most cases, the right answer is to keep discussions about the sale very private, so that customers, employees and suppliers are not aware of your plans. It can be disruptive to the business if employees worry about the future of their jobs, or if customers decide to seek another company with which to do business. And it is critical that a broker who wants to list your business has the requirement that any prospective buyers must sign a non-disclosure document before obtaining the name or identifying information about the business for sale.
3. Is it a good idea, then, not to let the landlord know the business is for sale? Since most owners are renting the premises from which they operate the business, cooperation of the owner of those premises will usually be necessary in order to achieve a successful business sale. And while it's best to avoid letting employees and customers find out about the intention to sell, it ordinarily is smart to discuss this matter with the person to whom rent is paid every month. The reason is that the marketability of the company may depend on how cooperative the landowner will be with the deal. Will he or she demand a fee to approve a transfer of the lease? Will the terms of the lease be changed, with higher rent or new restrictions on use, for a new owner of the business? The attitude of the landlord about a sale of the business should be assessed before the company is offered to the market of buyers. Otherwise, the seller and broker risk spending a lot of their time and advertising dollars with no chance for a return on that expenditure.
When preparing to sell a distribution company recently, the owner of the business learned the owner of the warehouse wanted a lease transfer fee totaling thousands of dollars. By knowing about this before starting the campaign to sell the business, the broker was able to arrange for another warehouse in the area to be used by the company. All the seller needed to do, since the lease at the existing building was month-to-month, was cancel that lease and arrange for the company to move into new premises. It was costly and aggravating, but it made it possible to sell the business without suing or paying off the landowner.
4. How might you approach competitors about selling the business? Sometimes, a competitor is not a good buyer and it can hurt a sales campaign to let others in the same business know a company is for sale. Competitors can use the information to worry customers of that company or try and take the company's best employees. The correct answer is really to have a discussion with the owner about whom among his competitors, might be a logical buyer. If there is no one that the seller specifically recommends, and believes will act responsibly with the information, then its best to avoid talking to competitors of the business being offered for sale. If the broker and seller agree that a specific person or firm might be a logical buyer, the broker may contact that prospect, but will decline to provide any information unless the prospect signs a non-disclosure agreement. And it needs to be a strong and enforceable agreement.
5. Do you cooperate with other business brokers? While most intermediaries promoting a business for sale are glad to hear from another licensee about a possible buyer, some brokers will not work with any of their colleagues from a different business brokerage. It's understandable that a listing broker may hesitate to cooperate with someone who is not skilled at selling businesses. If the selling broker or agent doesn't handle the showing correctly, or misrepresents the business for sale, the listing broker will have more problems with the listing than he or she anticipated. But it's not fair to a seller not to promote the widest possible exposure of the business to possible buyers. Some brokers handle this challenge by paying a generous finders' fee to the other broker, who is expected to step aside and let the listing professional handle the introduction and any deal that follows. Another solution is for the selling broker to agree to do what's needed from the "selling side," and to work closely with, perhaps work under the direction of the listing broker.
When a broker is to be selected to represent an owner in the sale of his or her business, it's important to make a careful choice. That decision may make the difference as to whether or not the company is sold. The way these five questions are answered by prospective listing brokers, can help the owner decide who is the best qualified to take the listing.
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About This Contributor: Peter Siegel, MBA is the Founder & Principal Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, small business owners/sellers, business brokers, agents, investors, and advisors). Reach him direct at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a puchase of) California businesses.
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Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.
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|Joe Sandbank, Esq. - Legal Services
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