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Selling A California Small Business? This Checklist Will Determine Your Success

Some owners interested in selling a California business believe they are destined to succeed in getting the price and terms they want because their businesses are so desirable. Others think that whether or not they can achieve a satisfactory deal is a matter of chance.

Both opinions usually are wrong.

The reality is, there are ten specific factors which determine the likelihood that a seller will get a deal at his or her terms. Taking those factors into account when preparing the company for the market will increase the chances of achieving a successful sale. And the focus should be on those factors that are weighted more heavily than others on the probability checklist for salability.

The factors and their importance in predicting success are:

1. Price: As much as 30% of the likelihood of selling a California business is linked to the way it is priced. The majority of sellers in the state are so fearful of selling their businesses too cheaply--and failing to collect all the money they could have received-- they make the mistake of asking too much. Pricing a business correctly is the most heavily weighted factor in the checklist.

2. Deal Structure: How much money is going to be required as a down payment to purchase a small or mid sized California business for sale? How much seller financing will be provided? And what are the terms of the seller's carry-back loan? Will the seller be willing to have his or her note subordinated to a loan made by a financial institution that provides the buyer with money needed for part of the down payment and some working capital?  These and related questions are addressed when the seller creates the deal structure. And they impact the salability of the business. In fact, 15% of the likelihood that the business will sell successfully result from the way the seller structures the financing of the offering.

3. Adjusted Net Income and Earnings History:  When a buyer evaluates an offering from someone selling a California business, the price and terms constitute two-thirds of the most critical components of a deal. The third factor is how much money the buyer can expect to receive from operations of the business. What he or she is looking for, specifically, is the net earnings available to a seller before deducting from earnings, the payments for interest, depreciation, amortization and other discretionary costs. And the smart buyer is interested in more than just the amount of the most recent adjusted net income. It's important to know whether adjusted net earnings or cash flow have been consistent over the past three to five years. If not, a buyer will need an explanation about what changes resulted in an increase or drop in the earnings figures from one year to the next. The vital calculation for a buyer, when comparing earnings history and the price of the business, is the return on investment. From the seller's standpoint, this factor can account for 15% of the chances that the business will be sold at the desired price. Showing satisfactory earnings increases the chances of selling by 15%. If the business lacks a solid record of earnings, the likelihood of a successful sale declines by that percentage.

4. Lease Terms: Most any experienced business intermediary--broker or agent--can tell numerous stories about the agreements between a buyer and seller that came unraveled when they contacted the owner of the property where the business is located. Cooperation of the landlord or landlady is absolutely essential for many business owners who want to sell. This is particularly the case for retail companies that depend on location to account for much of their business. A Hallmark Greeting Cards franchise, grocery store, dry cleaning agency and many other kinds of small, location-sensitive businesses will lose most of their customers if they have to move away from the retail area where they have been located. It's often a waste of time for a seller to offer a business for sale without first making sure a good lease will be provided to the new owner.

5. Pre-qualification for Financing: Most sellers believe it is the responsibility of the buyer to get his or her own financing and don't bother to get their business pre-qualified by a lender (or multiple financial institutions) for a business purchase loan. By not visiting one or more financial institution and asking for pre-qualification of the business, they are missing an opportunity to increase the salability of their company. It's valuable to know that a business will be qualified for a business purchase loan, assuming the buyer also is qualified. It can save time when a buyer is seeking a loan commitment if the institution already has reviewed the business and considers it a loan-worthy purchase. And it's a good selling point when a seller can say the business was pre-qualified by a local bank or other financial institution.

6. Market, Competition and Business Cycle: To some extent, external factors can influence the likelihood of a business owner finding a qualified buyer and closing a deal. A digital services company in a growing market is more saleable than a company oriented around obsolete technologies. Less likely to sell is a business in a neighborhood dominated by a larger, stronger competitor. The chance to buy a construction supply company is a great opportunity during a real estate boom, but less appealing--and less likely to sell--when there is little or no building of houses or commercial buildings going on in the area.

7. A Concise Profile Sheet: This provides a brief history of the business and some pertinent facts about its current operations. Included would be hours of operation, description of customers, number of employees, distinguishing characteristics of the business that lead to its success, terms of the lease and related details. This Profile Sheet is usually given after a Non-Disclosure/Confidentiality Agreement is signed and should also include basic financial information about the business, especially how the adjusted net income or cash flow was computed (this is probably the most important financial info buyers seek along with history of overall earnings).

8. Ad Copy and Promotional Material: Online advertising and other methods of promoting the business for sale should be worded carefully to emphasize the desirable aspects of the offering without going into too much detail - however more info is better than less (give too little information and buyers will not attempt to reach out to you). Part of the promotion campaign is to have a dedicated phone number/and or email address so contact from interested parties won't come to the business and ruin the efforts to maintain confidentiality about the campaign launched for selling a California business.

9. NDA (Nondisclosure Agreement) Some sellers don't understand why making sure to get a signed NDA from each prospective buyer improves the likelihood of securing a satisfactory deal. There is an indirect cause-and-effect relationship because the seller who manages the introduction of his or her business to prospects has a better chance of managing all the way to a closed escrow than the seller who just responds to the questions and needs of buyer candidates without taking control of the process. Because getting a signed NDA is the first step in qualifying a buyer, the seller who fails to do so is probably wasting time with buyers who are not qualified, and increasing the chances that employees, customers and vendors will learn the business is for sale.

10. Tax Returns and Financial Analyses: The question critical to buyers--what are the earnings of the owner?--should be answered with more than a figure printed on a profile sheet. Buyers tend to be skeptical about the statements made when they are introduced to a business for sale. That is especially true when it comes to any claims about the owner's adjusted net income. To combat this problem, the smart buyer provides a buyer candidate with the documents that prove the assertions about adjusted net income (cash flow).

Studies reveal that 70% to 75% of campaigns to sell a small or mid-sized California business fail to accomplish the desired objective. In other words, about three-quarters of the businesses offered for sale in California are never matched with a business buyer. The 25% to 30% of owners who are able to find a buyer at satisfactory price and terms usually are those who implement the ten factors on the salability checklist above when selling a California business.

#photo#About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established in 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily). Peter consults daily with business owners, brokers, agents and other looking to successfully sell a California business. He can assist you with business valuations/resources, examples of/producing successful Profile sheets, referrals to successful brokers and agents, pre-qualification for business purchase financing, formulating a successful deal structure & price and put you in contact with motivated business buyers throughout the BizBen Network. Reach him direct at 925-785-3118 to discuss strategies regarding selling a California small to mid-sized business.

Categories: BizBen Blog Contributor, Deal And Escrow Issues, How To Sell A Business, Selling A Business

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (over 25 years), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Posted By: Chuck Post: Laundry Specialist, Consultant, Due-Diligence    

Peter, great blog! Preparation is much more important today than ever. If the Seller truly wants to maximize the selling price he or she needs to demonstrate the benefits of the business from A to Z. This requires a good Market Definition. Having a prepared Business Review with Competitive Analysis, Demographics, Income History, Projections, Lease Analysis and the short & long term potential of the business (Business Plan) would be time and money well spent. Additionally, the red flags should be worked out in advance. This may require negotiating lease issues early. If you anticipate a problem with the lease being extended, increased or extended it is best to work the issues out before you are dependent on the Landlords decision to make your deal come together. Also critical is your businesses qualifying for financing. Your Financial Statement should support the combined price and terms you anticipate settling on. If it will not, you may need to adjust your thinking or consider carrying paper in order to get a sale done. At any rate, it is likely that the issues you have hanging at the time an offer is accepted will cost you. Often, many more times than what the corrections would have cost.


Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area    

Peter's checklist hits the mark--strategically planning the business sale considering all these items well go a long way to a successful, profitable sale.

My comments on two items:

DEAL STRUCTURE: Studies have shown that business owners who are willing to "take back" some financing are likely to sell their business for 12% to 15% more than those who do not. By being willing to "hold paper" on 10% to 20% of the purchase price, sellers attract more buyers, signal buyers that the seller has confidence in the future prospects of he business, and assure third-party lenders that the seller endorses not just the business but the ability of the buyer to be successful. Is there risk? Of course. But this can be mitigated with proper personal guarantees and tangible collateral (liens on equipment or real estate, for example). However, consider this: How much is really at risk? If the seller is getting 15% more for the business and is financing that last 15%, what happens if the buyer defaults? At worse, the seller ends up with the amount he would have gotten for a cash sale anyway. So, practically speaking, very little or nothing is really at risk.

LEASE TERMS: Sellers of retail or location-sensitive businesses must be realistic about what they are selling and must be proactive in securing the long-term rights to their location. Recently I visited a retailer in San Francisco who wanted to sell his business. Frankly, it was extremely run-down and unattractive; but, the owner wanted me to look at the whole facility before we talked--store space, warehouse space, "extra" space, freight access, street exposure. Then I asked about his figures and ongoing business. When I told him that his answers meant he had a business that could not be sold, he smiled and said: "Yes, but I have a lot of space in a wonderful location in a neighborhood undergoing a huge transformation and a new corporate campus opening around the corner that will employ five to ten thousand people. This location is very valuable!"

So, I asked the obvious: "Do you own this building?" Answer: "No"

"Do you have a long-term lease that you can transfer?" "No, it's month to month."

Then, I told him: "Your landlord has a location that is very valuable -- to him; but it adds no value to your business."

So many sellers just don't understand the obvious--if they don't own the building or have a long-term transferable lease, the location does not belong to them, but rather to the landlord. And, if the business is location-dependent, not "owning" that location massively reduces the price they can expect when selling the business.


Posted By: Business Broker, Northern California

Another important factor that comes into play is timing. If a business seller receives lots of interest and a few offers early in their effort to sell their business their temptation is to believe they underpriced the business and hold out for higher offers. I'm currently working a transaction where the first buyer offered $2 million to buy the business 9 months ago. The seller initially accepted and then during the process to finalize the purchase agreement added contingencies that were not part of the original offer and so the buyer withdrew from the sale. A second buyer was found quickly but the buyer saw issues the first buyer didn't see and withdrew from the sale. The business is now available for $350,000 less because its not performing as well as previously.

Selling and buying a business is about doing the best you can with what you have at that time. Closing a sale takes months and not weeks. As a result, life happens both at a business and personal level to all those involved.


Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area    

When establishing an asking price, it is very important not to get "greedy." When you ask significantly more than the business is worth, you miss potential buyers and sacrifice credibility. ("If they're that unrealistic about the price, what else are they telling me that's pure fantasy?")

If you really want to sell/retire/move on, what's the psychological, emotional, and social cost of holding out for an unrealistic number? Conversely, even if you want to sell real fast, be careful not to set the price too low. ("They're giving this business away--what's wrong with it?")

The prudent seller will consult with a professional business broker and get an accurate and realistic evaluation of the market value--not a "pie in the sky" exaggeration designed just to get the listing.






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