5 “Must Know” Items for Buyers and Sellers of Businesses

by Keith Basik on March 5, 2012

Questions anyone?  I see that some of you out there are raising your hands.  And for good reason.  Buying and selling a business is not an easy topic to master.  Let’s start with a few “Must Know” items that hopefully will provide you some direction in buying and selling a business.

1. Understanding Valuations: You need to understand  your industry

For example, does your industry use capitalization rates or percentage of sales or multipliers against SDE (Sellers Discretionary Earners)?  You need to know how to adjust off of these multipliers.  A slight difference in the industry category, for example, an assisted living facility vs. a skilled nursing facility, can mean a great difference in how you look at profit margins and what capitalization rate to use.

Also, a difference in the size of the business or project can alter multipliers as well, since various aspects of economy of scale come into play.  Yet, understanding these multipliers are just the beginning.  A good business broker or intermediary will recast the valuation based upon the nuances of a particular practice or business to fine tune the valuation to its true number.

2. Non-Disclosure Agreements:  The Need for Confidentiality and Confidentiality Agreements

In particular, sellers of a business are very concerned about having the confidentiality of their business being breached.  If word was to get out that their business was for sale, it could have a significant impact on morale, their ability to retain employees, their relationship with their competitors, and, in short, their bottom line.

A perspective Buyer, at the onset, needs to know and be educated on this aspect of  buying a business.  A broker/intermediary can assist both parties in ensuring confidentiality is maintained by not only assisting with the education process, but also ensuring the proper paperwork (e.g., NDA – Nondisclosure Agreements) are inserted into the process. And just as important, ensuring this paperwork is strong, creditable, and binding.   Too often, a buyer or seller use off-the-shelf contracts and NDAs that have not been vetted and provide little to no protection for either party.

Along with this aspect, as a seller, it is nearly impossible for you to personally attempt to sell your business and maintain that aspect of confidentiality. A third party needs to be inserted into the process to ensure non-disclosures are in place prior to divulging the name of the business. If you are the owner of the business, it becomes almost impossible to discuss the possibility of selling the business to a potential suitor without giving up which business it is.

3. Knowing the Market: You have to know what you are up against

Knowledge is power.  It also just makes good business sense.  Both a buyer and seller of a business need to know what other similar businesses have sold for or are on the market for; otherwise, you are just flying blind.  Having access to or finding that data pool can be difficult at best, particularly when it comes to businesses.

A good business broker has current and historical data that they can bring to the table to assist in this process.  Even as a seller, this data is extremely important since you may price your business either over or under price  of its true value.  Even over pricing your business could present problems.  In essence, you may pass by offers that are good but you don’t realize it.  As such, your business can sit on the market for a long period of time unnecessarily–the adage of “time is money” comes into play.

Obviously, as a buyer of a business, you do not want to overpay for a business.  If you do, you live with that mistake for many years to come.  A business broker or intermediary can not only help you gather the needed data, but also can help you know how to take that data and arrive at a true and fair price for that  particular business.  As mentioned, you first have to understand the baseline price but then you need to be able to know how to adjust off  that baseline to know what you should offer.  The key is having the data and knowing what to do with it, which is one of the roles of the broker.

4.  Negotiating the Sale: The value of  an intermediary

Emotion, emotion, emotion.  Similar to location–location–location, “emotion” can play a big part in the whole  selling process.  The importance of having someone act on your behalf, with knowledge of the industry, and having negotiated similar deals, can not be overestimated.  It can save you an inordinate amount of time and money.

Within this equation, is the aspect of emotion.  Having a broker help to “calm the seas” and effectively convey the pros and cons of an offer or counter-offer is extremely important, because sometimes it is not what you say but how you say it and who is saying it.  There is a natural combative interaction between a buyer and seller, and as such, having a third party on one side or both sides is a prudent way to alleviate the tension.

Thus, Step One is having an intermediary in the process. Step Two is ensuring that the intermediary has the experience, knowledge and temperament to articulate your point of view (buy/sell price, concessions, structure, etc.) in a manner that is understood and well received by the other side.

 5.  Understanding the Whole Process: There is much to do

The buying and selling of a business is a process.  From a seller’s point of view, it is understanding the following:

  • how to analysis their business (without emotion or prejudgement)
  • the collecting of data
  • the pricing
  • the packaging
  • the searching for and qualifying of the perspective buyers in a confidential manner
  • the deal structuring
  • the negotiation
  • the closing and post-closing (e.g., non-compete, transfer, misrepresentations, etc.)

From a buyer’s perspective, it is understanding the following:

  • how to analysis the business (without emotion or prejudgement)
  • the collecting of data
  • the searching for and qualifying of perspective businesses
  • the deal structuring
  • the negotiation
  • the closing and post-closing

Underneath each of the above are various subsets to consider and work through.

Class Dismissed…At Least for Today

At the end of the day, although these steps can be “negotiated” solely by a buyer or seller, there is much merit to the idea of having an experienced third party, in the way of a business broker/intermediary, to provide their services to the buy/sell process to help avoid mistakes and missteps that can live with you for years to come.

 

 


Leave a Comment


Previous post:

Next post: