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Article from the International Business Broker Association Inc.

The typical business owner will only sell a business once. Understanding the complex process involved will help produce the best results. But don’t fall prey to the myths that can derail or seriously affect a potential sale.

Myth #1 – I Can Sell It Myself

Many owners believe they’re qualified to sell their business without professional assistance. Many owners are entrepreneurs and the key salesperson for the company. But selling a business is not like selling a product or service.

If you’re looking to sell on your own, confidentiality is lost. If word of a potential sale gets out, there are definite risks of losing clients, employees and favorable credit terms.

Do you really have the time to run your business and compile marketing materials, advertise, screen buyers, give tours and facilitate due diligence

When you’re looking to sell you want to put even greater emphasis on running your business, boosting your sales and not taking on new challenges.

Myth #2 – I’ll Sell When I’m Ready

Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business.

Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.

Myth #3 – I Know What it is Worth

Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.” Still others utilize industry multiples.

A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.

Myth #4 – It’s Like Selling a House

Preparing to sell your house may take a few weeks, then you want to get the word out to everyone that the house is on the market. Once you get a satisfactory offer, you sign on the dotted line, turn over the keys and move on.

Selling a company is much more complex. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.

The average house will sell in less than four months, while the average business sale is nine months to a year.

Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success.

Sound sale strategies will bring you the optimum price the market will bear. Go to market with realistic expectations by getting a professional valuation and using a professional business broker or intermediary.

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If you are a seller, it’s lonely at the top. Normally, you have your spouse, your partner and possibly your CPA and attorney to assist you in making major decisions. But in reality, it falls upon your shoulders to determine whether you should or should not sell. Many times, a CPA or attorney will encourage you to stay in business because they want to retain you as a client. They do not understand the importance of freedom to an entrepreneur who has invested blood, sweat and tears over many years and now wants to take a break or a breather. Your attorney and CPA are very important in the completion of the sales process after you have made the decision to sell.

A business broker who has been helping sellers and buyers on a daily basis fully understands the trade-off between personal freedom and financial freedom. They are not oriented towards bodily retention. They are oriented towards retention of goodwill. There is tremendous personal satisfaction in having been the causal agent for matching the needs and wants of a seller and buyer who each have differing objectives.

When working with a seller, they have to maintain communication and keep telling the seller to keep their powder dry. When working with a buyer, they have to control excessive enthusiasm. There is a delicate balance that must be maintained in order to have a successful conclusion.

A business broker knows experts in various professions that can be brought to the table when necessary. It might be a CPA, an attorney, a financial planner, an investment advisor, an insurance agent, an EPA expert, a real estate appraiser, or an equipment specialist, etc.

The business broker is the quarterback for the team. They need to know when to pass the ball to another expert and let them run with it. They need to know when a conference call with the seller and buyer is adequate. They need to know when a face-to-face meeting is necessary. And most importantly, they need to know when to let the seller and buyer bond with one another. Excessive interference based on insecurity will kill the deal as quickly as inadequate personal involvement.

The business broker constantly serves as the “reality check” for the seller or the buyer. When the seller says “I want x dollars and it must be all cash” as the asking price, the business broker knows that emotion is driving this statement, and that over time, personal freedom will allow the seller to become more negotiable.

When the buyer says “find me a company for $150,000 where I can earn $100,000″, the business broker will present the buyer with a list of companies where they can earn $100,000. But the buyer will quickly find out that their expectations may differ greatly from what the market has to offer.

The most important reason to use a business broker is to have someone who routinely must “think outside the box.” Someone who has worked in this industry for over 20 years has probably seen almost anything imaginable. They have been called upon to mediate transactions in order to help sellers and buyers put their egos aside for the benefit of the deal. Creativity can save a transaction that has been stopped dead in its tracks. The business broker brings this creativity to the equation to help solve the problem and make everyone a winner.

Author’s note, Loren Marc Schmerler, Bottom Line Management, Inc., President & Founder. After helping sellers and buyers for more than 20 years, I have found that honesty, integrity, full disclosure, patience and a willingness to consider various alternatives makes the probability of success for all parties very high.

Today’s question is from Robert in East Cobb. Robert wants to know how Owner’s Discretionary Cash Flow (ODCF) is calculated.

Listen to the following podcast for the answer…

Calculate ODCF [ 7:00 ] Play Now | Play in Popup | Download

Or, read the answer here:

There is a great deal of confusion concerning the calculation and significance of ODCF. First, it is not taxable income as shown on the tax return. Second, it is not net income as shown on the income statement. Rather, it is a calculated figure that helps a buyer determine how much free cash flow is available to a new owner if he or she buys the business in question.

To perform the calculation correctly, you do the following:

1. Start with either taxable income from the tax return or net income or net loss from the income statement.
2. Then, add back owner’s compensation and owner’s payroll taxes.
3. Next, add back any owner perks such as medical insurance, life insurance (usually non-deductible for tax purposes), automobile expenses, cell phone expense, pension related expenses (can be Keogh, 401k, SEP-IRA, etc.), dues and subscriptions (if applicable), etc.
4. Then add back amortization expense and depreciation expense, since they are “non-cash” items and simply serve to reduce taxable income (net income) so that less tax can be paid legitimately. If a company is capital intensive with significant fixed assets (machinery and equipment), you may not be able to add back 100% of the depreciation expense.
5. Next you add back interest expense if it is unrelated to net operating leases that are expensed properly on a monthly basis and have no buyback provision at the end of the lease. The reason for adding back interest expense is because a new owner will have his or her own debt structure with the associated interest expense having no relationship to what the current owner is paying.
6. Then you will add back any one-time non-recurring expenses. Examples can include a major software upgrade, litigation expenses, major repairs and maintenance, consulting expenses or anything else that is not going to affect the new owner.
7. Then you will make employee-related adjustments for family members who do not work in the business but are being paid by the business. This also applies if a family member works in the business but receives more or less than market wages. Thus the adjustments can be add backs or negative add backs. If another non-family member is either overpaid or underpaid, a similar calculation must be made.
8. If a 2nd working owner will be leaving the company along with the 1st working owner and the buyer does not have a spouse or partner to replace the individual, then there must be a negative add back for a replacement employee at a market rate of pay.
9. Now we get into a truly gray area. Sometimes a business owner uses a company check to pay for a personal item or totally non-related item that has nothing to do with the business. This check is then coded to a general ledger account like cost of goods sold or some other expense account. These items are also add backs, but the business owner feels awkward disclosing them because they cannot be justified. Yet sometimes the cumulative amounts are quite significant and not adding them back severely understates ODCF.
10. And last but not least, we arrive at unreported cash sales or “skim” as they are commonly known. Under normal circumstances, skim cannot be adequately proven, and as a result, these sales cannot be added back. But in rare instances, skim can be proven and can be treated as a legitimate add back. Obviously, this is the most sensitive area of all, since the business owner is doing something illegal for which the penalties can be quite severe. Many business owners will simply not disclose their skim and understand they will receive less for their business as a result of not depositing all sales into their checking account.

Author’s note. After helping sellers and buyers for more than 20 years, I have found that honesty, integrity, full disclosure, patience and a willingness to consider various alternatives makes the probability of success for all parties very high.

Today’s question is from Mary in Alpharetta. Mary is thinking of selling her business and wants to know why she should use a business broker instead of selling her business by herself.

Listen to the following podcast for the answer…

Why Should I Use a Business Broker? [ 5:33 ] Play Now | Play in Popup | Download

Or, read the answer here:

If you are a seller, it’s lonely at the top. Normally, you have your spouse, your partner and possibly your CPA and attorney to assist you in making major decisions. But in reality, it falls upon your shoulders to determine whether you should or should not sell. Many times, a CPA or attorney will encourage you to stay in business because they want to retain you as a client. They do not understand the importance of freedom to an entrepreneur who has invested blood, sweat and tears over many years and now wants to take a break or a breather. Your attorney and CPA are very important in the completion of the sales process after you have made the decision to sell.

A business broker who has been helping sellers and buyers on a daily basis fully understands the trade-off between personal freedom and financial freedom. They are not oriented towards bodily retention. They are oriented towards retention of goodwill. There is tremendous personal satisfaction in having been the causal agent for matching the needs and wants of a seller and buyer who each have differing objectives.

When working with a seller, they have to maintain communication and keep telling the seller to keep their powder dry. When working with a buyer, they have to control excessive enthusiasm. There is a delicate balance that must be maintained in order to have a successful conclusion.

A business broker knows experts in various professions that can be brought to the table when necessary. It might be a CPA, an attorney, a financial planner, an investment advisor, an insurance agent, an EPA expert, a real estate appraiser, or an equipment specialist, etc.

The business broker is the quarterback for the team. They need to know when to pass the ball to another expert and let them run with it. They need to know when a conference call with the seller and buyer is adequate. They need to know when a face-to-face meeting is necessary. And most importantly, they need to know when to let the seller and buyer bond with one another. Excessive interference based on insecurity will kill the deal as quickly as inadequate personal involvement.

The business broker constantly serves as the “reality check” for the seller or the buyer. When the seller says “I want x dollars and it must be all cash” as the asking price, the business broker knows that emotion is driving this statement and that, over time, personal freedom will allow the seller to become more negotiable.

When the buyer says “find me a company for $150,000 where I can earn $100,000”, the business broker will present the buyer with a list of companies where they can earn $100,000. But the buyer will quickly find out that their expectations may differ greatly from what the market has to offer.

The most important reason to use a business broker is to have someone who routinely must “think outside the box.” Someone who has worked in this industry for over 20 years has probably seen almost anything imaginable. They have been called upon to mediate transactions in order to help sellers and buyers put their egos aside for the benefit of the deal. Creativity can save a transaction that has been stopped dead in its tracks. The business broker brings this creativity to the equation to help solve the problem and make everyone a winner.

Thank you for listening, and remember that Your Bottom Line Is Our Foremost Concern.

After helping sellers and buyers for more than 20 years, I have found that honesty, integrity, full disclosure, patience and a willingness to consider various alternatives makes the probability of success for all parties very high.

Recently, a listener emailed me to ask, “How do I establish a realistic asking price for my business when I am ready to sell?”

There are several ways for me to answer this question. Listen to the following podcast for the answer…

Establishing a Realistic Asking Price [ 7:59 ] Play Now | Play in Popup | Download

Or, read the answer here:

I can simply say that the price should be somewhere between 2 to 3 times Seller’s Discretionary Earnings (also know as Owner’s Discretionary Cash Flow) plus inventory at cost for a Main Street Business or somewhere between 4 to 6 times EBITDA (earnings before interest, taxes, depreciation and amortization) for a business in the middle market. When using the EBITDA model, inventory is factored into the multiple.

In both models, if you have vehicles or machinery, you can include the fair market value of the items less any associated financing. It is very common for the owner to retain all cash and accounts receivables and be responsible for all liabilities as of the date of closing. Sometimes, the owner includes accounts receivables in the asking price to help the buyer with their working capital needs. When accounts receivables are included in the selling price, there normally is a provision for uncollectible accounts.

Main Street businesses might have revenues from hundreds of thousands to roughly $3 million and Merger and Acquisition(M&A) companies might have revenues from $3 million and above. The multiples I quoted are for financial buyers and not for strategic buyers. Strategic buyers will pay more for a business because their business model can be synergistically expanded with the acquisition and can justify the higher price.

The strategic buyer is buying market share, access to customers , capital assets, company reputation, patents, trademarks and other tangible and intangible assets. Accordingly, the strategic buyer might pay multiples of 4 to 5 times Seller’s Discretionary Earnings(SDE) or multiples of 7 to 10 times EBITDA based on the perceived strategic fit between your company and theirs.

Another answer to your question is determined by your answer to the following question. How important is money versus freedom in your life? If you want as much money as possible for your business, you should be more aggressive when setting the initial asking price. The reason I say initial asking price is because during the last 22 years I have learned that circumstances and owner emotions can affect the asking price on a day to day basis.

If freedom is more important to you, then you should be less aggressive in setting your asking price. Perhaps you have health issues, perhaps there is a new baby in the home, perhaps you have aging parents that need assistance or perhaps you are simply burned out and need a period of time to recharge your batteries and find something else to do. You cannot place a price tag on freedom, and the longer your business sits on the market unsold, the more valuable your freedom becomes.

Another answer to your question is the simplest of all. Set your asking price at any one of the following price points:

1. What you want for your business based on years of blood, sweat and tears. Unfortunately, a buyer is not very interested in what you have invested in the company since inception.
2. What you need for your business to pay off all debts to banks, vendors, others and yourself. Unfortunately, a buyer is also not interested in what you owe your bank, your creditors or yourself
3. What you will accept to pay off all external liabilities but not pay yourself back what you have loaned your business. Once again, a buyer is not interested in helping you out of your jam.
4. What you will accept for your business to avoid personal bankruptcy. I do not want you to think all buyers are heartless, but here also they have little concern for your well being.
5. A price that can be justified to the buyer. If real estate is involved, you need a current arm’s length 3rd party appraisal in addition to a justifiable multiple of SDE or EBITDA.

In conclusion, setting an asking price is a daunting challenge. No one wants to leave money on the table nor do they want their business to sit on the market and never sell. It is a delicate balancing act. From my twenty plus years of experience, the more flexible you make your terms, the more you can ask and receive for your business. In the future, I will discuss how deal structure can help you obtain the highest possible price for your business.

Thank you for your question.

Loren Marc Schmerler, CPC, APC is President and Founder of Bottom Line Management, Inc. Loren has been a business consultant for 38 years and a business broker for 22 years. During the early 1990’s, he was the business advice columnist for Sam’s Club and has experience in more than 200 industries/types of businesses. Loren invites you to submit any questions related to buying, selling or operating a business. All inquiries will be held in strict confidence.