Tip #1: Give yourself a reality check.

Do you have the courage to take the entrepreneurial leap? Forget about the cozy comfort of the corporate environment where you can have someone else take out the trash, clean the bathroom, get your coffee, pick up your dry cleaning, etc. The buck stops with you, and you will be taking 100% responsibility for everything.

Do you have adequate working capital for one or more years? If you are a start-up, you may not see a return on investment for a few years. If you are buying an existing business, the best laid plans of mice and men can sometimes become undone. Most, if not all, undercapitalized businesses will fail eventually. I have seen some fail in months while others have a painful death of years.

Have I gotten your attention with my cautionary tales? Remember that buying a business can be the most fulfilling, yet the most challenging, experience of your life. It’s best to be prepared about what you may experience because that preparation will likely be the key to your success.

Tip #2: Learn the upside of hiring independent contractors.

In your new business, do you want to manage employees or just yourself? Using independent contractors is a great way to operate a business if you are sure they will perform to your expectations and standards. Managing employees often forces you to worry about issues dealing with health insurance, retirement benefits, employment tax, workers’ compensation, overtime, etc.

As stated by the IRS, three characteristics are used to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

• Behavioral Control: Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
• Financial Control: Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
• Type of Relationship: Relates to how the workers and the business owner perceive their relationship.

Tip #3: Step back and observe.

Do you know what your strengths and weaknesses are? Are you strong at selling, strong in finance, strong in operations, strong in marketing, strong in supervision, strong in organization, strong in customer service, strong in planning, etc.? It is highly unlikely that you can do all the preceding well. When you purchase a business, it’s important to understand exactly how you will fill in the blanks with other resources.

My best advice is the old adage: If it’s not broken, don’t fix it! Would you be able to leave a business alone that is not broken for at least 3 months after the purchase? It’s important for you to take the time to observe from the inside how the business operates and examine where there’s room for improvement. If you don’t do this, you risk the possibility of self-destructing, scaring off your loyal customers and running off your employees.

During your 3-month observation period, I encourage you to have regular meetings with your staff and keep the communication open. Solicit their advice, counsel and suggestions for improvement and positive change as they see it. Then, as you make changes, be sure to explain why you are “trying them out” to see if things improve. If they don’t, put your ego aside, admit your mistake and return to the basics. A little humility goes a very long way.

Tip #4: Create strategic alliances.

Are you willing to create strategic alliances to protect the health of your business? I encourage you to regularly share your financial statements with your banker, CPA and attorney. Your banker can give you a line of credit, your CPA can give you excellent tax advice and help you understand the numbers, and your attorney can help you avoid litigation or any other worst-case legal scenarios.

As a business owner, would you be able to admit when you have made a mistake? Are you willing to take full responsibility for it and do whatever is necessary to correct it? If you stay in denial until the bitter end, there may be no way to recover from your error. This is probably the most important thing to remember: You will not have a boss leaning over you to correct you. If you do not work with your strategic partners to keep your business running smoothly from the inside out, it may prevent you from achieving the highest level of success.

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.

Tip #1: Make sure you really want to sell your business.

First, ask yourself the tough questions: Are you bored, burned out, ill, have a new child, have aging parents that need your assistance? Or, are you simply unhappy with how much money you are making? If you’ve answered yes to any of these questions, you may not need to sell your business. Quite possibly, what you may need is some guidance to get it back on the right track.

An experienced business consultant can help you refocus to see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But, if you conclude that selling is what you want to do regardless of any of the above-mentioned variables, then you should proceed to the next step.

Tip #2: Rate the “curb appeal” of your business.

After you are 100% sure that you want to sell your business, I suggest that you drive up to your business to determine if the following applies to you: Are there any potholes in your parking lot? If so, fix them before a buyer shows up. Is the landscaping out of control or unappealing? If so, replace it with attractive shrubbery that is well-maintained.

Are the windows clean? If not, get them washed. Is the building exterior clean? If not, schedule a professional pressure washing. Does the roof look old or damaged? If yes, then make the necessary repairs. Does the building need to be painted? If so, get it done.

In brief, be objective to ensure the “curb appeal” of your business has no obvious and easily correctible issues. This may seem like overly simplified advice, but remember that a buyer will be paying a considerable sum of money for your business. You don’t want to turn a prospect off with a bad aesthetic first impression.

Tip #3: Look around the inside of your workplace.

Once you have fixed any exterior issues with your business, it is now time to examine the interior from top to bottom. Start with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Are there any light bulbs that need to be replaced? If so, get on a ladder and put in new and shiny bulbs. Does any of the furniture look ratty? If it does, either repair it or replace it.

Are there scrape marks on the walls? If yes, then have them repainted. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. How about the rest rooms? Are they an embarrassment? If so, clean them up and keep them tidy. Are they handicap accessible? If not, make arrangements to bring them up to code.

Most importantly, look at your office with a keen eye. Remember that when a buyer tours your business, you want them to visualize becoming the owner and being proud to do so.

Tip #4: Evaluate your infrastructure.

After you have fixed any interior “physical” issues with your business, it is now time to look at job descriptions, policies and procedures. First and foremost, you need to draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed, and make certain you have someone proofread the final product and correct any errors.

After you are satisfied with your job description, ask all of your employees to complete theirs. This process has several benefits: First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete, place them in an organized binder labeled “Job Descriptions.” Then, you will move on to policies and procedures.

Tip #5: Assess your policies and procedures.

Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions where employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.

When asking a prospective employee to complete an application, it is best to stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of Hispanics, you will need to consult with a labor attorney to insure you do not hire illegal immigrants. Severe penalties can result. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked. More policies and procedures will be discussed in Tip Number 6.

Tip #6: Stay current with all your employee evaluations.

It is very important to stay current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom he or she has never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.

That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.

Tip #7: Keep your financial statements current.

Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told that a date cannot be given for when they will become available. Talk about red flags. How can you run a business without current and accurate financial statements?

The short answer is that you cannot do so. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.

When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.

Tip #8: Ensure your tax returns are in tip-top shape.

Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes.

It is absolutely critical that you are current with all these returns to instill confidence in your business’ prospective purchaser. But when it comes to sales tax, if you have not filed and paid all returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last 3 years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.

While we are on the subject of taxes, you need to have a heart to heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bona fide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after tax position.

Tip #9: Understand the meaning of due diligence.

What is due diligence and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc.

With financial records, the process starts with the tax returns, goes backwards to the financial statements, goes backwards to the general ledger, goes backwards to all source documents that include bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc.

To prepare for the financial side of due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last 3 years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.

Tip #10: Tie up your legal loose ends.

There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings?

Do you have outstanding liens for debts that have been paid off? If so, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.

Have you paid all of your payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales tax that is due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?

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.

Listen to the following podcast…

Self-Destructive Sellers and Buyers [ 6:34 ] Play Now | Play in Popup | Download

Or read the transcript here:

As Jack Webb used to say, “there are eight million stories in this naked city.” He was of course referring to Los Angeles. But there are thousands of horror stories of business owners all across the country who self-destructed for a variety of reasons. This article will deal with some real life examples.

Sellers and buyers can each undo themselves. Let’s start with the owner of a 15 year old dress shop located in a high demographic suburb of Atlanta. When I took her listing, she gave me her drop dead figure. For those of you who do not know the meaning of this expression, it means the owner would rather drop dead before he or she will accept less than a certain amount for their business.

They also use the expression “before I will let them steal my business for that amount, I will shut it down.” With regard to the case of the dress shop owner, she started with an asking price of $300,000 which was clearly excessive based on her history of declining sales. During the course of the listing, she received offers in the mid to low $100,000 range, but she could not see herself letting someone “steal her 15 year old business for such a meager amount.”

So after months of limited interest at her asking price, she made the executive decision to close her business forever and received nothing for her 15 years of blood, sweat and tears. That was one of my earliest experiences where I learned that selling a business is so personal and so emotional that some business owners would rather close their doors and receive nothing than have to live with accepting an amount that bruises their ego.

Another example of an owner who was not on the planet Earth with regard to his expectations of what his business was worth was the owner of a family owned fence company. When he and I first sat down for lunch, and I asked him what he wanted for his business, he said without hesitation that he wanted $1.2 million. As I continued to prod him for more information, it became obvious that his expectations were totally without merit. But I took the listing at his required price and started marketing the business.

In short order, it became obvious that all buyers felt the business was so over-priced that they refused to even agree to have face-to-face appointments. Then out of the blue, after working the listing for months, the business owner presented me with two previously unknown facts. First, there were significant amounts of unpaid payroll taxes that needed to be settled. And second, the owner wanted to require that any buyer agree to keep a family member on the payroll who had been receiving an above market salary and was doing little to nothing to earn it.

Long story short, I was fortunate to find a group of buyers who wanted to diversify out of the telephone industry. When they looked at the books and tax returns, they concluded that the business was worth no more than $100,000. That’s right. I said $100,000 which was 1/12 of what the owner expected and was $1.1 million less than the listing price. The owner was happy to accept this amount and was able to settle his tax liability. By the way, the family member was immediately terminated on the day of closing.

Now let’s look at a buyer who self-destructed. For purposes of confidentiality, I cannot identify the industry. But I can tell you that it was a service company with great employees and great clients. After closing, the sellers started teaching the buyer the methods that had made them extremely successful. But the buyer resisted listening and learning and started to tamper with things he should never have touched.

When they attempted to introduce him to the important clients, he resisted the introductions and behaved in an introverted manner. When they tried to explain the importance of all the employees and independent contractors, he felt the company was over-staffed.

Because the buyer had obtained a very sizable SBA loan to acquire the business, he started feeling the pressure of debt service. This pressure got worse because clients were typically billed, and he had to wait for the accounts receivables to be collected. He was undercapitalized as many businesses find themselves to be.

So he started to terminate employees or reduce their hours. He put the terminated employee’s workloads on those that remained. The happy and harmonious environment that had existed under the former owners turned sour and oppressive. Employees started looking for new employment. When they left, the owner did not replace them. The nightmare finally ended when the buyer defaulted on the SBA loan and filed personal bankruptcy. The moral of this story is “don’t try to fix what’s not broken” or “leave well enough alone” or “a fool and his money are soon parted.”

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 Charlie in West Cobb. Charlie is thinking about buying a business where the tax returns do not agree with what the owner says he really makes from the business. Charlie wants my counsel on what to do.

Listen to the following podcast for the answer…

Unreported Income [ 6:33 ] Play Now | Play in Popup | Download

Or, read the answer here:

First and foremost, I am not an attorney and cannot give legal advice. Second, I am not affiliated with the IRS or any law enforcement agency. Third, I am going to recite “stories” I have heard from “other” brokers during the last 23 years.

Let’s go case by case. An owner of a trophy shop said he was earning $145,000 from his business, but the tax return said $98,000. To prove the missing $47,000, he walked over to a desk drawer and pulled out a stack of customer invoices that all said “cash sale.” The buyer ran an adding machine tape on the 14 inch high stack, and the total came within $700 of the correct difference. The buyer then went through an entire year’s deposit slips and bank statements and discovered that never once was any cash or checks deposited. Only credit card sales were shown. The buyer concluded that it was very probable that the invoices were legitimate and that the owner kept all cash and checks from the business as unreported income.

The next situation was where the owners of a pizza parlor claimed they were making more than $100,000 a year but their tax return showed $49,000. The buyer asked the owners to prove the missing sales figures. The husband went to his Point of Sale cash register and printed out a very, very long report. The report showed sales by day, by week, by month and for the year. Then he printed out a second report that showed “voided transactions.” The total of the voided transactions report was $56,000. So the tax return plus the voided transactions report totaled $105,000, and the buyer bought the business.

The next situation is absolutely the most unbelievable story I have ever heard in 23 years of being a business broker. Two men who owned a liquor store said they would not sell for less than $300,000 all cash. They guaranteed a minimum inventory of $50,000. Their tax return showed that they earned $55,000, but they claimed they were making $159,000. When asked to explain the difference of $104,000, they said that each of them withdrew $1,000 cash a week for a combined total of $104,000. But the broker and the buyer wanted “proof” of this. The owners then pulled out 16 years of over-sized multi-column accounting spreadsheets. The older years were clearly very, very old, and the more recent years looked cleaner.

But the next part of the story is the 8th wonder of the world. They had kept track of sales for the past 16 years, not by year, not by month, not by week, not by day but actually by “hour.” As unbelievable as this may sound, they could tell you how much product they sold between the hours of 2:00 p.m. and 3:00 p.m. March 26, 1987 or between the hours of 9:00 p.m. and 10:00 p.m. on a Friday night in 1991. When the buyer saw the extraordinary “accounting records” they had been maintaining, he wrote them a check for $300,000 without any further due diligence.

The next situation is not outrageous like the last one. A buyer wanted to buy a light manufacturing company. When he compared the tax return to what the owners claimed they had made from the business, the difference was $22,000. The buyer asked the owners to prove where the missing $22,000 could be found. They went to a file marked “confidential” and produced photocopies of checks that had been written to them personally during the year. These checks totaled the exact amount that was missing, and it was obvious that they were never deposited into the company checking account.

I could go on and on with other stories, but the old adage “buyer beware” certainly applies in all cases. There is a reason for “professional due diligence” using a CPA firm. You want to avoid making the mistake of your lifetime by believing something too good to be true. You need to obtain “unassailable proof” before taking the plunge, and when in doubt, run, don’t walk from any situation where the owner has to work too hard to “convince” you of what he is making that cannot be supported by tax records validated with the IRS.

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 was submitted by Alice in Marietta. Alice wants to know what she should do when trying to sell her business.

Listen to the following podcast for the answer…

Top Ten Must-dos When Selling a Business [ 4:38 ] Play Now | Play in Popup | Download

Or, read the answer here:

1. Know why you want to sell your business. Make sure it’s a good reason and not just to dump your problems into someone else’s lap.
2. Give some thought as to what you will do with your time after your business sells. Finding yourself with nothing to do can be very demoralizing.
3. Make certain that your taxes are current. This includes sales taxes, unemployment taxes, payroll taxes, state income taxes and federal income taxes.
4. Document all your policies, procedures and controls. Not only will this help during the transition period when you train the buyer, but this will make your business more appealing to the corporate buyer who is accustomed to formal documentation.
5. If possible, develop and train a strong “second in command” who can fill in for you when necessary. The buyer might be hands-on or hands-off, and having a strong assistant provides flexibility. Many business sales are lost when there is no depth of management.
6. Review each employee’s strengths and weaknesses and show when they were last reviewed and when they next need to be reviewed by the new owner. Not reviewing an employee on time can cause anxiety and diminish loyalty.
7. Make sure your financial statements and tax returns are “bullet proof.” You do not want the transaction to fall apart when the buyer or buyer’s CPA finds discrepancies.
8. Prepare a business and marketing plan that will help a new owner understand where the opportunities for growth exist. This plan should include an Executive Summary that explains why the business was started, how it progressed to its current status and what a new owner should do to take it to the next level.
9. Select an asking price that is based on reality – not fantasy. Be able to justify it based on a multiple of Owner’s Discretionary Cash Flow. Bad reasons include “it’s what I want”, “this is what I have in it”, “this is what I owe the banks” “I have put blood, sweat and tears over x years into the business.”
10. Be willing to be flexible on price, terms or both. Deal structure can make or break a transaction. When each party to the transaction is willing to bend, there is a higher probability of success.

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 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 Stephen in Norcross. Stephen would like to know the best time for him to sell his business.

Listen to the following podcast for the answer…

When is the best time to sell my business? [ 6:32 ] Play Now | Play in Popup | Download

Or, read the answer here:

1. When sales and profits have been increasing. Nothing speaks louder than success. When buyers see an upward pattern, they are inclined to believe all is well with the world and will pay a premium price for the business.
2. When your employee base is stable with as many long-term, happy and loyal employees in place. This will reassure the buyer that he or she is inheriting a solid workforce to provide them with technical support in running the business.
3. When your outstanding accounts receivables average 30 days or less. This has two advantages. It gives the prospective buyer the impression that your clients are financially solid and satisfied with your products and/or services. Additionally, if accounts receivables are part of the purchase price, it is unlikely that they will be discounted. Thus you will receive dollar for dollar at closing.
4. When your accounts payables are less than 30 days old. This will reassure the prospective buyer that you are paying your obligations in a timely manner and vendor relationships have not been damaged. It is most important for a buyer to inherit existing vendors so they can receive similar credit and not have to be on a COD basis.
5. When your equipment is in the finest working condition. Make sure you can show when the last time maintenance or repair work was done on each piece of major equipment. Point out if you have been using a preventative maintenance program to keep all equipment in top notch order.
6. When your entire inventory is fresh and not out of date, stale or obsolete. Sell off or dispose of any inventory that is not up to par, since you do not want “bad eggs” to surface during a physical inventory prior to closing. You can jeopardize a business sale by making the buyer suspicious when he or she finds unacceptable inventory items that cannot be sold or contributed.
7. When all your tax returns have been filed timely and correctly. If a buyer has to wait for you to file a tax return that could have or should have been filed many months ago, you will create ill will unnecessarily and cause red flags to surface. Make certain that sales tax, property tax, income tax, withholding tax, unemployment tax, etc. have all been completed and submitted on time.
8. When other investments don’t look quite as attractive as owning a business. If you see that the stock market has declined 40% during 2008, there are many individuals who now see business ownership as a superior “investment” to other types of investments.
9. When long-term capital gains rates are favorable. Many business owners are trying to have their businesses sold by December 31, 2009, since the long-term capital gains rate is 15%. If it were to become 28% during 2010, a $1 million dollar business sale would leave the owner with $130,000 less in his/her pockets.
10. When you still have enthusiasm for the business. If a prospective buyer sees you as a burned out and unenthusiastic owner, they will find it hard to get excited with the prospects of owning a business that ran you down so low. You want to be able to “sell” the buyer on the business with as much energy as possible.
11. When you have a good reason for selling. Good reasons are retirement, health reasons, relocation, aging parents, birth of a child, the commute has become excessively long etc. Bad reasons are the business is losing money, I can’t stay current with my rent, I am undercapitalized, I spent all my money on build-out and had nothing left for marketing, I am burned out, the business takes more time than I thought it would, I lost a major customer, a major supplier went bankrupt, etc.

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. In the above situation, the seller and buyer stretch the truth for the common good and peace of mind of everyone concerned.

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.

As a certified industry expert, whenever I list a liquor store of any size, I am bombarded by emails and phone calls. Many of these people turn out to be financially unqualified or tire kickers. And some are the competition – just checking to see what their business might be worth based on what another storeowner is asking for theirs.

Buyers with adequate funds are an interesting breed. Whenever I ask them why they want to buy a liquor store, I normally get answers like “it’s a cash business” or “everyone drinks in good times or bad times” or “it’s a real people business where you get to know your customers really well.” Never do I hear, “I expect to earn a fortune!” However, I have found that if a buyer listens to Bottom Line Management’s seasoned advice, he or she will have a higher earning potential and will contact us down the road to resell the store for much more than what it was purchased.

To be truly successful at owning, operating and selling a liquor store, you need to do four things. These basic concepts hold true for many other types of businesses as well:

1. Acknowledge every customer when they enter your store. Immediately ask them if there is anything you can help them find. Once a customer finds what they want at a specific location, the chances are they will continue to patronize that same establishment.
2. Never let a customer leave empty handed. If they could not find their first choice, ask them what their second choice might be. Offer it to them at a deep discount and throw in some chips or other snacks. This gesture will salvage the relationship and allow you to meet the customer’s needs and wants the next time around.
3. Promise to order their preferred beverage whether it is wine, liquor or beer. And most importantly, get their phone number and let them know you will order the product immediately and will call them the day it arrives. And, make sure that you do call them when it arrives. You cannot imagine the goodwill you will create and the word of mouth and repeat business this will create.
4. Leverage your inventory! As we all know, the most important aspect of real estate is location, location, location. In the liquor business, it is inventory, inventory, and more inventory. The key to success is to have enough working capital and physical space to take advantage of volume discounts from distributors. You want to be able to purchase the most popular wines and liquors at the greatest possible discount, and that can only be done in large quantities.

To effectively compete against the large superstores, you must be able to make great buying decisions and offer superior customer service. A customer will pay a little more if they like you and feel important when they enter your store.

And now, for a few of the real marketing freebees… To think outside the box, you need to do some of the following that most competitors do not even think of doing. Sponsor a wine tasting once a month. Offer a frequent customer program, with a percentage discount on every fifth purchase. Set a minimum for the first four purchases, but have no maximum for the fifth purchase where the customer receives the discount. Insert a flyer in each bag thanking the customer for their business and asking for any feedback that can help you make their shopping experience more pleasurable in the future.

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.

Truth is truly stranger than fiction, and I continue to be amazed at how many times a business owner with their head in the sky comes crashing down to reality in a very painful manner.

One such case was when a woman owner of a high end men’s and women’s boutique shop in the Virgina Highlands area of Atlanta called us to help sell her business. Now for those of you who are unfamiliar with Virginia Highlands, it is one of those “hot” areas of town where merchants want space and will gladly dismantle an existing business to install their own concept.

When my partner and I met with the owner and asked her how much she wanted for the business, she said $455,000 which I thought to be a rather odd number both due to it being very specific and considerably higher than the business was worth based on its financial performance.

I always ask an owner how their asking price was arrived at, and most of the time I hear one of the following answers: 1) It’s what I want; 2) It’s what I have invested in the business; 3) It’s what I owe the bank; 4) It’s what I need to pay all my debts and to pay back my loans; 5) I put blood, sweat and tears into this business, and I will not sell for less, etc.

I have learned long ago that trying to convince an owner that their expectations are unrealistic when I first meet them will get me shown out the door very quickly without receiving the listing. So I prefer to set the listing price at whatever the business owner wants and let the buying public establish what they feel the business is worth.

So I took the listing at a price of $455,000 all cash knowing full well that no one would buy the business. And six months passed before we received any bonafide offers. At that time, we had two women and one man making offers between $300,000 and $325,000 with differing terms and conditions. Long story short, the owner rejected all three offers because she felt they were not suitable and did not represent the true value of the business as she saw it.

Twelve months into the listing, one man presented an “all cash” offer of $250,000 for the business. This offer was summarily dismissed by the business owner. Now I would like to point out to you that this latest offer was $75,000 less than the best offer previously received.

Eighteen months into the listing, an offer of $184,000 with terms was received from a man. The business owner was so burned out that she accepted the offer even though it was $271,000 less than the listing price, $141,000 less than the first bonafide offer with terms and $66,000 less than the “all cash” offer. The business owner wanted and needed closure so she could move on with her life.

And now the story takes a wicked turn. On Monday of the week of closing, the buyer changed his mind and backed out of the deal. So the business owner and I were left shaking our heads over what a disaster had just taken place, and the light at the end of the tunnel vanished in an instant.

If she had decided that freedom was more important than money when we first met, she could have been less aggressive with her asking price, attracted more buyers and probably sold her business for between $300,000 and $325,000 within 6 months. Then, at long last, she would have been free to pursue anything she chose. But greed reared its ugly head, and the business owner paid the ultimate price of closing her business and receiving nothing for her many years of hard work.

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.