Author: Loren Marc Schmerler, CPC, APC, PresidentBottom Line Management, Inc.
Featured by INC. Magazine

Business Intermediaries Facilitate Business Sales

What Is a Business Broker? What is a business? If you're the owner of a privately held company, it's your livelihood, your brainchild, and your identity. If you're the purchaser, it's buying a job after downsizing, taking a leap of faith that you can be an entrepreneur. For employees, it's a wish for steady income in an uncomplicated market.

When is the best time to sell a business? It's when the business is doing well and you don't have to sell. Unfortunately many owners don't follow that pattern. 

Where does the business broker or intermediary fit into this picture? A business broker is a trained specialist in the field of business transfers, just as an attorney is trained in law and a CPA in accounting and taxes. These are issues that are far more complicated than a real estate transaction.

Owners, who would never think about writing their own contracts or doing their own taxes, often feel that if they have run and grown a successful business, they should be able to handle its sale.

What should buyer and seller expect from an intermediary beyond their introduction? Besides the time consumed in qualifying buyers, there are issues that are obviously emotionally and financially involved.

And an intermediary's experience and knowledge of the whole story of your company – finances, competition, your market – gives him (or her) objectivity to effectively offer your business for sale and know whether a deal will or will not work.

How do you know if your business is fairly priced? The broker may suggest an “Opinion of Value” to determine the fair market value of your business within a specified pricing range. This is the best way to sell the business quickly.

Confidentiality is of course paramount. What about employees? Should they be told? Will key employees stay and if not, how will that affect the sale? Special packages may have to be negotiated for them as part of the offer.

Owner financing always speeds the process. Determine ahead of time reasonable payments the cash flow of the business can support and still leave enough for the buyer to have a return on his investment to live on. You can often get your asking price if the terms are attractive enough.

Give yourself adequate time to plan your sale. Smaller businesses should expect to be on the market a minimum of seven to nine months; middle market ones at least a year or longer. As with most things in life, it's the attention to preparation that leads to the best results. A professional intermediary can help make the difference.

Let us show you what we can do for your bottom line. We are open for business 24/7/365.
Bottom Line Management, Inc.
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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.

I had been promising myself that this article needed to be written before another day passed. To put it in perspective, you must understand the simple reality check I routinely perform when I first meet with business partners, husbands and wives, or single owners of a business. It is fun for me to perform a visual analogy where I hold up my two hands parallel to one another and perpendicular to my chest.

I explain that the right hand is the “money” hand and the left hand is the “freedom” hand. The “freedom” hand signifies that the primary reason for selling the business is to obtain freedom so that other priorities can be pursued or handled. I always ask my prospects where they fall on the spectrum between money and freedom.

Examples of preferring freedom to money might be that one of the owners has a health problem, or that there are aging parents to look after. Another common reason for freedom is simple burnout. Whenever a person has worked 15 to 20 years at the same business, they simply get tired and need a change.

You might be surprised to know that 95% of the time my prospects indicate that freedom is more important than money. But what about the other 5%? Why do they say money is of greater importance? Possible reasons include: I owe the bank x dollars; I owe relatives x dollars; I owe myself x dollars; I have put blood, sweat and tears into this business and want to get paid for it; I want to get back every dollar I put into the business, etc.

I explain to my clients that I am willing to list their businesses for whatever price they desire, but there are risks to consider. Everyone understands the expression “I don’t want to leave money on the table” by pricing the business too low, but not everyone understands the danger of overpricing a business and scaring off bonafide prospects who might have bought the business had it been priced correctly.

Given today’s economic environment, I now need an extra hand. Most business owners in their late 50’s and early 60’s thought they would be able to retire and live off of interest, dividends, pensions and social security. But, when their personal fortunes plummeted by 40% to 50%, all bets were off. Now I am hearing people tell me that they prefer freedom to money, but they must sell their business for enough money to be able to live freely.

So the selling strategy must be somewhat altered. A listing price must be adequate to meet the owner’s financial needs so that they can be free to live their lives comfortably. If they cannot sell the business for the correct amount, they will have to accept that they may not be able to retire and may have to continue owning the business and working in it whether they want to or not.

I would like to make another observation about setting an initial asking price too high. Contrary to what you might think, a buyer will not make an offer, even a low-ball offer, if he or she feels the price is unreasonable. They will simply continue looking until they find something they feel is priced more reasonably. Then several months into the listing, the owners will lower the price and tell me that freedom is looking a whole lot more important than it did at first. So they will ask me to contact anyone I spoke with previously when the listing was over-priced. When I do as requested, two equally bad things may take place. Either the potential buyer has found something else and is no longer interested – or worse yet, they now think there is something wrong with the listing since we are now chasing them instead of the other way around.

In conclusion, you need to do a great deal of soul searching before deciding whether now is the right time to sell your business – and if so, at what price. Our firm will be happy to meet with you to discuss your options.

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 Lynn in Fayetteville. Lynn wants to know how I feel about distribution and manufacturing businesses.

Listen to the following podcast for the answer…

The Advantages of a Distribution Business [ 5:31 ] Play Now | Play in Popup | Download

Or, read the answer here:

If you ask me what my favorite companies are to sell, I would have to say distribution and light manufacturing. The reasons are quite simple. A distribution company is typically not complicated. You order merchandise from the manufacturer. You receive the merchandise. You repackage the merchandise and ship it out to the end user.

Or better yet, you order from the manufacturer and have the manufacturer drop ship the merchandise directly to the customer. The goods never enter your premises. Now what could be easier than that? Your priority is to ensure delivery, invoice the customer and await payment!

Now with light manufacturing, the story is a little different. You must first understand the difference between light manufacturing and heavy manufacturing. Heavy manufacturing companies are very capital intensive with very large pieces of machinery and equipment. They can be antiquated like 40-year old printing presses or leading edge like laser cutting devices, but in either event, there is a great deal of repair and maintenance involved.

Some of the maintenance is routine. Some of the maintenance is preventative. Preventative maintenance is where a schedule is established to inspect equipment and machinery “before” it breaks down or fails to operate. A company can have its own internal personnel perform the maintenance, or they can outsource the service.

My preference is to outsource the service so that another company can be held responsible if there is a preventable problem that arises. Another reason for outsourcing is that you eliminate the risk of an employee sabotaging the equipment or machinery.

Now, let us discuss employees. With a distribution company, you typically need fewer employees to handle operations because most of their time is spent receiving, shipping and billing. There will be times when physical inventories must be taken, but even if they are performed as infrequently as annually or as routinely as monthly, either internal personnel can handle the task or part-time staff can be used to supplement their efforts.

With manufacturing companies, you are dealing with different issues altogether. Typically, you need more employees in a light manufacturing environment to generate the same level of sales as a distribution company. This means more hiring, more supervision, more potential personnel conflicts, more possible injuries, more downtime, etc. But the upside is that light manufacturing is normally much more manageable than heavy manufacturing when things go wrong.

You may ask what I mean when I say “when things go wrong.” If equipment or machinery fails to operate, it normally can be replaced or repaired in a short period of time with little impact on production. If employees are ill or you sustain unexpected turnover, the learning curve for full or part-time replacements is much quicker. If you run out of inventory, you might be able to obtain a shipment the same day or even pick it up yourself.

I think you will agree that distribution and light manufacturing businesses are highly desirable to all parties. Buyers like them due to their lack of complexity and short learning curve. Sellers like them due to their ease of ownership and ease in selling. Buyers and Sellers both like them because they are able to take raw materials and labor and create finished products. There is a great deal of satisfaction in creating “stuff” that is tangible. And brokers like them because they are in high demand under normal circumstances.

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.