62 Reasons
Why Sellers of Small & Midsize Businesses Hire Business Transfer Intermediaries
© 2011 Ted J. Leverette (“Partner” On-Call Network LLC) 

This poll was commissioned by the Authorized Business Buyer Advocates ® who are licensed by “Partner” On-Call Network ®.

Poll:  "Why do sellers hire business brokers instead of trying to sell by-owner?"

62 reasons are why sellers of small and midsize businesses hire business transfer intermediaries (i.e., business brokers and advisors who specialize in dealmaking on behalf of sellers), according to our poll, conducted in the USA and Canada (plus a few contributors from around the world).

To view all 62 Reasons Why Business Sellers Hire Brokers click here to view PDF. 

The top reasons are these:

• Brokers know how to sell businesses; most sellers don’t
• Seller doesn’t want to be distracted from running business
• Confidentiality preservation and knowledge of what/when to show buyers
• Access broker’s database of potential buyers and investors
• Maximize price buyers will pay for the business
• Owner does not know how to find buyers
• Prepare owner to sell and prepare business for sale
• Broker understands and can depersonalize negotiations
• Explain and handhold seller throughout selling process
• Owner afraid of trying to sell by-owner 

TIP

Business transfer intermediaries of all types function as go-betweens; they can filter communications so all parties to the pending transaction can focus on the most salient points and realistically negotiate differences of opinion. It is normal for conflicts to arise between sellers and buyers (and their advisors). Sometimes it pertains to personalities; and maybe differing goals or misunderstandings about facts. The best business transfer intermediaries can help people understand the facts and find win-win compromises instead of becoming unnecessarily defensive.

Bottom Line Management, Inc. has teamed up with the Edge Connection, a nationally recognized leader in microenterprise and small business development, to provide seminar training on buying and selling a business entitled, "What You Need to Know When You Are Ready to Sell or Buy a Business or Franchise" that offers specifics on how to successfully prepare yourself and pitfalls to avoid.

The Edge Connection offers an award-winning, nationally recognized, multi-faceted program that delivers best-practices business training, financial literacy, entrepreneurially focused technology training, and essential support services to aid micro and small business owners to launch, sustain, or grow a business. 

It was developed through community collaboration and remains a campus and community partner with Coles College of Business, Kennesaw State University.

Bottom Line Management, Inc. looks forward to partnering with the Edge Connection program to create growing entrepreneurial businesses and positively impact the community. "My passion for helping business owners understand and maximize their bottom line was the motivation for starting a free seminar. I want to share my successful experiences to help others navigate through the details of preparing, listing and selling." – Loren Marc Schmerler, CPC, APC, President

Buying or selling a business can be a complicated and daunting endeavor. Bottom Line Management, Inc.'s President, Loren Marc Schmerler, CPC, APC will unravel the mystery of the process and answer all your questions such as:

• How do I get started? – How long should the process take?
• What role does financing play in the process?
• What do I need to know about buying a franchise, license, distributorship or business opportunity?
• How can a business intermediary help you buy or sell a business or franchise?

And much more! If you have ever thought about buying or selling a business this free seminar is a MUST!

Seminar Dates:
The seminars will be offered monthly on the second Wednesday of each month from 1pm – 4pm at Kennesaw State University Center 3333 Busbee Drive, Room 464, Kennesaw, GA 30144. The first seminar is scheduled for July 13, 2011 from 1pm-4pm.

For more details contact Bottom Line Management, Inc. email: info@botline.com or call: (770) 977-7334.

About The Edge Connection
The Edge Connection is a fully independent, non-profit 501 (c) (3) organization. It is housed on the campus of Kennesaw State University's Coles College of Business and enjoys many benefits from its KSU partnership, including in-kind support and teaching assistance. In the fall of 2004, The Edge Connection became an SBA Women's Business Center that targets low-to moderate-income women, minorities, veterans, and persons with disabilities.

The Edge Connection received the U.S. Models of Excellence, Visions 2000 award from the U.S. Small Business Administration, the "Simply the Best" award from the U.S. Department of Housing and Urban Development, and the Federal Home Loan Bank Community Partnership Excellence Award. The Edge Connection is a founding member of the Georgia Micro Enterprise Network and is a member of the national microenterprise trade association, the Association for Enterprise Opportunity (AEO).

Contact:

For details or to sign up contact: Edge Connection at 770-499-3228 or email lsperry1@kennesaw.edu Leslie Sperry, Program Manager. Visit www.theedgeconnection.com

This Seminar is for:

• Individuals who are interested in either buying or selling a business.
• CPA/accountants interested in providing information to clients interested in buying or selling a business.
• Attorneys interested in providing information to clients interested in buying or selling a business.
• Business Professionals.

Visit: www.botline.com/free-seminars for seminar details.

2011 is a great time to buy or sell an existing business. Read why 2011 is a good time to become your own boss or sell your business to move onto a new project.

Reasons to Buy a Business

1. Many baby boomers are reaching the retirement age of late fifties or early sixties. From my experience, the most common age when business owners call me is 62. They are tired of working 40+ years since high school, the last 15 to 20 years as owners of their own businesses. The available supply of good and well established businesses has never been greater.

2. When you find a business you want to buy, the owner will be more receptive to both traditional and creative financing. Traditional financing would be where an owner holds a note for part of the purchase price. Interest rates are roughly 6% for owner notes at the current time. Creative financing would be assumption of liabilities or earn outs. Earn outs are based on a percentage of sales above certain thresholds.

3. SBA preferred lenders are more willing to make loans due to relaxed federal guidelines and the elimination of certain costs and fees. While you will not be able to obtain an 80% loan like the good old days, you should be able to easily obtain a 65% loan with you making a 25% down payment and the owner holding a 10% note.

4. Vendors are highly motivated to make sales. Their businesses have suffered financially during the last 2 years. As a result, you should be able to purchase inventory, supplies and other materials at substantial cost savings.

5. Due to the millions of unemployed workers, the labor pool is loaded with qualified and motivated prospective employees. Additionally, existing employees at the company you purchase will be highly motivated to stay with the company, since finding another job will be quite difficult.

6. You are now able to use 401k funds, IRA funds, Sep-Ira funds, etc. to purchase a business. There are many tax advantages to doing so, and you can control how much you may yourself for salary and how much you keep within the C Corporation tax free.

Reasons to Sell a Business

7. With millions of unemployed workers living off of their savings and retirement plans, there is a high demand for good businesses. And due to the unprecedented demand, multiples of Owner’s Discretionary Cash Flow are exceeding 3 where in the past the multiples ranged between 2 and 3. Thus there will never be a better time to put your business up for sale.

8. Since unemployed people have had their 401k plans and savings devastated, and they are tired of only earning .25%, they need an alternative plan. The tax code allows them to purchase a business using retirement funds and creating a C Corporation. Once the Corporation is created, all profits can grow tax free, and the new owners are not obligated to disburse profits, dividends or salaries.

9. If you are in your late 50’s or early 60’s, there is no way to know what the future may hold. Regardless of your current health, it can change unexpectedly. Or you may have issues with aging parents. By selling now, you can remove some of the uncertainty.

10. If you are willing to provide owner financing for some or all of the purchase price, you can earn interest in the range of 6% which is more than 20 times what a bank will pay you.

11. SBA financing is loosening up which will allow more prospective buyers to have an opportunity to buy your business.

12. There comes a time when quality of life becomes more important than money. Only you can decide if obtaining freedom trumps obtaining money and to what extent.

13. There are investment vehicles that will allow you to defer most or all of the seller’s proceeds. Thus there will be little or no tax liability due in the year of sale. You can work with a financial professional to set up a residual income stream that will meet your needs and spread the capital gain over many years.

If you are unsure of what type of business opportunity to purchase or looking to sell your business but are unfamiliar with what steps to take, Bottom Line Management, Inc. provides a FREE Consultation with no obligation.

Bottom Line Management will work with you to determine how your strengths and interests will align successfully with businesses that are available in the marketplace and explain the entire selling process. Call (770) 977-7334 or click here to contact Bottom Line Management, Inc. to schedule a FREE business broker consultation.

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.

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.

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.

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.

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 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.