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 When your entire inventory is fresh and not out of date, stale or obsolete.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.

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.

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.

1. Do not put a ‘for sale’ sign in the window or on the property. Selling a business is much different than selling a home. You cannot broadcast to the world that your business is on the market. Discretion and confidentiality are critical.
2. Do not stop doing the things that must be done on a daily, weekly or monthly basis. You need to operate your business as if it will never sell. If you let down in any area and sales and/or profits start to suffer, you will regret it forever.
3. Do not build up inventory in advance of a sale. In fact, you should work it down to the minimum level necessary to operate the business. You should do this for several reasons. You want your inventory to be fresh and current or else it will be discounted at closing. It will take less time to take a physical inventory prior to closing. A buyer doesn’t want to tie up their working capital in unnecessary materials or products.
4. Do not let your accounts payables get into arrears. Not only will you damage your vendor relationships, but you will unduly alarm the buyer. He/she may wonder if you are undercapitalized or operating inefficiently.
5. Do not let your accounts receivable go uncollected. Not only will this create cash flow problems, but the buyer may be lead to believe that your clients are not financially stable.
6. Do not use withholding taxes for working capital. Not only is it illegal, but you will be severely penalized with interest, penalties and a possible jail sentence.
7. Do not keep your business looking like a slum. If a buyer sees a physical building or leased premises that is not properly maintained, they may think that is how the business is operated. If the business needs to be painted, hire a painter. If the business needs a good cleaning, bring in a cleaning crew.
8. Do not listen to your friends and business acquaintances when they ask why are you selling. Ignore questions like, why don’t you just hire a manager, why are you giving up making so much money, etc. Quite frankly, it’s none of their business why you are selling. You do not owe them an explanation.

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.

For those of you too young to remember the television show Marcus Welby, M.D., let me take a moment to fill you in on the details. Marcus Welby was the only doctor in a small rural town. He knew he needed another doctor to enter his practice for a few reasons. One was to handle the growth of new patients. Another was to relieve him of some of his workload with existing patients.

But the most important reason was that if he wanted to retire and receive anything of value for his practice, he needed to transfer the “goodwill” of the business to another doctor over time. If he could not accomplish this task, when he was ready to retire, he would have to close his doors and receive nothing for over 30 years of service to the community.

So how did Marcus Welby handle his situation? After Dr. Kiley entered the practice, Dr. Welby introduced him to each and every patient when they came to the office. Dr. Kiley was introduced as being a “partner” in the practice and would be relieving Dr. Welby of some of his day to day workload. Dr. Welby assured each patient that they would continue to receive the same high level of personal and professional care from Dr. Kiley.

Over time the patients came to trust Dr. Kiley and had no objection to his treating them if Dr Welby was unavailable. Many stopped asking for Dr. Welby altogether and asked for Dr. Kiley instead. The transfer of goodwill had taken place, and now the medical practice had real value that could be sold to Dr. Kiley when Dr. Welby was ready to retire.

The same analogy can apply to any business where the buyer is concerned about losing employees, customers, clients and vendors after a sale takes place. If the current owner introduces the new “owner” to each customer, client, vendor and employee as a “partner”, the transition can go very smoothly. Over a reasonable period of time, the new owner will interact more with everyone he has met, and the seller will gradually wean himself off of daily communications and operations.

Then, after a mutually agreed upon period of “partnership”, whether it is 3 or more months, the seller can announce to all clients, customers, vendors and employees that his “partner” likes the business so much that he has made the seller an “offer too good to refuse” to buy the business. Since the seller will have successfully transferred all the “personal goodwill” to the buyer, this announcement should not concern anyone. And the business will have been successfully transferred with all parties pleased.

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.