The majority of our business sales are financed with an SBA 7A loan. This type of financing is a win-win situation for both the buyer and seller when compared to seller financing. The buyer benefits from a lower down payment and longer financing period. The typical SBA lender requires a down payment of 15% to 25% with a 10 year repayment period. Seller financing, on the other hand, generally requires 40% to 50% down with the balance to be paid within 5 years.
The lower initial cash investment and monthly payments allow the buyer to purchase a larger business than would be possible with seller financing. Sellers also benefit when buyers acquire an SBA 7A loan. The lower down payment greatly increases the number of potential business buyers and that in turn increases the chance of receiving a higher price for the business. The biggest win for sellers, however, is that they get all or most of the purchase price at the closing.
Types of SBA Loans
There are two types of SBA loans commonly used to buy a business. The 7A loan mentioned above is used to buy the business, its assets and goodwill. These generally have a 10 year term with interest rates 2.75% above prime. The maximum loan size is $5,000,000 with the SBA guaranteeing 75% of the loan amount.
A second type of SBA financing is a 504 loan which can be used to buy the equipment and commercial real estate used by the business. This loan usually has a 20 year term with slightly lower interest rates than a 7A loan. The focus on this blog is the 7A financing.
Preferred Lenders
Most people seeking to buy a business are somewhat familiar with SBA loans, but they are often unaware of how to find good SBA lenders. These are generally banks, and while the SBA has certain loan requirements, the banks often establish their own additional requirements and preferences.
The first thing a business buyer should look for is a “Preferred” SBA lender. These lenders must be approved by the SBA and are more experienced in handling this type of financing. Dealing with a preferred lender simplifies and shortens the process because the lender is allowed to approve the applications rather than requiring the application to be approved by the SBA. Dealing with a Preferred lender will generally shorten the length of the process. For a list of SBA lenders, that identifies those who are Preferred lenders, go to your local SBA website.
Cash Flow vs. Collateral Lenders
SBA lenders fall into two broad categories, “cash-flow” lenders and “collateral-based” lenders A cash-flow based lender is interested in financing businesses which generate enough cash flow to make the loan payments, cover the buyer’s income needs and provide a margin of safety. A collateral-based lender uses this criteria also, but, in addition, will require enough collateral to support the loan. We primarily send prospective buyers to cash-flow lenders.
Another factor to consider is that each lender has its own preferences regarding the types of business they do and do not want to finance and the minimum size loans they are willing to offer. It’s important to find a lender with preferences that match the type of business you wish to buy. Finally, keep in mind that the quality of the loan officer is critical to a smooth process. This is the person who will quarterback your loan. A good officer can process the applications quickly and efficiently, providing you with a prompt answer regarding loan approval.
Finding your Lender
If you are buying a business, be sure to look for financing as soon as you have a purchase agreement in place for the business. Obtaining SBA financing typically takes a couple of months and is the task that usually takes the longest in the process of closing on the purchase of a business.
The last thing I would tell you is not to put all your eggs in one basket. Contact several SBA lenders to find a loan. Because most of our deals are financed with SBA loans, we know several good SBA lenders in our area that meet the criteria listed above. We can give you contact information for them and help you with the process.
There are a variety of ways to handle the sale of working capital when buying or selling a business. In accounting terms, working capital is the difference between current assets and current liabilities. By working capital, I’m generally referring to the sale of inventory and accounts receivable when a business is sold. Here is a short primer on the most common ways the purchase of working capital is handled in the sale of a business.
Working Capital Sold Individually
When an individual buyer purchases a smaller business, the company is usually sold free of any debt. The individual working capital components, such as inventory and accounts receivable, are purchased separately at cost. The seller normally keeps the cash balances used in the business.
Buying Inventory
Inventory purchases should be handled carefully. For instance, a purchaser does not want to 
buy too much inventory or purchase products which are obsolete. A prudent buyer should determine the inventory requirements of the business independently to eliminate the need to rely on the seller’s judgment. Inventory can either be paid for at the closing or be financed by the seller or a lender.
Buying Accounts Receivable
Companies that sell to other businesses usually have a significant amount of receivables. They generally offer purchase terms to their customers and it is not uncommon for this type of business to carry 30 days worth of receivables. In a sale of this type of business, it is beneficial to both the buyer and seller for the buyer to purchase the accounts receivable. The advantage to the seller is that he no longer has the work of collecting accounts receivable and “chasing” past due accounts. Some clients may become less willing to pay in a timely fashion once they discover that the seller no longer owns the business and cannot use the threat of withholding future purchases in response to slow payment.
For the buyer, there are also several advantages. For example, a seller who no longer owns the business may not be as motivated to preserve the customer relationship as the new
owner who wants to maintain the customer base. With nothing to lose, a seller may be more likely to offend a client while pursuing a past due receivable. Buyers also want a seamless transition. They want the client to continue making payments to the same business at the same address.
There are several issues which need to be addressed when negotiating the sale of accounts receivable. What, if anything, should the buyer be paid for collecting the seller’s receivables? Does the buyer bear any of the loss of the uncollected accounts receivable? How will uncollectable debts be treated? In most instances, agreements regarding the sale of accounts receivable call for payments to be applied to the seller’s oldest receivables except in case of a disputed invoice. Once receivables have aged beyond a pre-determined time limit – typically 60 or 90 days – the debt reverts back to the seller who is free to pursue collection. These policies are why delinquent debts are not usually included in a sale of the receivables.
If the business purchase includes inventory or accounts receivable it is common to set caps on the amount that the purchaser is buying. These limits are essential to ensure that the buyer will not run out of money before the closing on the business. If the amount of receivables and inventory to be purchased becomes too large it can either force the seller to extend financing on the excess or the deal may not close.
Net Working Capital
Another way of handling working capital that is popular in larger transactions is for the buyer to purchase all of the current assets (except cash) and to assume all of the current liabilities (except current portion of funded indebtedness). This is commonly referred to as “net working capital”. The parties need to agree on several essential elements such as exactly what components of the current assets and current liabilities are included in net working capital and the level that the buyer is purchasing. They may agree that these should balance out at zero and any difference is adjusted at closing. They may instead agree that the net working capital level being purchased is that which is reported as of a specific balance sheet date with any changes to the net working capital to be adjusted at the closing.
The purchase of working capital is an important element of buying a business. There is usually a significant amount of money tied up in working capital so both parties need to be careful to determine that the approach used will serve their needs. A successful sale requires that both parties believe the terms of the sale of working capital is reasonable.
Business owners sometime think of hiring a real estate agent to sell their business. This seems like a good idea for a few reasons. If the real estate agent is charging a lower commission rate than the business broker, the owner figures he can save money on the commission. In addition, if the business owner is also selling the real estate with the business, he may think that he needs to hire a commercial real estate agent. Actually, many business brokers have real estate licenses and can sell the commercial property with the business. Since real estate brokers and business brokers are both called “brokers”, some sellers question how much difference there is between them.
It is a bad idea to hire a real estate agent to sell a business for a number of reasons.
The first reason it is a bad idea is that the area of expertise of real estate agents is real estate, not business. A broker needs to know a lot about business in order to do a good job of selling a business. A good business broker does. They have experience selling businesses. Many have owned businesses before becoming a business broker. Many business brokers have business degrees. They understand financial statements. They may have experience selling the type of business the seller owns.
Another reason to use a business broker is to price the business. The methods for pricing real estate and businesses are different. In most business sales, the business broker helps the owner decide on a selling price. He also needs to justify the price and be able to have an intelligent negotiation with a buyer about how the business should be valued. Business brokers have that training and experience.
Once a deal is under agreement, the process for closing on the sale of a business is not the same as the process for closing on the sale of real estate. In particular, the due diligence, financing, and purchase and sale agreement are all done differently.
A business broker and a real estate agent have different types of buyers. A business broker has clients who are looking for a business to buy. A real estate broker either has people looking for a house to live in or investors looking for a real estate investment. One reason real estate buyers like this investment is because it doesn’t require active management. This is just the opposite of a business which requires active management. If you are selling your business, it helps to hire a salesperson who already knows prospective business buyers. A good business broker will have a list of active business buyers.
Today, the primary advertising for commercial real estate or business sales is on the Internet. But, the sites where each is marketed are different. Most business for sale websites require a monthly subscription. Only by selling many businesses can a business broker afford to market businesses on many of the websites. In addition, Google will rank a business broker’s website more highly for the search terms buyers will use when searching for a business to buy. This makes it more likely a business buyer will find the business broker’s website, and the business for sale, when doing a search.
What about the situation where real estate is included in the sale? A commercial real estate agent probably knows more about selling commercial real estate to an investor than a business broker. But, in a business sale that includes real estate, the sale of the business is what drives the transaction. The choice to buy the real estate is only made after, and is dependent on, the decision to buy the business. Selling the commercial real estate in this situation is not complicated. The buyer is not making the same investment decision that a real estate investor makes. They are determining if the cost to purchase the real estate is acceptable as compared to what the rent would be.
There are business brokers and there are real estate brokers. Although both are called brokers, that doesn’t mean they are the same. If you are selling a business, hire a broker that specializes in selling businesses. You will end up with a better sale using a business broker to sell your business.
The automobile has been a staple in society for more than a century, and as cars began to spread throughout the country, auto repair shops appeared as well. Unlike businesses which rise and fall when fashion or technology changes, car repair continues to offer stability and opportunity for the business buyer. If you are looking for a business to buy, here are 7 good reasons to buy an auto repair shop.
Reason 1: Auto Repair Produces a Good Income
Information from Bizcomps®, a database which tracks financial information on small business sales, shows that auto repair shops enjoy a median cash flow of over 20% of revenues. This means that if a shop has $750,000 in revenue it can generate an owner’s cash flow over $150,000. This is also a business which can thrive in any economic climate. During strong economies, auto repair shops can cater to both new and used car owners by offering standard maintenance and repairs for much better prices than those charged at auto dealerships. During tough markets, consumers are more likely to hang onto their cars longer, considering it more economical to pay for car repairs than to buy a new car.
Reason 2: Lower than Average Purchase Price
It’s not uncommon for franchises or businesses in a variety of industries to carry price tags of 2 to 3 times the amount of the owner’s cash flow. According to Bizcomps, this is not true with auto repair shops which have an average cost of only 1.69 times the owner’s cash flow. This means that, on the average, an auto repair business generating $150,000 in owner’s
cash flow sells for about $254,000. This makes buying an auto repair shop a much more affordable option for a business buyer.
Reason 3: Limited Cash Outlay
While operating an auto shop requires a certain amount of equipment and tools, owners do not have to worry about having their cash tied up in accounts receivable and extensive inventory. Auto repair shops operate on a pay-at-the-time-of-service basis and very few stock large inventories of parts. In most areas, parts can be obtained quickly from parts stores as the need arises.
Reason 4: Strong Industry Outlook
There are several trends which show that the outlook for independent auto repair shops is excellent. For one thing, the number of cars on the road continues to grow. It is estimated that there are over 247,000,000 vehicles registered in the United States and that number increases annually. With just a few exceptions, the number of cars has increased over 3.5 million each year since 1960, and there is nothing to indicate that this trend will change.
Another factor includes the extended life of today’s automobiles. In the past, cars were frequently traded in before they reached 70,000 miles, but improved technology has significantly lengthened the life of most automobiles, and it’s not uncommon for owners to continue driving a car with has more than 100,000 miles on the odometer. The increased age of these vehicles creates a corresponding increase in the need for repairs and on-going maintenance.
During the recent recession the average number of miles driven by Americans has been stagnant. Families struggling with unemployment or underemployment issues are less likely to drive on vacations or non-essential trips, but as the economy improves industry forecasters are predicting a steady increase in the number of miles driven. In fact, the US Energy Information Administration (EIA) is predicting that the number of car miles driven annually in the US will increase from 2.6 trillion in 2011 to 3.6 trillion in 2035; an annual growth rate of 1.2 percent. These facts all point to a sustained demand for independent auto repair businesses.
Reason 5: Positive Competitive Landscape
Unlike many brick and mortar businesses, auto repair shops have not been replaced by internet businesses. This industry also faces little consolidation. While major auto dealers offer repairs, their market share has been shrinking. One reason for this is that auto dealers charge significantly more for auto repair work than do small car repair shops, and a Consumer Report survey found that customers who go to independent auto repair shops report a higher satisfaction level than those who visit an auto dealer for repairs. The independent market is highly fragmented and the typical auto repair shop may have just two to five employees.
Reason 6: Limited Shop Hours
Another reason to buy an auto repair business is that the owner still has time for a personal and family life. Most car repair shops operate during business hours Monday through Friday and are only open until noon on Saturday.
Reason 7: You don’t need to be a Mechanic
You don’t have to be a mechanic to own an auto repair shop. Much of the repair business involves maintenance work and minor repairs for which there are many auto mechanics who can do the work. For the owner, good business management skills are more important. Classes in auto repair shop management are readily available.
If you are a business buyer looking for an affordable, profitable business to own and run, consider an auto repair shop.
Last night I had the pleasure of hearing Ed Pendarvis speak at the monthly meeting of the New England Business Brokers Association. Ed Pendarvis started Sunbelt Business Brokers, a chain of franchised business brokerage offices. After selling it, he started Business Buyers University to help buyers learn how to buy a business. It offers online courses that buyers can take to learn more about how to buy a business.
Ed made some interesting points about small business. He pointed out that with our relatively high unemployment rate and the likelihood that it will continue for awhile, more people will look at owning a business for an income. In particular, older Americans, who are having a harder time finding a job, may be looking at buying a business despite their being over 50 or 60.
Ed pointed out that the safest way to own a small business is to buy an existing business or a franchise, rather than starting a business from scratch. When you start a business, you have to find employees, put procedures in place, and persuade customers to shop at your business rather than where they have been shopping. It is unknown if your business will succeed. When you buy an existing business, you can see a track record of success. The people, procedures, and customers are already in place. As the buyer, you just need to maintain them.
Ed was speaking to an audience that consisted primarily of business brokers and he pointed out problems in selling businesses. He pointed out that most people don’t know that there 
are business brokers and that they sell small businesses. [Author’s note: “Small” is a relative term. The Small Business Administration has published its criteria for what is a small business, by industry, and it includes businesses with tens of millions in sales revenue and/or over 1,000 employees.] Secondly, most business schools are teaching about big business, not small business. Another problem is that buyers are trying to evaluate a business at their computer, based on financial statements, without seeing the business, or the big picture. Small business income statements are not the same as those of public companies who have shareholders. Small business owners are trying to minimize their taxes so their tax returns frequently don’t show much profit and need explanation. Ed pointed out that a business that has been operating successfully for many years and providing an income to the owner is showing that it is a viable business. Buyers need to get out and see businesses they are thinking of buying, rather than just studying financial statements. Buyers and business brokers need to meet face to face to better communicate and find the best business for the buyer to buy
If you have the chance to hear Ed speak, be sure to take advantage of the opportunity. He always has insightful thoughts on small business and business brokerage.
One of the biggest mistakes a business owner can make is not being realistic about the value of their business. By value, I mean the likely selling price. This can happen when the revenues and profits of the business are declining. The problem is that by not recognizing the market value, the owner holds out for a higher price that never comes, while his business is continuing to decline in value.
With the recent recession, many businesses had a drop in sales and revenues. Many are now recovering from the lower sales and profits. A business normally sells at a price based on the most recent financial results. The owner remembers what their business was worth and expects it to get back to that level. Maybe it will, but today the business is valued based on current sales and profits, not on what sales and profits may be in the future.
Another situation where owners are not realistic in their expectations is where their
investment in the business is much more than what the business is likely to sell for now. This could be a business that was bought when it had higher sales and was bought at a higher multiple than it would sell for today. Another example is a franchise business that is not performing well. In both cases, today’s selling price may be much lower than the owner’s investment.
One other example is a business in a declining market. In this situation, the business sales are dropping and the multiples at which businesses in the industry are selling for are dropping also. When combined, the value of the business can drop significantly. It may be best for the owner to accept the best offer and get into another type of business.
Finally, there is the business where, for personal reasons or poor management, the sales and profits are dropping, but the owner wants to sell based on how the business used to do. A common explanation is that all the business needs is a new owner with the drive and enthusiasm that the current owner no longer has. The buyer won’t pay the seller for the efforts the buyer will make to improve the business.
In all of these situations, the owner is going to take a loss compared to their investment or what the business used to be worth. But, if the owner doesn’t sell now, the value may continue to decline and the loss will be even greater in the future. I’ve seen situations where owners have turned down, what they considered, a low offer only to close the business or declare bankruptcy, and receive nothing, soon afterward.
If you are thinking of selling, and your business broker has suggested a selling price that is lower than you think your business is worth, get an independent valuation. Usually, this will cost a small amount as compared to the value of the business. This will give you an independent opinion from an expert.
No one wants to hear that their business is worth less than what they would like to get, or need to get. But, one of the characteristics of a good businessman is the ability to be realistic. If your business is declining, failing to be realistic and accepting less, could result in an even worse outcome later.
Over the years, I’ve made a number of sales to industry buyers. These were good deals for the buyer and seller. I’ve also seen offers from industry buyers that were very low – perhaps a fraction of what the business sold for. If you are considering selling your business to an industry buyer, here are some things to keep in mind.
Selling to an industry buyer is attractive to many business owners. They probably know the buyer. Selling to an industry buyer, rather than putting the business on the market, may keep 
the sale more confidential. The industry buyer is more likely to close on a deal because of their industry experience. They save the broker’s commission. The due diligence is easier. There are lots of good reasons to consider selling to an industry buyer. The question is whether it ends up being a good deal for the seller.
What are the potential drawbacks of a sale to an industry buyer? The price may be much lower than what another buyer might pay. I’m not referring to 10% or 20% less, some of these deals are a fraction of what another buyer would pay. Last year, I received an offer from an industry buyer, who had bought many businesses in his industry, that was 1/4 of what the business sold for. Another disadvantage of an industry offer can be the financing. Most of our business sales are financed with SBA 7A loans (which can go up to $5,000,000) with the seller financing being little to none. If the industry buyer’s business is not in great shape financially, the only way they can finance the purchase may be with seller financing. To make the deal even worse, some industry buyers convince sellers to make the sale price dependent on what the sales are after the buyer purchases the business.
Industry buyers can be very seductive and convincing. If they are not paying the best price, they are probably being very nice to the seller. People tend to give better deals to their friends than the “Gordon Gekkos” of the world. Since they have bought other businesses in the industry, the seller sees them as having credibility. The seller is thinking that If other owners sold to the industry buyer, it must have been a reasonable deal.
What are the lessons for a business owner?
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Get an independent business valuation from an accredited appraiser before putting the business on the market or making any deal with an industry buyer. The cost is low, generally about $3,500 if we provide it, and we deduct it from the commission when we sell the business.
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Get credit information on your industry buyer and have them sign a confidentiality agreement before you spend time dealing with him.
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Get a personal guarantee if you are financing any of the sale price. This includes if the financing is only supposed to be for a short period.
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Don't make a deal where the price is based on how the business does after the sale – when you will no longer be managing it. Note: If you are in a declining industry, or have a high percentage of sales in one, or a few, customers, or have other circumstances that make the risk of retaining customers higher than normal, having part of the price based on customer retention may be reasonable.
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Putting a business on the market is the best way to get the best price for the business. The risk of breach of confidentiality is low with a competent business broker handling the sale.
A sale to an industry buyer may be easier than selling to an individual buyer, but that doesn’t mean it is the best sale for the business owner. If you are selling your business to an industry buyer, you may still want to use the services of an experienced intermediary to handle the transaction. In any case, as with any business sale, seller beware.
This blog was guest written by Cody Boyte, Marketing Manager of Axial Market
In most small business sales, there are generally three main types of acquirer: individual buyers, private equity groups and other businesses in the same industry. For the sake of this article, the focus will be on how private equity groups differ from individual buyers in the way they analyze and make offers for businesses. In another article we’ll examine how different sized businesses think about acquiring your company in a business to business sale.
Private equity groups and individual buyers tend to think about the purchase of a company and valuation of a company very differently, and thus will negotiate with you differently. Why do they think about your business so differently if they’re both hoping to buy it?
For the most part, individual buyers are looking at your company as something they’ll 
purchase and run themselves indefinitely. Private equity groups, on the other hand, are professional investors considering your company more like a stock. They’re hoping to purchase the company, grow it, and resell it a few years later for a profit. The differences are why you get offers that are positioned dramatically differently.
How Individual Investors Value Your Business
An individual investor is typically going to look at the annual income produced by your business and compare it to the price you’ve set for the business. In many ways an individual investor is actually thinking about your company the same way you’d think about a mortgage. How much money, per year or month, is the loan on the business going to cost me? How long will it take me to pay of the loan or get back my invested capital? Then, once I’m making money, how much money am I making per month or year?
These mental calculations tend to lead towards individuals negotiating based on the price you’ve set for the company, trying to lower the price so they can break even faster. In the event that you have multiple parties bidding on your company at once, individual investors typically bid in relation to their previously approved funding sources (bank loans, friends and family, cash in the bank, etc). They’re thinking about their own personal balance sheet, risks against their other holdings and negotiating with you based on the price you’ve set in most cases.
How Private Equity Groups Value Your Business
Private equity groups think about purchasing companies in a very different way. As professional investors, most of the funds a private equity group (PEG) invests come from ultra high net worth individuals, pensions, endowments, and other limited partners who expect a good return on their investment. Private equity groups are typically judged by their “Internal Rate of Return,” which calculates how much a dollar given to the firm appreciates each year. That causes PEGs to generally focus on investments that will help them hit their “target IRR”, or the return on investment that is high enough to satisfy the investors.
In order to judge how much the firm should pay for your company, the private equity group will usually use a combination of three methods: discounted cash flow, comparables, and EBITDA multiples. All three methods will be compared against the target IRR to decide at what price it’s worth buying your business and thus the offer you receive. Notice, your asking price isn’t anywhere in their calculation. So how do they calculate each part of their valuation?
Discounted Cash Flows
Private equity groups calculate discounted cash flows by looking at the Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which is very similar to owner’s cash flow, and projecting how they will change over the next 5-10 years. The EBITDA number is basically the cash available to pay down any debt associated with the company, since most private equity groups use debt as a large part of the acquisition financing. To calculate the value of your company, they’ll add up the expected profits in the next 5-10 years, apply a discount for the time-value of money, and then add a discount for the projected riskiness of your business. The more stable your business, the more confident they’ll be in your numbers and thus the easier it is for them to offer you more money.
Comparables
The second, and most common, method by which a company is valued is to use comparable businesses that have sold recently. There are typically two different ways of thinking about using comparable: using public market data and calculating back or using database of historical reported sales. The method is fairly similar to looking at houses that sold in your neighborhood in order to figure out the value of your own home.
For large businesses where there are public companies with comparable revenues and earnings in a similar industry, the best way to value the company is to look at how the stock market is valuing the public company. Then adjustments are made based on differences between the nature of the private business and what is known about the public business. One caveat is that PEGs will often adjust their offer for your company based on changes in the fiscal environment, lending rates, and perceived differences between your business and the business reported on.
For smaller companies where there aren’t any comparable public companies, comparables data is pulled from databases of past business sales that were reported to the database companies or where a public announcement was issued. The most common database services are Bizcomps, Peercomps, or the IBA database. This method is generally referred to as the Direct Market Data Method.
Private equity groups will occasionally purchase similar firms as part of a roll-up strategy, making many acquisitions in a single vertical. . If a PEG can find comparable sales in the recent past, they’ll often use that company as a precedent for the sale of your company. If the company that sold was 10% bigger, they’ll offer 10-15% less for your company. If you’re the third or fourth plastic extrusion manufacturer a PEG has acquired in the last year or two, they’re not going to pay significantly more for your business than they paid for the previous ones.
Multiples
The last way of valuing a business, or at least getting a quick idea about the rough selling price, is to consider multiples of either revenue or EBITDA. Typically, most PEGs are going to focus on EBITDA unless your business is extremely rapidly growing - as long as it seems like a reasonable expectation that you’ll convert market share into earnings in the future. The reason that multiples are often used is because they can be scaled nicely for different sized businesses. Generally, a business with less than $1M in EBITDA will be valued in the 2-3x earnings while a company in the $10M EBITDA range will be valued closer to 5-7x EBITDA or more.
The reason for the different valuations based on EBITDA size is actually based on three things. First is the concept of ‘multiple arbitrage’, where a publicly traded company can get immediate value by acquiring a company at a price to earnings (P/E) ratio lower than it’s trading at in the public markets. The larger the acquired company, the greater the impact on the earnings per share of the public company and thus the bigger the relative value for their shareholders. Second is based on acquisition financing, since many of the lenders for a PEGs acquisition of your business will be loaning based on multiples of EBITDA. They’ll only lend 3x EBITDA or 4x EBITDA, so the private equity group can only offer you that much. Third is based on risk. The larger your company, the more room there is for recovery if something goes wrong in the general market or in running the business. Less risk = higher prices.
Who should you work with?
Private equity groups and individual investors typically also structure the acquisition differently. Most often an individual investor wants to acquire your entire company and run it himself. If the company grows after you sell, the new owner reaps all of the benefit. Many private equity groups, on the other hand, would like to retain you at the company with some ownership so you can continue to help growing it. This can lead to an experience where you are able to focus on what you do best while the PEG takes care of some of the financial aspects of the company and you both share in the growth after their acquisition.
However, making the decision isn’t always cut and dried. Private equity groups, as professional investors, will also have significantly more experience acquiring companies than you have selling them. Watch out for terms in your sale like impossible to hit earn-out targets or clauses making you liable for any future actions of the company. Working with a good broker can help protect you from thinking you’re selling for $20M and only ending up with $2M in your pocket later on. To see which PEGs are most active in the middle market right now, visit the AxialMarket list of private equity groups.
Before there was an Internet, an M&A consultant would market a business by identifying the potential buyers and contacting them directly about the business for sale. The goal was to generate interest from several qualified buyers in order to have competition for the business and bid the price up. The business was not advertised publicly because, it was believed, this would primarily attract financially unqualified individual buyers. In addition, it would increase the risk that the identity of the business for sale would be discovered. The use of the Internet, by individuals and businesses has made this marketing approach obsolete.
In addition to the use of the Internet, the nature of the market for business sales has changed. Many years ago, buyers tended to buy businesses located relatively close to their business. There were a few reasons for this. First, the geographic market for most businesses was not as broad as it is today. The Internet has expanded the geographic market for many businesses and, as a result, increased their interest in buying businesses located farther away from their primary location that could service their market elsewhere. Businesses are doing business with other business located elsewhere in the world. In addition, better communication and faster travel make managing a remote business more doable.
Now that potential business buyers could be located anywhere in the country or world, it makes it practically impossible for an M&A consultant to identify all, or even most, of the
potential buyers. To effectively market a business for sale, an M&A consultant needs to do more than just contact the identified potential buyers. The business needs to be marketed so that most potential buyers will learn of the business opportunity. The most efficient way to do this is by using online marketing.
The leading method used to market businesses for sale online is “business for sale” websites. Most of these websites are advertising small businesses for sale to individual buyers. Business brokers, who primarily sell smaller businesses to individuals, were the first to adopt this marketing method because the superior results were obvious. At the cost of one ad to advertise one business in a Sunday newspaper, all of the business broker’s businesses for sale could be marketed on the leading Internet business for sale website indefinitely. And, the businesses were marketed to a much larger group of potential buyers. The difference in cost/benefit was many-fold.
While business brokers enjoyed using the internet to discover new buyers for businesses, M&A consultants and investment bankers were prohibited to do so. They have been restricted by non-solicitation mandates by the SEC that doesn’t allow them to broadly advertise businesses they’re selling on “business for sale” websites the way business brokers can. However, the superior results of this marketing method could not be ignored and we are now seeing websites that cater to M&A buyers.
The new breed of M&A websites, like AxialMarket, are more like Linkedin or other networks than like the back pages of the Sunday paper. The networks are built around connections between advisors and buyers, helping your advisor find exactly the right firms connect for your company. These connections helping M&A consultants and investment bankers establish pre-existing relationships so they don’t violate non-solicitation rules.
The new websites have allowed the groups of buyers looking for businesses online to expand beyond the individual buyers on the old “businesses for sale” sites. Now other businesses and private equity groups also search for businesses online. We have made several sales of businesses to other businesses that found the company through our online marketing.
Effective online marketing is much more than just advertising a business on “business for sale” websites. I recently wrote a blog about the many ways to market a business online. When choosing an M&A consultant to sell a business, a business owner needs to look into how the M&A consultant will be marketing the business, online and off, and analyze how effective their total marketing is.
Kirsty Dunphey wrote a blog asking the question, Is Your Business a Business or Just a Well-Paying Job? In it, she gives several examples of people who make a very good income out of their business, but whose business income is dependent on them personally providing the service the business offers. She raises the questions:
“Do you have a business or a job? Do you want to start your own business or create a job for yourself? Is what you've built saleable? Does it work for you whether you spend the day in bed in your PJs or you're out in the field?”
The problem starts with the owner’s mindset. I’ve met many owners of small businesses whose sales have leveled off and the number of employees in the business are the number they can manage directly. When you ask them why, they say that they just can’t find good people. What they mean is that they can’t find people who will do it as well as them or the way they would do it.
Buyers are looking for a business to buy, not a job like the one described above. If you own a business that you want to sell, and realize that you really have a job, how do you turn it into a business? I would recommend you start by reading “The E-Myth Revisited”. This book is all about this particular problem. If you want to know more, go to their website, http://e-myth.com.
One of the major points that this book makes is that the small business owner needs to create systems for employees to follow so they know what to do. This is what franchises do. Create a complete system to follow so the product or service the company is selling is the same no matter what employee is doing the work. The quality of the product or service is not dependent on the skills of the employee delivering it.
Another thing that the business owner needs to do is “let go” and recognize that others will not do things as well as he, or she, might, but the business will run much better, grow, and make more money. If the owner can delegate, it will become a business, not a job. And, become a business that someone will want to buy.