While many people compare selling a business to the sale of real estate, there is one very significant difference: Confidentiality. When you are selling your house, you put a big sign out in front of your house in order to attract as much attention as possible. If you did the same thing with your business, you could create conditions of uncertainty that could negatively impact your bottom line.

What could be the consequences of people finding out your business is for sale?

1. Employees: employees are an extremely valuable asset to your company, and knowing change is on the horizon may cause some individuals to leave. They worry they will lose their jobs, or the new owner will bring in their own team. Even if you were to reassure them, some may still try to seek a different position to mitigate any risks.
2. Customers: customers may seek similar services/products elsewhere; they may be concerned the new owner will not stand behind the work or honor the warranties of the previous owner. Once your competitors know you are selling your business, they may use that as leverage to steal away your customers.
3. Vendors: vendors and creditors tighten terms; you may find that previous contract terms become stricter. Perhaps debts and lines of credit will be called due.

 
All of these consequences can negatively impact the current health and operation of the business. These consequences are indicators of greater risk to a Buyer.

Gateway’s proven processes protect the confidentiality of your transaction. All potential business Buyers must sign a Confidentiality Agreement before receiving the Confidential Business Review for your business. As the process progresses, Buyer-Seller meetings are scheduled after-hours so that no employees or customers are on-site. Gateway Brokers are highly skilled at protecting your proprietary information throughout the Selling and Due Diligence processes. As the transaction nears closing day, outside parties, such as bankers, appraisers, surveyors, or licensing agencies may be brought into the transaction. All outside parties are instructed on the confidential nature of the transaction. We cannot control the actions of outside parties and their approvals may be necessary to get the transaction finalized. However, Gateway does everything in its power to stress and enforce strict confidentiality.

Once you are committed to the sale of your business, you probably want to do it as quickly as possible. Often the sale of a business is compared to the sale of a home. The expectation becomes the business will sell within a 30-60 day time frame. This is not an accurate expectation. Anyone can live in your home – not everyone can successfully run your business. Thus, it can take much longer to sell a business. The differences include:

1. Confidentiality: When selling real estate, signs and advertising shout out “this home is for sale.” In the current DFW Real Estate market, homes are sold almost as soon as they are listed. On the other hand, the sale of a business is highly confidential. Buyers must be carefully screened before they are allowed to sign the Confidentiality Agreement, which is required prior to revealing the name, location, and summary of financial information on the business.
2. Uniqueness: While most houses in a neighborhood primarily have the same square footage and floor plan that anyone can live in, no two businesses are alike. Your business has a unique culture: the employees, the customers, the products and services offered, and how you stand behind them separates your business from all others. Thus, it takes time to find just the right Buyer to continue your Legacy of Success.
3. Financing: Banks love Real Estate. It is a tangible asset that strengthens their balance sheet, and can be easily resold within percentage points of the asking price. Financing a business is another matter. Most of the value of business is intangible and specialized lenders need to be utilized to finance the sale of a business.
4. Connection with the Buyer: When selling a home, you will almost never meet the Buyer. Selling a business requires the Buyer and Seller to meet a number of times. After the sale of the business, the Seller may need to train the Buyer and transition the business for weeks or months after the sale, depending on the complexity of the business.

Most real estate agents specialize in selling residential homes or commercial property. Business brokers specialize in selling operating businesses and the real estate associated with it.

There are 3 major differences between a real estate agent and a business broker: training, confidentiality, and what we sell.

The 1st difference is training. For a real estate agent to start their career in the real estate industry they are required to take six real estate courses that are geared towards residential real estate agents. These courses prepare a real estate agent to sell residential homes and have limited education on selling commercial real estate and have no education in selling businesses.

In addition to real estate courses, business brokers take courses on business transactions. These include Standards of Care for Business Brokers, Analyzing and Recasting of Financial Statements, Managing Due Diligence, and Pricing Businesses. Advanced training is also available to experienced business brokers to earn certifications such as: Board Certified Broker, Certified Business Intermediary and Merger and Acquisition Master Intermediary. A well-trained and experienced broker is key to smoothly and successfully closing on the sale of a business.

The 2nd difference is confidentiality. We, as business brokers, require all of our potential buyers to sign nondisclosure or confidentiality agreements before we disclose the name, address or financial statements for any business that we sell. Real estate agents will place a sign in your front yard and advertise addresses so everyone knows that you’re selling. Most business owners would not want their employees, customers, suppliers or competitors finding out that they are selling their business.

The 3rd major difference is what we actually sell. Both real estate agents and business brokers sell real estate, but the business broker also sells the operating business. It is very common for us to sell a profitable business that includes real estate for over twice as much as what the real estate alone is worth. If you work with just a real estate agent expect to only be paid for your real estate. When you work with a business broker you will be paid for your business and your real estate. A business can be sold without the real estate. The new owner will lease the property from you, if you own the real estate, or from the landlord.

Use your local real estate agent the next time you’re ready to sell real estate only, but use a business broker when you’re selling your business or your business with real estate.

Ultimately, Market Value is the amount a Buyer is willing to pay for the company and the amount you are willing to accept, when neither party is under duress. Knowledge is power. Are you ready to sell and want to negotiate from a position of power?

CONSIDER THESE 3 OPTIONS:

1. Rely on a Broker Opinion of Value.
2. Leverage Gateway to provide a more in-depth study: After utilizing proprietary software, weight asset based, market based, and income based valuation approaches to determine selling price ranges.
3. Secure an independent 3rd party Valuation: If your Seller Discretionary Earnings are near $1 Million annually, the independent 3rd party Valuation provides defensible documentation of value. Your Gateway Business Broker can facilitate a 3rd party Valuation at a significant cost savings to you.

If you are building your business for a future sale, a Broker Opinion of Value will give you the information you need to plan for a future exit. The multiples and comparables are weighted to determine a potential asking price. This figure is then put through a Lender’s Assessment and Buyer’s Test to verify the asking price is attainable in today’s market. A Gateway Broker can provide you with a Broker Opinion of Value at no cost and with no obligation to list your business for sale.

As a Business Owner, your goal is to get the most money for the amount of time, care, and passion you have invested in your business. In order to accomplish this goal, preparation is needed. The number one mistake that business owners make when selling their business is not preparing early enough. A recommended rule of thumb is to begin consulting with and building your selling team about 2-3 years before you expect to exit your business. If you are getting close to your expected exit day, don’t worry, you can still prepare. Proper preparation will enhance the value of your company, make the transaction flow more smoothly, and avoid pitfalls.

INCREASE YOUR COMPANY’S VALUE TODAY:

 

1. Increase Profits and Cash Flow The most important factor in determining the value of a business is profit. Buyers and banks want to “see the money” in order to close the deal. Continue to reach out to existing customers to increase their annual spending. Sales goals should include total Sales and number of Customers. Monitor labor costs and improve employee productivity. Keep working with suppliers to get better pricing. You will enjoy increased profits and Buyers will pay more for your company.
2. Clean Up the Financial Statements If you are running personal expenses through the company, it is time to STOP. It is acceptable to have the company pay you an above-market salary, pay for insurance (health, life and disability), retirement plans (401k or IRA) or even pay rent for the building you own personally. However, Buyers expect accurate, detailed financials.
3. Remove Owner and Key Employee Dependency If the business cannot run without you, you do not have anything to sell.
   1. Start cross training your employees to have at least one backup person for each position. Talk to your attorney about having employees sign a non-interference, non-circumvent or even a non-compete agreement.
   2. Update or create an operations manual. This can be as simple as the employees documenting what they do. It will make it easier to hire and train new employees if needed.
   3. If you have family members working in the business that will not be available after the sale, it is time to start transitioning them out of the business. When a Buyer purchases the business, they generally will want to keep all the employees.
4. Diversify Your Customer Base If 40% or more of your revenue comes from one customer, both Buyers and banks will be concerned by this. In some industries, it is common to have higher customer concentrations, even so, try to diversify by adding new customers.
5. Sell Obsolete Equipment and Inventory If you have equipment or inventory that is obsolete or not contributing to the profits, then sell it. If you have equipment that is only occasionally used and is not vital to your operations or you can rent it, think about doing that. A general rule is that every piece of equipment needs to generate enough profit to pay for itself every three years. The same thing goes for inventory – does it make economic sense to keep an item in stock? Every business is different and you need to evaluate your inventory levels and availability of restocking.

If the business tax returns do not document enough profit for the bank to provide financing, you as the Seller must finance the purchase. This can be avoided by reporting all the sales and minimizing Seller Discretionary Spending.

Sometimes, either the Buyer, the bank, or both require some Seller Financing in order to finalize a transaction. Typically, the Buyer will provide a 20% down payment, the bank will lend 70%, and the Seller Financing will make up the balance. According to BizBuySell.com, about 60-90% of small to medium business sales have some form of Seller Financing.

Requiring some Seller Financing stems from a bank’s reluctance to finance business purchases. The reluctance is because small businesses attempt to minimize profits and taxes. Additionally, a bank cannot step in and manage a business if foreclosure becomes necessary. Both of these reasons make business acquisition funding unappealing for the bank. However, if you are willing to fund a small portion of the purchase, it demonstrates your confidence in the continued success of the business.

Some Business owners are reluctant to provide financing. Keep in mind, Seller Financing can be beneficial for both Seller and Buyer. With Seller Financing, business owners can attract more Buyers, secure a higher selling price and are only taxed on the proceeds received in the tax year. Buyers have the confidence that you will answer emails or phone calls related to the business during the term of the Seller Financing. Many serious Buyers will not even commit to buying a business that doesn’t offer Seller Financing.

If the Seller is the only lender in the transaction, all or some of the following conditions would be required:

• A personal guarantee from the Buyers
• 1st lien position on all assets and real estate of the business being sold held as collateral
• Payments made to Seller automatically by ACH/EFT each month
• Control of the business if there is non-payment that is not cured

If there is a thirty party lender in your transaction and you are financing a portion of the purchase your protections are limited. You can require:

• A personal guarantee from the Buyers
• 2nd lien position on all assets and real estate of the business being sold held as collateral; the bank has 1st position
• Payments made to Seller automatically by ACH/EFT each month
• Control of the business if there is non-payment that is not cured. This must be in the Definitive Purchase Agreement and documented in the Guaranty and Security Agreements to the Promissory note. The bank must also approve this after Buyer’s default. You may be required to assume the balance of the bank loan.

A Seller’s biggest fear when providing Seller Financing is the Buyer defaulting on the loan. To avoid this from happening, Sellers generally want terms in the Purchase Agreement/Security Agreement/Guarantee Agreement giving them the right to take back control of the business within 60 -90 days of the Buyer missing payment.

If a you are the only lender in the transaction the decision is yours. Typical transactions have the Buyer’s down payment around 50% - 70% leaving you to finance 30% to 50%. Every transaction is unique, and some owners may offer more or less financing. With the assistance of your CPA or finance professional, and your Gateway Broker, you can determine the right amount of Seller Financing for your transaction.

Every situation has its advantages and disadvantages. Let’s look at some scenarios:

• Seller receives 100% of the purchase price in cash at Closing:
  • Training and transition is complete and you are free from all business responsibilities
  • Cash is in the bank – no waiting for additional proceeds
  • You can focus on your next business or new adventure
  • You will be taxed on 100% of the purchase price the year of the sale
• Seller chooses to finance the sale of the business
  • You have more control of price and terms of the sale without a bank in the transaction
  • Buyer Personally Guarantees the loan
  • You are in first lien position on all assets and real estate sold in the transaction
  • You can re-take control of the business if Buyer does not cure a default in the loan payments
  • You are taxed only on the proceeds received in a given tax year
  • Buyer may be a “slow pay” and you need to follow up on the monthly payments
  • Risk of the Buyer defaulting on the loan
• Seller Financing along with a 3rd party bank loan
  • Vast majority of the Purchase Price is received at closing
  • Buyer Personally Guarantees the loan
  • You are taxed only on the proceeds received in a given tax year
  • You are in 2nd lien position on all assets and real estate sold in the transaction
  • Buyer may be a “slow pay” and you need to follow up on the monthly payments
  • Risk of the Buyer defaulting on the loan
  • You have no recourse unless the bank approves

We recommend you consult your attorney to determine if the advantages outweigh the disadvantages for you.

The combination of DFW’s strong economic climate, the increase in Buyer activity, and with banks lending can all shorten the average time to sell a business. Even so, there are many factors that influence how long your business is on the market. Some factors you can control:

 

• Asking price in relation to profit
• Transparency of financial information
• Diversification of the customer base
• Elimination of owner dependency
• Willingness to seller finance a portion of the purchase price

 

The main reasons for a business not selling are:

 

• Unrealistic asking price
• Business highly dependent on the owner
• One or two customers generate the bulk of the revenues
• Financial statements are inconsistent, casting doubt
• The parties are unwilling to negotiate mutually acceptable price and terms

 

The national average from listing to contract is approximately 184 days. Minimizing red flags for a Buyer can aggressively decrease the time your business is on the market and allow you to cash in on the market momentum in the DFW area.

Gateway’s aggressive and proactive marketing programs will be tailored to highlight the very best about your business and to increase the size of the Buyer pool. We don’t sit around waiting for Buyers. We aggressively search out the most suitable Buyers for your business. At the same time, we leverage our database of over 11,000 Buyers to get the most capable Buyers interested in your business. Your Gateway Broker will be straightforward with you about realistic expectations for selling your business and the potential asking price. We keep the Buyer, the banker and even you, the Seller, focused on the transaction to achieve the shortest possible timeframe to Closing.

Even the most experienced business owners may feel they are unprepared to negotiate the sale of their business. Here are some things to keep in mind during the negotiations, according to Entrepreneur Magazine (August 2009).

1. Price is not everything: You want to walk away with the most money possible in your pocket. However, the terms of the sale also matter and should be considered. How the payout will occur, your future commitment to the business, and what will happen to your former employees are all things you should think about before the final sale.
2. Make strategic concessions: Sometimes, to get what you really want, you will have to give away something valuable. This will build goodwill between you and the Buyer. Additionally, you have leverage to ask for something just as valuable as what you gave up.
3. It’s okay to walk away: It’s very easy to get tunnel vision when it comes to the negotiation process, especially if an outside force is pressuring you to sell quickly. No business owner should accept a deal they are uncomfortable with. When beginning the negotiation process, reflect and define what terms and/or price you are unwilling to accept. By already having an idea of what you’re unwilling to accept, it becomes much easier to say no to a deal that will not work for you.

Your Gateway Broker will be a buffer between you and a potential Buyer. By keeping negotiations at arms-length, you have the opportunity to maximize the final selling price. Additionally, you and the Buyer can maintain a working relationship. By utilizing your Gateway Broker to handle your negotiations, you can trust that your interests are paramount. Our Brokers have significant experience negotiating successful terms and conditions for the transfer of businesses, with the minimal amount of stress for the Buyer and Seller.

Once the offer is negotiated and the due diligence process finished it is time to begin the closing process. Using a commercial escrow company saves you time and money with attorneys focusing on the review, negotiation, and finalization of documents instead of drafting them. Every business sale is a complicated transaction and involving paperwork specific to the individual transaction. Many business experts recommend working with a commercial escrow company and a professional closing officer.

A commercial escrow company facilitates the funding and closing of a business sales transaction.  They are a neutral party holding the escrow money.  They efficiently handle:

Your Gateway Broker will work closely between you, the Buyer, the banker and your financial and legal advisors to keep the transaction moving efficiently to the Closing Table. The longer a deal takes to close the less likely it will close. Your Gateway Broker will make sure your deal points don’t get lost in the revisions from the Buyer. Your transaction attorney and transaction CPA will balance the legal and financial points to protect your best interests.

Please note: Gateway Mergers and Acquisitions Brokers do not provide any legal, accounting, tax advice or any related services to Buyer or Seller.

Gateway has several advantages over other Brokerage Firms. Expertise, Marketing and Connections to name a few. Our sterling reputation, our team of skilled and knowledgeable Brokers, our 20 years of success. Gateway is trusted by business owners and Buyers alike. Our Brokers have over 40 years of combined experience and in wide range of specializations. Our team turns your equity into wealth.

We Listen. We listen to you, the business owner, to learn about your business, your employees and your goals. We learn who would be the best fit to continue your success. We listen to Buyers and learn their skills, their financial capabilities and their goals. We then have the knowledge to bring the Buyers that “fit” the business.

Gateway tailors an aggressive, comprehensive marketing program for your business. We leverage our database of over 10,000 Buyer candidates, web-based advertising (such as BizBuySell.com and BusinessSales.com), print advertising, email promotions, and industry publications. Gateway is an industry leader proactively marketing your business so it is sold quickly.