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Guide for Sellers

People who have been in business for many years may be emotionally attached to their business. They find it difficult to let go of their business that they have built. Once you have made that decision, you need to decide if you are going to use a broker to sell the business or are you going to sell it yourself. A broker is an intermediary between the buyer and the seller. If you eliminate the middle man, you can save money and hopefully realize a greater profit on your business for sale . If you want the assistance of a broker, you can locate one on the broker directory . Keep in mind, business brokers will know how to package and market your company and may already know many investors looking to buy a company like yours.

When you eliminate the middle man, you must assume a greater role in the sale of your business.

Advantages of selling your business on your own

  • There is a significant financial benefit. Business broker commissions vary depending on the actually selling price. Commissions may vary from broker to broker and may range from as low as 1% for a large business to 10% or more for a small business. Many business brokers require you to pay a non refundable retainer that is often applied towards the commission due on closing. But there is no guarantee that the broker will be successful. If they are not, you will not be entitled to a refund.
  • Many brokers do not understand your business and they may not be able to explain the details of your business to a potential buyer. Buyers often do not know the type of business that they want to buy when they begin their search for a business. If you use a broker and they cannot communicate how your business works, the type of customers that you have and the uniqueness of your business, you may have missed an opportunity to consummate a sale.
  • By selling your business yourself, you have to option to reduce the price below market yet still end up with more money than if you were using a broker. The lower the price of a business, the more opportunity there is to attract more potential buyers.
  • When you sell a business you may not want your competitors to know that you are for sale. Brokers may require that all potential buyers sign confidentiality agreements but you may never know who the broker spoke to therefore you have no control over the people that become aware that your business is for sale. If you sell your own business on The Business Place, you decide when and to whom you reveal your identity.
  • You have an opportunity to monitor the responses to your listing. If your listing does not get any queries from potential investors, you may need to modify the price. You do not have to wait until the end of the broker contract to find out that no one was interested in your business because it was over priced. You can react immediately because you will be able to get feedback from potential investors when they write you for more information.

Advantages of using a broker

  • They have more experience in selling a business.
  • They will screen potential purchasers and only bring you qualified candidates to purchase your business.
  • They are an independent third party who may be able to mediate the differences between the buyer and seller.
  • They are not emotionally attached to the business therefore they may be able to place a more realistic selling price on the business.
  • Brokers may be able to assist the buyer prepare the letter of intent and review the legal agreements before forwarding to the vendor. The broker may be able to negotiate contentious issues before the seller sees the documentation prepared by your lawyer.
  • Many people have never bought or sold a business therefore the broker will be able to educate the buyer and/or the seller.
  • The broker may be able to approach a competitor without revealing your identity to obtain a higher price than you would otherwise be able to obtain.

Determining the selling price of your business

There are many factors that must be considered when valuing your business.

  • Type of business: manufacturing, distribution, service, retail, etc.
  • Profits over the last three years, is your profits constant from year to year, are they increasing or did your profits decrease significantly in the current year?
  • Are you dependent on one or two clients, what per cent of sales does your largest 5 customers account for? The fewer the customers, the higher the risk for the potential buyer.
  • Location: a business located in a small town may be worth less than a business in a large city where the potential for increasing sales is greater.
  • Competition: are your products competitive or can they be purchased cheaper elsewhere?
  • Key staff: will the current employees stay with the new owner? Are any of the key people family members?
  • Number of years that employees worked in the company. The longer the employee works in a company, the greater the potential severance will be in case they will be terminated by the new owner.
  • Nature of assets: is the purchase price supported by assets or is it mainly goodwill.
  • Multiple of earnings of your type of business.
  • Total sales the higher the sales of a company, the greater the multiple that someone is willing to pay for the business. Someone will pay a higher multiple for a company with $100 million in sales vs. a company that has sales of $1 million.
  • Share vs. asset sale.

How do you value a business?

Businesses are sold based on reoccurring earnings that will be available for the new owner. This is called normalized earnings. The two methods which are often used to value a business are: a multiple of earnings or discounted cash flow. Companies which have no goodwill may be sold for net asset value.

If investors use the multiple of earnings method, they often look at the last three years normalized income and take a three year average. If you won a large contract that only generates income in the one year, averaging reduces the one time anomaly to net income and results in a more realistic earnings of the Company.

When businesses are sold for a multiple of EBITDA earnings before interest, tax depreciation and amortization, the term earnings refers to normalized earnings.

How do you calculate normalized earnings?

  • You first start with the net income before taxes as disclosed on the financial statements of the company.
  • Add back non reoccurring expenses that would not be paid by the new owner, for example, salaries of family members not active in the business, expenses not related to the business that you are currently selling.
  • Add back the salary of the owner and subtract a reasonable salary that you would have to pay a third party to run your company.

Often sellers exclude their salary in the calculation of normalized earnings. This is incorrect. Owners receive two types of compensation, an income or salary for being an employee and also profits from operating the business. If an owner took out a salary of $1 million and he could be replaced by a third party at a salary of say $100,000, then $900,000 would be added back to the net income to calculate normalized profit. On the other hand, if the owner took a salary of $20,000 but it would cost him $75,000 to find a third party to run the business, then he would have to deduct an additional $55,000 from net income to determine normalized income.

Multiple of Earnings

Multiples will vary depending on:

  • type of business (i.e., manufacturing vs. retail store)
  • location, a business in a major city may be worth more than an identical business in another part of the country
  • size of company is important, the larger the company, the higher the multiple may be
  • if the company is private vs. public
  • economic dependence, if the company has one customer that generates 75% of the sales. This has more risk than a company who has many customers and would not be significantly impacted if they lost one customer
  • Competition
  • If the company has redundant assets and has more equity than is required to run a business
  • If you are selling assets vs. shares of the business
  • Do you have any loss carry forwards that may be of value to the new purchaser?
  • s the purchaser a synergistic buyer – can he acquire the business and consolidate the operation of the business and employ less people and/or assets but maintain the same revenue as prior to the acquisition of both companies combined together.
  • Do you have a lot of employees who have worked in the company for many years? Will the new owner be responsible for severance in event that they would like to reduce the workforce of the company?

What happens if you ask too much money for your business?

The sale of a business is not like the sale of real estate. If you want to purchase a home, you will first determine the area that you want to move to, then you look at the houses that are available in the neighborhood. If a house is overpriced, you will wait until the vendor lowers the asking price.

When an investor decides to purchase a business, they often do not know what they are looking for. They do not know what types of businesses that are available. Many buyers often know what they don't want to purchase and will consider all other opportunities. Buyers are impatient and want to find a business immediately. If they come across your business and the price is considerably above a realistic value, they may not look at your business and may not keep checking to see if you drop the price of your business.

It is imperative to be realistic in setting the asking price of your business. Remember, you cannot sell a business for a price which you need for your retirement, the business should be valued based on it previous earnings and the underlying assets of the business, often a multiple of normalized earnings. Investors purchase businesses because they see an opportunity to expand the business. In traditional businesses, sellers are not paid for the potential earnings of the company, they are paid based on past performance.

What are you selling?

Prior to listing your business for sale, you need to determine if you are selling the assets or shares of the business.

Sale of shares

When an investor purchases the shares of the Company, they are assuming all the liabilities of the Company. This includes but is not limited to undisclosed liabilities, trade payables and potential environmental concerns. Purchasers of shares are responsible for potential tax reassessments which may have resulted from aggressive tax planning strategies of the old owners.

A vendor may have a tax advantage to sell the shares of the company. The gain on the sale of shares may be taxed at a lower rate than ordinary income and in fact, a portion could be tax free. If the profits are reinvested into another company, the tax may be deferred for a period of time.

All buyers and sellers should contact their tax advisor to determine the tax implications of the sale of shares.

Sale of assets

When an investor acquires the assets of the company, they are only assuming liabilities that are specifically stated in the purchase and sale agreement. Any liabilities not identified in the purchase and sale agreement are the responsibility of the vendor. Purchasers of assets are not responsible for potential tax reassessments resulting from aggressive tax planning strategies of the old owners.

The sale of assets may result in different tax implications depending on the nature of the asset sold. Certain assets may be subject to recaptured depreciation while others are classified as capital gains. The cash from the sale of assets may be subject to additional taxes is distributed to the ultimate shareholder.

All buyers and sellers should contact their tax advisor to determine the tax implications of the sale of assets.

Buyers prefer to acquire the assets of the company since they are not responsible for liabilities that they did not assume.

Vendors prefer to sell the shares of the company since the tax treatment on the sales of shares may be lower then on an asset sale.

The most important thing to remember is not what the selling price is, it is how much was the seller able to retain after paying all tax liabilities.

Tips for writing a successful listing on this website

There are many ways that a potential investor can find your listing on The Business Place website

  • Search by industry
  • Search by purchase price
  • Search by sales
  • Key word searches – potential investors can search for a word or phrase in your listing. The more that you describe your business, the greater the chance that a word or phrase in your listing matches a key word search

The more information that you provide (i.e., the larger the listing that you take), the better your chances are to be contacted by a more qualified buyer. The buyer will have already reviewed the information that you posted on the website therefore they are already aware of your financial position, your asking price and any information that is provided in your description of the business. The potential investor will be more informed than someone who did not see your listing.