Questions Frequently Asked Prior to the Sale of Your Company
Why should I work with a Business Broker to sell my business?
In the United States, just over a million business for sales are for sale at any given time. Of these, ninety percent are offered “for sale by owner”, also known as FSBO’s. Of these, over 50% of the businesses that sell are sold through Business Brokers according to the U.S. Department of Labor and the SBA.
Business owners will often pursue a FSBO approach to selling their business. They usually do this in an effort to avoid paying a commission to a Business Broker. The short term concern of paying a commission is overshadowed by the benefits of having a professional Business Broker working on their behalf. The fact is, engaging a Broker has many advantages including:
- An understanding of potential challenges in business transactions
- A commitment to work in the best interest of both buyer and seller
- A professional responsibility to maintain strict confidentiality
- An interest in qualifying potential buyers for expertise and financial fit
- Expertise to advise regarding potential financing options
- They can increase the cash that remains in a seller’s pocket following the sale
This professional level of service enables the business owner to continue to operate throughout the transaction while successfully securing the right buyer.
How much does it cost to list and sell my business with a Broker?
The seller usually pays for the services of a Business Broker, with a commission fee arrangement, which is detailed in a listing agreement and paid at closing. Increasingly, Brokers collect a partial up-front fee to advise, defray initial expenses associated with marketing and optimizing the business for sale. The commission amount is dependent on what the seller and Broker agree to and is typically between 8 to 12 percent of the selling price. Generally, the smaller the business, the higher the commission percentage rate. If the Buyer was introduced to the business by a different brokerage - not the listing Broker, the commission is divided by the listing and the selling Brokers,. Occasionally, a buyer will engage a Broker to help search for and purchase a business. Under those circumstances the buyer pays an agreed upon amount (usually a negotiated flat fee), depending on the size and complexity of the transaction.
How long will it take to sell my business?
Most Business Brokers agree that it takes between 6 and 12 months to sell a company (9 months on average). According to industry statistics, a series of business brokers were surveyed and their information showed that 28% of all Brokers indicated it takes 6 months or less to sell a company. 31% of all Brokers have indicated it takes 9 months while 21% of all brokers say it takes 12 months. Only 10.5% of them said it takes over a year to sell a business.
How will my business' value be determined?
There are two cursory methods for approximating the value of a business. The first is to apply a multiple to the cash flow of the business, the second is to apply a percentage to the annual gross revenue of the business. The most accurate of the two seeks to approximate the value of a business by applying a multiple to the company’s discretionary cash flow. What is discretionary cash flow? It is not the profit or loss that you show on your tax return. Discretionary cash flow is the total cash that the business generates, in a year, that is available to the owner after deductions for necessary operating expenses. Another way to define discretionary cash flow is the “total owner’s benefit” derived from owning the business, regardless of how the owner takes the money out of the business. Almost all privately held businesses will appraise for somewhere between one to five times discretionary cash flow (DCF). Where a business falls in this range depends on the type of business.
What about confidentiality?
Reaching your exit goals is important for the success of your business post-sale. If word gets out to your creditors, customers, competitors or employees, it could trigger a negative reaction, weakening your business momentum and therefore its value. Moreover, prospective buyers may become hesitant about purchasing your business if they feel sensitive information has been shared with others. Once marketing begins for the sale of your business, confidentiality can get tricky. The risk can be lessened considerably when you choose to work with a Business Broker. Business Brokers are experienced at fielding inquiries from would-be buyers and reaching out to prospects without ever mentioning you or your company name.
How will you advertise my business?
Business brokers utilize specialized tools to communicate the details of your business to potential buyers. With confidentiality as our main consideration, a unique formula of affiliates, proprietary databases, websites and other media are leveraged to communicate the details of your business opportunity.
What Is Exit Planning?
Exit Planning is the holistic approach to designing a business-exit strategy that provides you maximum value for your life’s work. It encompasses setting Exit Objectives (When do you want to leave? How much money do you need from your business exit? To whom will you sell the business?); creating an Advisor Team comprised of trusted, professional advisers (CPA, attorney, financial adviser, etc.); and writing down each aspect of the transition sequence.
Who needs an Exit Plan?
Any business owner who wants an orderly, financially sound, and tax-efficient exit from his or her business needs an Exit Plan.
What does Acme do as an Exit Planner?
As an Exit Planner, Acme is the business owner’s chief of staff. With the business owner’s input, we gather information, assemble the Exit Planning Team, and offer a set of Recommendations. We oversee the building of the Exit Plan, much like a general contractor would coordinate the construction of an office building.
My CPA (or attorney or financial planner) can do that. Why should I hire you?
Your CPA (attorney, financial planner, etc.) can be a valuable member of the Exit Planning Team because of the expertise he or she can bring to the table. However, most advisors are limited in what they’re trained to do. They have a set of powerful core skills but aren’t trained to come at an Exit Plan from the big picture perspective. That’s where Acme comes in.
What qualifies you to do Exit Planning?
Robert and Acme has been doing some form of Exit Planning for their clients over the past 9 years. The Seven Step Exit Planning Process we deploy has helped us put it all together in a complete, turnkey package. From helping you set your goals and objectives to setting transition strategies, we are here to help.
What should be in an Exit Plan?
A Comprehensive Exit Plan should include the following:
- Your retirement goals and objectives
- A listing of your current personal and business financial resources
- A strategy to build and protect the value of your business
- A plan to sell your business to a third-party buyer OR
- A plan to transfer ownership to an insider
- Business-continuity instructions for unexpected circumstances (e.g., death or disability)
- A personal wealth and estate plan
Who would be on an Exit Planning Team?
The Team could be made up of the following:
- CPA/valuation specialist
- Attorney (Business/Estate Planning)
- Insurance professional
- Financial planner
- Management consultant
- Business broker/investment banker
- Other professionals as needed
What if I want to work with my existing team of Trusted Advisors?
We can do that. However, just in case one of your Trusted Advisors doesn’t have the expertise or knowledge about a technical issue or doesn’t have the time, Acme has several people we can introduce you to who can step in and fill the void.
How long will it take to do an Exit Plan?
Typically, an Exit Plan will take as few as 60 to 90 days to build. If there are extenuating circumstances (e.g., business owner travels a lot and can’t meet, the business is intensely complex with multiple locations), they could extend the planning process to a year or more.
To build an Exit Plan, what will you need to know?
The more information we have about you, your goals and objectives, the company, your management team, and key employees will help us design a one-of-a-kind Exit Plan that fits your unique situation. Remember, we guarantee to keep all your information confidential.
What if things change—tax laws or maybe a divorce—while you’re building my Plan?
If circumstances change while creating your Plan, we’ll contact the Responsible Advisor and make the necessary alterations. Your Exit Plan is a dynamic, living document, so, once completed, we suggest a yearly review to adjust and modify the Plan to keep it fresh and current.
What if I never want to retire? Do I still need an Exit Plan?
The short answer is yes. Because an Exit Plan looks at many different aspects of your business and personal situation, we recommend building a Plan to cover business-continuity issues, Estate Planning, and building business value, which are all pieces of a comprehensive planning effort. An Exit Plan can cover all the bases.
Questions Frequently Asked Prior to the Purchase A Business
Should I buy an existing business or start my own?
When you purchase an existing business, you're purchasing that company's future revenue and profit stream. It has a track record and is relatively predictable. Here are some advantages to buying an existing business:
- Existing cash flow
- Established customer base and market share
- Proven business model
- Brand identity
- An infrastructure is already in place
- Trained employees and established vendors
- A wider variety of financing options
Buying an existing company is often the preferred pathway to entrepreneurship versus starting a business from scratch (a startup).
How is the value of a business determined?
Typically, an initial evaluation of the business is conducted by the business broker. The seller's feedback is considered but the evaluation is accurately derived by assessing the business' financial records, assets (equipment, property, etc.), goodwill and operations. Additional factors often considered include location, market conditions and competition. All of this information is calculated to determine a price range and the business is then listed. The price range, high and low, is contingent on the payment terms (e.g. seller-financing, cash requirements, etc.). When an offer is made and price and terms are agreed to, the buyer then has time to perform due diligence in order to confirm the valuation of the business and complete the transaction.
How do I finance the purchase of a business?
Purchasing a business can be financed in a variety of ways. The three main components include the buyer's investment (equity), seller financing and or any other third-party financing. Small Business Administration (SBA) loans are common as are retirement funds. They may be used without penalty to begin a business.
I'm interested in buying a business. What happens next?
Once you've made the decision to purchase a business, beginning the search process online is usually the next step. Refining your requirements and understanding what's available will provide context for your upcoming investment decision. There are many resources to assist you in that process. Alternatively, you can contact Acme Advisors & Brokers. Once we understand what you're looking for in your new business, we can match you with our list of present opportunities.