June 2012

Do have all of your business documentation ready. Everything starts with it.

Don’t underestimate the value of your business. Owners of privately held businesses usually minimize profits to lower taxes. The financial statements may not reflect the real value of the business.

Don’t overprice your business. The right buyer who is willing to pay the right price may not even want to consider your business because the price is way out of line.

Do offer as favorable terms as you can. Buyers, even good ones, want to leverage the sale as much as possible.

Don’t use a “magic” formula to value your business. Your business is unique, different from every other business out there.

Don’t wait too long to sell. The best time to sell is when business is good.

Don’t wait until poor health or a downturn occurs – sell from strength!

Do allow at least six months to sell your business. The larger the business, the more time you should allow.

Do use a business broker. They can take the mystery out of determining the selling price, prepare a marketing plan of action to maximize the selling price, handle all of the details, and leave you to do what you do best — continue to run your business.

Some of you might remember the commercial for one of the major airlines in which a business lost a major client, because they never saw anyone from the company. The president handed out airline tickets to the entire sales staff so they could go out and visit the customers. When asked what he was going to do with the remaining ticket he replied that he was going to go see the lost client. And, a recent study revealed that customers really want contact with the business owner. In fact 83 percent of the decision makers want personal contact with salespeople.

Both of these examples point out the importance of customer contact. From the small shop owner to the CEO of a large company, meeting with the customers is still the smart way to go. With today’s technology, it may be easier to fax, telephone or e-mail a customer or client, but is it really the best way to contact that person? Remember how good you feel when the owner of a restaurant comes to your table and asks how everything is. Nothing beats owner contact!

Is your business resorting to just telemarketing and direct mail programs to contact your customers – both present and possibly future ones? Perhaps it’s time to hire a salesperson to go out and meet the people. Perhaps it’s time to go out and do it yourself. Why not go out yourself and meet or visit your important customers or clients? If you own a retail business – go out and meet the customers. Owning your own business is not a “back-room” or hide behind the business-plan business. It is a “front-room” business – go out and meet the customers!

In the day-to-day activity of making a business work, many owners overlook the importance of the buy-sell agreement. This document (also referred to as a business continuity agreement) is like a will; no one thinks about it until it’s too late. However, it may just be the most important written agreement or document you ever create.

If your business has more than one owner, either partners or stockholders, what happens if one or more of them dies or “wants out”? The same thing holds true in family-owned and operated businesses. A buy-sell agreement can dictate the transfer of business ownership under certain events as described within its specifically-written language.

The well-drafted buy-sell agreement is designed to prevent the following:

• The sale of the company because one of the partners or stockholders desires to exit the business and no one can agree on the price or the terms;
• The necessity to sell or dissolve the business due to the lack of a written agreement determining ownership/management of the business in case of a partner’s, stockholder’s, or family member’s death; (Or, what might prove even worse than a precipitous sale, an heir might decide that he or she is going to get involved in the operation of the business.)
• A lack of agreement on who should take control when an active partner, stockholder, or family member becomes disabled and can no longer run the business;
• A serious dispute on any key issue among the partners, active family members, or stockholders that cannot be resolved; and,
• Questions about business operations following a legally-complicated divorce (or other legal entanglement) involving one of the partners, family members, or stockholders.

The buy-sell agreement can help prevent these situations, as well as many other problems that can befall a business enterprise. In a small business, one of the areas frequently overlooked is the buy-out provision, in the event one of the active partners decides to exit. The buy-sell agreement normally, and properly, provides for the partner, family member, or stockholder to have the first right of refusal in this case. But at what price? If two partners are in disagreement over how to run the business, they will most likely never come to an agreement about its value. A method or formula for valuing the business should be included in the buy-sell agreement; otherwise, the first right of refusal would be no right at all.

In larger businesses, especially those that are incorporated, it is important that the buy-sell agreement specify how the stock of the business should be valued. The agreement should also specify whether the stock must be purchased by the company or its shareholders, or if it can be sold to an outsider. In many cases, life insurance coverage is used to purchase the interest or stock in the business, in the event that one of the partners or majority stock holders dies.

The buy-sell agreement is really the key to the continuation of the business. You can see that the buy-sell agreement, if executed properly, can solve problems surrounding retirement, disability, termination, divorce, bankruptcy, death, and business disputes. Given all the benefits of such an agreement, why doesn’t every business have one?

The answer is simple; most business owners are too busy trying to get the work done and the bills paid. Creating such a document means that the owners must stand back from the business and decide what should happen under a variety of serious situations. The process is time-consuming and also expensive. There are no pre-printed forms; it isn’t possible simply to fill in the blanks and come up with an instant agreement. A lawyer must do the drafting to get a document that will have legal authority in the event that it is ever challenged.

If your business already has a buy-sell agreement, perhaps it is time to review the document, checking for the need to update or amend it. If your business doesn’t have a buy-sell agreement, you should seriously consider creating one. It may be the most important business decision you ever make.

Buy-sell agreements, as well as all of the important documents pertaining to the sale of a business, should be handled by an attorney experienced in such matters. It may seem expensive in the short run, but the careful preparation of any agreement that can affect the rights of the buyer or seller will be a bargain in the long term.

Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost effective than the attorney who handles a general practice.

Business brokers–because of their knowledge and experience–are a good source of information concerning the buying and selling of businesses. They are conversant with the local marketplace, business prices, and terms. In sum, they are an excellent resource.

For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.

The Buyer and Seller Are in Agreement From the Beginning

In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.

The Buyer and Seller Don’t Lose Their Patience

Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.

No One Likes Surprises

The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.

The Buyer and Seller Must Both Feel Like They Got a Good Deal

If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.

There are several things to consider when buying or selling a business. The most important is to listen to the other side. There are always reasons why someone wants something – even if you don’t agree at first. Find out where the other side is coming from, then make a decision on whether you can live with it or not.

Next, whether you are the buyer or the seller, you can not have everything your way. You can’t win on every point or issue. Be prepared to give in on those areas that are not as important as those you feel most strongly about. If you are a seller, you may not be able to get a real high price and a real high down payment. You will have to decide which is more important. The same is true for the buyer. You can’t have it both ways.

Always enter the purchase or sale of a business with a spirit of cooperation rather than one of confrontation. The buyer or the seller, as the case may be, is not the enemy. If the seller wasn’t interested in selling, the business would not be for sale. If the buyer did not like the business there would be no negotiation or eventual sale.

The secret of a successful negotiation is laying out all the points on the table for discussion. It is key to understand where everyone is coming from and to understand what is and what is not important to each party. When there is a sense of cooperation among all of the players, a successful deal will usually result.