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Beyond Financials: The Real Keys to Selling Your Business
By Joe Oddo
November 17, 2023 -- Goose Creek, SC - When the time comes to sell your business, there is tremendous emphasis on financial reports. The company’s performance leading up to and during the sale process will be important for proper valuation and for structuring the ultimate transaction. However, strong financial performance alone does not guarantee a successful experience or even an executed deal.
In his 2017 book entitled ‘The Road Beyond – What Nobody Tells You About Selling a Midsized Business’, one of the foremost respected M&A advisors on the East coast, Achim Neumann, President of A. Neumann & Associates, states, “The goal for any caring and experienced M&A Advisory Firm is to provide proper valuation, marketability information, and brokerage services to private business owners so they can prepare for and execute an efficient sale of their company when the time is right for them – a transaction that delivers peace of mind and quickly maximizes financial return with the correct buyer in a confidential and professional manner.”
It is easy to underestimate the importance of other key ingredients that will make completing the sale more efficient. Beyond the numbers and margins, the tax returns and valuation multiples, there are the human factors.
A Prepared and Motivated Seller – The business owner’s level of motivation for selling will be gauged by the prospective buyer before opening serious negotiations. It has been estimated that 75% of business sellers face some aspect of regret a year later. One of the most important ingredients for the successful sale of the business is the business owner taking their time to become mentally prepared and “at peace” with the decision to sell. What will you do with yourself post-sale? Who will you become?
Most business owners’ public identity is tied to ownership of their enterprise, and a change may create a challenging transition. The owner’s monetary and lifestyle goals must be clearly defined and obtainable. Moreover, they must be willing to go through the process and endure the stress involved in meeting those objectives.
Once the emotional decision is made, then the seller must know what to expect beyond the value and deal structure before going to market. This is accomplished with a proper independent, accredited fair-market valuation. A qualified M&A advisor knows how to bring together all the components to prepare the valuation, including a recasting of the financial reports, the marketability assessment, and a detailed business information organizer that will generate the details needed to prepare the marketing documents. All the positives and negatives are addressed in this early phase including process steps, confidentiality, timelines, tax implications, seller notes, along with tangible assets and real estate implications if applicable.
A Cohesive and Efficient Team – In order to complete a transaction, a qualified team of professionals needs to be in place to support the owner. The team should include a tax/financial advisor, a transaction attorney, and an experienced M&A advisor. Each professional should understand their specific role, prioritize the transaction, act efficiently on behalf of the owner, and defer to the expertise of their colleagues. Good communication and dialogue throughout the various steps are critical to success. In addition, it is crucial that all stakeholders including spouses, family members, and key advisors be one hundred percent supportive and share the motivation to sell. Anything less will cast doubt and put the deal closing in jeopardy.
The Correct Buyer – What happens when a buyer approaches a business owner with a proposition to purchase while multiple other potential buyers are placing bids for the company? Although flattering, this can be problematic. Before committing to a deal with a potential buyer, it is critical to know who each buyer is, their management capabilities, and their financial qualifications to complete the proposed transaction. Good chemistry, communication, and professionalism add up to the proposed buyer being “a good fit” to maintain the positive culture of the employees, vendors, and customers.
The buyer should be decisive and have a well-prepared vision for success. Obviously, a buyer unable to qualify for bank financing or secure a seller note will doom the transaction. If the seller is not convinced that the buyer will be successful in growing the company, servicing its clients, and taking care of its employees, then expect an uphill battle to close the deal.
Choosing the wrong buyer can jeopardize confidentiality, waste months of valuable time, and exhaust professional resources. It will also reduce the negotiating leverage with other buyers as you return to the market after each failed attempt.
A Problem-Solving Quarterback – Once a deal is in place, the buyer will conduct their due diligence, bank financing must be obtained, and the closing process must be completed. During this time, there will be numerous tasks and potential problems that need to be deftly navigated. These could include coordinating the myriad financial documents needed by buyer/bank, handling landlord/lease issues, filing any necessary environmental impact or regulatory documents, obtaining debt/UCC terminations, addressing any buyer concerns, and working with the financing bank and transaction attorney to close the transaction.
It is imperative that the business owner have an experienced quarterback (usually the broker or M&A advisor) dedicated to managing these tasks and bringing the deal to fruition. Such an individual has seen these points of contention before and is best positioned to address any challenges along the way – an invaluable resource for the business owner.
Mr. Neumann adds, “Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful and proactive approach. The execution of an efficient sale is a complicated process that calls for experience, discretion, patience, and professionalism. The legitimate concerns of a seller must be addressed. Determining the ultimate deal structure with cash at closing defined, preserving confidentiality throughout the process, and maintaining the continuity of the organization are paramount priorities. To avoid a failed process, proper preparation and an experienced M&A team will go a long way to alleviating any fears involved with the sale of a business.”
Selling a business is never an easy task. Combining these four elements with a properly priced and professionally marketed business offering will greatly increase the chances of a successful closing. Thoughtful planning with a proactive team properly maneuvering toward a rewarding transaction will not only meet the goals of the owner, but also reward employees remaining with the new owners.
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Top Seven Mistakes Business Sellers Make
by Joe Oddo
July 5, 2023 -- Have you heard how quick and easy it is to sell a business? Or that at any given time a business owner knows precisely what his or her business is worth? These myths do not match reality. The time it takes to sell depends on factors as diverse as the industry, the size of the business, and the market conditions. The value of the business will be driven by the seller’s financial records, the target market, and the marketing strategy.
Such a major life decision can be both exciting and daunting. Unfortunately, many business sellers make mistakes that cost them money or derail the sale altogether. Here are some of the mistakes to avoid.
1) Not maintaining peak operations. It is absolutely vital that sellers continue operating their business as though it may never sell. It can take months or years to sell a business. The last thing any seller wants is for their business to lose value when they are in the process of trying to sell.
Imagine taking hours out of your day to set up negotiations, screen prospects, do introductions, or send reams of due diligence documents. It might work if you had someone in charge of the day-to-day operations of the business; otherwise, those activities would take away from your ability to perform, with an increased risk of jeopardizing a sale. The prospective buyer will want to see peaking sales and cash-flow, and if they sense you slipping, they will strike for an opportunity to undercut your return.
An M&A advisor can take care of the details of the sale, giving you peace of mind and allowing you to focus on what you do best: running your business.
2) Not conducting a logical exit strategy. The plan we provide consists of twenty recommended steps, including prepare, valuate, market, find a qualified buyer, set up introductions, solicit offers-to-purchase, negotiate, help the buyer with financing, and due diligence reports. We get you to closing, with the attorneys and the banks all working to meet the desired timelines. Our model requires no up-front retainers, ensuring we work hard to earn our success fee at closing.
3) Not being prepared. Make sure your financial statements are up-to-date and accurate. Sellers should have several years of well-prepared records and legal and accounting documents on hand. Every serious buyer is obligated to pour through your financial records. Providing organized and easy to understand data will ease the transition.
The proper team to carry out the details of the transaction will include our M&A advisory team facilitating, the transaction attorney drawing up the definitive merger agreement, and your tax specialist or financial planner ensuring you maximize your financial windfall and reduce your tax obligation after closing.
Once you have decided on a change in lifestyle, be prepared to deal with the emotions that come up during the sale process and have a plan for what you want to do with your time and money.
4) Not maintaining confidentiality. Keep the details confidential! It is important to shield your intent to sell from employees, vendors, customers, the landlord, even friends and family.
For our part, we issue the prospectus only to inquirers who we qualify for both management capacity and the financial proof to conduct a transaction. Potential buyers are vetted to make sure they're a good fit for your company culture and values. Then we issue an enforceable, four-page Non-Disclosure Agreement that will prevent these recipients from disclosing any information to anyone.
5) Not getting a professional facilitator. People who try selling their business themselves usually run into snags and end up accepting much less. Your M&A advisor will check all the boxes and solve the complexities from financial recasting to marketability. We facilitate introductions when the time is right. We negotiate and secure offers-to-purchase with defined timelines for the financial and legal aspects of the process. We conduct the exchange of due diligence and assist with financing as necessary.
After taking the time to understand your business and your goals, we then develop a comprehensive marketing plan that will reach the right buyers and highlight your business's unique strengths. As experienced negotiators, we work smart to get you the best possible price and terms for your business.
Our marketing efforts will encourage a competitive situation with more than one interested party. As seller, you should be prepared for the possibility of back-to-back Zoom or live introductions of prospective buyers.
6) Ignoring the importance of a business valuation. What may seem like a short-term luxury, is truly a long-term investment. Naturally, family-owned business owners spend their time thinking about short-term cash flow, personnel issues, and customer satisfaction. The broader view identifies the true monetary value of the business with an accredited valuation which also reveals the competitive advantages. It answers the hard questions of how the business will carry on without you.
The Valuation positions your business for a sale and justifies your asking price. Even if you’re not ready to sell, get a business valuation while the business is peaking. Then update it when ready to sell. Knowing the value of the company with confidence and verification gives you leverage if someone wants to offer less. To counter, you can simply present the valuation document and have them show you how they justify a lower price.
Sure, there are cheap ways to determine company value using software generated outputs. We caution clients not to use inaccurate and misleading ratios to arrive at the valuation of their company. Popular ratios such as 50% of annual sales for liquor stores, 1.1 times revenue for accounting firms, 60% of revenue for dental practices, or 3 times for software companies are inaccurate “guesstimates” that can be alarmingly different from the results of an accredited business valuation. Professional valuation firms do not recognize these rules of thumb as legitimate valuation methodologies.
Our business valuation services use numerous criteria with three approaches: Asset Based, Income Based, and Market Based. Each approach has several sub-criteria to establish a value.
In total, at least eight different key components are factored in to derive accurate market value. Once you confidently know what your business should bring on the open market, you can decide on a timetable and determine tax implications. This eases your selling decision while providing you credibility and leverage with a potential buyer. It also provides security for lending institutions funding the acquisition. Omitting a professional business valuation will ultimately hurt a seller in numerous ways.
Our deep-dive Business Information Organizer (BIO), along with the financial recasting as the base data for the appraisal, will reveal hidden strengths or any correctable weaknesses of the business. This could help improve operations by analyzing key performance metrics like personnel, inventory, or customer concentration.
7) Being unprepared for the buyer’s desire to negotiate. Besides price and terms of payment, other aspects of the deal may be negotiated including closing date, seller's representations and warranties, and buyer's indemnification obligations.
Buyers may not have the cash to buy your business outright. Help your position by working with them on a payment plan or a seller’s note for up to a quarter of the transaction value. By being flexible in deal structure, you can increase your chances of earning interest while selling your business for a higher price and getting the terms you want.
Even though the business owner knows more about their business than anyone else, that is not sufficient for maximizing their return while trying to handle the complexities of a sale. Using our “Exit Strategy Formula” to pull it all together, our firm is positioned to represent the seller with complete confidentiality and maximum return.
If you are considering selling your business, contact us to learn more about our formula, delivered by experienced professionals with a reliable, verified track record. We would be honored to help you achieve your goals.
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Seven Reasons to Use An M&A Advisor To Sell A Business
by Joe Oddo
May 6, 2022 -- Based on many testimonials, the decision to engage a professional to sell your business will be one of the most important investments you can make. Sellers tell us how emotional the process can become. After all, business ownership has been your life’s work.
The entire process from preparation to execution becomes much less stressful with the proper M&A advisory team carefully guiding you through the multiple steps. For many business owners, the sale of a business will result in making up to 70% of an owners total net equity available.
The most common challenge in selling your business is ensuring that it is performing at its peak when the process of selling is initiated. As M&A advisors, our objective is to minimize the time that you need to worry about the selling side – in order to stay focused on generating cash flow. The other two important services you will need are a reliable transaction attorney to expedite the deal closing, and a good tax specialist to keep Uncle Sam from taking too large a chunk of the transaction.
Owners we interview say they could not have run the business at full capacity without us confidentially coordinating the selling process. It would be impossible to tend to the details needed in marketing a business, qualifying prospective buyers, walking through due diligence, negotiating the terms, and possibly even helping the buyer achieve financing. Below are seven reasons that highlight the value of trusting your M&A advisor as the conduit to a successful sale.
Firstly, before you decide to sell your business, certain key information must be discovered. That is why we take the steps to build a relationship with our clients and begin a dialogue using a business information organizer (BIO) questionnaire, a financial recasting, and the certified valuation to learn all the pertinent information to properly represent the business.
For instance, even if you are attempting a simple transaction such as selling your half of the business to a partner, there are multiple steps needed to ensure that the true Fair Market Value (FMV) is agreed upon. If you base your assumption of the value on the financial documents alone, then you are likely to come up far short of the true competitive value.
Using a professional to identify the Seller Discretionary Cash Flow (SDCF) finds the true value hidden in the numbers. These are the owner perks and benefits that need to be accounted for in the form of add backs during a financial recasting. For every dollar found, you could see as much as three to four dollars back in the final sale receipts.
Commissioning a Certified Business Valuation from your M&A Advisor is a smart first step which can be done long before you are ready to sell. This gives you a baseline on the Fair Market Value of your business as an ongoing concern. Once you confidently know what your business might bring on the open market, you can start deciding on a timetable, figuring out the tax implications, or updating your business plan for enhancing the appeal to prospective investors. Plus, having the business valuation in hand will allow the purchasing party to ultimately secure financing, in essence accelerating the transfer process.
Second, preserving the confidentiality of the transaction should never be compromised, otherwise it will be putting the whole transaction at risk by causing uncertainty to employees, vendors, the bank, the landlord, but most importantly to your customers. People don’t like change, and selling a business that has any aspect of confidentiality breached could threaten the entire deal or provide unnecessary leverage to the buyer. A good M&A Advisor knows how to preserve confidentiality.
Third, business owners are free to do what they do best, run the business at full capacity while off-sourcing the key components that bring a deal together. Once the FMV is established and the owner decides to engage, a professional team kicks in to complete the marketing. Since investors demand concise, convincing information to explore an acquisition, they can rely on a carefully prepared Confidential Memorandum that incorporates the BIO data to describe the business details, the competitive advantages, the growth potential, the general picture of the market and the prospective deal structure.
Fourth, a well-established M&A team like ours will generate quality marketing materials and spread them confidentially through multiple channels to get the word out about this great investment opportunity. The reality is that most businesses change hands with people that you do not know and are not even in your specific industry, thus they need good marketing documents, developed by a qualified M&A firm.
Here again your M&A advisor is able to tap into the years of previous connections with a confidential email campaign, non-divulging approach letters, and informal calls to alert his network of investors. Utilizing these web channels may yield prospective buyers from parallel trades. For instance, a search firm specializing in the healthcare field may also find higher education or non-profit placements a good vertical to add to grow their business.
Fifth, speaking for our organization, we only work with experienced, financially pre-qualified buyers and private equity investors with a strong cash position who are motivated to move forward. Generally, these investors act quickly and decisively, and don’t waste time.
We thoroughly pre-qualify prospects who must disclose both their management capabilities and a strong financial capacity, with proof of liquid funds that would make a deal possible. Having capable and qualified introductions screened to provide the most likely matching profiles from the investment pool really minimizes the owner’s time and allows for running an efficient, saleable enterprise.
Sixth, imagine yourself trying to run the business when a number of prospective buyers start asking for due diligence, offering Letters of Intent (LOI), want to start negotiating, or ask to talk to key employees. Relying on your M&A advisor to address these tasks frees you up to focus on the day-to-day business operations.
One example of how we help is steering the prospective buyer to draft an Offer to Purchase (OTP) rather than an LOI. If asked to take the business off the market, you want a stronger agreement that has proper terms and consideration in the form of escrow funds deposited, due diligence timelines defined, benchmarks established for clearing financial hurdles, and ensuring the proper Definitive Agreements.
Seventh, it is well-established that even elite athletes need coaches. As a business owner, you too should have a coach to depersonalize the negotiating process and have you well prepared to answer buyers’ questions. Chances are that the investors have negotiated many deals and know to look for weak spots and how to gain advantage in the negotiation.
In sum, with your M&A advisor as a business intermediary, you will be in complete control of the deal without having to worry about the intricate details. You’ll have peace of mind that the transaction is being conducted professionally, and that all the pieces are being coordinated, especially meeting the timelines and coordinating the external activities of the transaction attorney, banks, landlords, and tax professionals.
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A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 703-338-0200 or j.oddo@neumannassociates.com