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Exiting Business

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Why Didn’t My Business Sell? Part Two…

Here are seven more reasons that your business did not sell or sold at a steep discount:

6. Bad Location or Lease: A great franchise in a lousy location makes for a failing business. Also, too high a rent as a percentage of sales can make it tough to survive. Thirdly, if your landlord won’t play ball with the buyer or the buyer’s bank, it can queer a deal.
7. Poor Growth Outlook: The old adage goes “Buyers pay based on your history in anticipation of the future”. If the future prospective sales don’t look that rosy, why would a buyer take the plunge?
8. Out of Favor Industry: Florida construction companies for sale in 2008 are taking longer to draw interest, even the good ones. They are getting tarred with the same brush as failing companies. The key is to stand out versus your peers.
9. “One Man Band” Syndrome: Entering parties are looking to buy a company with good systems and procedures in place. If they see an Exiting owner who is frazzled, over-worked and whose company’s existence depends on him; that is not very appealing. Next…
10. Unrealistic Price: See Point #5 from the prior post, It will not Support Financing. You think your business is worth $5 million and an unsophisticated buyer will pay $5 million (it rarely happens) but the bank, backed by an appraisal will only loan $2 million.
11. Sales/Cash Flow trending down: This is part and parcel of point #7. Unless your business is distressed and a turnaround professional is called in, and Entering Party wants to see plenty of business in the pipeline and margins improving.
12. Not willing to give out enough data: I see this from time to time. Exiting Clients are (rightfully) worried about sharing too much data. But sometimes it goes beyond that. What are they hiding? Has trust become an issue? Screening Entering Parties up front to make sure they meet the buying criteria will prevent this. A well-written Non Disclosure is a must.

These are the common reasons that your business didn’t sell. Now that you have identified the problem, you can take steps to rectify it and try again.

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Why Didn’t My Business Sell? Part One…

If you have tried to sell your business on your own or it was listed with a broker for over a year and the contract lapsed and you have given up in frustration, let us talk about what might be the problem. We will break this down into two posts:

1. Poorly presented to the world: There is an old saying that a website is akin to a billboard in the middle of the desert without proper marketing. How was your business confidentially marketed? Were enough monies budgeted to get your business out to the world and was it marketed to the correct potential buyers? If you are a niche business (like a medical practice or manufacture a unique product) there are certain media venues and industry sources where you do and don’t place your business.
2. Inferior books and records: The number one reason a business does not sell. Please see our detailed post on this subject, What Prospective Buyers Look For.
3. Critical deal breakers: If you are set in stone about a certain point (short training period, all cash, obsolete equipment or inventory included, certain staff or family must be retained, etc.) and the market is giving you negative feedback, take a hard look about whether your desire in a certain area is the problem. Time is not your friend and roadblocks are a serious deterrent to a successful exit.
4. Curb appeal: When we are feeling out a potential client, one question I always asked is “if we decide to work together and I see something in your business that would give a buyer or lender pause, do you want me to be politically correct or brutally honest?” Everyone always answers brutally honestly (whether they mean it or not). Broken signs, weeds, obsolete inventory or a messy shop floor do not set the right tone. People take about 6 seconds to generate a first impression. Don’t blow it.
5. It will not support financing: You are asking for two million dollars for your business, but the free cash flow is $150,000/year. Debt coverage on 80% of the offered price for 10 years is approximately $230,000/year.  Add another $100,000 salary for the new owner and your business would be a negative $180,000/year loser. Your asking price has to be “back tested” against reality. This is another reason a third-party appraisal with pre-financing in place is so critical.

In my next post, I will describe seven other reasons businesses don’t sell or sell at a deeply discounted price.

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How is the Credit Crunch affecting Smaller M&A Deals?

I get asked by potential Exiting Clients how the tighter lending environment is affecting the market for their company. It results in a credit crunch, which is is a decline in lending activity. Here are a couple of things that I could see happening in the marketplace:

Deals are still getting done- Fairly priced companies under $10 million are moving nicely. It seems the smaller the deal, the less radical the lender requirement changes. However, getting deals financed is still tougher than it was a year ago and Buyers must “line up” correctly for the bank.

Private Equity has moved “Down Stream”- PEG’s (Private Equity Groups) have funds that must be employed and they are looking at smaller deals than they have historically done in the past. These smaller deals are typically easier to get funded.

Due Diligence: Slower and Pricier- Because of stricter lending requirements and Potential Buyers being more gun shy, due diligence can be drawn out and more expensive for both sides. This alone is a good reason to get a reputable third-party appraisal and pre-financing in place. Cleaner books and records will help your business stand out and reduce transaction costs.

More Corporate Buyers- With the big company layoffs and turmoil, more middle management types are looking to leave the corporate world and build their own economic engine. While always strong, I have seen an uptick in these types of buyers.

The International Buyers are Coming- There have always been foreign buyers looking for businesses in the US. However, with the strength of their home currency versus the USD, this has accelerated. I have been asked to give seminars in Canada and Great Britain to potential buyers who can also use buying a US business as a vehicle to get a visa.

Despite the credit crunch, you can see this is still a fine time to Exit Business Ownership. Whether the Prime Rate is 20% or 5%, the proper steps still need to be taken before your business is brought to market.

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Selling to Family Members or Employees? Ask Question #1

If you are contemplating selling to your family or employees as part of an Exit Strategy, Question #1 is: Do you need money from the sale to fund your retirement?

If your retirement needs are already met, you can afford to be more benevolent or take more risks with the structure of the sale. If a sizable portion of your retirement monies depends on a liquidity event from the sale of your business, then certain steps need to be taken.

After a business valuation, an SBA-backed loan can be utilized for borrowing up to $2 million. For larger transactions, there is a universe of Asset Based Lenders and Private Equity Groups. However, your company’s financial reporting and profile of the buyer(s) have to be managed and presented correctly to the right lender. You only get one chance at a good first impression.

We get calls all the time from frustrated sellers who’s a family member or employees who have been trying to buy their business for 6 months and they need help. Sadly, confidentiality has probably been breached and the lender’s appetite for the loan has soured because it was poorly packaged and served up. Also, your current bank might be the wrong source for a business acquisition loan.

We typically have 2-4 generational or key employee transfer engagements at any point in time. This is very satisfying work as it gives us great pleasure in helping the next generation/key employees take the reins and grow their own business and wealth. Visit us at www.bankersadvocate.com if you need assistance in selling to family or employees.

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What Prospective Business Buyers look for:

  • Provable & Timely Books & Records
  • Reasonable Price backed up by an Appraisal
  • Satisfactory Borrowing Leverage & Terms
  • Sufficient Free Cash Flow
  • FF&E  (Current FMV,  Not Overstated)
  • Good Appearance & Lack of Environmental Issues
  • A Scalable Platform that can be taken to the Next Level
  • Real Estate Included (for some Buyers)
  • Building Lease (Terms and costs in line)
  • Training (By Owner for Appropriate Time)
  • A Suitable Covenant Not to Compete
  • A Good Reason for Seller to Exit
  • Time is of the Essence
  • No Last-Minute Surprises

This is an excerpt from our seminar, Planning Your Exit from Business Ownership; one section we spend a significant amount of time on is what business buyers look for when buying a business. At Bankers Advocate, we spend a third of our time representing Entering Clients via a Targeted Search to find them a suitable business. By us having both Entering and Exiting Clients, it gives us a unique perspective into both side’s of a transactions goals and objections.

In the bullet points above, we list what variables make up a typical Buyer’s wants and needs when looking at an acquisition. Of course, some areas are more important than others depending on the type of buyer. But we can readily see a common theme among all classes of Buyers.

Books & Records

Problems with a company’s Books and Records is the #1 reason a business does not sell or sell at a deeply discounted price. Integrity is everything in the business world and if you cannot believe the financials, what other problems are not readily apparent? If the Buyer finds some negative surprises late in the process, the purchase price adjustments can be overly harsh. The transaction value is often attacked well beyond the economic impact of the surprise.

On our initial visit with a potential Exiting Client, we always ask to see the internal financials. Too many times they only hand us the Income Statement. When we request the Balance Sheet, the response is too often the (AR, Inventory, etc.) is not correct and our Balance Sheet is meaningless. They fail to understand that any correction to the Balance Sheet will affect the Income Statement. Also, Borrowing is Balance Sheet-driven.  Thus, buying a business is Balance Sheet-driven.

We addressed the Quality of the financials; now let us look at the Timeliness. Six-month-old data does not work for the buyer or their lender. Also, if getting information from the Exiting Party smacks of pulling teeth, trust and credibility quickly erode. If a Non-Disclosure has been executed and the financial viability of the buyer has been confirmed (required), the business ready for market needs to have a complete (sanitized) book ready to move the process along.

Knowing what business buyers look for is essential to build trust and credibility between the Entering and Exiting entities and helps hasten the business sale. If you need assistance with your business exit preparation, Bankers Advocate is ready to help.

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It’s All About Control

You have built a great business. You control your labor & material costs, AR turn, cash flow, etc. You’re not even afraid to “fire” a client occasionally if they don’t meet your standards. Now that you are ready to exit from business ownership, controlling the exiting process becomes tantamount. How is this confidentially done so the value and goodwill you created are not destroyed by employees, vendors, clients, or competitors finding out?

For answers to all your questions about controlling the Exiting Process and about exiting business ownership in general, we invite readers of our blog to one of two Exiting Seminars to be held in Ft Myers & Ft Lauderdale this June 19 and 20. When you RSVP, mention you read about it on our blog and get a special discount.

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