Buying & Selling A Business
In our local market, businesses are changing hands at a steady pace.
For buyers, it’s a life-changing opportunity to try their hand at something they’ve always dreamed of being – a business owner. Or perhaps it’s building upon one’s current portfolio of businesses or pursuing a new ownership opportunity in a different industry. Whatever the case may be, it’s a significant investment and should be thoughtfully considered before entering into an agreement and assuming ownership.
For sellers, it may be part of an exit plan as retirement arrives, a death occurs, a partnership dissolves, or it may just be time to move on and do something different. Having everything in place will make all the difference in getting what the business is worth with a smooth transition as the business changes hands.
These transactions are always best handled by the experts for parties on both sides, as are the items that need to be in place prior to selling and after buying to be set up for success.
There are many things that will factor into the results of a business sale or purchase. Undoubtedly, the professional who acts as your agent to help you buy or sell is at the top of the list.
The broker that you select to work with will play a key role in the transaction, so it’s important to choose wisely. “In Nebraska, there’s no agency requirement, which means by law, a broker isn’t obligated to look out for your best interests like a real estate agent,” cautions Jethro Hopkins of No Coast Business Advisors. “It’s a common misconception; unfortunately you can’t extend your complete trust based on the professional title alone. There’s no special training, licensing, or requirements to be a broker here in Nebraska by law either, and due to confidentiality there’s little you can do to check references with respect to the details that would be most helpful to evaluate. How can you tell if the broker is giving you an accurate price for the business if you’re a buyer, or negotiating in your best interests? How can you tell if the broker is knowledgeable at pricing, listing, advertising, etc. if you’re a seller? How do you know the broker is capable of doing the paperwork correctly in either scenario? This all leads to the question, ‘So how exactly does one pick a good, qualified broker?’
Well, first off, what you shouldn’t do is leave your future business plans and aspirations in the hands of the first one you come across. Instead, let it be a well thought out decision based on information derived from your own personal investigation. There are some telltale signs you can follow along with your instincts, which as a business owner, you rely on often.
Is the broker willing to meet with you in person? – Meeting with several will give you a good basis for comparison, and it should happen face to face. If you receive a letter from a broker saying there’s a buyer looking in your industry, be aware that this is probably just a tactic to fish for leads. If you decide to pursue it and the broker does have a buyer for your business, the broker should only be asking you for a one-off agreement, and only sign an agreement to show your business to that one buyer. This means if that deal doesn’t go through with that particular buyer, the deal is off and there’s no extended listing agreement. You’ll then reserve the right to retain his/her services moving forward from that point on if you want or part ways if you don’t.
Is the broker from the city where the business is located? – It’s important to have a good understanding of the business community, climate, and conditions that would impact the purchase or sale of a particular type of business.
How long has the broker been in business? – In our local marketplace, reputation can be very telling of experience and ethics. It’s really all you have to go on given what I mentioned with respect to references. Instead of requesting references from a broker as you would with other professionals, ask around within the business community. Those people have the freedom to choose whatever details they’d like to divulge, and at minimum, can tell you whether they’d use that person again or not. Keep in mind that it’s not so much about personality, but more so about competence and results.
Has the broker ever owned a business him or herself? – If you have the opportunity to work with an owner of a business brokerage, it’s with the understanding that this person has their reputation on the line with every transaction represented by his or her business. It’s not a person who is interested in doing just enough to get the deal done and the commission for it. Furthermore, if this person has owned another business in the past, that’s also a good sign, particularly if they’ve built it or been in business for a substantial amount of time. Someone who has personally gone through this before has had to learn some tough lessons. They know the ins and outs, and can apply this information and insight to their dealings with your business transaction.
When does the broker want to get paid? – Using real estate as an example again, if you call me to sell your house and I want to get paid before I list it, how much work am I going to put into it? Or, let’s use an auto dealership as another example. They will pay you a price that gives them a healthy profit margin before they mark it up and resell it. Be wary of any broker who wants to get paid up front, is interested in personally investing in your business, or who is quick to go down on commission without much of a negotiation process. A good broker knows the work that will need to be put in to get the desired results, will be honest and up-front with pricing, and knows what he/she is worth. Depending on the industry and the current market conditions, it could take 6-9 months, and even up to two years to sell a business. It’s not generally a quick process, and shouldn’t be approached as such unless it’s the seller’s intention to sell it quickly and that person fully understands the potential ramifications of doing so. For buyers, if a broker is pushing the sale instead of giving you the time you need to review everything, you’re in a bad situation.
Is your broker rushing you into making a decision? – Along the same lines, buyers and sellers should both be wary of this unless there’s good reason given to reach a timely verdict either way. There are certain timeliness that need to be adhered to, yes, but it’s a red flag if you feel as though you’re being badgered or not given enough time and space to make an educated decision. A business transaction will be the single largest purchase a person will make, more than a car or even a house in most cases. Don’t go into it blind, but also don’t get pushed into it either. You’ll know what the deadlines are and it’s in your court, with the exception of perhaps a reminder here or there. If it’s a hard sale, slow down. If there’s no solid reason why the deadline is there, slow down. In any red flag scenario, slow down. If you have questions, ask them, and if you’re not satisfied with the responses or they’re not answered in a full and complete manner, slow down.
Is the broker asking you for the right paperwork? – For sellers, if a broker is willing to list the business without all of the right paperwork in place, you can be pretty sure that it isn’t in your best interest to move forward with that person representing you in the transaction. If you’re trying to sell your business without three years of tax records documented and available, banks will be much less likely to approve a loan on it, potential buyers will be wary thinking you are hiding something, and it’s just problematic in general. What is the broker using to make a valuation of the business if you don’t have the proper documentation or the accuracy is questionable? Furthermore, it reduces the value of the business because you don’t have provable income. If you’re a buyer, never let the broker fast forward through the closing documents. Reserve time to review, be thoughtful, and ask questions. At closing, you should always be sure to confirm the inventory on-hand; that what they said you are getting is there. Next, you should make sure all of the equipment works. Check everything personally; start it up, test it out. By signing the closing documents, you are agreeing to the sellers claims that all inventory listed is accounted for and in working order. Always have the closing paperwork – offer to purchase, letter of intent, documents to transfer the business – reviewed by your attorney. Even though they may have been created by the broker’s attorney, having an independent evaluation is always advised.
Inventory is low currently, so it’s a seller’s market. That being said, for buyers and sellers alike, be aware of your surroundings, what the competition looks like, and projections for the future. Any business will be affected by everything around it – it’s not an island.
It’s ultimately your responsibility as the buyer or seller to have a working knowledge of the basics, and aware of what’s prudent in certain situations that may arise. Do your due diligence regarding who you want representing you in the purchase or sale of a business – make sure to ask the questions and carefully consider the answers.”
While your broker generally will have a significant role in the process, there are other professionals you may need when you’re preparing to buy or sell a business, during the process, or once you’ve completed the transaction and are planning for the future.
For all of the above, your banker, accountant, and attorney are the ones you can plan on regularly consulting and working with throughout all of the phases.
Then there are the people you employ. When it comes to staffing, there are things for both sellers and buyers to carefully consider. In some instances, the employees will remain with the business, while in others, the new owner will want to bring in their own team – and sometimes, it’s a blend of the two. If you’re a seller and know the buyer will not be retaining your staff, it’s going to be tough to break the news, but it must be done. Consider connecting them with a local staffing agency to set up a meeting, especially if you’ve worked with one in the past and know that your staff will be in good hands there. Or, if you’re buying a business and know that there will be key personnel gaps to fill, it can be tough to dedicate your resources to hiring at a time of transition when so much else is going on. Consulting with a staffing agency to see what they can do for you is wise at this point because with their help, you’re more likely to be hiring someone who is qualified for the position as they’ve already been screened, which is also a way to minimize the potential for turnover. It can take quite a bit of time devoted to hiring with promoting the position(s), reviewing applications, conducting interviews, and then there’s training. Having the right people in place is a major factor in a smooth transition when a business changes hands. With hiring comes onboarding and HR-related requirements, so if you’re a new business owner, you’ll also want to make sure to partner with a company that can help you with your needs in those areas.
With the purchase of an existing business, the goals moving forward will be dependent on a host of different factors. If it’s already successful or has a lot of brand equity – a strong reputation with an established clientele of repeat customers – you may decide that not much needs to change and stick with a good thing. If you’ve decided to take a risk with one that will take some work getting to that point, it could mean a number of things will need to happen. If rebranding is part of the plan, you’ll want to consult with the professionals on this too. In short, with anything that’s done to change the image of the business, the design of all critical elements and promotion of it moving forward will need to align.
Buying or selling a business requires having all of the necessary things in place for the best possible outcome. While those are different for each party, what remains the same is surrounding yourself with competent professionals who can help you get to that point is critical. Being a business owner is such a rewarding venture, but it’s certainly not for everyone, and those who will succeed won’t do it alone. Best of luck in your future endeavors, entrepreneurs!