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Selling a Business
12 Keys to Success for Main Street Business Brokerage Practices
12 Keys to Success for Main Street Business Brokerage Practices
Len Krick, MBA, CBI, M&AMI
| Principal Broker, United Business Brokers of Nevada
The Sunbelt Business Brokers Franchisee in Las Vegas
Len Krick, MBA, CBI, M&AMI
| About The Author
- Identify key success factors
- Increase efficiency
- Increase commissions
- Decrease liability
- Increase broker retention
When I started in this business almost six years ago, I just couldn't accept some of the ways that some of the industry practitioners were doing things. I tried most of them, but, whether it was my market or just my background, the methods just seemed so unsophisticated and inefficient, that I started to reinvent/invent my own practice standards.
Here are a few of my main street business sale philosophies:
Don't take the listing if:
- You wouldn't buy it.
- Their asking price is outside of reality and cannot provide cash flow sufficiency.
- They refuse to sign the Sellers Disclosure Statement.
- They aren't sufficiently motivated to sell (unless you have some fully qualified Buyers asking for that type of business.)
- The business has a fatal flaw (losing their lease next month, etc.)
- The Seller is a jerk, who will kill the deal due to his ego, etc.
You have to be able to answer the following four universal Buyer questions:
- If this business is so good, how come they're selling it?
- How much money does it make?
- What's the upside potential if I buy it?
- Where the heck did you get that price?
Of course there is a "B" list of important questions, which include:
- Will the seller carry a note?
- Do the assets go home with the seller every night?
- Are there trained employees who will stay with the business?
- What is the condition of the lease?
- Does the business have a vendor concentration issue?
- Does the business have a customer concentration issue?
In my office, we answer those and other questions in writing, in a formal (Bound/ PDF) Business Summary. Last year we sold over 80 percent of our main street listings and our clients received over 90 percent of the asking price. Three received considerably more than asking price! I attribute that level of performance to the following dozen rules:
- Prescreen your seller prospects. I use an actual interview form. If the Seller doesn't meet your minimum acceptable standards, stop. We turn down at least five for every listing we take. Do not take the listing if they refuse to sign a Seller's Disclosure Statement; obviously, they are hiding something or misrepresenting if they refuse to make representations about all material aspects of the business (pending litigation, unresolved insurance claims, etc.) there is no use exposing yourself to litigation needlessly. Remind your seller prospect that they are only going to sell their business once, they better chose their broker wisely if they want to maximize their after-tax proceeds.
- Do the valuation before you take the listing. That way, you see what the buyers are going to see during due diligence, and you set the price properly. Remember, the difference between the fair market value of the hard assets and the selling price is the value of the intangible assets. The buyer pays for the past and buys for the future. The value of the business is today's implied value of the future cash flow that the business is likely to generate for the buyer.
- Perform some basic calculations from the buyer's viewpoint. All Buyers need to receive three things from the deal, or they will not purchase it: (a) Sufficient cash flow to service any debt incurred to purchase the business; we lie to see 3 to 4 times debt coverage, (b) Enough income after servicing debt to support their family, and (c) A decent cash-on-cash return on investment, that is, a return on the cash down payment made from "hip" National Bank; we like to see at least 20% cash-on-cash ROI. Remember, the best defense is a good offense. Make them show you why the business is not priced correctly. I guaranty you that a business broker knows more about the proper value of a business than 90% of the buyers.
- Package the listing. What goes in the summary? What would you want to know about a business if you are sitting around your table in Cleveland, trying to decide if the business is worth buying a ticket to visit your area? I say: "Remember, that Summary has to stand up and do the soft shoe on their dining room table, without any help from the broker or the seller." The first impression, which they get from your write-up, has to be just as good as the business.
- Rehearse your client. Let your client know the buyer prospect's "hot buttons." Go over each point so that, if it doesn't come up naturally in the conversation, the client needs to bring it up. Also, identify any defects of the business ("the warts of the business" as opposed to material defects, which should be identified in the Seller's Disclosure Statement), and decide, in advance, how these should be addressed if they come up, and who should address them, etc. Remind your client that he has job to do: keep the business buffed up. If your client goes on vacation in their mind, thinking that they have it sold prior to closing, and the financial results slide, then they are going to receive less for their business.
- Remember, the deal has to work for both parties. Therefore, the broker has to identify what the true motivations and goals of both parties are. If these parameters are known, then it gives the "deal" the highest chance that a mutually acceptable structure can be worked out.
- Don't be afraid to get creative. If you go into these transactions expecting them all to fit into a specific "mold," you are going to lose a lot of them. The "Skin-the-cat," "Can-do," "Keep an open mind" attitude is necessary to get deals done. Creative financing schemes, such as earn-outs and cash sweeps are very important for businesses that have an element of cash income or blue sky.
- Figure out who influences each party. Their "team" of advisors, whether it's their wife, attorney, CPA, banker, best friend, son, etc. is very important to the deal. If you think they are going to sell the business (or buy a business) without consulting someone, you are wrong. Identify these "influencers" early on (for buyer prospects, we do this on the first interview, using a buyer profile form), and then keep them in the loop, or "on the team."
- Address the income tax parameters of the deal structure. Tax consequences are one of the primary reasons that, at the end of the day, deals fail to close.
- Include a timeline and due diligence list in the Purchase Agreement, so that all parties are aware of these factors, and they can never claim that they didn't know.
- Control the due diligence process with a Due Diligence Checklist and Contingency Sign-Off. Due diligence is when these deals fall apart. The broker should function as the expediter and to keep the process on track. He should anticipate any "road blocks" and work to minimize the roadblock as the transaction is driving toward closing. Control the tasks that are the broker's responsibility and manage those tasks that are the responsibility of others.
- Distribute the documents to the parties well before the round-table closing, and incorporate their review comments into the final documents That way, there are no surprises at closing and you are basically just passing documents for signatures.
Bonus Dozen Tips:
- Remind your seller prospect that they are only going to sell their business once, they better chose their broker wisely if they want to maximize their after-tax proceeds.
- Remember, the difference between the fair market value of the hard assets and the selling price is the value of the intangible assets. You must scrupulously maintain confidentiality; the intangible assets are the most damaged by a breach
- Educate the Seller About the Importance of Seller Carry-Back
- Chances of Selling are Far Greater
- Seller's Generally Receive 11% More For Their Business: An Average Multiple of 2.31 For Businesses with at Least 5-% Carry, Versus 1.84 For All Cash Transactions (Source: Toby Tatum's Book "Transaction Patterns")
- Seller Carry Back Interest Can Provide Significant Proceeds to the Seller: Interest Over 9 Years at 8% Equals the Principal. Receiving Installment Payments May Provide Significant Tax Advantages For the Seller.
- Seller Financing Validates the Business To the Buyer. Obviously, the Seller Believes the Business Can Make the Payments.
- Financing Provided By "Seller National Bank" Usually Expedites the Transaction Process.
- The Money For Each Transaction Must Come From Somewhere!
Buyer's Home Equity
Friends, Family, and Fools
Seller Carry-Back is used in 54% of all transactions (Toby Tatum, Transaction Patterns)
- Use a Buyer Profile form to screen the Buyer Prospects.
- Find out who the decision-maker is.
- Find out their horizon to buy, where the money is coming from, what form it is in.
- Rate the Buyer to determine whether to spend your time; your time is precious.
- Minimize Your Exposure to Liability
- Use the Seller's Disclosure Statement
- Stamp all information received from the Seller
- Use a disclaimers: end of summary & financials. For example:
"This PricePoint valuation and pricing report is based on information furnished by the owner(s)/officer(s) of the business under review. United Business Brokers does not assume responsibility for the accuracy or completeness of the information. All Buyers should consult their own attorney and accountant."
- Have them sign agency acknowledgment form. This establishes whom you are representing and records their acknowledgement.
- When opening escrow, have them sign a final Broker Indemnification (also have the Seller sign it).
- Try to do 2 hours of marketing each day, even if the pipeline appears to be full.
- Use past closings to get new listings.
- Obtain endorsement letters when the client is the happiest; at the close of escrow.
- Do not get emotionally involved with a transaction, even if you need the fee. With Buyers, develop an "S W S W S W N" attitude: Some Will - Some Won't, So What. Next!
- Maintain control of the transaction.
- Don't allow the Buyer to visit the business without you.
- Keep yourself focused on attaining your client's goal, and the fee will come.
Len Krick, MBA, is the Managing Member and Principal Broker of United Business Brokers of Nevada, LLC; a nine-member office based in Las Vegas, NV, which concentrates on businesses with EBITDA less than $1 million annually. He is also Managing Director of United Mergers & Acquisitions; an eleven-member team based in Salt Lake City, UT, which concentrates on businesses with EBITDA over $1 million annually.
Len has over twenty-five years' experience with both privately held and publicly traded companies, which includes: consulting, negotiating, turnarounds, bond and initial public offerings, operations, development, general business brokerage, and small and mid-cap mergers and acquisitions. Mr. Krick has exceptional expertise in operational analysis, business planning, and packaging businesses for sale. Len frequently serves as a moderator and speaker at the International Business Brokers Association conventions. He is a Certified Business Intermediary ("CBI"), Merger & Acquisition Master Intermediary (M&AMI"), Certified Machinery and Equipment Appraiser ("CMEA"), and is the Sunbelt Business Brokers franchisee for Clark County, NV.
United Business Brokers' website is www.unitedbusinessbrokers.com. United Mergers & Acquisitions' website is www.unitedmanda.com. Mr. Krick can be reached at 702.364.2589 or firstname.lastname@example.org.