In our final article in the Selling Your Business series, we'll address pricing issues, flexibility and timing.
The Price is Going Down...Not Up: Once you set your sale price, the final price you receive is likely to only be less. It's not very often that a buyer will be so impressed with the value of your business that he or she will voluntarily offer to pay more for it than you've asked; extremely rare, if ever! So once an interested buyer materializes and the path to the sales agreement begins, discoveries will be made or events will occur which will place a steady downward pressure on the value and price of your business.
Your prospective buyer will begin to know more and more about your business, its operations, employees, financial wellbeing, competitiveness...little by little, each of your secrets will begin to emerge and some of these may not be so favorable. Speed is of the essence because the longer the sale process takes, the more likely it is that events will start deflating the initial rosy picture of your business being in the peak of health: your key man might leave (subtract $100,000); a key customer defects (subtract $100,000); a lease is canceled (subtract $100,000); one of your facilities has a bad fire (subtract $100,000)...there is no end to the things that could go wrong, and even if things go right, the buyer won't be offering you a higher price for your business.
The longer it takes to get to 'yes', the more likely it is you'll have a lower and lower sale price. It is generally understood that about 70 - 80% of businesses don't transact, so the price goes down...to zero!
Timing Issues: Maybe it's better if you wait a bit and don't sell now. The economy is tough, housing construction is going through a dip...furniture sales are going to be off for a while as the cycle goes through its downturn. You know the market, you can read the signs; it's smarter to hold onto your furniture business for another year or two, let the economy improve, see an upswing in construction. The market will improve and your business will begin flourishing again; that's the time to sell!
Post LOI Flexibility: The prospective buyer is showing continuing interest, and has delivered a Letter of Intent to purchase. This is not legally binding, but it is good news and does bring the sale a bit closer. The LOI allows more serious discussion to take place, providing an outline for developing the terms of the contract without creating a liability for either party. Remember that your flexibility with negotiations is very limited after the LOI is signed, because you've already set the table.
Every important term and condition should be clearly stated and understood before signing. Therefore, you need to be prepared and know which of your terms of sale are negotiable and to what degree, and which are not.
Highest Price Does Not Equal Highest After-Tax Proceeds: There are two goals for the seller in offering the business for sale. You want to sell the business, and you want the most money you can get for it. However, keep in mind that the sale will create a taxable event, and the government will be entitled to a healthy slice of your pie...unless you design the sale to favor your best interests, and quite possibly the best interests of your buyer.
Assuming your business sells, money will exchange hands...but your focus needs to be placed not on your sale price but on the amount of money you have left after taxes. Your financial planner can work with you and, in some instances, with the assistance of your other professional team members, help you arrange a deal that makes a lower sale price but provides you with more after tax dollars than if you insisted on a higher sale price.
This way, both the buyer and the seller benefit with an important money-saving advantage. Also, remember that a good deal for both parties isn't always the price; non-price factors like escrows, earnouts, representations and warranties, indemnifications, etc., also contribute to the value of the package.
In conclusion, selling your business is a very complex transaction. It is not something that can or should be achieved overnight. It requires careful planning and forethought. We recommend that you work with a trusted team of advisors to help you sell your business successfully. Good luck!
Selling a business is a complex transaction that often requires a skilled broker like Joseph M. Maas of Synergetic Finance in Seattle. For additional info., visit Synergetic Finance online or check out Maas' new book Exit Insight: Getting to Sold, available at Merrell Publishing.