One of the first questions business sellers ask me as a business broker in Toronto, Ontario is “what are your fees?” Business owners contemplating the sale of their companies generally consider fee structure a very important criterion for the selection of a broker to work with. The business brokerage/Intermediation/ Mergers and acquisition markets offer a variety of fee structures depending on the size of the transaction and the nature of the services offered.Businesses of less than $100,000 in value generally sell through Real Estate Agents who sell mostly real estate and a few businesses on the side per year. The service offered is merely putting an ad in MLS and showing potential buyers the business. The seller does most of the selling and answers buyers’ questions. The Real Estate salesperson charges a flat fee of $10,000 or 10% of the value of the transaction on closing. A real estate agent can hardly make living selling businesses only because a large percentage (over 90%) of these small businesses never sell.Businesses between $100,000 and $1M in value generally sell through business brokers/Intermediaries. In the province of Ontario, Canada and some US states, business intermediaries need to be real estate licensed.
Selling Your Business to a Buyer
These brokers tend to offer a wider range of services including, business valuation, exit strategy consulting, preparation of a sales package or an offering memorandum, buyer screening and confidential marketing etc. Their fees generally range from 8% to 12% of the price of the transaction and is generally paid on closing. Some intermediaries charge a non refundable retainer between $1000 at $10,000 after signing the listing agreement. Businesses of these sizes generally have higher probabilities of selling because they are more professionally prepared for the sale. Because of the absence or the small amount of retainer charged, the number of sellers changing their minds about selling in the middle of the sale process tends to be very high. Some sellers tend to simply taste the waters to see how much their businesses are worth with no intention of selling. This ends-up costing a lot of time to business intermediaries.Businesses between $1M and $5M in value tend to sell through business brokers/Intermediaries who specialize in the lower middle market segment. These are more sophisticated business brokers who generally have a good understanding of Finance and Business Strategy and have the necessary people/sales skills to help in the long and tedious negotiation process. These intermediaries generally help in the business evaluation and provide advice to business sellers to maximize the business value. Some intermediaries prepare a short business summery of a few pages with summarized business information and industry analysis. Some but not all of these intermediaries charge a non-refundable retainer between $2,000 and $20,000. The success fee/ commission charged on closing of transactions is generally 10% of the first million dollars and 1% to 5% of the balance. This segment of the brokerage industry has been impacted the most by the Internet and the profession has been open to new entrants who do not have deep connections within traditional industry players. Business listings are simply advertised through large business for sale websites and generally attract a large enough pool of buyers to locate a serious buyer.Businesses between $5M and $50M in value are sold through Mergers and Acquisitions Intermediaries/Advisors. Those professionals generally process more advanced finance skills and are capable of detailed business valuations. They also offer more extensive sales package for the businesses to be sold.
The sales package involves an extensive interview with the business owner and some key employees and a determination of the key success factors for the business, a detailed industry analysis and potential synergies and/or opportunities for expansion for potential buyers. Because the sales package involves a large number of hours of work, most M&A (Mergers and Acquisitions) Intermediaries charge a non-refundable retainer between $10,000 and $50,000. Charging a retainer also insures that only serious business sellers will list their businesses. While this practice tends to reduce the number of potential listings that an Intermediary will have at a certain time, it does insure a much higher quality of listings, meaning motivated sellers and realistic prices. On top of the retainer, these intermediaries charge a success fee using the Lehman or Double Lehman formulas. These formulas consist of charging a declining percentage on each million dollar of value ( 5% of first million + 4% of the second million + 3% of the third million + 2% of the fourth million + 1% of any balance) or (5% for first and second million + 4% for third and fourth million + 3% of the balance).Businesses with over $50M in value generally sell through medium size and large investment banks and have more complicated fee structures.
How To Maximize The Value Of Your Business
Whether to close up shop, or keep fighting for survival is a question that more business owners seem to be facing than ever before. The economy is in the tank, banks won't lend, and you haven't slept in 18 months. As much as you don't want to, if you are losing money month after month, perhaps you need to sit down and have "the talk" with yourself.Nobody wants to be a failure, but as they say, sometimes discretion is the better part of valor. Once you decide to take a hard look in the mirror, ask yourself the following:- What are the chances that this business will ever be able to pay all the bills, and then leave enough for me to make it worth while?Some business owners made purchase at the height of the market, when the economy was chugging along. Of course, things have changed since that time, so the historical cash flows that drove up the purchase price are no longer a reality. If you paid $1,000,000 for a business, and revenues have dropped by 50%, is it reasonable to expect to be able to service that much debt?- What are my alternatives?If the business went away, what do you have to fall back on? A college graduate who left a corporate job to start their own business could always dust off their resume (yes, the one they swore they'd never again) and start checking Monster.com. If you have options, why not cut your losses for the time being? There's nothing that will prevent you from trying again in the future. At least if you have a job, you'll get a paycheck while you attempt to figure out your next venture.- How much are you willing to lose?If you apply for a modification, the bank will inevitably look for more collateral. When the bank starts sniffing around for your house or your stock portfolio, are you willing to bet those items that your business will succeed? It would be one thing to have your business close, it would be another to have your business close AND lose your home to foreclosure.- Do you like what you do?10 years ago, the idea of working for yourself sounded great. Work your own hours, you call the shots, make all the decisions, and do things your way. Now you are tired of crabby customers, haven't had a day off since you had hair, and you don't trust your employees enough to leave them alone. Entrepreneurship is tough. Like, really tough. It's perfectly OK to want to just have a job with a regular pay check and benefits where you can eat dinner with your kids and sleep in every weekend.
How to Sell Your Business - 7 Questions You Can Expect Buyers to Ask
So, you're considering selling your business. If you haven't done it before, most likely, you're not aware of all options and possibilities of selling. Let me help you to organize your thoughts and make the right choice.
First, you have to decide whether you're going to do it on your own or hire a broker. You have to be aware that the process of selling a business takes a lot of time and knowledge. Simply placing ad on Craigslist won't do you any good. If you, like most business owners, have pretty hectic schedule, it will be very hard to combine running a business with servicing buyers. Every buyer assumes that she is the only one and requires your undivided attention. With every buyer you have to do the following.
pre-qualify financially and professionally
provide your business' profile and financial statements. Additional information may be requested
follow-up, follow-up, follow-up...
schedule business tour
negotiate terms of the purchase agreement
prepare documentation and submit to escrow
maintain a log of activities and current status for every buyer
In the current buyer's market you have to be very prompt with your communication otherwise buyers lose interest, turn around and start looking for other opportunities. When they turned away, it's practically impossible to win them back.
If it seems like too much work to combine with running your business, you have to seriously consider hiring a business broker. Qualified business broker will take over all the above activities and considerably minimize your interaction with buyers, as well as helping you with their expertise. Obviously, you have to pay commissions for broker's services, around 10-12% for businesses priced under $1 million, with declining percentage as price goes up.
BEWARE OF HIRING A REAL ESTATE AGENT WHO OCCASIONALLY SELLS BUSINESSES. THEY DON'T KNOW SPECIFICS OF SELLING BUSINESSES AND WON'T BE MUCH HELP TO YOU. ASK AGENTS IF SELLING BUSINESSES IS THEIR FULL TIME JOB.
Now, lets review services offered by business brokers,
The process starts with business valuation (appraisal) and analysis. It is very important to correctly determine the purchase price. On one hand, you don't want to overprice the business because it won't sell. Do not try to "test waters", it never works. Only correctly-priced business will sell. On the other hand, you don't want leaving any money on the table either. Some business brokerage firms offer business valuation services free of charge to the clients who decided to list with them.
Our statistics reveals that it pays off to spend more time on preparing business for sale. It increases chances of selling and conditions of sale are much more favorable to the business owner. Our business brokers work very closely with business sellers gathering necessary information, preparing Business Profile and re-casting financial statements, thus presenting your business in the most attractive way.
Means of advertising vary greatly depending on business type, size and geographical coverage. Majority of businesses are advertised with internet business listing services, like bizbuysell.com and businessesforsale.com. However, sometimes it may require to advertise with trade magazines or contact potential buyers directly. Marketing team of business brokerage firm creates descriptive advertisement and determines the best advertising strategy for each client individually. It's worth mentioning that advertising with one business listing service can easily run about $40-70 per month. Good business broker publishes ads with 8-10 business listing services at no additional cost to clients.
Having intermediary involved is very important for preserving confidentiality of the transaction. You don't want business buyers starting questioning your employees, vendors or customers for information about your business operation. It may start a rumor mill, cause vendors to revoke credit terms, employees starting looking for new employment, etc. Professional business broker never reveals client's business name or location until proper confidentiality agreement is signed by the buyer.
It's not a secret that around 50% of buyers inquiring about a business for sale are not qualified to buy it, one way or the other. Multiply it times 25-30+ buyers and you can see how much time can be wasted. It is very important to pre-qualify every buyer early and eliminate tire-kickers.
One would assume that once inquiring about your business for sale buyer will continue their communication until he or she makes final decision. One week later, still not hearing anything back from the buyer, you start wondering what's going on: if she is still interested, did she get the information that you sent her via email, etc. You would probably call and ask, however, you may be afraid that your call may be considered as a sign of despair, and you would expect that buyer should be calling you, not the other way around. Besides, if you're working concurrently with several buyers, you have to keep a very clean record of each communication, current status and follow-up activities. Yes, follow-up is very important, and organized record keeping is very important too. Business brokers use proprietary database for record keeping and scheduling follow-up activities. As a neutral third party they can communicate with both sides without weakening your position.
It's not a secret that all business owners are trying to minimize their tax liability. Sometimes small business owners charge their personal or family expenses to the business too. It may work to their benefit while they're running the business, however works against them when they decide to sell. When selling, you'd like to maximize your income, thus increasing the purchase price. Business brokers do necessary adjustments to your financial statements, reflecting correct unbiased performance of your business. Business intermediaries will professionally prepare Confidential Business Profile, recast financial statements and compile all necessary information about your business that may be requested by buyers.
Properly orchestrated negotiation can make a difference between deal and no deal. There is a lot of tension and agitation when people discuss money. Simple misunderstanding may cause an argument and terminate the deal. Having business intermediary as neutral third party mediating your negotiations will bring calm, business-like atmosphere and assure successful outcome.
After purchase agreement is executed by both parties most business sale transactions are finalized through escrow. Majority of escrow companies do not perform "bulk sale transfer" operations, under which business sale is processed. There are only a few selected ones with no more than one escrow officer qualified to perform this duty. Having knowledgeable and responsive escrow officer is very important. She can not only save you money, but also help with drafting necessary documentation and keep informed about escrow progress. Experienced business broker can suggest you well-tested escrow company.Finding knowledgeable and dedicated business broker isn't easy. Don't rely entirely on reputation of the firm because, after all, you're working with a particular person and your success depends on her and her alone. Ask the agent how many deals he or she closed within last year and ask for references. Ask if you have the right to terminate the agreement if you're not satisfied with their service. Walk away if you don't have such right. Ask to report to you every ... "Hooold on, we're getting to the next topic." How to select a business broker will be subject of my next article.