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Buying or Selling a Business

People sell businesses for a variety of reasons. Perhaps the owner or majority stockholder is ready to cash out and retire.  This is often the case when none of the owner’s children are interested in continuing in the business.  Sometimes it’s the spouse of a deceased owner who’s looking to sell.  And I can think of an instance where the owner of a small chain of hardware stores sold out when he learned that Home Depot and Lowes Hardware were planning to move into his market…smart fellow. 

Business buyers may be looking to launch a new career, trying to enter a new market area with the acquisition of an established business, or perhaps like Warren Buffet, just looking for a great investment opportunity. 

Often both sellers and buyers contact investment bankers to help with the transaction.  Investment bankers act as middlemen in helping to bring buyers and sellers together and often arrange loans, or other financing to facilitate the sale.  They are also useful in helping to establish a reasonably fair price for the business.  This can, and often does, involve fairly elaborate ratio analysis and projections for future sales.  In some cases the valuation approach, and there are many, can depend on the reason for sale or the owners desire for a quick sale.  Typical valuation examples include:  Discounted Economic Income Method, Market Comparability, and the Asset Accumulation Approach.  Business Valuation is complex and most buyers and sellers will want to get the expert advice of an investment banking firm or a law firm that specializes in mergers and acquisitions. 

As a seller you will want to get the most value for your business.  Just like you try to get your home ready for sale you also try to get your business ready for sale.  For starters before you even contact a broker, get your books up-to-date, work hard to get accounts payables down as well as average days for accounts receivables.  Settle any nuisance law suits.  Nothing unsettles a potential buyer like looming potential liabilities, and you are going to have to give up a lot of value to settle the buyer down.  Now get your numbers together showing historical financial performance, non-recurring items (settlements, asset purchases and sales), and partnership, affiliate, or franchise expenses.  This would also be a good time to put some numbers together about employee and customer turnover.  You’ll be expected to be able to explain your end of the business backwards and forwards, but you’ll also need to be confident, accurate, and knowledgeable in your assessment of your competition and suppliers.

The potential buyer works the other side of this process. In addition, the buyer has the requirement of making certain that all of the sellers representations are accurate, logical, conservative, and reasonable.  Contact competitors and ask them what it’s like to compete with your target business.  Similarly, contact key suppliers and ask them what’s its like to do business with the company.  If there are major customers, you will want to ask them to what would improve the business relationship.  Now consider the major business processes from taking orders to collecting cash and see if there is significant waste or redundancy…there usually is.  If you are planning to add a business to an existing one you’ll need a detailed plan for what the merged business will look like after you eliminate overlapping processes.

The ultimate sales price will depend on the results of the negotiation process.  The party with the most accurate data and the least sense of urgency will usually get the best end of the deal though both parties will have to be generally satisfied or it will not take place.  If you find yourself at loggerheads over the deal try Peter Block’s approach to negotiating:  Draw a cross on a piece of paper—label the upper left side “What I have to have to do this deal”.  Then label the lower left side, “What I want to have in this deal”.  On the upper right side “What the other guy has to have to do the deal” and on the lower right “What the other guy wants.”  Fill in your side and ask your negotiating partner to fill in his side.  If you can’t give what he has to have or visa versa, you are never going to have a deal.  If you can both give the “have to haves” then trade off the “want to haves” and your there. 

Resources:

Tools and resources to help you sell your business – valuation software, books on how to get in and out of business, and nearly 20 articles with some pretty savvy advice.

Here are two sources of information that you will find useful:  The Fed Trade Commission and the Small Business Administration.

"How Do I Position My Firm For Sale" This informative article by Ann Fisher focuses on how to evaluate the sales value of a small one person company where the assets are in the owner's head. There is also a link in this article to money's rudimentary business value calculator. A similar free calulator is available a bizbuysell.com, though you will have to provide your email address and some indication of your willingness to buy or sell a business to see the valuation.

© Copyright 2003-2006, Donald J. Bodwell.  All rights reserved. Email: bodwell@ptcpartners.com