Who has a vested interest in the sale of your business?
If you’re selling a company, it’s important to understand each stakeholder, and the role they play in the transaction.
An experienced business broker can identify each stakeholder’s role for you. The broker will ensure smooth communication with each party, so that the sale process is seamless and the deal closes in less time.
A business broker’s role is to maximize the sales price you receive, and to eliminate barriers that may hold up a potential business closing. Here are some specific tasks performed by business brokers:
- Understand the seller’s motivations, and address any issues that may delay or prevent a sale.
- Use metrics and online valuation tools to determine the business price. Analyze the sales of similar companies, industry trends, and market factors.Prescreens buyers to determine if they have sufficient financing to purchase the business.
- Manage the due diligence process, so that documents are provided and reviewed in a timely manner.
A broker negotiates the final sales price on your behalf, and ensures that all of the necessary documents are signed at closing. Brokers can also address any laws, regulations, permits, or licenses required for the transaction.
A business sale has an impact on family members, including individuals who are not involved in operating the business.
A company sale may be the biggest financial decision you ever make. The sale can be a life-changing event for your family, and emotions may run high.
If you tell family members about your plans to sell the business, you must ask everyone to maintain confidentiality. If word gets out, a potential buyer may lose interest, and the news may put your business at a competitive disadvantage.
Talk with your broker about your family dynamics. Explain who is involved in the business, and who is not. Your broker can help you plan for discussions with your family, and you’ll need to explain how the sale proceeds will be managed after the sale is completed.
A company sale involves a number of legal issues.
Your attorney’s role is to protect the seller’s interests from a legal point of view.
An attorney will insist that each potential buyer sign a non-disclosure agreement (NDA). The NDA prevents another party from using your confidential information.
If you and your broker decide to move forward with due diligence, your attorney will review the documents you will provide to the purchaser.
The attorney will review all closing documents, and the legal transfer of assets to the buyer. Your attorney works with the broker to verify that the sale proceeds are paid by the buyer.
The taxation of your business sale has a big impact on dollars you ultimately receive for the sale.
If you’re considering a business sale, meet with your broker and tax accountant to plan for the tax impact of the sale.
Your business structure will determine how the transaction is taxed. Pass-through entities, such as partnerships, are taxed differently than C corporations. Most business sale transactions are taxed as a capital gain, but some sales are treated as ordinary income to the seller.
The timing of your payments may also have an impact. If you’re considering an installment sale, discuss the tax impact with your accountant.
In-House Accountant, Bookkeeper
You need an accurate set of financial statements to calculate the profit on your sale.
Some business owners use a bookkeeper, while larger firms may hire an accountant to produce the financial statements, and to manage the bookkeeper.
Your broker may work with a valuation expert to analyze your business.
Valuation experts add credibility to the sales process. If the buyer and seller agree on a valuation professional, both parties are more likely to accept the valuation.
Courts are more likely to accept a valuation from a certified expert, and the valuation can be used to support the information in an estate of gift tax return. A certified valuation provides a more reliable estimate of value for private companies.
Your business broker is a trusted advisor, who can help you understand a buyer’s motivations for the purchase.
Here are some business traits that the purchaser may value:
- Competitive differentiation and uniqueness in the market
- Track record of sales, positive cash inflows, and net profits
- Recurring revenue streams with automatic customers
The buyer may be a financial buyer or a strategic buyer.
The goal of a financial buyer is to earn a specific rate of return on an investment.
Financial buyers achieve a return on investment by following these steps:
- Evaluate and purchase: Find a company that generates an attractive level of earnings and cash flows.
- Manage: Operate the business and generate earnings, which are used to recover the cost of the investment. Once the entire investment cost has been recovered, the buyer will start to earn a positive return on the purchase.
- Exit opportunity: Sell the business to another firm that is interested in the track record of earnings and cash flows. An eventual sale generates the biggest return for the investor. The exit may be an initial public offering, or another private sale.
Strategic buyers, on the other hand, purchase companies in order to grow an existing revenue source, or to diversify into new products and markets.
Strategic buyers have a long-term focus, and are willing to make substantial changes to the acquired firm over time. The seller may be a competitor, a supplier, or a large customer. A strategic buyer is willing to pay a premium for a business that can help the combined firm increase profits.
Business expansion can take several forms:
- Vertical expansion: The seller’s business allows the buyer to control another step in the delivery of a product or service. If a sporting goods manufacturer buys a company that supplies leather material, the purchase is a vertical expansion strategy.
- Horizontal expansion: If you expand horizontally, you add new products, or sell products in new markets. If the sporting goods company purchases warehouses to store and market goods in a new geographic region, the expansion is horizontal.
Selling a business is difficult, and the process is more complex if you’re selling a franchise.
When you sell a franchise, you must comply with the requirements of your franchise agreement. Your franchise may be attractive to purchasers for several reasons:
- Brand awareness: Buyers are looking for competitive differentiation and uniqueness in the market.
- Recipe for success: Business owners want predictability, and a successful franchise may offer an operating model that produces consistent financial results.
The franchisor wants to identify franchisees that can manage each franchise successfully. Purchasers need financial resources to pay for the franchise, and they must invest the time required to learn the business. If the franchisor produces a high percentage of successful franchisees, the franchisor will earn more royalties.
Franchises that produce a track record of success are more valued by potential buyers.
Finally, the buyer will have a team of professionals, including an attorney, accountant, and other advisors.
Your broker can invest the time to communicate with the buyer’s team, build a relationship, and find common ground on issues.
It’s important to understand all of the players in your business sale.
Understanding the Stakeholders
The professionals at Raincatcher have years of experience advising business owners. They understand your industry, and how you are positioned in the market. Raincatcher’s staff will assess the buyer’s interest, and determine if the purchase is strategic or financial.
When you hire an expert, you can make a more informed decision about your business sale. Work with Raincatcher, so you can sell your business and have peace of mind.