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Selling Q & A
Business owners have
focused their entire lives on growing and developing
their businesses and seldom know how to answer all
of the questions related to selling a business. That is where a professional
firm such as Veracity help.
Is there a fee to sell our business?
A. Yes. We have many
different options for you to choose from.
How will it be advertised?
A. The advertising of each
business will depend upon the size and type of business.
Veracity uses several mediums to solicit prospective
buyers, including local and national newspapers,
including the Wall Street Journal, trade publications
and the Internet. In addition, qualified buyers from
other brokers, corporate acquirers and investment
groups.
What affects selling price?
A. Numerous factors come
into play and can affect the sales price.
1. One of
the most critical is the “terms” or the amount of
down payment and the amount financed. Over eighty
percent of all businesses sold above $100,000 are
sold with one-third or less down and the owner
financing the balance. Asking for one-half down
will reduce the price by approximately twenty
percent. Asking for cash will reduce the price to
about forty to sixty percent of the amount
attainable with one-third down.
Down payment or the
“terms” is a key factor, because a buyer is trying
to buy as much business as possible for the money
available for down payment. So, when a seller asks
for $200,000 down on a $400,000 value business,
buyers prefer to continue looking until a $600,000
value business is found where the owner will accept
$200,000 down and finance the balance. The seller
who asks for all cash or a large down payment is not
going to succeed in obtaining the full fair market
value of their business, because buyers know they
can buy three times as much business for the same
investment. In a nutshell, high percentage down
payments cause buyers to discount offers.
2. A second critical factor
is the quality of the information provided to a
prospective buyer. The value of the assets and cash
flow generated by the business must be provable and
verifiable. A professional business broker will be
able to assist the business owner in arriving at
these values.
3. The third most important
factor that effects the sales price of a business is
whether there is competition among prospective
buyers for the business. Competition creates higher
selling prices, as we all know from basic economic
principles. When a business owner asks for more
than the fair market value for their business or
does not offer reasonable terms, there will be few,
if any, buyers interested in acquiring the business.
On the other hand, when a business is priced
realistically and with proper terms, multiple buyers
are likely to pursue acquiring the business. A buyer
who knows he has other buyers competing for the
business will be motivated to offer the price being
asked to ensure he does not lose the business to
another buyer's better offer.
Is confidentiality important?
A. Sound working relations with employees,
customers, suppliers, and bankers are important factors
to a company. Any premature indication of a possible
change in ownership could disrupt these relations and
weaken the company’s competitive position. For these
reasons, and many others, confidentiality is critically
important at all stages. With the proper procedures, it
is possible to minimize the risk of an untimely
disclosure.
Veracity does everything it can to
protect the real identity of any business we list for
sale. A comprehensive fact sheet is created for each
listed business. The public fact sheet section is featured on our website for all to
see, but more detailed or identifying information may only be
viewed after the prospective buyer provides Veracity
with a signed Confidentiality Agreement and a Net Worth
Statement. In
every transaction, there is an appropriate time to
reveal that a sale may be imminent. Proper timing of
these sensitive announcements can contribute to a smooth
transaction and reinforce the buyer’s willingness to
proceed to a closing.
Generally, Veracity chooses to make the
announcement that a sale has occurred "after the
closing" through an escrow process. Veracity helps to
ensure that information is kept confidential throughout
the entire selling process.
An owner may ask: "Why can’t I sell it
myself?"
A. There are several reasons why most owners
choose not to try and sell their own business:
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An owner representing himself cannot
maintain anonymity and the lost confidentiality
could seriously hurt the business
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An owner may not be knowledgeable in
current areas of law, accounting, taxes, and
marketing of businesses
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An owner typically does not have the
ability or time to contact, screen and qualify a
large group of prospects to find a qualified buyer
who is serious and will offer a fair price
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An owner’s talents are much more
effectively utilized in running the business than in
trying to sell the company
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An owner generally would not have
the experience, knowledge, and negotiating skills
needed to sell his company efficiently and for the
best price, particularly in a highly emotional
negotiation such as the sale of a business where the
buyer’s objectives are totally opposite of the
owner’s
-
Many times owner's cannot separate
themselves from the business enough to answer
questions and provide information objectively
What is the difference between a
business broker and a M&A Intermediary?
A. The main
differences lie in experience, skill set, and
size/complexity of the deal. M&A deals usually
start around $2.5 million depending on who you ask.
Veracity will directly handle deal sizes at this time up
to $20 million and will partner or direct clients to
firms specializing in transactions exceeding that
amount.
Should I get a valuation and how much
do they cost?
A. Yes, get a
price valuation. The cost is really determined by
what level of valuation you need. From a simple a
financial review to evaluating changes in the economy as
a whole or your specific industry at large can cause a
price a valuation to escalate. Our general rule is
the more complex your business or greater its worth the
more in-depth of a valuation you should get.
Prices can range from straight hourly fees to ten's of
thousands of dollars.
What is "Book Value"?
A. It is a
method of business valuation that takes an accounting view of the value of the
assets of the business. "Book Value" is not an accurate
economic perspective. It considers arbitrary deductions
from the value of items owned in the business.
Therefore, "Book Value" only considers the skewed
accounting view of the value of the assets and does not
consider the income that the assets generate. The
non jargon answer is this... let's say you buy a van for
your business. You need to depreciate that van
over time in the accounting records. The "book
value" of your van decreases over time as you depreciate
the asset. So, if your depreciation schedule is
aggressive the van might still be worth more than what
is in the accounting records or "book value".
What is "Fair Market Value"
A. FMV considers the true economic value of the
assets. There are a number of ways to arrive at the
true economic value and most professionals employ
several techniques. "Fair Market Value" also considers
the fact that some assets generate income for the
business. Therefore, "Fair Market Value" is what buyers
consider, what banks lend on and what sellers can expect
to be paid for. What are those assets worth in the
open market if you sold them. If your company van
is worth $10,000 at the car dealership then it's FMV is
$10,000.
How many different ways are there to
value a business?
A. There is
REALLY only one... how much a buyer is willing to pay.
If you ask a financial analyst they may throw out:
book value, FMV, income capitalization, discounted cash
flow, P/E multiple, dividend capitalization, multiples
of sales or profits, liquidation, market approach, etc.
The list can go on.
When I sell my company should I also
sell my property or buildings?
A. You can sell the property with the
business, or keep it and lease it back to the buyer.
There are lots of things to consider in any deal.
Although, in some cases the property is a deal maker or
breaker.
How important is purchase asset
allocation?
A. Is is very
important. There are tax and accounting
consequences to how the purchase price is allocated.
Buyer and seller will both report to the IRS on the
allocation. Veracity will make suggestions or give opinions, but we
always suggest speaking with your accountant or attorney
regarding asset allocation.
If I would like to "cash out" and the
buyer wants me to carry a note do I have any
alternatives?
A. Yes.
Veracity works with a network of businesses that buy
notes from sellers. Although, expect to sell at a
discount for them to assume your risk. On the flip
side, you are able to "cash out". There are tax
decisions to be made on taking notes, consult with your
accountant.
How long will it take to sell my
business?
A. This can
depend on a wide variety of factors. For most small
businesses that are properly prepared and priced the
average time to sell is around 3 to 6 months. For larger
companies that time may be extended to a year or more.
Obviously there are exceptions. Some businesses sell in
a matter of weeks, and some have taken more than a
year. In general, the sooner Veracity receives all the
necessary information to begin preparing for the
marketing process, the shorter the time period should be
to close a deal. The bottom line is that a good business
with a solid track record that is priced properly will
sell faster than others.
How much will I pay in taxes?
A. We cannot
answer that as we are not tax experts. Please
speak with your tax advisor. Now that the
disclaimer is out of the way... here is a quick example:
Let's say you sell your business for $3 million.
Time to hit the beach right???
|
Assets |
Allocation |
Basis |
Tax Treatment |
Tax Due |
| FFE |
1,000,000
|
0
|
Ordinary Income –
39.6%
|
396,000 |
|
Goodwill
|
600,000
|
0
|
Capital Gain – 20%
|
120,000 |
|
Non-compete
|
300,000
|
0
|
Ordinary income –
39.6% |
118,800 |
|
Consulting Fee
|
300,000
|
0
|
Ordinary income –
39.6% |
118,800 |
|
Building*
|
800,000
|
400,000
|
400,000 Capital
gain – 20% |
80,000 |
|
Depreciation
recapture building) |
|
|
200,000 Ord. Income
– 39.6% |
79,200 |
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Total
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$912,800
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* Originally
purchased at 400,000, depreciated over time to
200,000. |
If you like paying taxes, cut a check
and call it a day. If paying almost 30% of your
sales price to the IRS is not OK we recommend you talk
to a tax professional.
Did you know all of the answers?
We have only listed a few quick Q&A's here, but this is
just a fraction of what you need to know about buying or
selling a business. Missing the smallest piece of
information could turn into a very critical mistake
costing you thousands of dollars. Don't you want to be
sure you know everything before you buy or sell your
business? Veracity can guide you with ongoing expert
advice at each step of the buying and selling process.
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