NFIB

Smooth Selling
04/ 02/ 2002

Selling a business does not always end the headaches of owning a business.

Scott Benjamin has two notable regrets in selling his business last May--the debt arrangements and the first broker he hired. Benjamin owned two restaurants in a mall food court in Annapolis, Md., and got a second-hand referral for a broker.

"The first mistake was that I signed a listing that was too long. In six months the guy didn't generate a single lead," said Benjamin, who then signed a non-exclusive contract with a different broker. "All he did was restaurants. He had a lot of leads, but I found a buyer on my own. Since I found the buyer, I did not have to pay him any commission."

Yet the delay caused lingering damage. "We had gone from doing $10,000 per week in sales to $8,000," said Benjamin, who lost a manager during that six months. "By then, there were only two years left on the lease. The mall would not give the buyer an option. So he wanted a new 10-year lease. In order to get that lease, the mall wanted him to guarantee that he would spend so much money renovating the store. So I had to drop my price.

"Also, I began running on credit with vendors. The guy who bought the store was paying me off over a couple years. I had to make payment arrangements with some vendors to pay them off over a couple of years."

Hindsight helps Benjamin see the fault of his debt arrangement. "A year prior I had another year left on the lease. The sales were stronger. I could have demanded a higher purchase price, and I would not have had any debt with the vendors. I paid off all the small bills at closing. I owed a fair amount of money to the franchise, and they would not transfer the ownership to the new guy until I paid them off. I told them that I had money coming in from the buyer and that as long as he was paying me, I would pay them."

Benjamin had little negotiating room because his loans were personally backed. Although he feels like the debts worked out fairly, Benjamin recommends having an attorney look at agreements.

Most small business owners recommend hiring attorneys and accountants long before a sale. Some veterans of the process swear by brokers.

That's where Glenna Barnes, former owner of Pets Day Out in Cedar Hill, Texas, turned when she wanted to sell in 1998. "People hire professionals to help them sell houses. It makes sense to have somebody do that when you're selling a business," said Barnes.

Hiring brokers Bill and Connie Womack allowed Barnes to work at her grooming and kennel company while they checked out possible buyers. Barnes did her part by prorating contracts and settling an advertising billing discrepancy. The result was that Barnes faced only one headache later on. "The electric company didn't get a payment on time. I showed them a copy of the closing, and they left me alone."

Leslie and Ted Bainbridge relied on peers and family when they sold their British Columbia-based company, Community Projects Inc. Leslie's father is the equivalent of a C.P.A. in Canada and some of their friends provided insight, Leslie explained. "We're young entrepreneurs, and we have friends who owned businesses." Also, it helped that the couple had planned since 1992 to build the business to sell it.

Regardless, they were surprised at the time it took. "It was frustrating. It just took forever, six to seven months," said Leslie. "There was a lot of due diligence. It was a lot of effort. When it was done, though, the whole thing was taken care of from a legal standpoint, an accounting standpoint and a personnel standpoint."

One headache sellers no longer have to worry about is the installment sales tax. At the end of last year, thanks to an intense lobbying effort by NFIB, Congress repealed this provision, which would have required payment in one lump sum of all capital gains taxes resulting from the sale of a small business. Beyond the business side of a sale, there's the emotional side to deal with. Joey Seeber was not prepared for the aftermath of selling an Atlas Transmission franchise last September, which he had owned for almost four years.

"It would have been difficult to do, but I might have looked for other opportunities before I sold that business," said Seeber, whose former business still exists in Tyler, Texas. "After the sale, I wondered what was next. I wasn't going to sit around at home."

When a buyer expressed interest, Seeber hired brokers Keith Chapman and Dan Hall by the hour instead of paying them on a percentage. The result was that nothing lingered after the close. "I had found the best professionals I could to help facilitate the transaction," said Seeber. "There were a few calls after the sale from different vendors that I had dealt with. I made sure my bills were taken care of and gave them the name of the new owner. Looking back I don't have any regrets about selling."

Seeber's peace of mind comes from the feeling that his business was always an investment that he would eventually sell. By being prepared, being patient and taking advantage of timing, he was able to sell it for six times what he paid for it. "I had heard the comment that the time to start thinking about selling a business is when you buy it," Seeber says. "The things that make a business attractive to a buyer also make a business more profitable."

The 6 Most Costly Selling Mistakes

1. Failing to know your company's value. Some business owners base their company's worth on the years of hard work they've invested in the business. While "sweat equity" brings personal satisfaction and other rewards, it doesn't have anything to do with market value. Divorce yourself emotionally from your business and learn its true value by retaining the services of a valuation professional--someone who understands the buyers in your market and has objectivity and years of appraisal experience.

2. Ignoring opportunity costs. You wouldn't work for free, would you? Many business owners do. It's important to determine what you would have to sell your company for so the after-tax return on the invested sale proceeds would equal (or exceed) your current take-home pay.

3. Selling when you feel like it. When owners least feel like selling is often when their companies will command the highest values. The key is to sell during growth, not after it. Buyers will pay premium prices on the front end of an industry consolidation. But on the back end, those same buyers will offer to buy the holdout companies at deep discounts or even try to drive them out of business.

4. Going steady with one buyer. In your haste to sell your business, it's tempting to lock in with the first buyer that makes a decent offer. But competition among several buyers can actually increase the selling price of your company. Since buyers are looking at companies other than yours, you have every right to play the field as well. With several qualified prospects taking interest in your company, your negotiating position (and thus the selling price) will be strengthened. Plus, courting several suitors gives you a better idea of your company's going market rate.

5. Thinking the business will sell itself. Most buyers are skeptical and distrustful. They'll look at your business like it's a used car--searching for that inevitable nick or dent that will decrease its value. Your job is to replace their skepticism with enthusiasm by proving the worth of your business. Tailor your sales pitch to each potential buyer's needs.

6. Selling only yourself. Don't eclipse your employees' accomplishments with your own. Sell your key employees more than you sell yourself. After all, your people are the intangible assets that raise your company's value. Restrain yourself from saying, "I designed that," "I wrote that," or "I handled that." When every sentence begins with "I," you devalue your company. The more dependent the business is on you, the less it will be worth.

Article by CBIZ/SRTDA Business Services, Inc., Copyright 2001. Century Business Services, Inc. For a free copy of the book, Selling Your Business: Making the Right Moves, Avoiding the Costly Mistakes, you can contact CBIZ/SRTDA Business Services, Inc. at (561) 392-7929, or e-mail your name, company, and address to BIZNews@cbiz.com.

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This article originally appeared in the September/October 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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