Copyright 2007 by Ron Sloan
by: Ron Sloan, BrokerSunbelt Business Brokers Morcap
1) Screening Buyers
2) Putting a Value on Your Business
3) Avoiding Seller Misrepresentations
4) Protecting a Seller’s Confidential Information
5) Writing Conditional Offers or a Letters of Intent
6) Getting More Than One Offer
7) Negotiating Deal Points
8) Taking Deposits From Buyers
9) Managing Due Diligence
Nobody likes to pay commission if they think they don’t need to. A capable Business Broker should be able to get you a higher price for your business and a better deal than you would get selling your business on your own.
Most Sellers have never sold a business before and don’t know how detailed the process is. There are a number of expectations that you should have of your Business Broker. Here are 9 reasons why a good Business Broker can get you better results.
1) Screening Buyers Advertising your business yourself could result in hundreds of Buyer enquiries. Based on years of experience, most of them are from people who have too little money or not the right skills to run your business. In plain language they are either dreamers or tire kickers. The most common false assumption that an inexperienced Buyer makes, is how easy it will be to get bank financing. If you ask them how much cash they have to buy your business, they will include money that they think they can borrow. Banks are secured lenders, and require either personal or business assets as collateral security, but they will not lend based on just the earnings history of your business alone.
Sellers who try to sell their business themselves usually don’t know enough information about the Buyers they are talking to. Buyers are rarely prepared to disclose their true finances and skills. So a Seller is at a real disadvantage when trying to screen Buyers and often disclose too much to the wrong people.
A skilled Business Broker hand-selects the best Buyers from the larger pool of interested Buyers, based on a number of important attributes – finances, skills, past history, personal integrity, personality, fit with the business, etc. This is time-consuming and intensive work.
2) Putting a Value on Your Business Sellers rarely have enough market knowledge to put an asking price on their business. Their accountant may offer an opinion but accountants don’t know the current marketplace for businesses either. Often Sellers over-price their business and sometimes under-price them. Getting a professional business valuation may indicate what the value is on paper, but the price the business commands on the open-market can be quite different.
Selling your business is not just about the price. It’s also about a deal and the terms that work for you. A high offer can often come with some unpleasant deal points. Over-pricing can cause the business to hang around for too long on the market, with the listing getting stale. We often see asking prices of one, two or three million dollars because the Sellers like these round number,s even when a proper analysis says they are worth two or three hundred thousand dollars less. Don’t ask one million dollars if the business is only worth in the $750,000 range. An asking price of $850,000 is more appropriate and will attract more serious Buyers.
3) Avoiding Seller Misrepresentations The number one complaint we hear from Buyers who tried to deal directly with a Seller, is that the deal fell through at the beginning of due diligence – just after their offer was accepted and the Buyer sent their accountant in. Why? Often Sellers give Buyers too optimistic a view of the business, or provide Buyers with misinformation – all information on which Buyers base their offers. A qualified Business Broker works to refine the Seller’s representations in an effort to avoid serious misunderstandings that waste time for both the Buyer and the Seller - and cause deals to fall apart.
Here is an example where the Seller of a business also owns the building. The Seller tells us that the business earns a certain amount of money. When we ask if the building is held in a separate company and the answer is “No”, we know immediately that the business is likely not charging itself a fair-market rate of rent. The rent the Seller wants to charge the Buyer will be three times higher than the current occupancy cost in the financials. As a result, the earnings the Seller is representing will be much lower than first thought. It’s an honest mistake because the Seller is just reading the earnings off of their Profit and Loss Statement. But it is a real life example of how an innocent misrepresentation by a Seller, acting without a Business Broker, can hurt a deal and waste time.
4) Protecting a Seller’s Confidential Information When you try to sell your business on your own, you could be sharing your confidential information with Buyers who have limited ability to actually buy. Financially unqualified Buyers could take your confidential financials and shop them to friends, family and possibly a bank or two, to see if they can raise the funds for the purchase. None of these other parties has signed a confidentiality agreement with you and they aren’t concerned about protecting your private information.
Of equal concern are unqualified Buyers who will sign confidentiality agreements and then not honour them. They may scan your financials and email them in a broadcast email to potential investors. The financials a Seller is sharing with potential Buyers are prepared by the Seller’s accountant for annual tax filings and usually don’t paint a true picture of the business. You don’t want the real picture to be known by anyone except a serious Buyer that is qualified to buy your business.
A capable Business Broker has experience working with many Buyers - those who are respectful of confidentiality and those who might not be. If your business is on the market for several months, and you do not have a capable Business Broker managing the confidentiality, it will become common knowledge that your business is for sale. We know of confidential information openly shared in a locker room at a golf club. Some business people like to brag that they already know about a deal to give the impression that they know every business that’s for sale on the market. We are very careful when working with Buyers and repeatedly remind all of our Buyers of their need and agreement to protect the information at every step of the deal.And a final note - no Seller should act on their own if selling to a competitor. This is a precarious scenario and needs the experience of a talented intermediary.
5) Writing a Conditional Offer or a Letter of Intent (LOI) A high number of offers made without the involvement of a Business Broker fall apart. Often, neither the Buyer nor Seller are experienced in the process of buying or selling a business and the only coaching available is from their accountant or lawyer. Lawyers and accountants are paid to protect their clients and don’t know much, if anything about the other party. Chances are that a Buyer’s Offer or LOI will be written by the Buyer’s lawyer. These offers are often too one-sided and contain too much legal language, resulting in a Seller who gets annoyed and frustrated. Many times there is too little common ground to move forward and the Seller does not want to continue to negotiate with the Buyer.
We work with the Buyer and Seller to find a fair and equitable middle ground, thereby preserving the goodwill in the relationship between the two parties. A Business Broker can do the drafting of offers and counter-offers and the Buyer and Seller may only need to pay to have the document reviewed either before the offer is made or just prior to a final offer being signed. If the offering process is left to the lawyers, your legal fees will climb early-on …. and before you know if you have a deal or not.6) Getting More Than One Offer For businesses that are attractive to a wider range of Buyers, a good Business Broker can often generate two or more offers at the same time. Businesses with broader appeal usually sell for better prices. However, a Business Broker and Seller often only know when they have reached the maximum price and terms that are reasonable,when there is more than one offer - and when these offers have been countered and improved.
These are not bidding wars in which the selling price gets inflated to a point that is unrealistic. The danger of this is that a Buyer makes too high an offer just to get rid of the other Buyers, then has their accountant perform due diligence on the business and once completed, claim they over-paid. The Buyer will then try to negotiate a lower price once all the other Buyers are no longer in the process, or just terminate their offer, resulting in a lot of time wasted.
7) Negotiating Deal Points A Business Broker who is a “dual agent” can act as an intermediary between the Buyer and Seller to avoid possible hostility and distrust between them throughout the negotiations and during the due diligence period. The Seller may give the Buyer some purchase financing - and the Buyer wants effective training and transition support from the Seller. A Business Broker acting as an intermediary works to enhance the relationship between the parties throughout the deal, as it is important for the Buyer and Seller to get along and trust each other. A high percentage of non-brokered deals fall through because there is no intermediary working to bring the parties closer together. Or, in a scenario where there is a “Buyer Broker” as well as a “Seller Broker”, the Brokers will get to know each other quite well - but the Buyer and Seller will not. These deals often become too adversarial, with too much distrust by the selling and buying parties.
A Business Broker who is a dual agent carries offers and counter-offers back and forth between the parties, while taking their direction from the Buyer or the Seller. The Business Broker cannot breach a trust regarding confidential information shared by either the Buyer or Seller. So for instance, when a Buyer asks me what is the lowest price the Seller would consider on the business, I can only suggest that they make a reasonable offer, based on the information presented to them, keeping in mind the fair market value for the business. And if the Seller asks me how much money the Buyer has or is worth, I can only answer that the Buyer’s financial information represented to me meets the requirement to purchase the business, but I cannot reveal specifics.
8) Taking Deposits From Buyers In a scenario where a Seller is selling the business without a Business Broker, and the Seller accepts a Buyer’s offer, the Buyer should give the Seller a good-faith deposit before having their accountant and/or lawyer perform due diligence on the business. A Seller who shares their most confidential information about the business without a good faith deposit being held is asking for trouble. Many Buyers however are not comfortable having their deposit held by the Seller’s lawyer - and vice versa. The Buyer’s fear, and that of their lawyer, is that the deposit may be unfairly retained by the Seller’s lawyer and the Buyer will have to fight to get it back if they decide they want to terminate their offer based on due diligence.
A qualified Business Broker who is registered to practice in the province of Ontario by the Real Estate Council of Ontario (RECO) under the Real Estate and Business Brokers Act (REBBA), is able to guarantee that the Buyer’s deposit is protected when it is held in the Business Brokerage Trust Account. This account is insured, must be available to be audited and the funds must be managed according to the terms in the offer. A Business Broker is an objective third party who can protect the Buyer’s deposit, thereby allowing both Seller and Buyer to be more comfortable with the process.
9) Managing Due Diligence After the Seller has agreed to an offer, the Buyer goes into the due diligence process to review all the financial, contractual and business practices of the business, with the goal of signing an Agreement of Purchase and Sale. The offer should allow the Buyer to perform due diligence tasks in a fixed period of time - most often three to six weeks or even two months when the financials are not complete.Due diligence can drag on for a number of reasons, such as the book keeping or year-end tax filings are behind; the accountants are both busy because it’s tax season; the landlord doesn’t want to transfer the existing lease but wants to sign a new five year lease but he’s away on vacation; etc. There are many more reasons for delays and yet every offer states that the Seller cannot continue to show the business or consider other offers while due diligence is in progress. The Business Broker’s job during due diligence is to help expedite the process, by dealing with the questions, concerns and issues that always arise between the Buyer and Seller and from their accountants or lawyers. The Business Broker continues this process once due diligence is complete and the lawyers start to negotiate the final elements, such as the Agreement of Purchase and Sale, any leases or financing documents. The Business Broker’s work is integral, as these negotiations can break down when one or the other lawyer, or the landlord, for example, expect too much.
I hope my insights have been helpful to you. If you have questions for me, please feel free to be in touch. - Ron
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