We have had the honor and pleasure to help many buyers and sellers get to the closing table with their businesses. The road to closing is definitely not always an easy one, and all parties involved need to work together as a team to get the job done right. We’ve gathered all of our experience and everything we have learned throughout the years to share with you the 5 secrets to a successful sale.
Prepare in Advance
Sellers who prepare for their sale in advance usually have not only a better chance of selling in the first place, but they have a much smoother due diligence period and sale process once under contract.
Generally, your customer database is the biggest asset that buyers are interested in. Make sure all of your client/customer records are up to date, as well as all other operational information. Knowing what you have to work with, or need to focus on, will give you confidence going into a sale. You will also need to be prepared with an inventory of your assets, equipment and any physical components of your operations. Buyers will want and need access to all this information as part of their due diligence, and the more information you can provide, the easier the sale process will be.
In addition, if the business looks like it is dependent on you or a few key staff, a buyer may believe the potential for its growth will go away when you do. Therefore, take time to ensure it can run without you as its face. Outline each and every responsibility of all employees and include key performance indicators that clearly establish what is expected of each role. Documenting all processes and procedures, and making sure employees are trained will be key.
Clean Up Financials
It’s no secret that small business owners aim to maximize expenses on their tax returns, in order to show the least amount of profit possible. While that is a common practice to minimize tax liability, it can negatively affect your business’s chances of qualifying for an SBA loan, and ultimately could hinder your chances of selling your business. It will definitely make the due diligence process more complicated and tricky.
If you are preparing to sell your business, or even thinking about selling it in the next few years, there is one big thing you can do now, which could help you increase your selling price and the ability to sell your business: show more profit on your tax returns.
Your business broker will perform a financial recast and perform add-backs (non-cash expenses and non-essential business expenses, such as personal expenses that get added back to the owner benefit) to maximize your business’s most probable selling price. However, any add-backs that you and your business broker add to your financials need to be provable to a buyer. As the seller, you have the burden of providing evidence to a buyer that the add-backs you’ve shown are the real deal, as those add-backs will be tested during due diligence. Ideally, there should be minimal add-backs and the buyer should be able to easily see why they have been added back in.
The cleaner and more solid your financials are, the better. The more chance your business has of qualifying for an SBA loan, the easier the due diligence process will be for you and the buyer, because everything will be transparent and easily provable.
The place where we see many deals fall apart on the way to closing is the buyer getting denied for their loan or the buyer failing to have the cash to get the job done. Before a prospective buyer even is able to see any confidential information about the business, they have to not only sign a non-disclosure agreement, but they need to fill out a buyer questionnaire, where we gather information about them and their ability to purchase the business. While we can only make decisions based on what the buyers put on the form, we do our best to filter out the buyers who are not qualified to purchase the business, normally based on the fact that they don’t have adequate funds.
However, before a seller accepts an offer and goes through the due diligence process with a buyer, it’s always a good idea for the seller to request to see either proof of funds (if it’s a cash offer) or if they will be borrowing money to purchase the business, you can request that the buyer speak with an SBA lender to make sure that there is nothing in their credit history, background, or financials that might prevent them from qualifying for a loan. Of course, a conversation with a lender will not guarantee that they will get the loan, but it will at least give everyone confidence moving forward that the loan has a good chance of being granted, especially if the business has been pre-approved for an SBA loan already.
There is one thing that we know for sure: every sale process has its speedbumps and challenges, no matter how smooth everything seems to be going. Sometimes these hurdles come out of no-where, and the very best thing that everyone can do is remain calm, gather all of the information we can, and just work toward resolving the issue. Usually when surprises come up, the knee-jerk reaction from buyers and sellers can be emotional, but as long as everyone stays flexible and open to exploring solutions to the problem, then everything normally works out just fine. Most of the time, issues that come up on the journey are absolutely surmountable, and the sky is not falling, even though it might feel that way at the time.
If challenges come up in the sales process, just let your broker know what the issue is, give us time to gather all of the details and information, and we will be able to sort through different ways of resolving the issue and moving forward. Of course it might take more negotiation, compromises, and things might look a little different from what you were originally expecting, but 9 times out of 10 we are able to patch things up and keep moving forward toward closing.
When you decide to list your business for sale, you are teaming up with the business broker you believe is the best person to help get your business sold. Honesty, communication, and trust are keys to keeping a strong relationship going with your broker.
Once we find a buyer for the business and get a contract agreed, it’s really important that you maintain a friendly and good working relationship with the buyer. All of the uncomfortable things, like negotiating the terms of the contract should go through the business broker, because that’s what we are there for…to act as a buffer between the two parties. After due diligence, buyer and seller will be working closely together to get everything ready for the handover of the business. It can be a stressful journey through due diligence and getting ready for closing, but as long as the buyer and seller maintain a good working relationship, the whole experience will be much smoother and more successful for everyone involved.
The other important members of the team that will be working towards getting the deal to the closing table are the closing attorney and their staff, as well as any SBA lenders who might be involved if the buyer is getting a loan. They are absolutely instrumental in getting the deal closed once you’ve passed due diligence, so it is highly important that you maintain communication with them, and you work quickly to get them whatever they need to get their jobs done.
In order to cross the finish line successfully, buyer and seller, the business broker(s), the closing attorney, and the lender (if applicable) all need to be on the same page and keep their eye on the prize: closing day. Everyone involved has the same goal, and the better that everyone works together to get toward that goal, the more successful the process will be.