Questions to Ask When Negotiating a Deal
Almost every sale of a business involves a high degree of negotiation between buyers and sellers. In this article, we share some of the questions you can ask yourself to prepare for this part of the process. After all, optimal outcomes are typically only achieved through proper negotiation strategies. Keep in mind that one of the key strengths possessed by Business Brokers and M&A Advisors is expertise and skills in negotiating deals.
Can Both Parties Split the Difference?
If the buyer and seller can’t agree on a number, one negotiating tactic is to have them split the difference. This is a tactic that is simple to understand, and it shows both parties that the other is willing to be flexible. This reveals a good degree of goodwill and can serve to not only keep both parties talking, but also lower any pre-existing tensions. When both parties are still at the table, there is still hope that a deal can be reached. This tactic serves to continue the discussions and can often be highly beneficial.
Can the Buyer and Seller Better Understand One Another?
When it comes to good negotiations, one of the goals is for both parties to seek to understand one another. Sometimes a buyer or seller’s needs don’t even involve the numbers on paper. Instead, they may be seeking to adjust terms to make them more conducive to their overall goals. If you can keep an open mind and seek to better understand what the other party is ultimately looking for, it can go a long way in making the deal happen.
Can You Bring in a Professional?
There is an old saying that says “Never negotiate your own deal.” One of the benefits of bringing in a brokerage professional is that this third party won’t have the same level of emotional investment. This means that he or she can keep a neutral perspective and be more apt to see things from both sides. Sometimes a new perspective can work wonders. Further, a brokerage professional will understand the myriad of complex factors that must be successfully resolved before the deal is finalized. A Business Broker or M&A Advisor will have tips and techniques that can only be gained from years of first hand exposure to making deals happen.
Copyright: Business Brokerage Press, Inc.
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What Do Buyers Really Want?
When sellers get ready to put their businesses on the market, they often wonder what buyers are really looking for in an effort to make their businesses as attractive as possible. The answer to this question can seem mysterious when you are on the other side of the bargaining table. So, what are buyers typically thinking about when they make the decision about whether or not to purchase a business? It should come as no surprise that much of this is tied into earnings and stability.
Guarantees of No Surprises
Earnings that are sustainable are very attractive to buyers. After all, it allows them to know what to expect. Buyers can then factor in if they can advance the business in a way in which it would grow faster than the current pace. If not, they at least would have the confidence to know that the business will proceed at the same rate. Of course, no buyer would want to acquire a business only to find that it only had high earnings temporarily due to a one-time contract.
Accuracy of Information
Along the same line of avoiding surprises, buyers will want to verify the information they receive about a business. Anything involving past, present, or future legal issues will be scrutinized along with other issues, such as pending product returns. The due diligence process is when you can expect the buyer to really dig into the details of your business. You can expect that he or she will often do so with the assistance of an attorney and accountant.
Oftentimes, accountants or appraisers add back one-time expenses or non-recurring expenses. Buyers will want to look at the earnings and have proof of expenses that are non-recurring, such as fees for a lawsuit or heavy repairs to a building. Since this process inflates earnings, it can make it difficult for buyers to understand the actual earning potential of a business. Otherwise, those expenses would obviously throw off the true earning potential of the business.
In Closing
These are just a few of the critical considerations made by business buyers when looking at a potential acquisition. There are numerous other considerations that a buyer will make and it is important to be prepared to address those questions and potential concerns a buyer may have up front, or they will quickly lose interest and move on to other potential acquisition opportunities. Put yourself in the shoes of a potential buyer and think about the kinds of assurances you would want before buying a business.
Working with a Business Broker or M&A Advisor can be tremendously beneficial in this regard. These professionals have worked with many buyers in the past, and therefore easily see things from a buyer’s point of view. They will not only be able to help you get prepared up front when buyers begin looking at your business, but easily identify and point out areas of concern that a potential buyer may have in order to keep the journey to closing on track.
Copyright: Business Brokerage Press, Inc.
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The Importance of Employee Happiness
Everyone knows that good employees are important for a thriving business. That’s why there has been so much emphasis on keeping employees happy. When your employees are feeling not only satisfied, but also valued, they will be more likely to keep your clients satisfied too. Your business will be more likely to thrive and grow. Of course, this works in the opposite direction as well. When your staff is frustrated and angry, their actions can drive away your customers and clients. If you are looking to sell your business for maximum revenues, it is a good idea to also maximize employee satisfaction levels.
Research from Oxford University found a link between happiness and productivity. According to their study, workers are 13% more productive when they are happy. It goes without saying that employees will be more likely to feel satisfied when they feel that their salary and benefits are fair for the work they do. If they are resentful about the compensation they are receiving for their work, this will ultimately impact their performance.
When you think about some of the most successful companies, you realize that many of them invest substantially in supporting their employees to cultivate higher levels of employee satisfaction. For example, Google is well-known for offering a wide range of perks ranging from parental leave and paid time off to free lunches and fitness facilities.
When it is feasible for employees to work remotely, many employers are finding that it makes sense to offer them this possibility. Not only will it help staff members to manage childcare, but also it can end lengthy and stressful commutes to work that could result in stress and anxiety.
Research in the journal Frontiers in Psychology showed helpful interventions that are proven to increase employee happiness levels. These included training in resiliency, mindfulness, and cognitive-behavioral techniques.
When you exhibit good leadership and act as a positive role model, your employees will likely follow suit. Employees should be acknowledged and rewarded for a job well done. In some cases, this may be a financial bonus, but in other cases it could simply be patting that employee on the back. Cultivating a positive company culture will prove to boost overall morale. This will increase success for your entire company.
Copyright: Business Brokerage Press, Inc.
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Leases: Key Considerations That Can Make or Break a Business
Are you selling a business that involves a lease? If so, this will be a factor that has significance to a buyer when you go to complete your deal. If your business relies heavily on its location and you don’t own property, then you’ll find the lease will be quite an important consideration for your buyer. By the same token, if you’re buying a business that involves a lease, you’ll want to carefully examine this document and consider how it might impact you and your business. Let’s take a look at some important clauses and terms you’ll want to be looking for.
Lease Transfers
What are the terms for transfer of the lease? This is something you’ll want to know before signing on the dotted line if you think you’ll be selling at some point in the near future.
Lease Lengths
How long is your lease? If your buyer can confirm that there are many more years on your lease, he or she will find that to be an advantage.
In the case of a business owner with a new endeavor, a shorter lease may actually be an advantage. That way the owner can get out of the lease if the business is not successful.
Competitors
If you’re planning on a lease in a shopping center, it’s essential to get in writing that the center will not accept other tenants that do what your business does. Otherwise, you’ll be constantly faced with competing with a similar business.
Unexpected Costs
It’s also important to look for clauses that address what happens in the case of an adverse event. For example, if the property was destroyed by a fire, who will pay in the interim?
There are other practical considerations to consider in leases that many business owners tend to overlook. For example, how are real estate taxes covered? Will you be charged a fee to cover maintenance of the property and, if so, what is it? Is someone in particular responsible for necessary repairs and who will pay for those?
It goes without saying that you’ll also want to check out clauses impacting rent changes. Otherwise, you may face unexpected rent increases that negatively impact your business.
Personal Guarantees
If you are a new business owner, a landlord may ask you to personally guarantee the rent. This would be quite a different lease from one that accepts a well-established corporation as a tenant.
As you can see, there is much more involved in a lease than just the amount of the rent. Be sure to read your lease carefully and ask questions. A Business Broker or M&A Advisor can assist you with lease terms when you are buying a business.
Copyright: Business Brokerage Press, Inc.
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What Should You Expect from Term Sheets?
If you’re selling your business, at some point you’ll likely be presented with a term sheet. As the name suggests, this document will include the “terms” of the deal including the basic economic terms and conditions of a prospective acquisition. It is a list of conditions to be met if the sale successfully takes place, yet it is not legally binding.
What is the Difference Between a Term Sheet and the LOI?
Both a term sheet and letter of intent (LOI) will include stipulations and lists for a buyer and seller to agree upon. The major difference is that the term sheet doesn’t require a signature, while the letter of intent does. In many cases, buyers are hesitant to sign before the due diligence stage. In this situation, you may find that the term sheet will precede the LOI.
How Lengthy are Term Sheets?
There is no standard model or form to a term sheet. Therefore, it may be as short as one page, or it could even be five or more pages. But no matter how many pages it may be, it should explain what is being purchased and a stated price. In some cases, the information in a basic term sheet will lead to a formal letter of intent.
What Components Should be Included?
In addition to the price and terms, a term sheet can include other considerations relating to the purchase of the business. For example, it can include employment agreements or non-compete clauses. They can also include conditions to be met upon closing. Often the term sheet will detail plans for the buyer to conduct due diligence and gain additional information. You can expect to find everything from warranties and lists of what is included in the sale to exclusivity clauses within term sheets.
One aspect of the term sheet that should not be overlooked is the method of payment. Typically, the payment sections are far more complex than just “cash at close.” Instead, they will describe a combination of elements including cash at closing, but also other forms of payments. In some situations, they will include details regarding a loan from the seller.
The term sheet is quite beneficial as it can expedite the sales process and prevent serious misunderstandings. As a result, this non-legally binding document can initiate a smooth beginning to a successful deal.
Copyright: Business Brokerage Press, Inc.
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Is Your Deal Really Done?
Once you get to the stage of your deal where you have a signed letter of intent, you may already be feeling a sense of relief that your deal is near finalization. But remember that the due diligence stage is typically yet to come. This stage includes everything from financial and legal investigations to a review of specific information regarding how a business is run.
The due diligence process can be quite comprehensive and it often reveals some surprises. Because it is important for sellers to know what to prepare and for buyers to know what to look for, let’s examine some of the categories that are reviewed during this process.
Trademarks and Copyrights
Will assets like trademarks, patents and copyrights be transferred? This is a point that has certainly interfered with some deals being successful. Due to the fact that trademarks, patents, and copyrights are often essential parts of a business, they cannot be overlooked.
Products and Industry
Due diligence will likely include analysis of product lines and the respective percentage of sales that they make up. If the business in question is a manufacturing business, then all aspects of the process will be examined. For example, buyers will be looking for age and value of the equipment, information about suppliers, etc.
Financial Statements
It goes without saying that financial statements should be poured over during due diligence. Current statements and incoming sales should be carefully reviewed. Review of financial information will also include balance sheets. Is there bad debt? Is there work in progress? These kinds of issues will be evaluated.
Customer Lists
If you are selling a business, you should be prepared to share lists of major customers. Buyers may also want to compare your market share to that of your competitors.
Key Employees
Buyers should be looking for information on key personnel, as well as data on any potential employee turnover. If you are selling a business, it’s important to try to fix any staffing problems that might interfere with a buyer’s ability to properly run the business.
A key goal of the due diligence process is to find potential problems, such as liabilities and contractual issues. But on the upside, due diligence also includes investigation into assets and benefits. The end result should be that the selling price of the business is justified and both parties walk away satisfied. As stated above, it is very common for problems and issues to pop up during due diligence, so it’s important to stay proactive and be open to negotiation until the deal is finalized.
Copyright: Business Brokerage Press, Inc.
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Exit Planning: Sell your business and start your retirement successfully
Many business owners are emotionally attached to their businesses. It is easy to understand why. Typically, business owners invest not only a considerable amount of time and money into their business, but a good bit of themselves as well. Owning and operating a business often becomes part of one’s identity. However, no one will work forever, as retirement eventually comes for almost every business owner. With this in mind, it is important to prepare for selling your business well in advance.
Brokerage professionals can take your knowledge regarding your business, and use it to help you frame your business in the best possible light. Your expertise in your business can also help a broker find ways to improve your business so that it is more attractive to potential buyers. Let’s turn our attention to the key steps you should take when to sell your business and start your retirement successfully.
Select Your Second-in-Command
Any savvy buyer wants to know that the business is well supported by a capable team. Buyers rightfully worry about having a smooth transition period. Nothing helps dispel those fears like having a proven and capable second-in-command standing by. When selecting this important individual, pick someone that understands how your business works and is a proven asset to its operation.
Automate, Automate and Automate
Buyers can be intimidated by taking control of a business. Having a proven second-in-command ready to assist is one smart step. Automating as much as possible is yet another prudent move. You want your prospective new buyer to feel confident about buying and operating your business.
Make a “Smooth Transition” List to Sell Your Business and Start your Retirement
As the seller, you have the critically important job of removing buyers’ fears. When you boost their confidence that they can successfully run your business, you increase the odds that your sale will go smoothly. Making a smooth transition list, is a smart investment of your time and effort. This will ultimately help you sell your business and start your retirement sooner rather than later!
A good transition list includes information about how to work with key customers, employees and vendors. You want to ensure that your customers, employees, and vendors understand that a sale will take place. However, you also want them to understand that the process will be smooth and trouble-free. Whether large or small, take any steps that you can to show buyers that the transition will be well-received.
The average business owner has, in fact, never sold a business before. Therefore, many are unprepared for this very complex process. Because of this, they should strongly consider working with an experienced Business Broker or M&A Advisor who can help guide them through the process. Brokerage professionals are experts at buying and selling businesses. They understand what both buyers and sellers want and need. As a result, they can help you take the necessary steps to get your business ready to be sold. If you’re ready to get started, contact us today!
Copyright: Business Brokerage Press, Inc.
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A Guide for Determining a Reasonable Price for Your Small Business
There is a considerable difference between determining the value of a privately-held company and a publicly-held company. Topping the list of considerable differences is the fact that privately-held companies do not have audited financial statements. Let’s look at how the owners of privately held companies should proceed in establishing a reasonable price for their company.
An audited financial statement is a costly endeavor. In order to avoid the cost, many companies simply don’t go public. Of course, it should be noted that publicly held companies, as the name indicates, reveal much more about their finances than their privately held counterparts do. Privately held companies are often seen as being more mysterious whereas publicly held companies are considered more “open.”
Business owners looking to sell their business will, of course, want to address the fact that their company lacks the public information associated with publicly held companies. Providing prospective buyers with as much verified information about your business as possible is one of the fastest and easiest ways to overcome buyers’ concerns. A smart move for any business owner is to work closely with their accountant to go over the numbers and create an easy-to-understand presentation for prospective buyers. This should serve to allay many of their concerns.
Working with your accountant is only the first step in providing prospective buyers with the information they need to feel comfortable. The second step is to work with an outside appraiser or other expert who can determine the value of your business. After that, you’ll want to decide on what your market price will be, as well as your “wish price,” or the price that you would ideally want. Third, you must know your “rock bottom” lowest price. You, as the owner, need to have this information as it will greatly facilitate and streamline all negotiations.
When buyers are reviewing materials and working to determine what price they are willing to pay, they will look at a wide range of factors including:
- Product diversity
- The size of your customer base
- Potential competitors in the area
- Competitors on the horizon
- Potential disruptions to your business, such as supplier problems
- The stability of your earnings
- The stability of the market
- Need for capital
Different buyers may place differing levels of emphasis on certain areas, but you can be certain that the aforementioned areas will be examined with care. The process is undoubtedly rather complex. This complexity underscores the need for professional assistance.
Ultimately, the market will determine the sale price of your business. For business owners, the first and most important step is to work closely with professionals such as accountants, appraisers, Business Brokers and M&A Advisors to establish the price of your privately held business. You can count on brokerage professionals to properly organize the facts and numbers that support that price.
Copyright: Business Brokerage Press, Inc.
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Current Insights Regarding the Labor Shortage
BizBuySell’s Insight Report is filled with key statistics and information on a range of topics, including the labor shortage and hiring problems that many businesses currently face. Visit BizBuySell for more information about the findings that they recently reported for the third quarter of 2021. This website also offers an archive of past quarterly reports dating back to 2013.
The pandemic has “reshuffled the deck,” causing many to reassess their positions in corporate America. At this point in 2021, businesses are recovering, but the pandemic continues to play a role in business operations. 71% of business owners surveyed noted that they are facing higher costs than before the pandemic. Most respondents indicated that labor shortages have been having a significant impact on their businesses. There are issues both in hiring and retaining employees.
As the report explains, “According to the U.S. Census Bureau, retail spending in September increased 13.9% over the previous year. However, many businesses still struggle to attract or retain employees. In fact, 49% of owners say the labor shortage is impacting their business, while Business Brokers see it as the number one concern facing small businesses.”
Some of the problems related to the issue of labor shortage are not immediately obvious. As it has become common knowledge that employers are having trouble filling positions and are having to increase pay in order to attract new employees, existing employees are taking note. Since existing employees realize that new hires are being hired at higher wages, they are themselves often expecting raises. In turn, operational costs are going up for many businesses.
The fact is that the business owners are still selling and for a variety of reasons. BizBuySell’s statistics also indicate that of buyers who are planning to sell, 20% cite retirement as their main reason for selling, whereas 38% cite burnout as the primary reason.
According to the data collected by BizBuySell, transactions are up 17% over the last quarter, but are still 7% below pre-pandemic levels. However, it is expected that the number of transactions will grow to be well above their pre-pandemic levels in 2022.
Buyers and sellers alike should remember that the pandemic has changed business and will continue to do so in the near future. In short, the business landscape continues to evolve.
Copyright: Business Brokerage Press, Inc.
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The Most Important Factors in Any Partnership Agreement
Every business has an array of important legal documents. However, the partnership agreement holds a unique and important place in your business and its future.
The facts are that many people choose to go into business with close friends or family members, and often these personal relationships lead to a forgoing of the partnership agreement. Don’t go this route, as it would be a major mistake. As a business owner, you have a responsibility to protect, maintain, and grow your business.
A well-written partnership agreement can greatly reduce the number of potential problems that your business can face down the road. Establishing a legal framework for the operation of your business is a must.
A good partnership agreement is one in which every major aspect of how the partnership should run is outlined and spelled out in detail. At the end of the day, your partnership agreement should be viewed as a legal document that serves as a key guidepost for the operation of your business. Since a partnership agreement is a legal document, it is essential that you work with a lawyer to create a contract that is specific to your company.
This type of agreement is often a more complex agreement than many business owners would initially expect, and for good reason. Due to the wide scope that a partnership can entail, the partnership agreement can address many different points.
It is important to remember that partnership agreements are designed to minimize misunderstandings and outline how the business should function. Issues such as how money is distributed, what percentage each partner will receive, and which partners are to receive a draw, should all be covered.
However, a partnership agreement does more than simply address how money is to be distributed. It should also outline key operational factors such as what happens in the event of the death of a partner. If that were to occur, for example, who will be in charge of managerial work? Issues such as how business decisions should be made, and how conflicts are to be resolved, are additional important issues that should be addressed.
A good partnership agreement, one that strives to foresee as many problems as possible, serves to protect your business against future disruptions. Every successful operation or enterprise has rules by which it operates, and your business should be no exception.
Copyright: Business Brokerage Press, Inc.
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