If you’ve gone this far, then selling your business has aroused enough curiosity that you are taking the first step. You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your business. This section should answer a lot of your questions and help you through the maze of the process itself.
The first question almost every seller asks is: “What is my business worth?” Quite frankly, if we were selling our business, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.
It doesn’t make any difference what you think your business is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your business is worth. Only the marketplace can decide what its value is.
The second question you have to consider is: Do you really want to sell this business? If you’re really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen. You can increase your chances of selling if you can answer yes to the second question: Do you have reasonable expectations? The yes answer to these two questions means you are serious about selling.
The First Steps
Okay, let’s assume that you have decided to at least take the first few steps to actually sell your business. Before you even think about placing your business for sale, there are some things you should do first.The first thing you have to do is to gather information about the business.
Here’s a checklist of the items you should get together:
- Three years’ profit and loss statements
- Federal Income tax returns for the business
- List of fixtures and equipment
- The lease and lease-related documents
- A list of the loans against the business (amounts and payment schedule)
- Copies of any equipment leases
- A copy of the franchise agreement, if applicable
- An approximate amount of the inventory on hand, if applicable
- The names of any outside advisors
If you’re like many small business owners you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.
Make sure the financial statements of the business are current and as accurate as you can get them. If you’re halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the business well “on paper”. As you will see later, pricing a small business usually is based on cash flow. This includes the profit of the business, but also, the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.
Prospective buyers eventually want to review your financial figures. A Balance Sheet is not normally necessary unless the sale price of your business would be well over the $1 million figure. Buyers want to see income and expenses. They want to know if they can make the payments on the business, and still make a living. Let’s face it, if your business is not making a living wage for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc., and feels that he or she can increase business.
The big question is not really how much your business will sell for, but how much of it can you keep. The Federal Tax Laws do determine how much money you will actually be able to put in the bank. How your business is legally formed can be important in determining your tax status when selling your business. For example: Is your business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? The point of all of this is that before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.
GABB member Lawrence Domenico, an experienced litigator, spoke to the Georgia Association of Business Brokers about how you can avoid litigation. Here’s what he had to say:
For you guys as Business Brokers, it almost always is better to avoid litigation if you can. Courts and Arbitration proceedings take a long time to complete and lawyers are expensive. The quickest you can expect to have a trial in Fulton County is a year after you file suit. Most business cases take several years. Moreover, there are lots of lawyers out there who are very happy to litigate to the death.
Before I tell you how to avoid litigation, please keep in mind, I don’t see most deals of business brokers because most go through to closing or the listing expires without success.
I only see the matters where brokers contact me because something is wrong with the listing.
It is probably not possible to never have a problem listing. There is a percentage of people that you cannot please and you will be in conflict them.
There are people that do not care about living up to their obligations, be it in a contract or otherwise.
These are often the same folks who have a tenuous grasp on reality and have a hard time telling the truth.
But there is good news, because these kinds of people exist, I will always have work to do.
What I would like to help you all with today is not dealing with these folks that I have just described. You will either have to sue those folks or walk away from them.
What I want to help you with today is minimizing the number of times you have to sue folks who have a grasp of reality, who generally do respect their obligations, but for some reason or another don’t see things the way you see them.
I have 6 recommendations for you to avoid litigation.
- First, avoid these problem clients. Easier said than done, I know, but I think you already know how to spot these people. First and most importantly, trust your gut. Call it instinct or experience or karma, whatever, when you have a bad feeling about working with a client, you are probably right. Almost all my clients say at some point, “You know, I had a bad feeling about this guy way back when, but I went ahead with the engagement.”
In my own practice, I know this is true. The greatest regrets and biggest losses of money in my practice were when I blindly trusted a client, or thought they would change once they saw how sincere and diligent I worked for them, or got blinded by the potential fee.
If your gut is not warning you about a client, there are still things you need to do to avoid problems.
Ask yourself, what do you really know about new client?
Sometimes the concern is not so much stealing money from you as wasting your time. A referral is the best, in my experience
This is true for hiring help, too. I far prefer to hire someone already known to me or someone at my firm. I always ask, “Are they crazy?” If not, you are way ahead.
Other options: make a personal visit to business; Google them; D&B; check references.
What do you know about the business? Co-broker if you’re not comfortable with the business or your experience.
- Next, you must, must, must have a written listing agreement. Since the late Middle Ages, there has been a law called the Statute of Frauds that says certain contracts have to be in writing. Real estate contracts have to be in writing. Contracts which take more than a year to perform have to be in writing. So, if you want to sell a business, your listing agreement has to be in writing.
Don’t call me if you don’t have a listing agreement. I won’t have anything to work with.
Use the GABB form listing agreement. If not that, at least look at it to see if there is something you should add or change in the form you use.
The listing agreement must be in writing. If the seller is hesitant to sign, that is another strong sign that you may have a problem client. You should think long and hard about continuing your efforts for that client.
Also, if the client only wants to sign a listing agreement in the name of the company, and not individually as an owner, that is another strong indication that you have a problem client. Most of the business sales I have ever seen are really asset sales. The selling company still exists after the sale, but it has no assets. If you have a listing agreement only signed by a company with no assets, you have a problem.
- Once you think you know something about the potential client, one of the best things you can do to avoid problem clients is to ask for a modest upfront fee. I know you guys typically get paid your fee at closing, but you do all your work before closing. If a client is not willing to pay you a small fee up front, and you can call it a marketing fee or an administrative fee or a listing fee, that is a strong indication that the client is going to be a problem going forward.
It’s the same in my business. If someone is not interested in paying me a retainer, that is a red flag.
- Include a minimum fee in your listing agreement. I have had a number of cases where the listing agreement said the fee was a percentage of the consideration paid at closing. But what if there was no closing? Most of the cases in which I represent business brokers are cases in which there was no closing. The seller withdrew the business from the market or sabotaged the sale. If you don’t have a minimum fee listed, and there is no closing, the judge or arbitrator is going to have a difficult time awarding you any damages.
Judges and lawyers are familiar with contingency fees. If you don’t have a minimum fee provision in your listing agreement, it is going to look like a contingency fee agreement to the judge or arbitrator.
- Put a mandatory arbitration clause in your listing agreement. Arbitration is slow and expensive. Litigation is painfully slow and painfully expensive.
In arbitration, you get a lawyer to make the decision as to who wins and who loses. In litigation, 12 people off the street make that decision. A jury is a crazy way to make decisions. In my humble opinion, juries make sense in criminal cases. They are a check on the government. But in a business case, I don’t think they make any sense. If you have ever interviewed jurors after a case, you would hear the most random explanations for why they made the decisions they did. Your jury may think $20,000 is a lot of money to award you for a year’s worth of work. Speak with an arbitrator after he or she makes a decision, and you’ll get a thoughtful, reasoned decision, even if you don’t agree with it.
- If you have a signed listing agreement, I encourage you to communicate regularly with your client. In my experience, clients don’t really understand what you do to market their business. Either through ignorance or willful ignorance, some clients think all you do is show up at closing to get a check. To fight against that ignorance, I recommend that you send regular letters or emails to the client detailing what you have been doing. Don’t go 3 months without communicating with your client. Regular updates to your client will not only combat the notion that you are not working for the client, it will be great evidence at a trial or a hearing if you end up in a dispute with the client.
Document your disputes. Lawyers are always asking clients whether they have anything in writing to document a dispute. I find that many people think that the kind of writing that lawyers are looking for is only a document that says Contract at the top of the page and is signed and notarized. That is not the case at all.
What is a “writing?” It can be a letter, or email, or a check. And here’s your tip of the day, confirm your agreement in a writing even without client’s signature. Send your client an email, “Jim, thanks for meeting with me today. I appreciate your promise to get me those financial statements by Monday. I’ll contact the buyers today and tell them the financial statements are on the way. As we discussed, this is one of the things you promised in our engagement agreement and if we don’t get those financial statements we cannot market your business.”
There is an assumption in the law that the recipient of a communication will respond if he or she does not agree with the communication.
This kind of email will give the judge, jury, or arbitrator a date, time, and the precise terms of the communication. It is not a “he said, she said” matter.
That’s my 6 recommendations. Probably not worth thousands of dollars. Don’t be afraid to call me or another lawyer before your relationship with the client has totally fallen apart. A good lawyer will tell you the good and the bad of your situation. Most times there are things you can do to save the situation. With counsel, you can make a bad situation better. And even if things fall apart, and you want to litigate, having a lawyer involved earlier will probably help you prepare your case for litigation which will increase your chances for winning.
ATLANTA -Fourth quarter job gains in Georgia proved resilient in the face of global turmoil, and domestic demand will continue to buoy job growth in the Peach State, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
Dhawan pointed to 2015 growth in four key sectors in his quarterly “Forecast of Georgia and Atlanta,” released Feb. 24, 2016. “Despite global headwinds, healthy domestic consumption is advancing employment in sectors such as trade, hospitality, education and healthcare, and government.”
These domestically-centered sectors, especially education and healthcare and government, can expect growth but at a slightly slower pace than 2015.
Despite an exceptional fourth quarter in which Georgia added more jobs (48,400) than the previous nine months combined (47,900), the state added only 96,300 jobs for 2015 – a steep drop from the 145,000 jobs added in 2014.
Job growth in manufacturing, a catalyst sector, was less than half than the 11,200 jobs added in 2014. “This slowdown was expected as a high dollar pushed prices up for international purchases,” Dhawan wrote. “Despite the headwinds, this sector is expected to eke out about 3,000 jobs in 2016.”
However, strong domestic consumption is expected to boost manufacturing job growth in certain metropolitan statistical areas (MSAs) where goods are produced to be sold in the country. Columbus, whose auto parts suppliers benefit from their proximity to the Kia plant in Troup County, is expected to see job growth of 1.7%. Dalton, where manufacturers produce carpeting and other inputs for residential and commercial properties, is expected to see manufacturing job growth of 2.0%.
The falling price of oil is proving to be a tailwind for metro Atlanta, unlike other cities around the country.
“We never had shale oil to begin with, so we are avoiding the bust being felt in Houston,” Dhawan said. “In the Atlanta metro area, construction is going strong since investment that was likely earmarked for oil investment is making its way into commercial and hotel investment due to low oil prices.”
As a result, new office towers are being proposed across Metro Atlanta. Perimeter Mall and Sandy Springs are anticipating large mixed-use buildings. Additionally, hotels are being planned near the future Braves stadium in Cobb County, the airport and a convention center in Alpharetta.
Residential construction in Atlanta also is booming with a 12.5% increase in housing permits in 2015 and an expected increase of 5.3% in 2016. Dhawan said that job creation in 2016 will support this permit growth. “Through much of the forecast period, global malaise will hinder job advancement, but expect domestic demand to give it all she’s got.”
Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta
- Georgia employment will gain 76,000 jobs (13,500 premium jobs) in calendar year 2016, 75,800 jobs (13,100 premium) in 2017 and 72,600 (12,300 premium) in 2018.
- Nominal personal income will increase 5.0% in 2016 and 5.6% in 2017 and 2018.
- Atlanta will add 54,500 jobs (10,000 premium jobs) in calendar year 2016, 52,100 jobs (9,300 premium) in 2017 and 52,000 jobs (9,000 premium) in 2018.
- Atlanta permitting activity in 2016 will increase 5.3%, grow 3.9% in 2017 and 2.2% in 2018.
Corporate Hiring Through Jittery Stock Market Key to 2016 Forecast
Despite a massive correction in much of the globe’s stock exchanges, U.S. gross domestic product (GDP) could continue to grow at a reasonable 2.0%, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
“The key factor is that companies, despite the jittery stock market and poor results in earnings last year, will keep hiring,” Dhawan wrote in his quarterly “Forecast of the Nation,” released Feb. 24, 2016. “If they pause, income gains will slow and fretful households will save even more, causing a slowdown.”
For the second time in six months, China’s attempt to manage the devaluation of its currency sent shockwaves through global equity markets. Dhawan believes that some nervousness surrounding the markets is warranted, but he called the current situation an overreaction.
“The markets are reacting like a petulant child to the promised fix of a monetary stimulus overseas that is failing to materialize soon enough,” Dhawan said.
The dip in the stock market will have a negative effect on consumer wealth, but nothing like the bursting of the housing bubble in 2008. In fact, falling oil prices will offset most of this negative effect, leading consumers to much better cash flow to start 2016 than at the same point in 2015.
In 2015, consumers used savings from low gas prices for big-ticket items like vehicles, which sold 17.3 million units last year. As a result, retailers are feeling the pinch of the now frugal American consumer.
“The United States accounts for 25% of the world’s consumption, Europe another 25%. Combined, this big engine is not firing on all cylinders for Chinese-made goods,” Dhawan said. “Thus, the Chinese slowdown occurred as a result of our own rational action to consume fewer items they produce.”
He expects that the Federal Reserve will examine investment indicators at their April meeting, and if they are stable, the forecaster expects a June rate hike. After that, rates will stay put until after November.
Regarding the election, Dhawan says two candidates in particular would have a substantial impact on the economy if elected. “If Donald Trump or Bernie Sanders wins, it will drastically change tax policy outlook for coming years. Neither of these candidates seems susceptible to lobbying and the shock to boardroom confidence will result in lower capital expenditure spending and a concomitant growth stall.”
Highlights from the Economic Forecasting Center’s National Report
- Real GDP grew at 2.4% in 2015, will expand at 2.2% in 2016, 2.5% in 2017 and 2.6% in 2018.
- Business investment will grow by 3.0% in 2016, rebound to 5.0% in 2017 and 4.9% in 2018. Jobs will grow by a monthly rate of 174,000 in 2016, 163,000 in 2017 and 137,000 in 2018.
- Housing starts will average 1.191 million units in 2016, rise to 1.255 in 2017 and 1.319 in 2018.
- The 10-year bond rate will rise to 2.5% by the end of 2016 and inch up to 3.1% in 2017.
ATLANTA—Greg DeFoor, founder and President of DeFoor Business Services of Kennesaw, is the 2016 President of the Georgia Association of Business Brokers, the state’s only professional association of business brokers. Michael Ramatowski, president of Georgia Business Associates, Inc., is the 2016 vice president of GABB.
GABB members represent owners of Georgia businesses and help them establish the sales price of their business, create marketing plans and strategies for the sale of their business, identify and qualify potential buyers, and work to protect the confidentiality of the entire process.
Other GABB officers are Jay Fenello of BizPlacements.com, treasurer of the GABB and Yasmine Jandali, owner and Managing Broker at Starwood Business Group, the secretary of the GABB. Board members for 2016 are Richard Burgess, president of Priority Business Acquisitions, Inc.; Jeffery Merry, founder and owner of the BUSINESS HOUSE, inc. SM, and GABB Past President C. David Chambless, president of Abraxas Business Services.
Mr. DeFoor is a business broker, a CPA and a Certified Fraud Examiner. He became a business broker in 2002 after working in public accounting followed by private industry experience as an accounting and financial executive in the healthcare and retail automotive industries. While in private industry, he was involved in a number of business transactions and decided to use that knowledge and experience to start his own firm. He has a unique blend of audit, tax, accounting, corporate finance, business advisory and transaction experience to use for the benefit of his clients. He has an active Georgia real estate broker’s license. His firm specializes in the sale of small and middle-market privately owned businesses in a number of industrial classifications. Mr. DeFoor has an accounting degree from Auburn University and lives in Powder Springs.
Mr. Ramatowski, CBI, president of Georgia Business Associates, Inc., works with business owners and sellers and candidates for merger by acquisition from manufacturing, distribution, and service businesses. He has owned and managed businesses that included a real estate master franchise, a property management networking company, and a service business. As COO of a banking conglomerate he managed brokerage operations, title companies, home and service warranty programs, and a relocation company. Mr. Ramatowski has served on the board of directors of 12 different organizations with diverse specialties including real estate brokerage, mortgage companies, title insurance, banking, health care, fitness center operations, and office supply operations, providing marketing and organizational growth expertise. He served as an Electronic Specialist in the U.S. Navy Submarine Service. He attended Cleveland State University and Baldwin Wallace College. He has earned the Certified Business Intermediary professional designation by the International Business Brokers Association.
Mr. Fenello started his career as a computer engineer for IBM, Boca Raton, where he worked on a new product called the IBM PC. After a successful career in computer hardware and software design, he earned an MBA in Entrepreneurship from the University of Arizona. He has been involved in small businesses and start-ups ever since. He first started in business brokerage in 1995, and has since worked for several brokerage firms, including one of the largest M&A firms in the country. Today, Mr. Fenello is with Keller Williams Realty Partners, where he helps people buy, sell and improve small businesses and start-ups, especially owner-operated businesses and franchises. Jay has an engineering degree from the University of Florida, and an MBA in Entrepreneurship from the University of Arizona. He is a member of the Atlanta Commercial Board of Realtors, and lives in Woodstock with his wife Beverly.
Mrs. Jandali is an experienced business broker with a track record of more than 10 years of successful transactions and highly satisfied clients. Mrs. Jandali founded Starwood Business Group in order to provide a boutique brokerage firm for clients seeking personalized service and specialized attention. As a certified Master Business Intermediary, she provides professional business intermediary services to both business sellers and buyers, including high-level business valuation services to business sellers. She has worked as a foreign exchange analyst at Wells Fargo, a marketing specialist at the Bank of America Corporation, vice president of Jandali Enterprises, Inc., and was managing broker and managing director of VR Business Brokers Mergers and Acquisitions. She has a B.A. in Business Administration Marketing from the McColl School of Business at Queens University of Charlotte, and also studied management at The Belk College of Business at University of North Carolina at Charlotte.
Mr. Burgess is president and owner of Priority Business Acquisitions, Inc. & Priority Real Estate Services, LLC, of Lawrenceville, Ga. Mr. Burgess is a licensed business and real estate broker with more than 20 years successful experience handling the sale, acquisition and financing of privately held companies and real estate in the Southeastern United States. Mr. Burgess has a mechanical engineering degree from the University of Maryland, and he and his agents use a Christ-centered, straightforward, successful approach to their brokerage services. He resides in Lawrenceville, Ga., and is an active member of Christ the Lord Lutheran Church in Lawrenceville, Ga.
Mr. Merry is a lifetime member of the Georgia Association of Business Brokers (GABB) prestigious Multi-Million Dollar Club and was the first Georgia broker in the GABB to receive the Phoenix award for being in the Multi-Million Dollar Club for 10 consecutive years. Jeffery has been a member of GABB for more than 20 years, and is a past president and board member. He holds a Bachelors Degree from Mercer University, a Masters of Business Administration from the University of Illinois, and a Juris Doctorate from Atlanta Law School. He is also a licensed real estate broker in Georgia and Florida. Further, he is an Adjunct Professor of strategic management, accounting, and finance in MBA programs.
Mr. Chambless is the president of Abraxas Business Services, a business brokerage focused on businesses with revenues of $5- to $30-million in the manufacturing, logistics, technology, healthcare, and services industries. Mr. Chambless has extensive experience in business development, finance, operations, sales, marketing, and international channel development and management. Mr. Chambless’ service over a 12-year period with various technology organizations (including the Open Applications Group Inc., (OAGi), C=WIN, Inc. PsionTeklogix, QAD, Inc., and The CODA Group), gave him a deep understanding of issues involved in international business and investment. Earlier in his career, Mr. Chambless served as chief financial officer for Aaron Rents, Inc and for Docutronics, Inc. Prior to graduate school, Mr. Chambless commanded components of a U.S. Army Pershing Missile unit in West Germany. Mr. Chambless has a Master of Business Administration in Finance degree from the Wharton School of the University of Pennsylvania and a Bachelor of Industrial and Systems Engineering degree from Georgia Tech. He is a member of BENS (Business Executives for National Security), the Association for Corporate Growth, and the International Business Brokers Association, and he is a fundraiser for the Boy Scouts of America. He is a nominee to the board of directors of the Callanwolde Fine Arts Center. He is past-president of the GABB where he has been a long-time member of the board of directors as well as a lifetime multi-million-dollar member of the Million Dollar Club. He has served on the boards of directors for the Grant Park Conservancy and the Southeast Atlanta Business Association.
The GABB is composed of professionals who work with owners of Georgia businesses. Many of today’s business buyers are individuals who have decided not to re-enter corporate America, but are ready to control their own destiny by purchasing and operating a Georgia business. The GABB’s monthly meeting is at the South Terraces Conference Center at 115 Perimeter Center Place, Atlanta. For more information about the GABB, contact GABB President Greg DeFoor at email@example.com or call Diane Loupe at 404-374-3990.
1.Sellers should find out the loan value of the fixtures, equipment and machinery prior to a sale. Many buyers will count on using it for loan or collateral purposes. No one wants to find out at the last minute that the value of the machinery won’t support the debt needed to put the deal together.
2.Sellers should resolve all litigation and environmental issues before putting the company on the market.
3.Sellers should be flexible about any real estate involved. Most buyers want to invest in the business, and real estate usually doesn’t make money for an operating company.
4.Sellers should be prepared to accept lower valuation multiples for lack of management depth, regional versus national distribution, and a reliance on just a few large customers.
5.If a buyer indicates that he or she will be submitting a Letter of Intent, or even a Term Sheet, the seller should inform them up-front what is to be included:
- price and terms
- what assets and liabilities are to be assumed, if it is to be an asset purchase
- lease or purchase of any real estate involved
- what contracts and warranties are to be assumed
- schedule for due diligence and closing
- what employee contracts and/or severance agreements the buyer will be responsible for
6.Non-negotiable items should be pointed out early in the negotiations.
7.The sale of a company usually involves three inconsistent objectives: speed, confidentiality and value. Sellers should pick the two that are most important to them.
8.A PricewaterhouseCoopers survey of more than 300 privately held U.S. companies that were sold or transferred pointed out the most common things a company can do to improve the prospects of selling:
- improve profitability by cutting costs
- restructure debt
- limit owner’s compensation
- fully fund company pension plan
- seek the advice of a consultant
- improve the management team
- upgrade computer systems
9.Sellers should determine up-front who has the legal authority to sell the business. This decision may lie with the board of directors, a majority stockholder, and a bank with a lien on the business, etc.
10.Partner with professionals. A professional intermediary can be worth his or her weight in gold.
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