Confidentiality is a major concern in virtually every business. Quite often business owners become a little nervous when it comes time to sell their business; after all, business owners usually want to keep the fact that they are selling confidential. Yet, at the same time, business owners want to receive top-dollar for their businesses and sell that business as quickly as possible. In order to sell a business quickly and receive top-dollar, it is usually necessary to present the business to a range of prospects. The simple fact is that you can’t sell a business without letting prospective buyers know that it is for sale.
All of this adds up to one simple conclusion: you will need a confidentiality agreement when selling a business. Let’s look at a few of the key points your confidentiality agreement should cover.
- Type of Negotiations
First, your confidentiality agreement should cover whether or not the negotiations are open or secret and exactly what kind of information can be disclosed.
2. Duration of Agreement
Your confidentiality agreement must specify exactly how long the agreement will be in effect. In most circumstances, it is prudent for the seller to seek a permanently binding confidentiality agreement.
3. Special Considerations
There are other considerations as well, for example, does your business hold any patents? A buyer could learn about your inventions during a buying process so you’ll want to make sure that your confidentiality agreement protects your patent and copyright interests as well.
4. State Laws
Additionally, your confidentiality agreement must factor in different state laws if the other party is based in a state different than your own.
5. Recourse in the Case of Breach
Finally, your confidentiality agreement should outline what recourse you will have if the agreement is breached. Having a confidentiality agreement does not offer magical protection against a violation. However, a confidentiality agreement does ensure that prospective buyers understand the seriousness of the situation and that there are indeed severe consequences if the agreement is not followed.
It is important for all parties involved to realize that a confidentiality agreement is a legally binding agreement that is enforceable in a court a law. Thanks to a confidentiality agreement, a seller can share confidential information with a prospective buyer or business broker so that a business can be properly evaluated.
With so much on the line, it is vital that you have your confidentiality agreement drawn up by a legal professional. A good confidentiality agreement is an investment in your business. It is possible for a business owner to sell his or her business and do so with some degree of confidence that information shared with prospective buyers will not be disclosed.Read More
By Tim Greene, Business Broker and Consultant, DeFoor Business Services
Recently I exchanged emails with the owner of a document shredding business. He asked me to explain the logic behind current business valuations for document shredding businesses. I show his questions and my answers below.
Why are business valuations stated as a multiple of revenue?
Most buyers actually calculate a recast EBITDA number when they are considering the acquisition of a document destruction business. EBITDA is an acronym that means Earnings Before Interest, Taxes, Depreciation and Amortization and is a measure of the free cash flow of the business. Buyers multiply the recast EBITDA number by around 4-5 to arrive at a value for your business. So it is easier for the seller to understand, they divide the value they’ve determined by your total revenue. Then they present their offer as a multiple of total revenue. A typical multiple for a document shredding company is 1.5-1.7 times total revenue. The multiple of revenue valuation they present in their offer is based on the conclusion of their EBITDA analysis. It is not the starting point for their offer.
Which assets are included in the sale of the business?
At the valuation multiple mentioned above (1.5-1.7 times), the trucks, containers and any other equipment used to generate your revenue are typically included in the transaction. You’d pay off all truck debt (or remaining lease payments) at closing using your own funds or down payment funds provided by the buyer. The buyer would receive free and clear title to the trucks once closing was complete. Other assets included in the sale are shown below.
- bins and containers
- hard drive shredding equipment
- customer lists including contact information
- customer agreements and contracts
- books and records
- website, phone numbers, fax numbers and email addresses
- company name
- seller non-compete agreement
Which assets are excluded from the sale of the business?
Normally at these valuation levels, you’d keep all accounts receivable (AR), accounts payable (AP) and cash in the bank as of the day of closing. The buyer would assume responsibility for those items after closing. Recycled paper inventory is often liquidated by the seller prior to closing and in essence, becomes AR. Every buyer is different, and occasionally they want to retain some level of working capital or current AR. Other assets excluded are shown below.
- office furniture and computers (sometimes but not always)
- cash in company accounts as of the day of closing
- accounts receivable as of the day of closing (you keep accounts payable thru closing as well)
- seller owned real estate
Some buyers don’t want to purchase shredding trucks for a variety of reasons (age, make, model). If you agreed to remove the trucks from the transaction and sell them independently of the remaining assets, then the equation changes. Both the purchase price and the 1.5-1.7 times multiple would be lower by the value of the trucks. You wouldn’t need to pay off the truck note balances until you sold them to another buyer.
The value of your real estate is excluded under this valuation method. If a buyer is interested in purchasing your real estate, it would be in addition to the value of the business.
Asset Sales versus Stock Sales
Most buyers prefer asset purchases over stock purchases in small business transactions. In an asset purchase, the buyer isn’t purchasing the stock of your corporation, just the assets of your corporation. As a result, the buyer does not inherit past liabilities such as workers comp issues, lawsuits, warranties, unpaid liabilities, etc. After closing, you’d still own the corporate shell of your business. Asset purchases frequently minimize tax consequences as well.
Keep in mind, these are the terms under which the business is offered in a memorandum to the buyer. Anything is negotiable as part of the sales process. As a result, the terms of purchase are frequently different than the terms of the offering. Every circumstance is different and “rule of thumb” valuation multiples can’t be applied across the board, as all businesses are unique.
I hope that helps in your understanding of valuation for document shredding businesses and valuation of small businesses in general.
Business Broker and Consultant
How the purchase of a business will be structured is something that must be dealt with early on in the selling process. The simple fact is that the financing of the sale of a business is too important to treat as an afterthought. The final structure of any sale will be the result of the negotiations between buyer and seller.
In order for the sale to be completed in a satisfactory manner, it is vital that the seller answers six key questions:
- What is your lowest “rock bottom” price? It is important for sellers to know what is the lowest price they are willing to accept before they begin negotiations. Far too often, sellers have not determined what price is their “lowest price” and this can literally cause negotiations to fall apart.
- What are the tax consequences of the sale? Just as sellers often don’t know what their lowest price is, it is also true that sellers often don’t think about the tax consequences of the sale.
- Interest rates are no small matter. It is important to determine what is an acceptable interest rate in the event of a seller-financed sale.
- Have unsecured creditors been paid off? Does the seller plan on paying for a portion of the closing costs?
- Will the buyer have to assume any long-term or secured debt?
- Will the business be able to service the debt and still give a return that is acceptable to a buyer?
Studies have indicated that there is a direct relationship between more favorable terms and a higher price. In particular, one study revealed that offering favorable terms could increase the total selling price by as much as 30 percent!
Business brokers are experts in what it takes to successfully buy and sell businesses, and this is exactly the kind of insight and information that they have at their disposal. Experienced brokers are able to use their knowledge of everything from current market conditions and financing strategies to the knowledge of previous sales and a given geographic region to help facilitate successful deals.
Usually, selling a business is one of the most important things that a business owner does in his or her professional lifetime. Business brokers understand this fact, and they understand the importance of making certain that the deal is structured correctly. The facts are that the way in which a sale is structured could mean the difference between success and failure.
Structuring a deal in such a way where it is the best possible deal for both the buyer and seller, helps to ensure that a deal is successfully concluded. Working with a business broker is one of the best way to ensure that a business will be sold.Read More