Four Common Seller Mistakes
Sellers are just like everyone else in that they can make mistakes. In this article, we’ll explore some of the most common mistakes that we see along with some of the repercussions.
1. Not Seeing the Buyer’s Point of View
The first major mistake that sellers make is that they simply fail to look at the situation from the buyer’s perspective. One of the smartest moves any seller can make is to step back and ask themselves two key questions.
“What information would I expect to see if I was thinking about buying this business?
“Would I trust the information being presented to me if I was the buyer?”
While there are many other questions sellers can ask to help reframe their thinking, these two simple questions can orient a seller’s thinking towards a buyer’s perspective. Additionally, investing the time to understand the buyer’s position can help avoid a range of problems and help smooth out the negotiation process.
2. Neglecting the Business During the Sales Process
Another seller mistake we see is that the seller neglects the business during the sales process. This can have significant negative long-term consequences. Sellers must understand that they must maintain the day-to-day operations as though the business is still theirs. The old saying, “Don’t count your chickens before they’ve hatched,” most definitely applies to selling any business. Business deals fall apart all the time. This is true from small deals to corporate acquisitions.
3. Overall Lack of Preparation
Any seller who is truly serious about selling his or her business will have all of their documentation available and well organized. This list would include financial records, environmental studies, business forecasts and more. It is important to make a good impression and convey to prospective buyers that a business is well organized and ready to be sold. Disorganization on any level could make prospective buyers worry that the business isn’t being operated in a professional manner.
4. Holding Misconceptions Around a Business’ Value
Finally, a real “deal killer” can be when sellers don’t understand (or have a mental block) concerning the real value of their business. This issue can lead many business owners to set a price that is simply too high or even completely unrealistic. Many sellers have put years of blood, sweat and tears into a business. Learning that their business isn’t as valuable as they had hoped can be an emotional, psychological and financial blow all in one. But sellers also have to adjust to the realities of what the market will bear.
Avoiding seller pitfalls is incredibly important. Working with a skilled and proven business broker or M&A advisor is a way for buyers and sellers alike to avoid an array of significant problems that could otherwise arise.
Copyright: Business Brokerage Press, Inc.
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Unraveling the Seller’s Predicament
Selling a business isn’t always 100% about the price. It is not like selling a house where typically the most important factor is who places the highest offer. In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered.
The idea of selling to a competitor is one that seems attractive to many business owners. After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider. But while this point is quite valid, selling to a competitor comes with its own problems. Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.
A second avenue that sellers will often explore is selling to a financial buyer. A financial buyer is likely not to be a competitor. But on the downside, a financial buyer may be unwilling to pay the seller’s price. It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.
The highest selling price may come from a strategic acquirer. But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller. A strategic acquirer may not have the best interests of the company at heart. When a strategic acquirer takes ownership, key employees and management may be replaced. The company may even be moved. Many owners are unprepared for the shock that may come along with a strategic acquisition.
There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business. It is possible that the best buyer for a company could be one of its employees. However, this option comes with risks as well. Key employees and management may leave if the deal falls through, as they now know that the company is for sale.
Finding overlooked buyers is what business brokers do best. Matching the right buyer with the right business is both a science and an art. Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.
Copyright: Business Brokerage Press, Inc.
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Buying a Distressed Business
Distressed businesses can represent a real and often overlooked opportunity for buyers, according to Howard Brownstein, President of The Brownstein Corporation.
Brownstein is an expert in providing turnaround management and advisory services to companies, as well as their stakeholders and is considered to be one of the world’s top experts in distressed businesses.
The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years.
However, not all distressed businesses are the same, Brownstein cautions. There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath.
Why is a Given Business Distressed?
Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses. Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future. It is essential to be able to convey “what went wrong” and how the problems can be fixed.
Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list. The first is cash flow issues, and the second is bad management. Often it turns out that the management was simply not rigorous enough. He also notes that companies will tend to blame external issues as a way to explain away their failure.
Of course, no two distressed businesses are failing from 100% identical causes. Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.
- What is the business’ potential value?
- Is there something of value under the problems?
- Under better or different circumstances, could the business be viable?
These are all questions that your business broker or M&A advisor can help you to answer. It’s important to gain a clear understanding of the business’ past, present and future before deciding to buy a business.
Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits. During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter. He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation. He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton. Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.
Copyright: Business Brokerage Press, Inc.
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Closing Transactions with PPP Loans
Diamond Financial Services
Now that the six-month payment incentive provided by the C.A.R.E.S. Act is off the list of our items of immediate attention, our focus returns to closing transactions that include Paycheck Protection Program, or P.P.P. loans. If you have closed any SBA transactions to date that include a P.P.P. loan, then you may have experienced the chaos and confusion on the forgiveness aspect that many lenders, sellers, and attorneys currently struggle with. Today, I will attempt to explain the methods that we have seen be used to help close transactions during these current conditions. PLEASE NOTE: We are not confirming that any of these methods are acceptable to SBA or will not cause a decline in forgiveness. These are only the ways we have witnessed these transactions close with P.P.P. loans in place.
The main concern is that if a seller retains the corporation and P.P.P. loan liability post-closing, then the buyer should have no exposure in the future (in theory). In most cases this would be true, but what many are not considering is that this is the Federal Government and they can go past a transaction if they deem it invalid. Hence the surrounding concern and nervousness. I will not go into specifics on this today, but you should know there is some level of validity to the above concern.
The SBA held a lender conference call in August, and on that call, they explained how specific guidelines for acquisitions that included P.P.P. loans would be published and sent out to all lenders within days. Days soon became weeks and as of today no such publication has been circulated. With no actual guidelines, aside from the two letters we have secured from District Representatives, the lenders have been on their own in creating safeguards surrounding these P.P.P. loan liability exposures to help clients close acquisition transactions. Below, I will describe the top four methods lenders utilized to close loans since March.
Our top choice from an active lender of ours allows an addendum to be included in the APA which simply states the following: “any Liabilities of the Seller or Principals associated with the Payroll Protection Program, including but not limited to any loans. Any Payroll Protection Program loan is and shall remain the exclusive obligation of Seller and Principals and is not being assumed by Buyer in this transaction.” By adding this addendum, our lender allows all transactions to close. A simple solution that many lenders choose not to utilize.
A more popular method is based on a version of an SBA letter that was circulated that requires an escrow account be set up with the seller’s P.P.P. lender matching the P.P.P. exposure amount, with deposits made using the seller’s personal funds. This seems to be the most accepted work around and another version of this makes it even easier. Some lenders will allow this escrow account to be held by an attorney until P.P.P. loan forgiveness is complete.
The least favorite of our available options, based off an SBA district letter, demands the P.P.P. loan be assumed 100% by the buyer and demands that the loan be processed GP. GP is when the entire loan package is sent directly to SBA’s central processing center for a complete review and subsequent eligibility determination. Most lenders will avoid this whenever possible as utilizing their PLP status allows them to bypass this step. The SBA GP program typically adds between one and three weeks to the overall loan process, time that most transactions would prefer to not waste.
If you are handling a transaction that includes a P.P.P. loan, be sure you explore the details of that loan to ensure the seller understands any concerns surrounding the forgiveness. If the buyer is securing an SBA loan for the acquisition of a business, be sure to address the same with the buyer’s SBA lender. Understanding the lender’s requirements and being sure all parties agree upfront will be critical to closing your deal and save you countless hours in the future.
The letters and documents mentioned above can all be found here. As always, our highly skilled Diamond Financial staff is always here to answer any specific questions regarding SBA transactions at any time. For more specific answers on these or any other SBA rules, please contact us at askdiamond@easysba.com, a no cost, no obligation, email solution to answer all of your SBA questions.
Diamond Financial specializes in larger goodwill transactions and we are always happy to share the information that makes them happen. Call us and experience the power of the experts and our three day yes or no guaranty!
How Should Your Company Deal with an Orphaned Product?
Keeping a product or service around that isn’t pulling its weight might prove to not be a very good idea. You may have invested a good deal of time and resources into its development, but if that product or service is no longer contributing to your bottom line, it might be time to cut it loose. Even if your product is pulling its weight, but doesn’t fit into your overall core business, then you should still consider getting rid of this “orphaned product.” Let’s take a look at some of the reasons you might want to keep or remove, an orphaned product from your company.
Reasons why an orphaned product might be bad for a company:
- An orphaned product line can distract from core business operations.
- Funds allocated to an orphaned product could be used instead to build the core business or make improvements that are not in the current budget.
However, one company’s orphan could be another company’s adoptee. Some buyers, companies and private equity groups are looking for product lines they can use to augment their existing ones. In fact, some buyers may even want to build a new business around a given product line.
Of course, it isn’t always as simple as “pulling the plug” and moving on. It is important to step back and consider the negative impacts of jettisoning an orphaned product, such as the fact that the product line could have key employees attached to it. Or there could be company culture issues related to removing the product, such as causing disruption within your company. You must also consider if the orphaned product could ultimately play a role in the sale of your company.
At the end of the day, an acquiring company may feel that the orphaned product line is a great fit for their existing distribution chain. Additionally, your offering might fit into a new product line that the acquiring company has launched. It is important that you evaluate every aspect of an orphaned product before making the decision to remove it from your company.
Understanding the needs and goals of your most likely buyers should play a role in your decision making. Working with an experienced business broker is an easy way to increase your chances of making the right decision.
Copyright: Business Brokerage Press, Inc.
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