Nine Steps to Better Due Diligence, Closing Deals
Third in a series on Business Brokering
Buyer and seller strike a deal, but a thorough due diligence and either seal or sink that deal.
Georgia Association of Business Brokers Vice President Mike Ramatowski moderated a panel discussion at the July meeting on getting buyers and sellers through due diligence and to the closing table. Panelists were GABB Board Member Loren Marc Schmerler, CPC, APC, President and Founder of Bottom Line Management, Inc.; Kim Romaner, President of Transworld Business Advisors, who has 30 years of corporate and entrepreneurial experience in sales, marketing, operations and technology; and attorney Sarah Wheeler of Moore & Reese.
Miguel Alandete and Jon Kaye of Wells Fargo sponsored the meeting.
Hear the entire panel discussion at the GABB blog.
1. Find out if your clients REALLY want to buy or sell the business.
Have a heart-to-heart talk with your clients before putting the business up for sale, or making an offer on a business, to make sure the buyer and seller are really truly ready to do this. Cold feet will sink a deal, says Wheeler, who represents buyers, sellers or acts as a transactional attorney.
2. Make sure each side has realistic expectations.
Sellers must understand that they will be expected to sign a no-complete contract when they sell. Buyers must understand that if they need financing, they shouldn’t expect to get financing from seller with zero percent interest.
3. Clarify the terms of a Letter of Intent.
A letter of intent, a.k.a. LOI, is typically the beginning of the buying process and signifies a meeting of the mind. Both parties should understand whether the LOI is binding or not, how earnest money will be handled, etc.
4. Take the skeletons out of the closet.
If something is wrong with the business, if there is a liability, it’s a bad idea to hide that fact from a potential buyer. If it comes up in comes up in due diligence, Wheeler notes, the buyer will assume the seller was trying to hide it, and that makes it a lot harder to deal with. Schmerler said he had a sale imperiled because a prospective buyer discovered that a major client was going to discontinue business.
5. Use a GABB lender.GABB-affiliated lenders have experience with business sales, and understand the process. Other GABB affiliates are familiar with the ins and outs of deal making and will make the process smoother.
6. Get franchisors, landlords on board.
If you’re selling a business with a lease, don’t leave the landlord out of the process. Ditto with a franchisor if a franchise is involved. These and other interested parties can make or break a deal.
7. Complete the lender checklist. Lenders typically send out checklists of items they need before a sale can be completed. Sellers should read them and get that information together as soon as possible. Try to educate your client that the money drives the ship, and the closing will happen when the lender is satisfied.
8. Leave enough time for proper due diligence.
Due diligence takes time. Count on at least ten days for a main street transaction, Romaner said, longer for bigger deals.
9. Clarify expectations after the sale.
Sellers often agree to stay on during the transition, but Schmerler said usually the buyer doesn’t want the seller there after the second or third week. The buyer wants employees to view him or her as the new owner.
Hear the entire panel discussion at the GABB blog.
The July 28 panel was the third in a 3-part series of discussions designed to help GABB members improve their businesses. In May, social media expert David Camp discussed effective ways to use quality content and technology to prospect for new clients. The June panel featured three experienced brokers with differing approaches to working with buyers and sellers. Read about the panel and hear a recording at the GABB blog.
GABB meetings begin with guest and member introductions. After introductions, we have a presentation by either a panel or a speaker and then some time for questions. After the presentation we’ll have a few items of association business and then adjourn the meeting at around noon.
There is no cost to attend and there are two parking decks available with free parking adjacent to the facility. For more information about the GABB, contact GABB President Greg DeFoor at gdefoor@defoorservices.com
Read MoreGeorgia Business Brokers Discuss Working With Buyers and Sellers
The collective wisdom of four brokers with 75 years experience was on stage Tuesday, June 30, as the Georgia Association of Business Brokers hosted a panel discussion on how to move buyers and sellers to the closing table.
Moderated by GABB Vice President Mike Ramatowski, the panel featured GABB Treasurer Jay Fenello, who specializes in helping people buy and sell small businesses and franchise resales; Kathryne Pusch, whose firm represents a wide spectrum of buyers and sellers; and J. Snypp, who works with both buyers and sellers of small to medium sized businesses in many different industries.
Listening, a lot of listening, to buyers and sellers, is a key aspect of how Pusch operates. “Each person we see has a different set of needs,” she said. “Each buyer and seller has different motivations, and so we’ve got to make that work. So in that sense we are problem solvers right.”
Be sure the buyer is prequalified for an SBA loan, and do due diligence, Pusch recommends. “You get financial statements, get a resume, get a bio. You look at that, and you say, ‘Can we fund this deal?’ So then we know that we have something that actually can work.”
“It’s great to have somebody who says I want to buy, but can that person actually buy the business?” Pusch asked. “Is there a way to make the deal work with the resources that they have with the experience that they have? For me getting prospective buyers and sellers together involves making sure I’ve got a true meeting of the minds.”
Pusch said brokers must avoid just displaying their knowledge while “trying to force people to do what we want,” and instead “we need to be listening to them to make sure we understand where they’re really coming from because I don’t believe there’s any real hostile takeovers in small business. You have to make it work, and they both have to really want it to work, and they both have to really feel like they’re winning.”
“The number one enemy we have in our in our business it’s the fear.” Money and time are also critical factors, “But for most people they will not do something if they can’t get over the fear hurdle, and they can’t do it if they can’t get over the financial hurdle.”
If brokers can help prospective buyers and sellers overcome anxieties about having a binding contract, they “can start to move that to the next stage we’re going to talk about next month, due diligence and getting that thing closed. which we all know takes lots of time and lots of tension,” Pusch said.
Snypp says his current deals range from $150,000 to $3.5 million, and said he asks for an upfront engagement fee from buyers and sellers.
“In the past, I’ve worked for months and months with a buyer who ended up not buying a business at all, going back in the corporate world, and I figured my time’s worth something. So we’re charging a fee up front to work with those people.” This policy avoids those clients who “will let you work and get offers just for their ego,” or “to find out what their business is worth to sell it to their cousin.”
The up-front money, refunded when a deal is closed, insures that both sides are committed, Snypp said.
In some deals, a buyer and seller are just really on top of things, Snypp said, “and they’re driving the deal more than I am because they are focused and they know what they want.” Snypp enjoys those deals because a broker can sit back and just provide guidance on potential missteps.
Snypp said he enjoys working with GABB affiliate lending institutions who will give him an honest answer about the viability of a deal. “I would much rather have a backer saying, ‘no this was not right for us,’ right up front and then we can find alternative lending or make some kind of changes within the deal structures.”
GABB attorneys have been essential in certain complicated deals, such as those involving stock transactions, Snypp said.
Efficiency is the key to Fenello’s specialty: main street clients, for which he gets a lot of referrals from GABB colleagues.
“I find that doing a transaction is a lot like a dance,” Fenello said. “You start out with two parties who don’t know each other, and you have to tell us what your finances look like before we’re going to show you the tax returns. You have to show us that you can financially do this deal before we let you talk to our accountant. So if you have a very definitive back and forth, everything gets done and everybody’s comfortable.”
Communication is also key, Fenello said. “The number one complaint I hear about business brokers in the low end of the market is ‘I haven’t heard from my broker in six months. I don’t know what’s going on out there. I don’t think he’s doing anything.’ “
To combat, Fenello sends a weekly report to every client describing what is happening in their market. “In order to do that, you have to be very automated. So I use a lot of automation to make my life easy.”
Ramatowski says when deals are active, he makes it a policy to contact clients once every 96 hours. Psychologically, the client should be contacted every 70-96 hours to allay anxieties about the approaching deal, he said.
Michael J. Ramatowski, CBI, has been a business broker for 26 years. Mike has served on the board of directors of eleven different organizations with diverse specialties including real estate brokerage, mortgage companies, title insurance, banking, health care, and office supply operations. He serves on three boards of directors where he provides marketing and organizational growth expertise. He has earned the Certified Business Intermediary professional designation by the International Business Brokers Association.
Fenello is principal and founder of BizPlacements.com, a full-service business brokerage firm that specializes in helping people buy, sell and improve small businesses and start-ups, especially owner-operated businesses and franchises. Jay, who is also associated with Keller Williams Realty, began his career in business brokerage in 1995 and has since worked for several brokerage firms, including one of the largest M&A firms in the country. Mr. Fenello began his career as a computer engineer for IBM in Boca Raton, Fla., where he worked on a new product called the IBM PC. After successfully designing a PC card and its supporting software, he left IBM for a small start-up called Core International. Mr. Fenello formed a company he called Iperdome, Inc in 1997, an internet venture that has turned into a world-wide process to establish internet governance. He has an engineering degree from the University of Florida, and an MBA in Entrepreneurship from the University of Arizona. Mr. Fenello is a member of the Atlanta Commercial Board of Realtors.
Snypp spent more than two decades in the office- furniture business before becoming a business broker and has been with Preferred Business Brokers, Inc. for nine years. He has found success selling businesses in a variety of industries, most recently selling day-care centers, a travel agency, and a cooking school. He has 25 years of sales, sales management, and marketing experience. He often works with buyers to represent them and find them deals. He has been in the GABB’s Multi-Million Dollar Club twice, and the Million Dollar Club twice. He helps business owners with their exit plans by finding qualified buyers for their businesses while maximizing their proceeds.
Kathryne Pusch, President of ConsultKAP, is a seasoned professional consultant and broker who began her career consulting for a large international consulting firm in 1979. Since then, she has worked successfully within the framework of large corporations, and small enterprise, across a broad range of industries, private and public sector. For nearly 25 years, her firm has focused primarily on preparing businesses for a successful sale, exit and transition planning for owners, and assisting disputing partners or shareholders in reaching their differing transition goals.
For more information about the GABB, contact GABB President Greg DeFoor at 678-644-983 or gdefoor@defoorservices.com.
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Overcoming Five Buyer Objections to SBA Loans
By Susan Kite, Vice President, Signature Bank of Georgia, and
Kim Eells, Vice President, The Brand Bank
I. “This deal costs too much; I can’t get it financed.”
- SBA 7a Loans are guaranteed by the US Government, giving banks a higher comfort level to make a loan they may have denied as a conventional loan. SBA loan terms can be up to 25 years with no balloon. This means that your buyer only pays closing costs once.
II. “SBA Loans have too much paperwork.”
- All commercial loans require both business and personal financial information. SBA loans do have a few additional forms, but most of these just require a signature – and your lender may even help your buyer fill them out!
III. “I don’t have collateral to offer the bank.”
- SBA only requires that all available collateral be taken. Experienced business acquisition lenders understand that these loans have a high amount of goodwill. They look to the SBA guaranty to help offset that risk. There also may be other factors that help offset the risk such as your buyer’s experience, personal liquidity, and strong business cash flow.
IV. “SBA Loans take too long.”
- It may seem to take forever, but most SBA loans only take 6 to 8 weeks from term sheet acceptance to closing. An experienced lender will help you move things along.
V. “I tried to get an SBA loan, but the bank I went to said no.”
- While this could signal the end of your deal – all banks have a slightly different appetite for different types of loans. Suggest that your buyer not stop there. In fact, GABB’s Business Acquisition Lenders have a network of contacts. We can usually find someone interested in doing your deal!
Call us if you need a knowledgeable and experienced SBA lender who will work hard to get your deal closed.
By Susan Kite, Vice President, Signature Bank of Georgia, Business Acquisition Loan Specialist, 770-595-9734
and
Kim Eells, Vice President, The Brand Bank, Business Acquisition Loan Specialist, 770-853-5625
Read MoreQuestions Business Owners Ask & Answers I Give Them
Questions Business Owners Ask & Answers I Give Them
Veteran business broker Loren Marc Schmerler, a member of the board of the Georgia Association of Business Brokers and president of Bottom Line Management, Inc., offers his advice for answering common questions asked by business owners.
- How much is my business worth?
The correct answer is the price a Buyer offers you that you are willing to accept. It makes no difference whether you are making money or losing money. It makes no difference whether sales are increasing, declining, or flat. It makes no difference how much blood, sweat, and tears you have put into your business. It makes no difference how much money you have invested in the business. It makes no difference how much money you owe to the bank or to yourself. It makes no difference what a business valuation or appraisal says. It makes no difference what your hard assets are. It makes no difference what your customer list or client list contains. It makes no difference what your patents or service marks cost you. It makes no difference whether you are a Franchiser, Franchisee, Licensor, Licensee, Distributor, or Independent Contractor. The bottom line is that what you finally accept is what your business is worth.
- How long will it take to sell my business?
The correct answer is no one knows for sure. But I tell my clients that the average time is seven months from listing to closing. For companies that sell for $1 million or more, the average is nine to twelve months. But I also explain that the quickest I ever sold a business was one week, and the longest it ever took me to sell a business was six years. Additionally, I explain that price and terms sell a business. The lower the price, the more affordable the business will be. The lower the down payment, the more people will be able to consider it. The greater the amount of owner financing, the easier the business will be to sell.
- Is there anything I can do to make my business more desirable?
The answer is yes. The most important thing you can do is to put your ego aside and not make the business dependent upon you. Ideally, the goodwill of the business should be at the lowest level that interfaces with customers or clients. This means that you want to hire and keep employees who make your customers happy with high quality work and excellent customer service.
- Is there anything I should not due during the listing period?
The answer is that you should not slack off in any way. You need to stay focused and operate your business as if it will never sell. You need to work as hard or harder no matter how burned out you feel. Do not make any major changes during the listing period. Retain all good and excellent employees, and remove those that are not contributing as they should. Keep your inventory fresh, and eliminate any obsolete items. Keep your equipment and machinery well maintained and properly functioning.
- What is due diligence?
It is the process where the Buyer examines all your books and records, gets approved by the Landlord, gets approved (if applicable) by the Franchiser, Licenser, Distributor, bank, etc. Your books and records need to be current and “bullet proof.” Your tax returns for payroll taxes, sales tax, state income tax, federal income tax, county income tax, city income tax, and any other municipality taxes should be 100% current. Your various licenses need to be current, whether or not the buyer will have to apply for their own. You want to fully disclose everything and not leave any skeletons in the closet.
- What else do you suggest I do to impress a Buyer?
Have a job description for each employee. Put together a Policies and Procedures Manual. This will make the corporate buyer feel more comfortable about taking over the reins. Make sure all your employee reviews are current. The last thing a new owner wants to do is to sit down in a vacuum with an employee who is expecting a raise. Make sure you clean everything that is dirty. Make sure you fix anything that is broken. You do not want the Buyer to wonder what else might be a potential problem. Prepare a business plan and/or marketing plan to show the Buyer how he or she can grow the business. Put together a transition plan that shows the Buyer how you will assist them daily for a period of 28 days. The Buyer may not want you for the full transition period, but at least you are showing that you have thought it through and are willing to make yourself available.
- What happens if I agree to do some owner financing, and the Buyer misses a payment?
The way the closing attorney prepares the paperwork, if a Buyer misses a rent payment or a note payment, it is considered an event of default under the note. This will allow you to take back the business in a worst-case scenario or enter into serious discussions to protect your financial interests. While the best outcome is a Seller getting paid all their money and a Buyer being successful, you must plan for the worst and hope for the best. But I also tell my clients that they should never sell their business to a person they feel will not treat their employees, customers, clients or vendors properly. If you ever get a knot in your stomach during the negotiation, that is the time to throw in the towel and let me gently explain to the Buyer that you do not feel it is a good fit.
I hope this list of questions and answers has been helpful. I offer a free no obligation consultation at any time should you wish to discuss the sale of your business or the purchase of another business. Loren Marc Schmerler, CPC, APC, President, Bottom Line Management, Inc., 404-550-1417.
What Are Buyers Looking for in a Company?
It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.
Quality of the Earnings
Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be:
- meeting some new governmental guidelines,
- paying for a major lawsuit, or
- adding a new roof on the factory.
The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.
Sustainability of Earnings
The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?
Verification of Information
Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables? The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.
© Copyright 2015 Business Brokerage Press, Inc.
Photo Credit: mconnors
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