There’s a reason that the process to sell a business is often referred to as a “roller coaster ride”. It can be a very unpredictable journey with unavoidable risks at every turn, especially if you are selling a business for the first time. Working with an experienced business broker can help reduce the stress, uncertainty and transaction risks that all business owner face when preparing to sell your business.
Business brokers have the expertise needed to guide you through the entire process to sell your business from start to finish. After you have made the decision to sell your business, the first step is to develop a unique listing strategy that’s build around the market asking price and that all starts with the company profit and loss statements. The business broker will take your company’s profit and loss statements and recast them to represent the true SDE (seller’s discretionary earnings) figure. The SDE number is calculated by adding back discretionary expenses that are not essential or required to maintain daily operations. For example, if the business owner is using the company debit card to buy lunch everyday for himself, this would be a perfect example of an addback expense. If John Smith buys the business tomorrow, will the business suffer if John isn’t using company funds to buy himself lunch every day? The answer is clearly no and therefore, this meals and entertainment expense can be added back into the SDE figure since it would be fair to say that the new owner would not incur this same expense after the sale is finalized. However, there must be a fine line between identifying and adding back real discretionary expenses vs. operating expenses that were incurred, but not necessarily the most effective use of operating capital. A common question that business brokers get often is about wasted advertising spend. For example, a business owner might have tried a new advertising channel that proved to be unsuccessful. You could make the argument that the new owner won’t incur these same advertising expenses because the business no longer uses the respective advertising channel. Just because the bulk of that advertising spend was wasted, does not mean you can simply add the expense back into the SDE figure. It just doesn’t work like that. There has to be a clear-cut case that illustrates that the addback expense in question had absolutely zero impact on the company’s financial performance. While buyers could easily make the argument that a small amount of revenues might have come from that “wasted advertising” spend, there’s zero room for interpretation in that respect when it comes to the owner buying himself lunch everyday using the company debit card. If the new owner didn’t buy himself lunch every day, there would be zero impact to the company’s annual revenues as a result. The same goes for other discretionary expenses like personal cars, personal health insurance, salary paid to the owner, etc.
After your business broker has finished recasting the financial statements, the next step is to prepare a confidential information memorandum, which is also referred to as the company prospectus. The company prospectus will include a full summary of the business which covers the company overview, daily operations, employee structure details, industry landscape analysis, growth opportunities and the financial summary. The goal of the company prospectus is to provide serious buyers with a professional presentation on the business that aims to answer the major questions that most serious buyers will ask. Before the business broker actually distributes the company prospectus or reveals the name of the company to inquiring buyers, it’s important to ensure that all buyers sign a confidentiality agreement or NDA. As buyers review the company prospectus, they will work with your business broker to get their preliminary questions answered by coordinating with the seller. The business broker will screen buyers and narrow the list down to a handful of serious acquisition candidates. At this stage in the process, our business brokers always recommend setting up a conference call with the seller. This accomplishes to important goals. First, it’s important the there is the right level of “deal chemistry” between the buyer and the seller. If the buyer and seller don’t have the right chemistry, this can lead to disputes and deals falling apart later in the process. Second, it’s important to build trust between the buyer and the seller. We always tell clients that trust is really what gets deals closed. You can have the best business in the world with an endless supply of new offers, but if the buyer and seller don’t trust each other, the deal will likely never get closed. After the seller conference call stage, the next step for the buyer is to submit a formal offer on the business by preparing and signing a Letter of Intent. The business broker will work with both sides until the LOI is acceptable and ready to be executed. This can involve complex deal negotiations, but this is one of the many benefits that come with working with business brokers to sell your business.
While most people might assume the hard part is over after the letter of intent gets signed, that couldn’t farther from the truth. After the LOI gets signed, the next step is to officially begin the due diligence phase. The due diligence phase allows the buyer to gain full access to all source documentation that was used to prepare the P&L statements which usually includes the company bank statements, company tax returns, merchant account statements, supplier invoices and more. The buyer usually gets 3-4 weeks to complete the due diligence investigation and the main focus of the due diligence phase should always be centered around verifying the P&L numbers presented. Preparing a meticulous guide for the buyer to help them reconcile the P&L numbers with the company bank statements is always recommended as this can help expedite the buyer’s due diligence review.
About halfway through the due diligence phase, the business broker will provide a boilerplate purchase agreement contract draft. This agreement will detail the specific terms of the transaction and since both sides usually have their attorneys involved, it’s important to get this process started far in advance of the scheduled closing date. After both sides are able to come to an agreement on the final purchase agreement contract, signing the purchase agreement is the last step before the closing funds change hands.
And while all of the process to sell a business might sounds pretty straightforward, there are many things that can and will go wrong during the process, but having experienced business brokers on your side can make all the difference between almost closing the deal and actually closing the deal.
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