Fear and loathing of selling your business

When you're ready for the big step that you may take only once in your life, make sure that you don't get hurt in the process.

If you have previously purchased a business, you may have gained enough knowledge to take you safely through the selling process, but complaints regarding sale transactions are frequent.

I recently had lunch with a local business consultant whose wife also happens to be a Realtor with a major company.

She had been approached by the owners of a well-established local retail store to ask if she could assist in selling it.

She was smart enough to know that, without prior experience, she would not be able to do them justice.

She was told that the owners had interviewed a few business brokers and had not found a company with which they could be comfortable.

There were several reasons for their complaints, not all of them due to the quality of the business brokers.

To begin with, the owners had set a price that was not supported by the business' reported cash flow.

They were told, correctly, that the business would have to provide a fair rate of return to the buyers and would essentially have to pay for itself over a number of years.

Second, they were wary of having the broker set the price and terms, fearing that the broker might set it too low to facilitate a quick sale, and, of course, a quick commission.

Third, they were concerned that one broker, in contrast to the other, was willing and eager to accept the listing at the higher price.

That eagerness prompted concern.

They had heard stories about business brokers wearing down sellers after prolonged listing periods, finally suggesting they accept a lower price to get on with retirement.

Fourth, they were unconvinced that a one-year listing to sell their business was warranted.

They felt that, with their history and customer base, there would be demand and they would sell it quickly.

Fifth, but not least, they were concerned about confidentiality.

The last thing they wanted was for their customers, their staff, and their suppliers to find out.

The consequences could be devastating, resulting in the loss of valuable personnel, loss of customers and even a change of credit terms with a supplier.

At the end, they asked the business consultant to help them and I don't know the results.

Choosing someone to assist with the sale of something as precious as one's life achievement is scary.

While not absolutely necessary, it would be very helpful to have some knowledge of how businesses are priced.

In some industries, there are wellaccepted multiples, typically of earnings, sometimes of revenues.

For example, accounting practices are often sold for one times annual revenues on an earnout basis.

That means the seller will get paid in full if the buyer is able to retain the clientele and is able to generate revenues similar to those prior to the purchase.

Some retail businesses are sold not only on the basis of reported income but also on the unreported, and untaxed, income.

In that case, the buyer will often spend some time prior to the sale observing the cash flow in the store.

Some retailers are sold on the basis of an attractive longterm lease in a busy shopping center.

There is a range of multiples for manufacturing companies but it is so wideranging, three to 10 times earnings, that the multiples are almost meaningless.

A manufacturing business with a high concentration of customers, where one or a few dominate the business, could be worth less than one that has hundreds of customers.

A company with good continuing management could be worth more than one in which the buyer has to hire new management.

A company in a cyclical business, such as a machine shop tied to aerospace, could sell for more or less depending on the number and timing of contracts.

An owner willing to sell the assets of a corporation may receive more than one insisting on selling his or her shares of stock in the corporation.

A buyer seeking a strategic acquisition may pay a premium to gain competitive advantages.

A business with good accounting and tax records can be sold more readily than one whose owners keep their records on a napkin.

Back let's go back to our local sellers.

They do have a very difficult decision to make.While they should probably seek references from other sellers of whom they might have heard, they may not want to expose their plans.

Next best would be to ask their accountant or attorney for a referral.

As a result, they would hopefully hire a reputable and caring business broker, one who would guide them to a fair transaction, one interested in the client's goals and not just in the commissions.

Fritz Strehlow is a managing director of The Mentor Group, Inc., a national valuation and investment banking firm.He can be reached at 424-2848.