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Where to be Firm and Where to be Reasonable when Selling your Business

Posted by Vance Baker in Articles

In the mind of an entrepreneur thinking about selling their company – their baby – that they spent years building up to a profit-making machine, their business is worth top dollar. And our goal as Internet Business Brokers is to assure our clients – those same entrepreneurs – that the business they are selling is just as important to us. We take those clients and their companies under our wing and we work together as a team to identify where we should be firm, and where we may have some wiggle room. This is done far before we ever negotiate with a potential buyer, so we felt an article on this subject might be helpful to those business owners looking to sell a business.

When it comes to purchase price, Selling a business is in some ways similar to selling a house or commercial property. In both instances (a) you likely worked very hard (sweat equity) to get it to the point where it is now, (b) you likely have spent a great deal of your own money to put it in the position it is today, (c) you likely took out a large loan to purchase the assets and (d) you would like to make some money on the sale. That being said, there are far more reasons why selling a business and selling a house are different, but when it comes to price, the key is what the market will bear (based largely on comparables) and getting the deal in front of the right interested parties.  Being firm on purchase price might be okay at the beginning of the marketing process, but we like to put a plan of action in place with our clients that amends the terms of a deal if we see challenges after some time has passed – the thing to remember is that full cash price buyers are not usually in play for most small business transactions. Most deals between $200,000 to $10,000,000 involve some form of bank financing, which means that if the purchase price is too high for a buyer, they might not be able to do the deal because their monthly debt service (amount owed on the loans) may be too high for them to earn a living from the business.  Also of importance is the fact that once a deal is taken to a lender, a third party appraisal will be required – if the deal is overpriced, it will be killed in underwriting.  So, while it is wise to be firm at the beginning to see what level of interest is available in the marketplace, a seller that is serious about selling her company should expect to be a bit more reasonable on price once time has passed.

When clients contact us to get a feel for what we feel their website, eCommerce, Amazon or other Internet company is worth, we go through a litany of details on our experience in the marketplace because we buy and sell technology companies each day. We also go through the client’s financials with a fine tooth comb to identify their Seller’s Discretionary Earnings. Once we have this, we can identify the amount of cash flow available to a company should the acquisition multiple be higher than standard industry practice. Obviously, as the cash flow goes beyond $500,000 annually, the company’s ability to manage debt service and earn a living becomes much easier … thus strengthening the argument that the business should be priced at a higher multiple than is “standard”. [There’s another thing many business brokers like to throw around a lot – the “standard multiple”.]  In technology and Internet-related companies, we are here to tell you that there isn’t a standard. And what we also offer our clients is contact with a third party valuation expert so that they can take what we’ve told them and compare notes with the third party so that they are in a great position to make a decision on how they want to price their business at the onset – and of course, we are there every step of the way to a/b test the client’s theories and help arrive at a win-win strategy.

The other important piece on this topic is getting the deal in front of the right interested parties. We’ve run across a lot of very bad business brokers during our time in the Internet Sector, and the one thing 99% of them all have in common – they are unfortunately quite lazy. Everything from doing the bare minimum to failing to assist during the due diligence process, to taking days to answer an email, to lacking the skills necessary to talk through an underwriting process, the one thing we find the most troubling in having a laissez faire attitude towards marketing a business for a client. Just placing the business for sale on a broker’s website and/or a marketplace is simply not enough – that’s why the Website Closers team works hand in hand with networks of Venture Capital and Private Equity Groups as well as an internal team that can contact corporate suitors regarding our deals to see if they have an interest in our clients’ companies. So, while most brokers use a soft, pull strategy that barely gets the product to market, we use a dynamic push/pull strategy that includes (a) contacting corporations and organizations directly on a deal, (b) utilizing email campaigns to our highly vetted VIP list, (c) multi-marketplace marketing, (d) paid search marketing and (e) VC / Private Equity networking. The mixture of all of these processes ensures that our team gets every deal in front of just the right people so that we are in the very best position to be successful in selling our client’s company for Top Dollar and to the Right Buyer. We are anything but lazy.

One other important note for a Business Seller to think about is the SBA process. In order for a buyer to achieve success via an SBA loan (7a for Acquisitions and 504 for Real Estate), there are certain things that the seller, the bank and the SBA (via their guidelines) have to agree upon.  And what the lender will be looking for, in accordance with SBA and bank rules, is that the tax returns and acceptable expense add backs show ample cash flow to provide an income to the buyer, payoff the loan and have a margin of safety.  If the tax returns don’t provide this kind of evidence, then there are many other options available to us, including having the seller underwrite a portion of the purchase, but those deals are not as easy to get past the finish line. The point is to not be too firm on requesting on all-cash buyer as they are extremely rare – and here’s why – if a person has $100,000 to buy a company, they can buy a company for all cash that has around $40,000 in cash flow, or use that same $100,000 to obtain SBA financing and buy a company that has around $400,000 in cash flow. For this reason, it is critical for sellers to be reasonable as it relates to putting requirements on the process. The great thing about using is that because of our large network of lenders, we can get SBA deals done in 4 short weeks – we know of very few other brokers out there that (a) have those relationships or (b) have any comfort level at all in working through the SBA process. We’ve done it so many times that it’s second nature.

One final note is the non-compete. We don’t see this as an issue with most sellers, but every now and then we get a seller that is firm on the idea that they either don’t want a non-compete at all or they want it narrowly tailored. While we will honor this request and respect our client’s needs, it’s important to understand that this could kill the deal in front of a lender (because they will then see you as a potential competitor against money they’ve paid you and risked on a deal) and it will narrow the buyer pool a great deal. Buyers typically will walk from a deal where they feel that competition from the Seller will be an issue. We can always work out language that both parties are amenable to, but it’s wise for a seller to be reasonable on this topic and open the deal up to the largest possible pool of buyers – which can help maximize the sales price.

This by no means is a full list of items Sellers should be aware of when deciding what to be firm on, and what to negotiate on. And we are here to help. Give us a call so we can help walk you through all of your questions – and if you like – put together a list of things you believe you’d like to be firm on so that, together, we can work out what challenges you might have by taking certain stances on certain issues.

We can be reached at (800) 251.1559 or by email at [email protected]. We look forward to working with you!