JUNK
Thousands of junk businesses are for sale. Go to any website that promotes FSBO listings and find hundreds of companies for sale. The valuation methods are “Blue Sky”, “What I need to retire” and “What I’ve got in it”. They have no packaged information. Financials, if available, will not be recast (more on this later). There may be varying levels of truth in any documents that are available. In this sea of junk there are some good businesses, they look the same as the junk.
What is a Junk Business? Junk businesses are ones that make money by siphoning off cash transactions and cheating on sales taxes. They exist in dieing industries. They require cash infusions to theoretically be made profitable. Hundreds of businesses make money by paying employees under the table to avoid payroll taxes and to employ illegal aliens. 9 out of 10 failing business owners put their businesses on the market to avoid the coming collapse.
Quality buyers invest in quality companies and you attract their attention with a package of information that represents a quality listing. Business buyers try to limit time wasted looking through junk. They look for short cuts in the search for good businesses by looking for eliminating factors to pare away junk listings.
Any number of the issues listed here can kill or maim a buyer’s interest in a company. Once a threshold killer sin(s) is uncovered, the buyer may have to start the search all over again. Here is a partial list of what you or a buyer will observe when looking through the flotsam of FSBO business listings:
No packaged information; Confidential Memorandum - Prospectus
Blue Sky asking price
Overstated financials
No financials
Bad leases with no ability for cancellation
Overpriced real property
Obsolete product lines
Unworkable debt ratios
IRS investigation and attachment
Under the table accounting
Understated cash income or two sets of books
Under the table payroll
Missing or non-existent payroll tax payments
Entire income based on one or two customers
No contracts with customers, suppliers or employees
On-going liabilities for tax and civil infractions
EPA issues
Falling income due to robust competition, declining markets or burn out
Loss of key individuals
Obsolete/inoperative equipment assets
An endless parade of arrogant, egocentric sellers offering a lame plow horse with a saddle as a potential million dollar derby winner
If your business exhibits one or more of these sins (except the last one) does it preclude any buyer from making an offer? No. Every business is a work in progress. Every business has issues that can be attended to make the company more stabile, to be better positioned. Buyers expect to find this when they take a close look. In fact, they hope to find things to fix. But, they aren’t going to look closely if the business looks like FSBO junk from a distance.
WHAT BUSINESS BROKERS DO TO FIND A BEST BUYER
How can a business owner, one that has a good business, attract qualified buyers? How can this owner determine that a potential buyer is legitimate, has the money and experience to buy this business? Here is a partial list of things that professional business brokers do to qualify and package a business for sale. A FSBO seller must do the same:
Review financials - learn them to the extent that they can answer detailed financial questions about a company before the prospective buyer asks the questions
Recast financials – the act of adding back into the financials all of the dollars that the current owner (and maybe family members) are removing from the business that the new owner will have the use of as income and to pay down notes
Buy a Third Party Valuation – forward the recast financials to, and pay for, a third party valuation that banks and the Small Business Administration will accept in the course of private and SBA financing approval
Meet with Bankers – this is an informal meeting where the business broker requests an informal OK for the business package (financials, Valuation and Confidential Memorandum) to meet the needs for a private note and or SBA note for purchase funds to a qualified but yet unnamed buyer. With this OK, the business is placed on the market as a professionally packaged business with recast financials and financing pre-approved for qualified buyers.
Write a Confidential Memorandum – a document that tells the story of the business. This includes the markets, a profile of the customers (without names), contracts, employees numbers, gross location (Midwest region as an example), financial performance and available terms from the seller. The CM does not include identifying company or individual information. It does include third party valuation company name, numbers and an asking price. This is the written part of packaging of the business.
Post on Websites – Depending on the business type, a business will be posted on up to 15 different business broker web sites. These are websites that the business brokers of the world subscribe to and peruse when their buyers make requests for them to locate businesses. A typical business broker working in the market of businesses that will sell for $500,000 up to approximately 25 million dollars will require subscriptions costs of 5 to 15 thousand dollars for the websites and associations.
Place Print Ads - Depending on the business, ads will typically be placed in trade journals and financial news papers like the Wall Street Journal and Crain’s. Sometimes, confidentiality requires making blind placements.
Contact Network Qualified Buyers – Business brokers keep a large inventory of buyers who are looking for qualified businesses. Most Downsizers, Growth through Acquisition buyers and institutional buyers list with and rely on professional business brokers to locate and present good saleable businesses.
Develop Likely Strategic Buyer Profiles – Consider who might be a strategic buyer by reviewing product offerings. What businesses may be in the same markets, maybe the same customer base with different, non-competing product types? These companies may have an interest in expanding into your field; they may be interested taking your products into their customer base.
Buy Business Lists and Contact Potential Suitors and Strategic Buyers – business brokers rely heavily on business data bases like Dun & Bradstreet and have open accounts with them for purchasing lists. If the broker is listing a printer, for instance, the broker would do a D&B search within a five state area for printers that are twice as large or larger in annual revenues and send out a mailing to them and follow up with phone calls to locate potential undiscovered buyers for that market segment. The same is done for the identified Strategic Buyer profile companies. Such lists might cost $500 to $5,000. The mailings and follow up calls will typically equal the list costs.
TIRE KICKERS & UNQUALIFIED BUYERS
One study shows that over half of first time buyers are unable to locate a business that they want to buy within 18 months of starting the search. Some give up at this point. Others contact business brokers to streamline the search. If you assume that these first time buyers had good intentions to actually buy, why were they unsuccessful?
There are three major reasons that first time buyers are unsuccessful making an acquisition. First, they have unrealistic views of what they can afford and have the experience to operate. Second, there is so much junk on the market that they frittered their time away sifting through bad listings and became disenchanted. Third, they haven’t decided what business to be in and spend much time looking at what is available for new ideas.
How many owners entertained these tire kicker buyers for endless hours with no hope of a sale? How many buyers could have reduced their search to that of only good businesses? These are rhetorical questions, of course. If you want to buy a business and you have the money and experience to run one, it won’t take three years to find one. According to the U.S. Chamber of Commerce one out of five businesses change hands every year. They are out there.
There are no shortages of tire kicking non-legitimate buyers. Just as “for the right price, I’ll sell anything” sellers are everywhere, there exists a buyer that is looking for the fairy tale purchase, the business equivalent of the 1959 Corvette convertible stored in a barn with 1,800 miles on it that the widow sells for $500. A buyer looking for this deal does not have the money for what they seek. They will use an owner’s time endlessly and not make a qualified offer. There will be a never ending search for, and identification of, “problems” with financial and operational details. They will insist the problems should result in vast reductions in price and terms.
SECURITY
In some market segments competitors look to illegitimately garner information on their competition. Recently, the term “Business Spy” has become widely known as a down market Industrial Spy. These spies try to find information about companies and sell it to the competition. Often they garner information then seek out a market for it like paparazzi photographers who take pictures of people then shop them to magazines. Industrial spies look for “notices of sale” because this is when many companies allow “free” access to internal information.
It may not happen to your business. But, since outside factors can hurt the value of your business, confidentiality should rank as a high order of concern. Security and confidentiality has to be agreed to in early qualification of the potential buyer. The buyer has to posses the financial might commensurate with the business they seek. Business brokers use tough legally binding procedures and documents to qualify buyers and secure sensitive information. They obtain financial statements from potential buyers and often interview buyer’s bankers.
In the last installment we’ll look at surrogate negotiation, how to deal with your real estate & building, different broker types and what business brokers cost.
