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What buyers look for when buying a business National statistics indicate that only 1 out 5 businesses listed for sale, actually sells. Will yours be that one? The business sure to sell needs to have the following:
As a seller it's natural for you to be most concerned with your own needs, but don't loose sight of the buyer's needs. Unless the buyer's needs are met, he will never buy a business. Sales that actually take place are win, win situations, not loaded heavily to the buyer or seller. BOOKS AND RECORDS This is in fact the most important issue when selling a business. Even though the buyer may trust you completely, he/she will want proof of the sales and profits that the business has made in the past, but most importantly, buyers will want to see with a high degree of certainty the actual Owner's Benefit (Cash Flow) which will be realized after they buy the business. This means you should have Tax Returns, Profit & Loss Statements, Balance Sheets, sales tax returns, Furniture, Fixtures, and Equipment List, utility and phone bills, advertising contracts, lease agreement, loan documents, etc., and if real property is included, buyers will need to review the property deed, mortgage documents, last appraisal, survey, etc. Therefore, you will need to have all these documents on file with your broker, and updated from time to time, as well as prepared explanations for items that may not be readily understood by some one not familiar with your trade or business accounting practices. You broker will provide you with a complete list of documents as required by the nature of your business. REASONABLE PRICE AND TERMS Quite frequently real buyers won't even look at a business that is over priced because they feel the seller doesn't really want to sell, or that it is priced incorrectly. While pricing a business is a difficult and complex matter, the broker can always advice the seller on a reasonable pricing. Brokers have access to historical data of business that were sold in the past few years; by comparing similar businesses, the broker can measure the length of time the businesses were on the market, the listed price, and the priced finally paid at closing. This will help you and your broker determine a few parameters to be considered when pricing your business. TERMS Generally speaking, banks are not very quick to finance the purchase of a small business. Over 95% of small businesses sell with seller financing thereby showing confidence in the buyer' ability and the business' future. Rule of thumb calls for seller financing of at least 20% of the price with a 5 to 10 year note. This makes it easier for the broker to help the buyer obtain financing through commercial of SBA Preferred lenders. Attractive terms and seller financing opens the doors to a larger number of buyers with less down payment, thus allowing your business to sell quicker. INCOME Buyers must feel they can make a decent living wage from the business after they have made their payment to the seller for debt service. Cash Flow or Owner's Benefit is what makes your business attractive to more buyers, the larger the cash flow, the more buyers you will attract. Therefore, it is paramount that you can prove with a high level of certainty the cash flow the buyer will enjoy after he acquires your business. FURNITURE, FIXTURES & EQUIPMENT Buyers will want a complete list of your equipment and will inspect it to insure that everything is in good working order. LEASE All buyers want a good lease and look to the seller to help in the transfer of his lease or in getting a new lease. You, as a seller, must make sure that the buyer will be able to operate in the same place, therefore, you must obtain, in writing, assurance from your landlord that the buyer will enjoy the same terms and conditions under an assigned or new lease. This should be done during the listing of your business, and NOT after you receive an offer, because the landlord can make the sale of your business if not impossible, very difficult. TRAINING One of the reasons to buy a business is that a buyer can buy a business he /she has no experience in and feel confident that the seller will train him/her. This opens up the number of potential buyers for your business. During a transition period, if necessary, training the buyer assures the transferring of the sellers success, and puts the buyer in a position to build from where you left. An assurance that the buyer will have if not better, the same success as the seller, is something to feel proud of. APPEARANCE Everyone wants to be proud of their business, therefore nice looking businesses sell first! Buyers deduct large amounts from their offering price for businesses that are in less than top shape. Please keep your business neat, clean and in good repair if you want top dollar. Use all senses when it comes to increase the desirability of your business: Looking good? Smells good? Feels good? Tastes good? Sounds good? For instance, if your retail business looks good, but you failed to spend $1 a month to change the A/C filters, you may not notice the bad smell because you became used to it through years of exposure to the same smell. New filters every month will make your business smell clean and healthy and the the business will be perceived subliminally more attractive than otherwise. NON-COMPETE AGREEMENT Most buyers fear you may decide to open another business just like the one they are buying and take all their customers. A promise not to compete with an appropriate distance and time is normal for many businesses. This may also provide tax advantages for both buyer and seller. A non-compete clause is now universal in the sale of any business, Generally, a 5 year, 100 mile non-compete agreement is signed by the seller. In some instances, the non-compete can be a substantial part of the acquisition, providing tax advantages to both buyer and seller equally. You must consult your CPA in order to take full advantage if this issue. WHY IS THE BUSINESS FOR SALE? This is one of the first questions a buyer asks. If there is not a good reason for sale such as health, retiring, moving etc. Buyers are always concerned because they are afraid you may be selling because of some undisclosed fact which may hurt the business in the future. Buyers must see a logical and credible reason for sale - without it they will assume the worst! TIME IS OF THE ESSENCE It's always wise to respond quickly to an offer because buyers are often looking at more than one business when they make an offer. An offer can be withdrawn any time until it is accepted and delivered back to the buyer. If you don't respond in a reasonable time, the buyer may lose interest in your business and move on to another. NO SURPRISES Honesty and full disclosure will surely sell your business! Almost any problem can be solved if we know about it in advance. Please be sure to tell us about any problems such as: Are you behind in tax payments? Are there any problems with the landlord or lease? Are there any loans against the business? Are you in compliance with zoning, health and other regulations? Etc. If the buyer is surprised by something similar to this late in the process, they often just walk away.
Buying a business |