Dallas’ Leading Mergers & Acquisitions Firm
for Companies with $500,000 to $50 Million in Revenue

(214) 396-8100

Older posts

Finding the Right Buyer for Your Business, Part 1

 The Power of Matchmaking when selling a business 

 

“How Do I Know if They Have the Experience to Run the Business?” – can be asked in a number of different ways, but the message is virtually the same: how can I be sure I’m finding the right buyer for the right company at the right time?

One resounding way in which I hear this same complaint translated sounds a lot like, “I don’t know what ‘that’ guy is going to do to my company.” Well, again, this concern can certainly be mitigated by paying closer attention to how, exactly, you find the right buyer.

So you are ready to sell your business, the business you have worked so hard to create and build. How can you find the right buyer, with the right qualifications, and at the right price?  Making sure you will find the right buyer for your business is the best reason to use a professional business brokerage firm or business intermediary to screen prospects.  The most successful and lucrative sale will be to that right buyer at the right time for the right company. 

I tell people that my job as a business broker is a little like being a millionaire matchmaker.  I wouldn’t be doing my job if I just went out and found my client the prettiest, tallest, blondest woman I could find (even if that’s what he “thinks” he wants at the moment).  I have to consider dozens of other variables that will predict how the two will get along, what interests they share, how they will mature together, what they will talk about. 

If you aren’t very discriminating in your choice of a life partner, you’ll likely end up divorced. If you are not being very discriminating during your screening process of prospective business buyers, then you could easily end up with a buyer who doesn’t have the experience to run your business and could easily, sometimes inadvertently, run it into the ground.  That fear is especially pronounced when the idea of seller financing is mentioned.  After all if you fear the buyer will run the business into the ground, the natural assumption is that you then will not get paid.  As I discuss in more detail in other articles, that fear can be rendered groundless by including into the sale a number of guarantees that protect your interest, your investment, back into your company with seller financing such that you are very unlikely to lose your money.

Don’t succumb to the temptation of selling your business to the first person to show interest in your business any more than you would marry somebody on a first date. Don’t sell your business to “Joe Bob” who has been telling you at every neighborhood picnic that he wishes he could own “a company like yours” one day.  Don’t even sell your business to a family member if they aren’t the right fit for the business.  With an investment this important, you have a right and obligation to be discriminating.

A good business broker will vet prospective buyers in such a way that guarantees that you are dealing with a reputable individual or group that is purchasing your business.

Most buyers that have access to the type of money necessary to purchase your business probably did not get that money by being an idiot. If they did, a quick Google search and a few reference calls will show this sooner than they can admit, “I’m not really qualified.”

Your business broker will not just consider the financial equation (although that’s vitally important) but will also look at experience, reliability, and the right “fit” for your company. They also will watch for small signs of incompatibility that you may not have even thought about before.  I have actually told prospective buyers that they can’t even look at the business because they were rude to my staff. WHY? Because these are the types of buyers that will be rude to your employees and clients as well. These are the types of buyers that will burn bridges and bury your business. You cannot afford the risk of a key employee storming out because of this RUDE new BOSS who wasn’t screened properly by your professional intermediary. If a prospective buyer is a jerk or an idiot, it is better to take a pass, regardless of the size of his or her checkbook.

There are ways to make sure you find the right buyer for the right company at the right time. Due diligence is as much a part of the process as preparing the sale documents.  Even if we are being mercenary, you are looking for much more than just the buyer that is the highest bidder for your business.

There is much more to selling a business than the total price; anyone can offer big numbers in an offer to purchase and, perhaps, even back them up (for a little while). The real brass ring for anyone seller financing their business is, of course, actually GETTING PAID! Getting paid today, tomorrow and through the term of the loan.

It doesn’t matter if you get $10 million for your $2 million business or $100 million for your $20 million company. If you will never get paid a dime of that money, what difference does the selling price make? (Well, besides the bragging rights while playing golf with your buddies or having coffee with friends, that is.)

At the end of the day, this process is all about getting paid. Therefore, you need to make sure that you are using a reputable intermediary or business brokerage professional to ensure that you have not only a qualified buyer but one who is committed to paying you throughout the term of the commitment. Hire an intermediary or business brokerage firm that is not just out for the one-time commission, but is particular about the buyers they attract and has a history of doing so successfully for his or her clientele – one that is discriminating about who they even talk to about your business.

Five ways to Guarantee payment when financing the sell of your business

One of the top reasons that business sellers don’t want to consider seller financing as part of the sale package of their business is the myth that with seller financing, there is no guarantee they will get their money back. Actually, there are five guarantees you will get paid, one of which will be discussed here and the rest in later articles.

First, let’s put the fear into its proper context.  You aren’t going to stuff the sale proceeds from your business under your mattress or in a safe deposit box. At least I don’t think that is your plan. You are going to place that money into some other investment, somewhere other than the business that you have been running from day-to-day for the years you were creating and building it. Wherever you put your money (even if you opt for the mattress plan), there will be some level of risk. After all the house may catch on fire….. How about a personal guarantee on YOUR financial investment?  Wouldn’t that be nice?  Someone else personally guaranteeing that you will make a profit on your investment (the loan amount plus interest). 

Unfortunately, your financial planner does not sign a personal guarantee ensuring your retirement funds will never lose value. Neither does your realtor sign a personal guarantee that you’ll never lose 10%, 20% or even 50% of your house’s value. Before you start thinking that personal guarantees are something out of the long-distant past, unavailable to protect your financial future, think again. When you sell your business, the business purchaser does exactly that. It is routine and expected that the business purchaser “sign their life away” to you with a personal guarantee of payment as a condition of seller financing. (Yes,to be fair on Mid-Market business sales we sometimes do not see a personal guarantee… We will discuss this later )

That’s right, on the sell of small businesses the purchaser agrees to personally guarantee the loan. Now, if you really stop to think about the fact that you are taking a piece of your retirement or investment future and placing it in someone’s hands, isn’t it somewhat comforting to know that the buyer has some skin in the game as well? Literally, a personal guarantee can be written in a way the buyer could lose everything if this venture doesn’t work. That is kind of like what you did when you started – or bought – this business.

The best way to approach the selling of your business is to think of it in terms no less important than you did when you started the business in the first place. Many sellers are so excited about the prospects of retirement, the good life, less stress, etc. that they lose sight of the finish line in the last few minutes of the marathon.

Take this one last opportunity, this one big push, and summon the energy to really, really think this all the way through. Think of how ingenious, gutsy, resourceful and downright crafty you were getting the financing to start your company. Now apply all that to selling your business and you could just see a bigger return than you imagined. Don’t settle for a 5% to 10% investment on this golden opportunity when you can reap up to 25%, 30% or even 40% instead.

Personal guarantee of the portion of the sale price that is seller financed is the first step towards letting you sleep better at night. There are four more guarantees also: (1) stock pledges; (2) a lien against all business assets; (3) covenants governing what the new owner (the buyer) can and cannot do in terms of operation of the company; and (4) term life or disability insurance covering those possible life events.

Seller financing of a portion of your business sale price is one of the best investments you can make in terms of transparency of its progress, and guarantees of getting paid. Get educated on all of its details, and include these five guarantees in the deal when you sell your business.

3 Myths & Fears when selling a business

As a Dallas business broker, I get a front row seat to all of the emotions, fears, and misconceptions of business sellers about the sell process of selling a business. Every day sellers complain, lament, excuse, and hem and haw about why they do not want to even consider financing the sale of their business.  I can categorize those hundreds of complaints into the following eight (sometimes legitimate but mostly illegitimate) complaints about seller financing.  I’ll address each of them in brief form here, and in more detail in subsequent articles.

dallas business broker
What is true and what is not?

Fear # 1: There’s No Guarantee That I’ll Get My Money

This is a legitimate fear in the abstract, but actually a low risk. Standard terms of a seller note (seller financing) include a personal guarantee by the buyer (in other words, they are pledging all their other assets), a stock pledge (in the case of default, the seller can foreclose on the stock of the new business through a simple procedure… Assuming that there is not a senior lender involved in the sale.), a lien against all assets of the business, covenants governing how the business will be run during the term of the note, and a term life insurance or disability policy that would pay off the note in the event of death or disability of the buyer.

Fear # 2: What if They Run the Business Into the Ground?

So what? If they do, you have all the protections described above, plus there are standard precautions that can be included in the deal to minimize that risk. First, make sure before you finalize the sale that your business is as turnkey as it should be; the new buyer should be able to step into your shoes and, without too much training, be able to replicate and build on your success.  Make sure “you” are not the whole business. Also, a good business broker makes sure that the buyer has relevant experience.  Look at the business buyers resume and see what experience is relevant.  I should also note that it is common to include the right of the seller to monitor the business progress through monthly or quarterly reports tailored to those aspects of business you know are key to success or failure. This gives you an opportunity to anticipate potential problems before they happen, and advise the buyer of how to adjust a few things. You and the buyer both want the business to thrive and grow; you are both invested in its success. If all else fails, you’ll be able to repossess the business, retool, and resell it.

Fear # 3: How Do I Know That The Buyer Has the Experience Needed to Run MY Business?

You carefully screen prospective buyers until you find the right buyer, for the right company, at the right time. You’ll look for someone who has similar skills (even if in a different industry) that will be needed to maintain and enhance the business you have already built.  A skilled business broker can help you walk through the process of identifying the type of ideal buyer you are looking for, and locate buyers who fit those criteria.

Reason # 4: I’ve Heard All Kinds of Horror Stories About Seller Financing

There are all sort of horror stories that are not based on factual inquiry and rational thought. For every horror story that any (well-meaning, I’m sure) person gives you, asks for specifics, and then (if they can even give you any), use that story as a cautionary tale, instructive in teaching you how to do better. Approach the prospect of seller financing as you would with any other major decision in your business, by gaining information and structuring a deal that works for you.

Reason # 5: I Don’t Want to Take My Business Back

That’s a fair enough concern in the abstract, but not enough to warrant lack of consideration of seller financing which could maximize your profit from your business in numerous ways, including obtaining a higher interest rate than most other investment opportunities, structuring of tax liability to avoid increased tax brackets, and allow for a higher sales price due to the difference between how a bank would view the business value, and how a buyer would view it. With careful planning, it’s unlikely you will even take your business back anyway, but there are certainly worse things in life than being able to repossess, rebuild, and resell a business a second time.

Reason # 6: I Don’t Want to Be the Bank!

Why not? You are in a superior position than any bank to see the value of your business, and its potential for growth. Do you want a bank to collect the interest on a loan for purchasing your business, or do you want to bankroll that loan (without putting out any money) for an even higher interest rate?

Reason # 7: I Have Existing Debt That I Need to Pay

There are a myriad of ways to structure debt payment into a business sales deal, including creating lease arrangements between you and the buyer for equipment or real estate. Enlist the help of a skilled business broker to formulate a plan to cover any debt elimination or reduction plan that will work for the business buyer.

Reason # 8: What if the Buyer Wants to Make a Lot of Changes to the Company?

Hopefully the buyer will make changes to the company, changes that will make it even better and more profitable than at the time of sale. To ensure that they don’t make too many “wrong” changes, there are numerous precautions that can be taken. Find the right buyer in the first place, someone with the right experience to know how to operate the business. Make sure the buyer has sufficient training from you and your employees to optimize the transition time. Make sure you have the necessary covenants in place to establish boundaries of how the business can and cannot be run while you continue to hold the seller’s note.

For every reason and fear you might have about seller financing, I can provide you with the background information you need to make better decisions, expertise gained from selling my own business and brokering the sales of hundreds of other business in Texas. You may eventually not make the decision to sell your business using seller financing, but I guarantee you that it won’t be for lack of information!

Older posts
location

Sigma Mergers & Acquisitions LLC: 18170 Dallas Parkway, Suite 203, Dallas, Texas 75287
Dallas Business Broker, Mergers & Acquisitions Dallas / Fort Worth / Texas

214-396-8100 Office
972-838-5202 Fax