Owners who are thinking of selling their businesses have picked a great time to do it.
“This is probably the best market that I have ever seen,” said Ron Chernak, president of FBB Group Ltd., whose firm has been selling businesses in Colorado Springs for 37 years.
Thanks to the strong economy, businesses are enjoying large profits, which are fueling demand and bigger purchase prices, Chernak said, adding demand is particularly strong in Colorado, which has one of the best economies in the nation. Furthermore, there is a lot of capital available to fund business acquisitions.
“Interest rates are relatively low. Banks have money to lend, private equity groups have money to invest,” Chernak said.
In order to get the best price for a business, owners need to spruce it up, as they would if they were selling a home. But the process of selling a business is much more complex and differs in significant ways.
One of the most critical items to maximizing value is having “accurate, timely, well-formatted financial information,” Chernak said.
Finding the right buyer
Once a business owner has decided to sell, it’s important to be clear on goals, objectives and timing.
“That’s where we start our discreet discussions with clients,” Chernak said.
The decision to sell a business is mostly driven by events, such as relocation or retirement.
“Some people are looking to raise capital to get into a different venture,” Chernak said. “There may be health issues. … Divorce may come into play. Sometimes we wind up dealing with estates, but it’s far better to sell a business before one is compelled to sell.”
Part of the initial evaluation centers on what type of buyer a business owner will feel comfortable with.
Individuals are the most common buyers, Chernak said. They may have accumulated equity through hard work and/or successful investment.
Lenders expect buyers to be able to invest 10 percent to 20 percent of the purchase price, and also look at whether a prospective buyer has the requisite skill to be successful and whether the new business will be sufficiently capitalized.
A second level of buyers is private equity groups, of which there are more than 3,700 across the country.
“These are buyers that have raised capital from investors with the purpose of finding appropriate businesses to acquire, grow and then resell,” Chernak said.
A third group consists of industry buyers looking to grow and expand.
“For good businesses, there are always more buyers than sellers,” he said.
Working with a broker
Most transactions are accomplished with the assistance of a third-party intermediary, and it’s important for sellers to be comfortable with the broker they choose.
Sellers should consider the broker’s experience, track record and communication process, Chernak said.
After thoroughly reviewing these qualifications, the seller will gather and transmit information including five years’ worth of tax returns, financial statements, valuation of tangible assets and other financial data.
The broker will use the data to determine a range of value for the business and will assemble marketing materials that will be distributed on a limited basis or more broadly.
“Small businesses generally want to be discreet,” Chernak said. “Most don’t want customers and employees to know about the sale until the right time. … In most cases, employees are not made aware of the transaction until it has been negotiated and financing has been obtained. You don’t want to have a false alarm.”
The objective is to find multiple buyers to bid on the businesses. Then the broker will help the owner select the right buyer, negotiate the transaction, make sure financing is in place and close the sale. The average sale takes nine to 10 months from the time an engagement agreement is signed, he said.
Most often, employees remain with a business after it has been sold.
“The employees who run the business and keep the doors open, those people are critical to the business going forward. So usually, all those employees remain,” Chernak said.
It’s also common for owners to remain involved for a period of time after the sale.
“Usually there is a period from 30 days up to a year to train the buyer and transition the company to make sure there is an uneventful change of ownership,” he said. “It’s fairly uncommon for them to remain involved afterward, with the exception of a private equity group that may supply some additional capital and expertise to grow the business, with the intention of a subsequent exit. The original owner may retain some equity, but usually the owner exits.”
Buyers want to see a business that is doing well, but it is possible to sell a business that isn’t.
“Generally, it is better if there is a reason behind why it is not doing well,” Chernak said. “So for example, maybe the business is undercapitalized, or maybe the owner has reached a point that he or she is not optimizing marketing and taking full advantage of social media and the internet. But there is a smaller market for those businesses than for those that are growing and profitable and prosperous.”
Selling a franchise
While an independent, one-of-a-kind business that’s doing well has a good chance of selling, it’s somewhat easier to sell a franchise, said John Spidell, a SCORE mentor who sold several franchises about 10 years ago. He declined to name the franchise because of a confidentiality agreement.
“The most likely purchaser of that business is going to be a competitor,” Spidell said. “Let’s say you own a tire shop, and you’re tired of changing tires all day long,” he said. “You approach me. I know nothing about the tire business. I’m willing to learn but there’s going to be a big learning curve. Someone who’s already been in the tire business, it’s easy for them to pick up.”
Spidell added buyers wouldn’t want to use a business broker for a franchise because franchisors have systems in place and can help accomplish a sale to the right buyer. Since franchisees pay up-front fees and monthly royalties, franchisors are invested in the new owner’s success, and their primary motive is protecting their brand.
Regardless of whether a business is independent or a franchise, owners should begin thinking about an exit plan when they start or buy a business, Spidell said.
And when the time comes to sell, owners need to continue to focus on running a profitable business.
Selling the Mariner
It took Anne Stinson, former owner of the Ancient Mariner tavern and Marilyn’s Pizza House in Manitou Springs, nearly a year to sell her businesses and the building that housed them. Stinson ultimately decided it was time to retire and hire someone to help her sell.
“I went through probably about three real estate agents,” she said. “I was just choosing the wrong agents. Finally I just took it off the market.”
Later, she started looking for a broker again and called Tim Leigh of Hoff & Leigh.
Leigh started knocking on doors in Manitou and, within a week, he brought a prospective buyer to Stinson.
“It was a lot of work to get ready” to close the sale, Stinson said. “There was a liquor license involved. It had to be clear that the corporation … was dissolved correctly. There was a lot of equipment that was rented and had to be returned. I had to make sure that I didn’t owe anybody any money. There were a lot of things to look at that you don’t even think about.”
She ended up selling the building and its contents, as well as the rights to the business and the Ancient Mariner name, to an investment company.
It took Stinson a year from the time she decided to sell to complete all the transactions that were involved, and even more time to protect her former employees after the sale.
“You’ve got to make sure that you keep up with them for a year, until tax time comes along again,” she said.
Several businesses have occupied the Mariner’s space since Stinson closed on the sale 4½ years ago.
“It was very hard work,” she said, “but I miss the people and the customers.”