Selling a Declining Business

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http://www.2misi.com/article/2012/06/selling-a-declining-business

It always amazes me when I meet with potential sellers whose businesses are in decline and they are surprised learn that buyers will not pay them based on their "glory days" of the past. Sometimes they're shocked to hear how little value their business may bring in the marketplace. The small business market is not ripe with turnaround experts. Buyers are mainly looking for stability, growth is a bonus.

Before we get into the meat of the article, you need to know that the best time to sell a business is when it is doing well, very well. It is far more difficult to generate any excitement when you bring a declining business to market. However; if you're faced with that predicament and must sell the business, here's what you need to know and consider:

• Can you resurrect it? If so, at what cost and how long will it take? Unless you have no choice, it may very well make sense to dedicate yourself for a year or so to bring the business back up. Doing so will clearly demonstrate to prospective buyers that the business can grow.
• Be completely honest with any prospective buyers - explain to them precisely why the business has declined no matter how difficult it may be for you.
• Spend some time to write down all of the reasons you believe contributed to the decline, what you would do differently if you could go back in time, and what can be done now to repair the damage. This will serve to be a very useful document to the buyer.
• Consider offering a longer transition/training period to the buyer although they may actually want you around for less time, but at least offer it.
• If you find a genuinely interested party, work to get a deal done somehow. Good buyers are hard to find. There are a ton of businesses for sale. If your business is not doing well, and you have an interested party, you may not come across another again.

The 7 Questions Every Buyer Wants Answered

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There are seven common concerns that almost every prospective buyer brings with them.

Is The Business Right for Me?

 

This is probably the only one of the seven that you cannot influence greatly. That is something the buyer must decide however; you can clearly assist them in reaching their decision either way. You must decide before you bring the business to market what the ideal buyer profile will be. This is not just someone who has a bag of cash. Even if they do, if they determine the business is not suited to them, there's no deal.

If you have a good idea of the skill set the new owner should possess then you should remain committed to your convictions and let any prospects know when they first contact you. If they don't possess the key skills to operate the business, you'll avoid wasting a lot of time meeting with the wrong prospects. Your supervisor will likely be conducting the same skill pre qualification as they too do not wish to waste time.

Similarly, don't over engineer the criteria or allow your ego to stand in the way. Unless there are specific professional licenses required to operate the business, most often solid business skills, with perhaps a specialty in one area (i.e. sales, marketing, operations, product design, etc.) will be the dominant skill necessary for a new owner to be successful.

Are The Numbers Provable?

One of the most frequent comments I get from buyer clients is that they have seen too many businesses where the seller cannot prove the numbers. So your strategy here is simple: If you cannot prove it, they won't pay for it, so only represent what you can back up.

If you have unreported income in the business, don't expect to get paid for it. You already received the benefit from the tax department.

Provide buyers with detailed proof to validate the financials you've represented and you will clear a massive hurdle. Further, as we discuss in other articles on this website, if your books and records are in disarray, don't put your business on the market. Take the time to organize them properly and you will reap the benefits.

Is It Priced Right?

While a smart buyer may be willing to pay a premium for a good business, nobody will overpay. Buyers need to be certain that the revenue and profits can be sustained, they can service any debt, pay themselves a reasonable salary, and ideally, have enough left to grow the business. No matter how good your business may be, the price and terms must fit within the prescribed borders for this to be a good investment.

What Does The Future Hold?

A business will almost always be sold valued based upon past financials, but the decision to buy will be based upon the future potential of the business. While some buyers consider growth to be their main criteria, at the very least the majority of buyers want to know that history will repeat itself. In other words, the business is sustainable, that there are no looming threats that could drastically alter the business or impact it negatively after they buy.

By presenting a realistic picture to the buyer about the future, and being open about possible challenges, it will go a long way in soothing their concerns. In today's information age, chances are that any potential hazards will be identified and so it is always best to inform them of these matters early on if they are material to the transaction. By the same token, you want to present the business in a compelling fashion that demonstrates that all the parts are in place for them to takeover and continue to be successful after your departure.

Will Customers and Employees Remain

This is especially important in businesses that may have a limited number of active customers or where there is one or a couple of key employees. The last thing a buyer wants is to experience losing a key customer or employee and find themselves out of business shortly after they get into business. Due to confidentiality, it may be difficult to provide them with the complete assurances they need but at the very least, you'll want to have mechanisms in place to provide some reasonable protections for them.

In the case of key employees, the buyer will more than likely want to meet them prior to closing and so too with any major customers. You may not be fully comfortable with this idea which is understandable but you may need to put yourself in the buyer's position for a moment to understand. As such, you need to structure the milestones of the deal to allow for this event. For example, they may only meet a key employee after all other deal contingencies are satisfied. 

After all, if you are going to be participating in the financing, you want them to be successful.

If The Business Relies on Location, Will the Lease be Assigned?

Landlords can sometimes derail your sale. I have witnessed and experienced it personally. You would think that every landlord's agenda is strictly to have their premises filled with timely paying tenants and to a large extent this is precisely the case. However; there are times when a landlord may want to alter the premises, or wants personal guarantees from a new owner, or may just be a pain when it comes to assigning the lease.

Before putting your business on the market, check your lease assignment clause to see if there is verbiage that reads that an assignment "will not be unreasonably withheld". Also, you may want to consider meeting with the landlord to see if they will add some option terms to the lease (even a three to five year option) but you must couple this with raising concerns about the sale. If you have less than two years on your lease, and the business needs to be where it is, you will want to get a lease extension before taking it to market.

Are There Any Hidden Problems?

Every business has secrets. Problems are common, even if you don't perceive them as an "issue", a buyer may. These will be uncovered by any diligent buyer. The best strategy is to be upfront with prospects about these potential issues so you can deal with them early on. Usually a work around can be figured out. If you wait too long, or try to hide them and they do surface (and they will) you will have a very difficult time resolving them and will likely lose all of the credibility that you have established with any prospective buyer.

This comes back to what I believe it takes to get deals done: when the seller wants to sell and the buyer wants to buy, and the parties trust each other, it's almost impossible to stop them from getting a deal done.

 

Why Now is the Time to Prepare the Sale of Your Business

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According to many experts, the time to begin preparing to sell your business is now. The sheer volume of businesses that will appear on the market over the next several years means that buyers will be presented with more options and more purchasing opportunities. The owners who will receive top dollar for their companies are the ones who have invested the time and energy to make their business stand out in the crowd.

Sellers must intensely focus on building value by optimizing the key drivers of the business. It is critical to continue to grow the business even after the decision has been made to sell the business.

What Needs to be in Place to Sell a Business

To sell a business, owners need to see their company through the eyes of a prospective buyer. It is impossible to begin the process of preparing your business for sale and positioning it in the marketplace until you understand what buyers want in a business.

Like most investors, buyers of businesses are risk averse. They are looking for a sure thing – or at least a business that appears to be closer to a sure thing than the other businesses on the market. In addition to a fair price, business buyers are interested in companies that have proven track records, are easy to operate, and can be relied upon for profitability and future growth.

Keep in mind that (just like you); buyers want to earn enough profit to make a living from your company – immediately. If buyers are told that they will need to increase sales, reduce expenses or completely restructure the company to do so, their interest in your business will quickly wane.

At the same time, buyers are on the alert for red flags that could translate into problems after the sale. Much of the preparation process involves systematically removing these red flags in order to make your company as appealing as possible to the marketplace.

Starting right now, you can begin to address several obstacles that often present a challenge to a smooth selling experience – regardless of when you plan to put your business on the market.

Inadequate Financial Documentation

Financial records are one of the primary tools buyers rely on to assess the health and viability of a business. In many cases, they can also be a crucial part of the valuation process. In today's business market, computer based accounting systems are the norm. If you haven't done so already, start transitioning your books to an electronic recordkeeping system and contract for an outside review of your company's financials with an established accounting firm.

Lack of Adequate Cash Flow

Not surprisingly, cash flow is another key factor for buyers. For most small business owners, cash flow is the number one measure that determines if a business can meet their lifestyle needs. A company that is incapable of demonstrating a plan for continuing profitability and cash flow quickly loses its luster in the eyes of the marketplace – even if your business has a history of healthy bottom lines.

Be prepared to offer buyers a trend of profitability and cash flow improvement as well as solid reasons why you expect that trend to continue for the next several years. If your company is currently not performing in the black, make hard decisions and do what needs to be done in order to return the business to profitability as soon as possible. 

Staffing Problems

Many business owners enjoy a special relationship with their employees. Buyers, however, are less concerned about your relationship with your employees and more concerned about your staff's ability to function at the highest levels, especially after you've moved on. Like it or not, concerns for your employees will ultimately need to take a back seat to the selling process itself.

If your workforce needs to be resized or reallocated, do it now and create a professional staff that will be a selling point for buyers. In addition, make sure you have a continuity plan in place that will ensure that key employees can be retained to help run the business for the new owner.

Lease Issues

Time and time again, I have seen lease issues bring an otherwise smooth sale to a grinding halt. With some exceptions, buyers envision themselves operating your business at its current location well into the foreseeable future. If the lease is scheduled to expire in a year or two, the new owner could renegotiate a longer lease with the landlord after the sale.

But without any guarantees, a lot of buyers will hesitate or focus their attention on businesses with more secure space. To prevent this scenario from unraveling, proactively address lease issues now by negotiating with your landlord to secure an option to extend the lease with favorable terms for the buyer.

Although the process of preparing your business for sale may seem overwhelming, the preparation process can improve your company. The bottom line is simple. Regardless of when you plan to sell your business, now is the time to start preparing your business for sale. Your business' current performance will improve and you will position yourself to achieve your sale goals when your business ultimately hits the market.