Do It Yourself
Business Sales Guidebook

A proven system to help you

sell a business with less than

$1 Million in revenue.

Ben Brickweg

COPYRIGHT NOTICE

All contents ©2011 Ben Brickweg and Launch Innovations Group, LLC. All rights reserved. No part of this document or the related files may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the publisher.

Printed Version ISBN: 978-1456568764

Table of Contents

Foreword

Why I created the DIY Business Sales System

As an experienced business transaction professional, I’ve met with countless business owners that needed to sell, but couldn’t afford to pay the standard commission or minimum fee to have a professional advisor help sell their business.

You know what?

I was frustrated, because I knew these small business owners deserved to have useful tools and advice to help them find a buyer for their businesses.

So I rolled up my sleeves and started writing the Do It Yourself Business Sales Guidebook. I spent over a year compiling and packaging the information learned from my own experiences, mistakes I saw small business owners make, and everything else I could think of that would help folks like you successfully sell their small businesses.

This guidebook will teach you secrets about selling a small business that many owners will never know. The material here is presented in simple and straightforward terms. You’ll find 9 modules that give you a step-by-step system for selling your business.

If you have any questions or feedback along the way, please visit us online at www.diybizsales.com and click on the Contact Us link.

Thanks for buying this book.

Ben Brickweg, Author
DIY Business Sales Guidebook

Module 1:
Getting Ready To Sell

Introduction

What’s your exit plan?

Can you imagine your life without your business? Many small business owners have never even tried. How about an even more difficult question: can you imagine your business without you? This doesn’t mean for an afternoon while you run to the bank, or a day when you are sick, or even during a month-long vacation. It means forever.

These thoughts should not be frightening. The sweat and tears that you have invested in your business might make it feel like you are inseparable. But even if you and your business are the best of friends, you should try imagining what your exit looks like. What happens if the economy or your health takes a nosedive? Are you ready for the consequences?

The concepts introduced in this book will help you if you are looking to sell your business next week, next year, or next decade. What you can learn here will help you even if you never plan to sell. Every small business owner should examine his or her business on a regular basis, figure out what it is worth, and improve its value.

The truth is, many small businesses simply dissolve when the owner can’t or doesn’t want to continue. It’s terrible to see all of your hard work and equity disappear down the drain. So start thinking about your exit now. It doesn’t matter how far down the road you imagine it happening.

Why Exit Your Business?

There are many different reasons to exit your business, and they may require different exit strategies. Be prepared for anything, as you never really know what tomorrow might bring. Here are some of the most common reasons why people like you might want or need to exit their businesses:

Retirement: It's time to cash in and relax, travel, go golfing, watch TV, or whatever else you've envisioned for your golden years.

Burnout: After years of hard work, you just don't feel like doing it anymore.

Poor Health: Bad back, car accident, or frightening diagnosis... these things take us by surprise.

Death: When your time comes, you won't be able to run your business anymore. There's no choice in this case.

Divorce: The judge bangs the gavel and orders you to pay your ex half the value of the family business. It's not likely you have the cash on hand to do so.

Children: You want to pass the business on to the next generation.

Inadequate Income: Family and/or lifestyle changes mean the business isn't providing what you need anymore.

Tax and Estate Planning: With proper planning, you can reduce or defer income tax liability when selling your business.

Relocation: You need to move but can't take the business with you.

Partner Conflict: The relationship isn’t working anymore.

Debt or Lease Escape: You need to get out from underneath a substantial liability.

Life Happens: For whatever reason, the time has come to move on.

Do any of these apply to your current situation? Do you expect any of them to be true in the future? You don’t need a crystal ball to understand your likely reasons for exiting your business. Think about it so you can plan accordingly.

NOTE

Many small business owners attempt to sell and quickly realize they should have made specific improvements to increase the value of their business before selling. If you can, try to do these things before you plan to exit.

Ways to Exit

Exactly how you exit your business will depend on your reasons for exiting and several other factors. One of the biggest variables is speed. If you need to get out quickly, your options are limited. You shouldn't expect to sell your business for top dollar in less than six months. A realistic timeframe for selling is one year or more.

You also need to think about what you want out of the exit. Do you need cash proceeds? Do you want to make sure that staff is taken care of if a change in ownership takes place? How much do you care about what happens to the business itself after you leave? How important is it that the business continues in its present form?

Consider your situation very carefully. Talk about it with family, friends, and professional advisors. If you take your time and understand what you need and what, you’ll be able to make wise decisions.

For most small business owners, the following list shows the order of possible exit strategies, from most to least desirable.

Pass it on to children

Sell it as an operating business

Close the doors & liquidate

Declare bankruptcy

This book is all about the second item in that list, but you should understand all of your options. Circumstances may change at any time.

Pass it on to children

This is at the top of the list for many people, but the reality is that only about a third of family businesses are carried on by the second generation, and less than 15 % go on to the third. It can be very difficult to pick a “favorite” child to take over the business.

It is also a challenge to overcome natural generational conflict or accept that your children have a different vision for the business than you. And, as hard as this is to accept, your children might just not want to take over your company.

In many cases, family members don’t have the cash to purchase a business. So if you need to benefit financially from your exit, this may not be an option. It’s very satisfying to know that your business is being carried on by your children, but you might have to give it away in exchange for this satisfaction.

Even when it is possible, keeping the business in the family requires good planning. It is a process, not an event. It should be a carefully managed transition, not a crisis. Transferring power and transferring assets are complicated activities. Training and timing are also extremely important.

Sell it as an operating business

This is the most attractive option if your exit strategy is about putting as much cash as possible in your pocket. But it's certainly not the easiest option. Depending on the type of business and its history of positive cash flow, there's the potential for a great payoff when selling your business. But the process of selling is hard work and a lot of deals die before money even changes hands. You need to do it right, because you usually only get one shot at it.

Timing is critical when selling a business. You need to think about how economic conditions come into play, when leases and other major contracts expire, and how long it will take to prepare the business to sell. You should also remember that successful business sales transactions can take a year or more to complete.

Even if you don’t plan on selling your business, it’s a good idea to think about what it would take to sell and to make the necessary improvements. Start enhancing the value of your business immediately, so if you do need to sell, or decide to sell, you are prepared.

Here is an overview of some of the important issues in selling a business that you will learn about in this book:

The preparation process (increasing value, timing, your needs)

Valuation

Creating marketing materials

Finding a buyer

Structuring a deal

Financing a deal

Closing the deal

Transitioning

Shut the doors & liquidate it

In some cases, liquidation is the only option. Maybe you have to get out of your business and don't have the time to sell. Maybe you’ve tried unsuccessfully to sell. Or maybe the business or industry is in such bad shape that selling is unrealistic. Then cashing in the assets of your business might be the best strategy.

When you liquidate, you list all of your assets, assign a reasonable price to them (fair market value, not book value or purchase price), and look for a buyer. The best-case scenario is when a single buyer purchases the entire package at once. This could be someone that wants your items to use in a similar business. But in most cases, you'll have to sell assets in pieces or call in an auctioneer. These methods usually mean less money for you in the end, but they are quicker and easier.

Liquidation also involves collecting outstanding receivables, paying off debts, tying up contracts and leases, terminating employees, and completing all other legal and financial tasks.

Declare bankruptcy

It's a dirty word, but for some people bankruptcy is the only way to relieve an excessive financial burden. Some business owners simply can’t pay off their debts through a sale or liquidation, and servicing those debts will drive them further into the ground after closing down. In this case, bankruptcy may be the best exit strategy.

But think carefully about your future plans and consult with an experienced attorney and accountant. People who treat bankruptcy like an easy escape route without proper planning and advice are sorely disappointed when they find out the hard way that their credit is ruined for many years.

You’ve just read about the four most common exit strategies. This book is designed to guide you through the selling option. The topics and information, however, will prove useful to any small business owner, regardless of future plans.

WARNING

You should be very tight-lipped about your exit strategy. If everyone knows you're looking to sell, it might sabotage your transaction. Employees may head for the doors. Customers or clients may look elsewhere. These circumstances can damage the value of your business. Be proactive and create a plan for when you’ll disclose your intentions of selling to employees, advisors and key customers.

Who Will Buy Your Business?

Figuring out who might buy your business is an important step. It will help you focus your search, prepare your business, decide on a proper price, and think about possible terms and financing options.

Potential buyers include:

Family members

Partners

Employees

Strategic buyers

Private equity groups

Financial buyers

So far, you’ve learned a bit about transferring a business to family members. If you're going that route, then some of the information here won’t apply to you. The same is true if you have one or more partners who want to exercise their option to buy outlined in your partnership or buy-sell agreement. But the reality is that few partners ever want to pay fair market value for your share of the business.

Selling to one or more employees has certain advantages. They're obviously familiar with the operations and customers, a good transition is much easier, and you could offer ownership in pieces in lieu of salary. But few employees, with all due respect to yours, have enough money or entrepreneurial drive to take over a business. If they did, they would have already started or bought a business instead of working for yours.

Your next option is to move outside your family and business circle. Possible buyers for your business will depend greatly on your company’s size and competitive position.

Many small business owners mistakenly believe that their best bet is to find a strategic buyer. A strategic buyer is another business, that wants to purchase your business to enhance their own business and market share. It is quite rare for small businesses, especially in industries like retail, to be acquired by a strategic buyer. It's a little more common in the manufacturing and services industries, but it typically requires a certain minimum in earnings (about $300K / year) and/or valuable intellectual property such as patents and proprietary products.

Another common misperception is that strategic buyers will pay substantially more money for a business than other types of buyers will. However, a strategic buyer is someone who already has know-how and experience, and will usually not pay more than it would cost to create the same advantage from scratch. Strategic buyers don’t only evaluate businesses based on earnings potential, but are focused on the value added to their business in terms of assets, market share, or key technologies and systems. So your price really has to make sense.

You might have also heard about Private Equity Groups (PEGs). PEGs are typically looking for businesses with at least $1 million in net income. They will sometimes buy small businesses to bolt onto existing holdings, but chances are that if you’re planning a DIY approach to selling your business, you’re not in the same league as private equity.

That leaves what are called "financial buyers." This is where most small businesses find success. A financial buyer is a person who wants to own and manage a business which will provide him with a reasonable income. In other words, a financial buyer is probably a lot like you. He or she probably lives in your area or plans to relocate there soon. This buyer is interested in immediate cash flow and an established job. The financial buyer understands that buying a business is less risky than establishing one.

NOTE

Think about the type of person who might be in a situation to buy your business. Imagine a 50-year-old executive who gets laid off in a corporate restructuring. It's tough for him to find a job simply because companies can hire younger and cheaper. After a few months of looking for a job and watching his savings slowly disappear, he starts to look for other options. It makes perfect sense for him to buy a job for himself. Keep this in mind. To this type of person, cash flow is important. He needs a business that generates $85,000 to $100,000 in earnings to match his salary expectations.

What are Financial Buyers Looking For?

If financial buyers are, in fact, the most likely buyers of your business, then you need to learn a bit about them. Who are they? What do they want to see in a potential business opportunity?

There are three conditions that every financial buyer wants to satisfy. The financial buyer must be able to:

Pay himself a reasonable salary

Service his debt

Have something left over to grow the business or save for slow months

Of course, different people have different definitions of what a "reasonable" salary is. Just remember that it may not be the same as yours. Regardless, most of a potential buyer’s opinion of your business will flow from those three “musts.”

Now here is a brief list of what a financial buyer wants to see:

Historical performance that will likely continue in the future

Upward trending sales and profits

Great location

Favorable lease terms

Reasonable price

Equipment and other assets in good condition

Experienced and well-trained employees

Relatively easy transition and transferable client base

On the flipside, there are a number of red flags a financial buyer will be watching out for:

Large customer concentration

Business dependence on owner, or chance that relationships won't carry over

An industry or business trend that has come and gone

High employee turnover

A heavy inventory burden

Obsolete inventory or risk of inventory spoilage

Declining sales

Poor record-keeping ("shoebox accounting")

A high-price, all-cash deal

High rent payments

A sales price based on best-case scenarios or wishful thinking

These lists are helpful, but they don’t give a complete picture. There are a few other aspects of buyer psychology that you need to understand.

First, money is not always the primary reason a buyer chooses a particular business. Yes, the buyer needs to satisfy certain minimum requirements, but money is usually further down the list in most surveys of small business buyers. Control, freedom, creative opportunities, status, and recognition can all rate higher than money. You must show these benefits to potential buyers. You need to demonstrate the perks of owning a business in general and the fun of owning your business in particular.

Second, buyers hate risk, and their strongest emotion is fear. They're afraid of paying too much for a weak business. In your attempts to sell, you should focus on the positives. Potential buyers, however, will be looking at all the negatives, the reasons not to buy your business. They will notice all of the little cracks, the cash flow problems, and any other little issues. You need to be prepared for this and ready to reassure the buyer throughout the process.

Of course, there are ways to establish trust, improve buyer confidence and alleviate their worries. You need to be flexible in negotiations. You might provide help in the transition, sticking around for a reasonable training period. Most importantly, you can offer to finance a portion of the sale yourself, which shows you have faith that the business will perform as you are suggesting it will.

Approximately 90% of people who look to buy a business never actually find the right one. For sellers, that means opportunity. There are many potential buyers out there waiting for someone to show them why a particular business is a good investment, not only in terms of money, but also in terms of time and energy. Go convince them that yours is their ticket to freedom, a stable salary, and satisfaction.

Learn from Others’ Mistakes

You’re not the first person to try to sell a small business. Many have tried and failed, and you should learn why. Here’s a list of the most common reasons that people don’t sell their small businesses:

The asking price is too high: remember that buyers are comparison shopping.

The asking price is based on the wrong things: historical performance is the key.

The seller refuses to negotiate: remember the saying “my price, your terms.”

The seller offers poor terms: you need to be flexible and accommodate the buyer.

The seller is not upfront about the negatives: potential buyers always find out eventually!

The seller neglects the business while selling: if you don’t run the business as usual during the selling process, you can just watch the value disappear.

Professional advisors kill a good deal: picking the wrong advisors that are inexperienced or too risk-averse is a big problem.

The business location is bad: as the saying goes, “location, location, location.”

The industry is suffering: there has to be a good history and promising future.

The business has poor products, services, or reputation: this speaks for itself.

The business relies on outdated technology or equipment: you have to keep up with the times.

The seller offers a poor transition plan: buyers need a bit of help learning the ropes.

The lease terms are unfavorable: buyers want stability and security.

The seller won’t finance the deal: and if banks won’t either, how can a buyer get the cash to buy your business?

The seller is slow in communicating or approving qualified buyers: don’t leave good prospects hanging.