Unfortunately, during the buyer-seller meeting, most sellers act just like a car salesman. They keep boasting that their business is flawless and is the best investment anyone can ever make. This looks obviously very suspicious to potential buyers. Confidence is lost and the probability of having a transaction as a result of such a meeting is almost nil.

I can understand that most successful business owners are involved in selling in most of their time. They are selling their ideas to employees, selling their products and services to customers, selling their potential to investors etc. As a result, they tend to assume that selling their business will be no much different from selling anything else.

Unfortunately, this approach simply doesn’t work with business buyers. Buyers are investing their hard earned lifetime savings in the business and they are as a result very cautious and extremely suspicious. The natural question they ask is “if your business is so good Mr. seller, then why are you selling it?” and, they expect the seller to be hiding some important unfavorable facts that would make the purchase of that business a very bad investment. When the seller keeps insisting that the business is perfect and that he/she is selling for strictly personal reasons, buyers simply don’t trust.

There are two real problems with this traditional selling approach. First, buyers expect the business to have problems. Nothing is perfect in life and yes if the business were perfect, the seller wouldn’t be selling it. So, the seller’s claim that the business is perfect is clearly a lie or at least an exaggeration. Second, most buyers want to buy a good business they can make great. If the business is already perfect, then the buyer has very little chance of improving it, which contradicts the very reason why the buyer is trying to buy it. Furthermore, by hiding the business’ imperfections, which could also be called opportunities for improvement, the broker end-up selecting the wrong buyer for the business. Even if the buyer trusts the seller and does put an offer, he/she will soon discover some of the imperfections during the due diligence period and will feel having being misled and will walk away. In the meantime a real buyer with some capabilities to correct the problems of that business has not been identified and has been lost. This is a lose-lose situation where the seller loses some real buyers and a lot of his/her credibility in the marketplace, the buyer loses a lot of time and money spent on accountants and lawyers and the broker wastes his time, the only asset in his possession.

Business sellers considering achieving results in their sale process should definitively abandon the traditional car salesman approach and become very upfront with  business buyers by telling them the good, the bad and the ugly about the business as early as possible in the sale process.

However, business prices like prices for any other asset are only a function of supply and demand at a given time. Factors that influence prices must influence supply, demand or both of them at the same time. When most sellers are waiting, prices tend to jump instantly because of a lack of supply. Demand also increases as investor sentiment improves. Spikes in prices tend to happen way before most sellers expect it. When sellers realize that prices have increased, they all tend to jump in the market instantly, driving prices down again. This is exactly what happened to the Canadian real estate market between May 2009 and April 2010. Prices increased dramatically at the very early stages of recovery and started declining as the recovery was confirmed. The business for sale market tends to follow a very similar pattern.

There are so many other reasons why business sellers who are ready to sell their businesses should act now and not wait for the market to improve. These are some of these reasons:

• The massive retirement of baby boomers who own businesses might increase the supply of businesses and decrease prices.
• The expected shortage of labor in the work marketplace might reduce potential buyers looking for job replacement, reducing demand and driving prices down.
• Sellers waiting for prices to increase might lose interest in their business, driving down performance and therefore business value, which could not be compensated by a price increase.
• Sellers with health issues might run short of energy and time to transfer the business to the buyer driving their business value to practically to zero.
• Business is like a perishable good, it could lose a lot of its value if its owner’s drive is not there anymore.
• Another recession might hit before the sellers even realizes it, which could make the sale of the business almost impossible.

There are so many other reasons why owners who are ready should sell and not wait for a wishful and unrealistic increase in prices. Aside from extremely unfavorable market conditions, the sale of a company should be made when the seller is ready not when the market is perceived to have peaked. Trying to time the market to sell for the best possible price is rarely a good idea when selling a business.

When practicing my profession as a business broker in the Greater Toronto Area, the most frequent question I am asked is “how much is the business worth?”. While most are not ready to pay for a formal business valuation, both business buyers and sellers are extremely interested to know the value of the business they are trying to sell and buy. While  business valuation articles I have written before are very general, this one is more specific and describes most commonly used valuation methodologies used in Toronto and surrounding areas in Ontario for the purpose of selling or buying a business. Below are some of  the most commonly used methods:

EBITDA Multiples:

This method is mostly used for valuing middle market companies (values higher than one million dollars). Accountants, Mergers and Acquisitions Intermediaries and Middle Market Business Brokers. it consists of computing EBITDA (Earning Before Tax, Depreciation and Amortization) and applying a multiple to arrive at the Enterprise Value. The enterprise value is then reduced by the amount of interest bearing debt to arrive at the value of equity. This value included equipment, goodwill, inventory, accounts receivable and the necessary cash to arrive at a historical average of working capital. The computed EBITDA has to be normalized before applying the multiple. The normalization process involved the non exhaustive list below :

1. Adjusting the seller’s and his  family members’ salary to market salary. Not working family salaries should be added back to EBITDA,
2. Adding depreciation and amortization
3. Subtracting the  capital investment costs for the following year necessary to maintain the sales at their current level.
4. Adding back to profits any one time, non recurring costs such as a large bad debt resulting from a large client bankruptcy.
5. Adding seller’s personal expenses and perks not necessary for the operation of the business such as meals and entertainment, if not necessary for the business, car allowance, personal insurance etc.
6. Adjusting rent to market price if the owners  owns also the real estate or rents at below market rent that cannot be transferred to the buyer.

The multiple of EBITDA used for valuation is determined  from comparable transactions in similar industries. this is the most challenging step since private company transaction information are generally not available to the public. Some business for sale websites offer incentives to business brokers to collect pricing information for closed transactions and offer large databases of transaction to business valuators for fee based subscriptions. These large databases are not always reliable since business transactions have so many terms other than price that are generally interrelated and influence price, and terminology used by these websites do not always have standard meanings to all business brokers.

Transactions in the Greater Toronto Area are not necessarily comparable to transactions in other US cities mostly because of the difference between Canada and the US in currency, risk, tax rates etc. EBITDA multiples in Toronto vary between 3 and 5 with 4 been an average especially in challenging economic times. These multiples can reach 7 in good times for established companies. High growth companies especially in the technology sector can reach much higher multiples, especially for a strategic buyer.

Seller Discretionary Earnings (SDE)

This method is mostly used for small businesses with less than one million dollars in value. This method is very similar to EBITDA with two main differences:

• The salary of the owner is added to SDE and the same normalization process is applied
• Inventory, Accounts receivable and cash are not included in the valuation.

Multiples of SDE are much lower than those of EBITDA. Generally between 1 and 3 in Toronto. Larger companies tend to sell for larger multiples. Multiples are lower for companies with problems, high risk or who require a large amount of inventory and accounts receivable.

Asset Based Valuation:

This method is generally used when the EBITDA or SDE methods cannot be used, especially when companies are unprofitable or when profits are very low compared to the value of assets. This method is generally the calculation of the net book value of the company. Most buyers acquiring a company based on the method are turnaround buyers with clear plans to make dramatic changes to the acquired companies to improve the bottom line.

While valuation is an important step before listing a business for sale, sellers should understand the the sale price will be the price a buyer is willing to pay irrespective of what a formal valuation is. A strategic seller for example can pay much more than the company valuation.

1. The price is right. Business buyers are looking for profitable businesses that are priced reasonably. A highly priced business will take a lot more time to sell and will sell generally for a lower price (not higher) than if it was priced right from the first time.
2. The general state of the economy: in prosperous times, buyers’ sentiment is positive and risk taking appetite is big. Businesses generally sell is much shorter times. An average time of 6 months is generally sufficient.
3. The seller’s emotional readiness: Sellers’ Remorse is one of the biggest deal killers in Canada. An unready seller that puts his/her business for sale in the market has a very hard time making a decision about an offer. They generally end-up frustrating the buyer, loosing the offer and even losing credibility in the marketplace. The seller would need the help of a very experienced business broker to get serious buyers back on the negotiating table and close a new deal in a reasonable time. This might take years.
4. Luck: sometimes the first potential buyer ends up being the right one. The business can sell in only a few weeks. The seller needs however to be alert and recognize that a reasonable offer from a first buyer could be a great opportunity that should not be missed. A large number of sellers interpret a quick offer from a first buyer as an indication that the business is low priced. This cannot be further from the truth, especially if the business has been professionally priced.
5. The business is “sexy”: some industries are simply more attractive to buyers.  This does not mean that they represent better opportunities. It simply means that they are trendy. For example, Import and distribution businesses are in big demand at this time and generally sell for higher multiples and in shorter time periods.
6. The seller is very honest with the broker and/or buyers about the good the bad and the ugly of his/her business. Brokers collect information from sellers and present them to potential buyers. When information is unclear or misleading, brokers loose faith in the seller and the business. Brokers will then take more time to understand the intricacies of the business and find the right buyer for it. On the other side, buyers ask many questions about the business. Most buyers will back off if information is conflicting.
7. Betting on the wrong buyer. Some sellers are so desperate to sell their businesses that they accept offers from non qualified buyers knowing in advance that these buyers will fail if they buy the business. This is a big mistake as these buyers at one time or another will discover that the business is not for them. All the time spent with these buyers is scarified, The business has been out of the market during that time. Worse, new buyers start wondering if there is anything wrong with the business. Why didn’t that buyer buy it?

These are some of the reasons that will influence the time it will take to sell a business. In the current state of the economy, it generally takes the average business seller between 6 months and 2 years to find the right buyer. Good Luck!

There are quite a few implications for business owners who have a good reason to sell their companies and need an exit in a reasonable time. The business owner needs to prepare his/her business quite in advance for an exit. These are some of the preparations that would dramatically increase the chances of selling the business at a reasonable price without having to spend years waiting for the perfect buyer:

• Seek professional advice from experienced business brokers, accountants and lawyers a few years before listing the business in order to prepare the business for the sale.
• Make your business more efficient buy reducing redundant costs.
• Sell unproductive equipment. This will not affect the value of the business but will certainly increase the total proceeds from the sale.
• Optimize your stock and sell any surplus before listing the business. Excess stock requires that the buyer invests more money for the same business without increasing profitability. It’s much easier to find a buyer for a business that has a smaller stock.
• Create documented processes and procedures for your business so that the less skilled employees can still be hired and manage the business. This will not only reduce the operating costs of the business but will make it easier to find a buyer with the right qualifications for the business. Buyers don’t like to depend on highly skilled employees and offer lower prices for employee dependent businesses.
• Hire an Internet capable business broker at the time of selling your business. The Internet became the first medium to reach business buyers. Furthermore, the Internet will bring buyers form large cities as well as new immigrant from other countries who don’t mind settling in a remote area if they can make a good living from the business.
• Finally, be patient. Selling a business located in a remote area will take time, so patience is a virtue.

While challenging, selling a business outside large cities in Ontario is not impossible  but needs discipline,  preparation and patience. The few guidelines we have provided will produce great results if followed diligently.

• Because of the larger amounts of money involved in the purchase of a middle market business, the number of potential buyers is generally much smaller. Middle market transactions generally require various types of financing and are as a result very dependent on lenders. The credit crunch that characterizes the current economic climate has dramatically reduced the sources of financing for middle market transactions and therefore reduced the number of transactions.
• Private equity groups investing in middle market businesses have now a serious advantage over individual purchasers because they have large amounts of equity to invest and generally do not need financing.
• Middle Market companies have a larger number of employees than smaller businesses and are consequently less dependent on their owners. This reduces the transition risks for potential buyers and as a result increases the business valuation. Middle market companies sell generally for larger multiples than smaller businesses.
• Middle market business buyers are very analytical and require detailed and accurate financial information before making a decision to purchase.
• Middle market transactions are also more complicated and require help from professionals such as business brokers, accountants, experienced business lawyers, tax experts etc.

Middle market business owners looking for an exit strategy should definitively seek professional help to assist them in their transactions. Potential buyers have to be screened for financial capacity, business experience and management capabilities. Sellers should hire professional appraisers to value their businesses before putting  them in the market. Sellers have to prepare their businesses for sale by improving their accounting practices and restructuring their businesses to make their businesses less dependent on them and more transferable to potential buyers.

When interviewing potential business sellers before listing their businesses for sale, I spend a lot of time and attention understanding their real motivation for selling their companies. A seller with fuzzy reasons will rarely have the patience to go through the whole process and complete a deal. Having a good reason for selling ,while necessary, is certainly not enough. The other key ingredient is the persistence. I occasionally run into sellers who get discouraged after the first unsuccessful attempt and abandon the whole idea of selling.

The rapid swings in sellers’ emotional state is one of the reasons reducing their persistence when trying to sell. Sellers generally identify with their businesses and tend to confuse buyers’ objections about the business with personal attacks against them that they have hard time handling. Sellers feel such a pain and unfairness that the whole idea of selling becomes insurmountable. A good business broker understands the emotional states of business sellers and warns them in advance about their emotions before listing the business. A prepared seller recognizes his/her emotional swings when they happen and deals with them accordingly.

I generally advise sellers not to rely too much on potential buyers’ preliminary excitement about the business. While the initial buyers’ excitement can be a real engine to push toward a deal it also could be an unrealistic dream that will never happen. In order to increase the likelihood of having a deal, the broker and/or seller should deal with as many buyers as possible and not rely on promises.

After a serious buyer makes an acceptable offer, the seller and broker need to make a tough decision. Is this buyer worth focusing on? Should we work with him/her on an exclusive basis? There is generally no sure answer to these questions. A decision needs to be made quickly. If the decision is yes, then the seller should put all his/her efforts to help the buyer with the due diligence.

It is frequent that the chosen buyer ends-up not being the right one. In this case the seller and broker must move-on and start the process again with no hard feelings!

1. Interest rates are currently historically low. Business valuations are very sensitive to interest rates just like any other capital assets. Lower interest rates increase affordability and increase demand for businesses. Supply of businesses for sale on the other side decreases because some business buyers will be attracted to the higher return debt markets. There is a consensus that interest rates might increase in the near future, which makes today a real opportunity for business sellers.

2. A large number of unemployed skilled workers are looking for job replacement opportunities. The number of corporate layoffs has risen dramatically in the US and Canada in the previous few months. Laid-off employees have hard time finding decent jobs in today’s economy. A large number of these unemployed capable workers are now looking for businesses to buy.

3. Baby Boomers are getting closer to the retirement age. Baby Boomers who own businesses are starting to retire in large numbers. The number of businesses that will be sold for retirement reasons will rise dramatically in the next 10 years. This will increase the supply of businesses for sale and might depress the market in the near future. Selling in today’s market will enable sellers to avoid a probable depressed future market .

4. In the province of Ontario, Canada the Capital Gain Tax Exemption has been raised to $750,000.00 per shareholder for the sale of company shares. This is a huge tax incentive for today’s business sellers . This might not last for long as governments in North America might increase the historically low capital gain tax rates to balance their huge deficits created during this financial crisis.

5. The economy is expected to recover from recession. Most experts agree that the economy is on its way to recovery. This has recently fueled the business for sale market as potential buyers are feeling more optimistic about future economic prospects. Some business sellers are waiting for a full economic recovery to get the best possible price for their businesses but this is a rarely good strategy for two simple reasons. First, other not so favorable factors will kick-in in the future and second the recovery might take much longer than expected.

6. Supply of viable businesses available for sale is now very low. A large number of business sellers were scared of the negative impact of recession on their business sale prices. As a result, many potential sellers are now on the sides waiting for the economy to recover before putting up their businesses for sale. This is defectively an opportunity for new sellers to jump in.

While there is no exact science that can predict future market behavior, business owners in the US and Canada looking to sell their businesses should consider the above factors before delaying the sale of their companies even further and miss today’s market opportunity.

Due diligence is the process by which potential buyers who have expressed a serious interest in the business (after submitting a letter of intent or a conditional offer) verify that the business is truly what they believe it to be.  With such a broad definition, its is understandable that business sellers don’t really know what to expect. The process is not standard and changes dramatically depending on the type of buyer, the industry, the size of the business etc.

In general terms the more sophisticated the buyer, the longer and deeper the due diligence. Large transactions, especially share purchase transactions require more sophisticated due diligence. Also, the more knowledge about the business the buyer has before signing a letter of intent or conditional offer the shorter the due diligence period. Whether the business seller (or Broker) should only accept a letter of intent from buyers who already have received extensive information about the business is always a dilemma. On the one hand, giving away confidential business information to a large number of potential buyers who simply expressed an interest in the business is very risky as it increases the chances of this information ending-up in the wrong hands. On the other hand, committing to a letter of intent from a buyer with very little knowledge about the company increases the chances of a deal falling through. A deal falling through does generally not help when trying to sell the business to other potential buyers.

Despite all the uncertainty regarding the due diligence process, there are some principles that if applied correctly can smooth up the due diligence process and increase the chances of reaching a deal:

1. There should remain some flexibility in negotiation during due diligence: if negotiations are too tight, deals generally don’t make it through due diligence. Buyers or sellers accepting reluctantly unfair terms and conditions have all the time to change their minds during the due diligence and deals generally fall through. A deal should be win-win where both parties receive a lot of value and are willing to give up a little bit more to save the deal.
2. Sellers should be upfront about the good, bad and the ugly about the business. It’s mach better  for the seller to loose a buyer before signing the LOI rather than during due diligence so let the buyer know in advance what to expect. Furthermore, it’s almost impossible to hide an important fact about the business to a savvy buyer. In this case honesty does pay.
3. Understand the buyer’s hesitations and deal with them. It’s perfectly normal that buyers show suspicion during due diligence. It’s up to the seller to bring relevant facts and address buyers’ concerns. This suspicion is not personal and should not be interpreted as an accusation of dishonesty.  Buyers are committing huge amounts of capital and their whole future relies on the success of the transaction.
4. Good preparation: It’s advisable that sellers prepare a large portion of the documentation needed for due diligence before putting the business up for sale, especially financial and accounting information, stock, legal documentation etc.
5. Patience: It takes a lot of patience to sell a business and due diligence is one of the final steps. At this stage, sellers are generally exhausted and are vulnerable to emotional bursts.  It’s important to control your mood.

While my description of the due diligence process might seem too general and lacks specifics about the types of documentation needed, my experience as a Business Broker in Toronto, Ontario has taught me that applying these principles is a key factor is to reaching a successful deal.

In our previous post we explained the work involved in selling a business and if it makes sens for the seller to do it on his/her own. The time,  effort and money spent by the average seller trying to sell their business is rarely worth it. If you add to that the possible mistakes that a seller can make when trying to sell on their own and the high cost of these mistakes, the decision to hire a professional is almost obvious.

Of course, in some rare cases, sellers should definitely learn as much about business sale process and do it on their own. These circumstances include extremely unique businesses that only a small number of potential buyers could acquire and the sellers already knows about them. In such rare circumstances, sellers would be better served by themselves because they can focus on these rare potential buyers and make a deal happen.

In most other circumstances, a competent business broker will add a lot of value to the transaction, much more that the fees he/she charges.

Business Brokers will save you time so you can keep focusing on your business and keeping it in a good salable shape while the broker is marketing the business. They will protect your confidentiality and save you from the harm that a confidentiality breach can cause to your business. Business brokers also expose your business to a much wider audience so you have qualified leads to choose from. You can then sell to the buyer who represents the best fit for your business and has the higher likelihood of making it successful. Such a buyer will recognize the potential and would pay  the highest possible price. Business brokers also create competition between buyers increasing the chances of obtaining the highest possible price from the market. The linked article about business brokers summarizes business brokers’ involvement in the sale of a business and the advantages of working with a licensed broker for business sellers and buyers in Ontario, Canada.

How to choose a business broker?

The most important criteria to look for when choosing a business broker are:

• Honesty: when selling a business it is extremely difficult to fool people by over-embellishing or misrepresenting your business to them. They will discover the truth sooner or later and you will have wasted your time and money. Honest business brokers are much more successful because they earn buyers’ trust and can sell them businesses.
• Professionalism: professional brokers attract serious buyers and protect sellers’ confidentiality. You can identify the level of professionalism after a brief interview with the broker.
• Personality fit with the broker: the broker seller relationship has a large impact on a successful sale. Brokers have to believe in the business and in the integrity if their seller to be able to sell the business.  I personally cannot sell a business if I don’t trust the seller!
• Marketing capabilities: Selling a business requires a wide exposure to potential buyers. The broker needs to have a successful marketing system to generate leads.
• Knowledge and experience: business brokerage requires specific skills in finance, sales, marketing and strategy to be able to explain the intricacies of the business to buyers.
• Interpersonal skills and energy level: Brokers talk to more than 50 potential buyers before finding the right buyer for the business. Successful brokers enjoy talking to people and are enjoyable to work with. Their level of energy is so high that they can create  enthusiasm in buyers’ minds and give them confidence to make the difficult decision to buy a business.

If you are a business seller and you have found a broker that has all these qualities, then you have found the right person to sell your business and you would probably be better off working with that broker.