When you’re putting your business on the market, one of the top considerations is your asking price. Once you have a fair price established, let’s take a closer look at how business brokers and M&A advisors work with their clients to back up that price with details concerning why it is justified.
Telling the Story
A key aspect of defending your asking price is telling the story of your business. Your brokerage professional will help you go over the details of the story so it is properly conveyed to prospective buyers. Buyers, of course, will want to understand the story behind the business so that they can understand its history and why it is for sale. You will want to feel prepared to interact with prospective buyers and how to discuss details concerning its value.
Your business broker or M&A advisor will put together written materials about your business. These also help buyers gain clarity on the story of your business and its sales message.
Seeing Your Buyer’s Perspective
It goes without saying that a big part of coming up with your decision of the asking price is that you want something that sounds not only reasonable but also attractive to buyers. We recommend trying to view the entire transaction from the buyer’s perspective. The buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
Another consideration is, how will they pay for the business? In many cases, it can tremendously benefit a transaction to offer assistance in the way of seller financing. Seller financing can speed up the process, as you will not be so reliant waiting for the bank loan process, which can drag out for months.
The Complexities of Your Asking Price
The process of establishing and then justifying your asking price is not always simple. It is a symphony of moving parts, and it’s important to feel educated and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the journey towards the completion of a successful deal.
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Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
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Each quarter, the Market Pulse Report issues a report revealing information about market conditions The report is supported by M&A Source and the International Business Brokers Association. The data that is analyzed is based on a comprehensive survey of business brokers and M&A advisors. The report focuses on Main Street businesses (with values up to $2MM) and the lower middle market (values between $2MM and $50MM.)
The research is conducted and then the report is published each quarter to reflect the state of the industry. In this article, we will look at some of the key takeaways of the report and what it reveals about the path ahead for buyers and sellers.
Tracking the Labor Shortage
For the second quarter, the report revealed a variety of interesting information. One massive data point from the report is that the labor shortage continues to be a significant variable for business owners. A staggering 92% of report respondents state that the labor shortage has negatively impacted their business with 54% stating that the shortage has had a “very negative impact” and 35% stating that the impact is “somewhat negative.”
The report further indicated that it is taking about seven months for a business to close. They noted that it takes about six months to a year to sell a well-priced business or a well benchmarked business. The report noted that approximately 60-120 days are spent in the due diligence or execution stage, once the letter of intent has been signed.
The Strongest Industries
In terms of what kinds of businesses are selling, the report points to restaurants making a solid comeback. It is interesting to note that restaurants valued from less than $500K to $1 million are enjoying a particularly strong rebound. Business services, personal services, construction and manufacturing remain steady.
The latest Market Pulse Report is pointing in several directions. Currently, three factors are impacting business owners, namely, the labor shortage, inflation, and supply chain issues. Many businesses have had no choice but to give large raises to employees, and others have been able to pass the costs on to consumers and buyers.
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When it comes to selling a business, there is more to it than just relaying the facts. It’s also important to emphasize the story behind the business. Business brokers and M&A advisors are also storytellers, as they must convey to buyers the story behind the business and how it can ultimately be transformed.
It is through storytelling that humans organize the information they have about the world. In short, storytelling is an exceptional way to learn lessons in life and a great way to frame information about a business to sellers.
Telling Your Story
Everything begins with the financials, in short, the facts of the business. When a business broker or M&A advisor begins working with a seller, he or she will look to gather those details. Once that information has been gathered, it is possible to begin to create a story. That story can be presented in many ways, including through a confidential business review or confidential information memorandum.
While many, if not most, buyers and sellers may think that when it comes to business, they are cold and methodical like a reptile on the hunt, the truth is more complex. Human emotion always comes into play. It is no accident that well-crafted stories, with their power to motivate and guide, play a role in the art of buying and selling businesses.
Decisions are Guided by Emotion
If we want to make the best decisions, it is important to consider the role of emotions in our decision-making. “In order to have anything like a complete theory of human rationality, we have to understand what role emotion plays in it,” said scientist Herbert Simon who is an American Nobel Laureate. 
Good stories grab the imagination and enable people to expand their definition of what is and is not possible. When buyers are considering buying a business, it is important that they can picture themselves as being the hero that transforms that business and takes it to a new level. It is a story of evolution and reaching new heights while simultaneously achieving one’s own goals.
It is no accident that so many of today’s mass culture storytelling revolves around sequels. The notion that there is a “storytelling continuum” where a buyer can plug into something that already has a history can be a powerful motivating force. Most epic stories have the hero as part of some sort of continuum. In other words, the hero does not simply appear out of nothingness. It is the hero’s mission to transform the world, in some fashion, for the better.
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“I’m not ready to sell now. I’ve got several years left.” A key follow-up question to ask yourself is: “Is now the right time to sell?” As the Fed continues to raise rates to combat inflation and the risk of recession looms on the horizon, how will your business fair in this environment? We encourage you to consider these external factors when weighing whether or not this is the right time to sell.
Hopefully you’ve read PGP Advisory’s article, “What to Expect When You’re Ready To Sell,” which highlights the preparation timeline and how to set realistic goals for the process.
The team at PGP Advisory has formed a step-by-step guide to ensure businesses are sold at the right time, for the right price, and to the right buyer.
Step 1: Be Informed
Do your research and educate yourself on the selling process. Consult with an M&A advisor.
An M&A advisor will help you establish a strategy tailored to your business and manage the complexities of the sale process so that you can stay focused on running your business. They’ll identify and qualify buyers, secure an offer(s), and negotiate the eventual sale with the best possible terms.
If you’re invested in selling your business for the best possible value, choose a leading M&A advisory firm to broker the deal.
Step 2: Get Your Finances in Order
Purchase price is important, but so are the terms on the deal. Accurate financials can make the difference between getting 80-90% of the purchase price at close (via bank financing) and you becoming the bank (in the form of seller financing) for a significant portion of the purchase price over several years.
Do your due diligence by organizing your bookkeeping and financials and getting ahead of items that could prevent bank financing or slow down the sale (such as sign-off from other shareholders or active lawsuits or legal proceedings).
Consider your business’ employee contracts, intellectual property issues, and federal and state tax requirements. To ensure you have time to fix all potential red flags, hire a third-party accounting firm to assess your financial statements and advise on an exit-friendly tax strategy a year or two before the sale.
Step 3: Get a Business Valuation
Turn to experts (e.g., business brokers, M&A advisors) to understand how much your company is worth and to whom. Value is more than a number on a paper. The value that matters is what a buyer is willing to pay for your business. A trusted advisor will help establish a range that you would expect a reasonable buyer to offer for the business.
Step 4: Build Your Transition Team
“Great things in business are never done by one person, they’re done by a team of people.” – Steve Jobs. Putting together a team early can prevent a lot of stumbling down the road. Here is our list of professionals that business owners should have on their team (before your business goes to market) to smoothly and successfully sell their business:
1) M&A Advisor – Expert on sale strategy and process
2) CPA – Expert on your financials and tax strategies
3) Lawyer – Expert on identifying and managing legal risks with both the business and sale
4) Financial Advisor – Expert on planning for post-sale impact on your overall financial objectives
As experienced M&A Advisors, we are at the center of your business sale transition team. If the issues are not unaddressed, you will spend valuable time and resources prior to and after the sale trying to “fix” things. Your business is likely your most valuable asset, and building a successful company can take years of time and effort. If you’re considering selling your business at some point, schedule some time to discuss how we can help you make an informed decision – and maximize the price you receive for the sale.