Only negotiate when selling or buying a business.  This may seem an unusual heading to an article but it now keeps happening too many times and I feel compelled to write about it.

There is no question that selling a business is difficult as there are so many items to consider.  Equally, buying a business is extremely difficult not the least because the buyer may not know the seller but more importantly to the buyer, because they are yet to fully understand how the business works and what has made it successful.

When you put these basic unknowns together and add the imprecise art of valuing a business, both the seller and the buyer understand there will be a negotiation on the final purchase price of the business.  What is intriguing from my perspective is that sellers and buyers can spend a lot of time and negotiating energy to purely focus on the purchase price, which is important as the seller does not want to take less than they think the business is worth and the buyer does not want to pay any more.

However, there are two things missing in this equation.  First, the terms of the deal are probably more important than the final purchase price.  Just as the final purchase price is emotional for both the seller and the buyer so too are the terms and conditions.  These emotions can go both ways.  For example, the seller may be willing to work for free for 4 weeks after the buyer owns the business and not get paid.  That is, the seller does not mind giving their time and emotionally does not feel they are giving up too much.  If you put a dollar value on it, it could be worth $2,000 to $20,000 depending on the equivalent salary the buyer would pay.  Additionally, having the seller work for four weeks and train the buyer instead of one or two weeks could be tremendous value as the buyer gets to absorb more knowledge from the owner.  There are many other examples such as the seller carrying a note as part of the purchase price for a lower rate of interest than a third party lender, the seller being willing to come back and work for three weeks in 6 months time so the buyer can take time off with their family, the seller stepping in to help the business if a key employee becomes sick.

The trend I am currently seeing is for the seller and the buyer to over negotiate every detail in the transaction.  The buyer feels they are doing the seller a favor by buying their company and as a result, should get every demand they make quickly and easily.  Conversely, the seller thinks the business is worth more than the buyer is offering and now that the recession is healing, the buyer is going to do so much better and therefore the seller wants to be paid for some of the success they think the buyer is going to enjoy.  The position of the buyer and the seller is not unreasonable however, if it gets to the point where it kills the deal, which is what I am seeing happen, then it makes no sense.

Another factor that effects the above is that the seller and buyer need to come to terms on the purchase price and terms of the deal.  Separate to this negotiation however, the buyer has to deal with negotiating with the landlord, the lender and if it involves a franchise, the franchisor.  The buyer may even have to negotiate with family and friends to borrow money to finance the initial purchase of the deal.

The bottom line in all this is that it is critical to understand what the word negotiation means.  According to one dictionary it says “a discussion set up or intended to produce a settlement or agreement.”  The key words are ‘settlement or agreement’ that is, both sides have to give and take or there will be no settlement or agreement.  To be clear, once one party demands too much the other party will quickly move to the same position and then neither party will get what they want.  Probably the most important component a buyer wants when they buy an existing business is goodwill.  In most business sales, the goodwill has the highest value.  For the buyer to maximize the goodwill they expect to receive from the seller, there is a need for both parties to negotiate in good faith and respectfully.  This also applies when the buyer has to negotiate with the other parties in the transaction, especially the landlord.

A landlord is completely separate from the business.  If the seller of the business has paid their rent on time and been a good tenant, the landlord does not want to see them go.  In most cases, there is nothing in it if the landlord approves or refuses to approve the buyer to take over the lease, that is, the landlord really does not care if the seller and buyer have agreed on the price and terms of the sale as it’s the landlords job to look after the landlords interests.  If they do not like the buyer they will not hesitate to deny the buyer a lease.

Negotiations can be tough.  Its fine to make negotiations tough.  If it gets to the point where the negotiations are no longer “a discussion set up or intended to produce a settlement or agreement” then neither the seller or buyer will end up with what they want.  Animal instincts such as the need to win, be right or pay a fair price can derail a successful business transaction.  Understand your personality and the strengths and weaknesses you bring to a negotiation and just as importantly, understand what is important to the other party.  The chances of success have just then improved.

If you are thinking about selling your business and would like to know its value, please email me at Andrew@RogersonBusinessServices.com and I can put together a Brokers Opinion of Value for you.  If you would like to see a sample document, click the following link:  http://www.rogersonbusinessservices.com/services/selling-a-business

Related articles

• Negotiating for Wimps (inc.com)

Hopefully you will make a New Year’s resolution which includes building a business plan and in it, your personal and business goals.  You will also do a budget to make sure you can afford to execute what is in your plans.  Hopefully you are rested and as they say, “all dressed up and ready to go.”  You are also saying “Bring it on.”  My question is therefore, you know WHAT you want to do but HOW are you going to do it?

Chances are you have a list of projects and tasks you want and need to do.  It probably does not include answering phones, sending and receiving emails, reading articles and newsletters, attending conferences, staying on top of compliance items that affect your industry but numerous day to day activities that lead most entrepreneurs at the end of the day to say “Where did the day go?”  That’s the point of a Productivity plan.

A Productivity plan is an attempt to put some system into each day, week and month.  Whether you are the President of the United States or the unemployed person looking for a job, we all have exactly the same amount of time in a day.  While we may not always be able to control who we spend our day with, we can control how we spend it.  For example, do you know how much time each day you spend on email?  Do you respond to each email as it arrives?  If so, you are not being productive.  An email is a non urgent means of communication.  If it was urgent you would be using a cell or telephone.

The goal of a Productivity plan is to plan and manage your day, first, so you enjoy it and second, so you get the important tasks done while the less important tasks wait.  Closing down your email after all the messages are read and answered in the morning and then again in the afternoon allows you to be more productive…which is what a Productivity plan is all about.

As a business owner you have been taught to mainly work in months as this coincides with a financial period and allows you to close and then open a new set of financial statements with your book-keeper or financial analyst so you can review the success or shortcomings in preparation for the next month.

What other areas can you address to remain as productive as possible?  The starting point is to make a plan at the end of each day for the following day and roll it up at the end of the week.  Deciding what tasks you need to do in your business vary greatly from one person to the next as we all work from personal habits.  This is because not only are we in different businesses but also because we are in different industries and just as importantly, at different stages of a life cycle of our business.

If you want some help with what productivity tasks to accept, look at your normal work habits and decide how they can be improved, the tasks that must get done that slows down others, and even consider what you avoid doing or spend too much time procrastinating over.  This is where you can improve your productivity.

The best option is to either write your plan in a word processing document or a spreadsheet.  Making a written record and spending the time to define what needs to be done is the first step towards success.  Another important task is to make sure you allocate a priority – A for urgent, B for needs completing within a reasonable time and finally C for non urgent.

Finally, a Productivity plan is not about measuring results.  A Productivity plan is about defining AND agreeing what needs to be done with what urgency.  Measuring the results of your Productivity plan is important as it is by doing this we can see if we are moving forward and get a positive sense of accomplishment.

Check out my You Tube channel with over 35 short videos if you would like information about selling or buying a business – http://www.youtube.com/user/andrewrogersonsac

Everyone is familiar with the Christmas song, The 12 Days of Christmas.  Without going into every verse of the song, the carol works forward with the first day of Christmas being a partridge in a pear tree, the second day of Christmas two turtle doves and so on.  The song is full of optimism and hope that the giver and receivers of the gifts will be thankful for life, the opportunity to share and hope for the future.

From researching the origins of the song, I came across something interesting.   One of the articles I read suggests the 12 days of Christmas is not about the 12 days prior to Christmas but in fact, the 12 days from Christmas until the beginning of Epiphany which begins on January 06.  When I thought further about this, it naturally combined with another favorite thing we do during the Holiday Season and that is to make New Year’s Resolutions.

New Year’s Resolutions are a powerful opportunity as they allow us to do three separate things.  First, look back at our experiences of the last year and decide if it’s been a good year and what we could have done differently.  Because it puts us in the mood, we also tend to go back and look at more than just the last year but initially the last couple of years and decide whether or not it has been good.  Once we start doing that, we obviously look back at our life and decide what we like and what we wish we could do differently.

Our next reflection tends to move to the present where we look at our life and what we now have.  We reflect on our family and friends and how important they are to us.  We also look at whatever means we use to sustain ourselves and put a roof over our heads, the food on the table, the clothes we wear and the myriad of other things that allow us to live our life.

This then brings us to the final reflection and probably the most exciting and powerful opportunity of all and that is to look ahead and decide what changes we’d like to make to build and enhance our life and our immediate loved ones.  This reflection, for obvious reasons, takes us to both our job and what we are currently doing or, if we own a business, how that business is performing.  Regardless of whether we have or do not have a job or own a business, it is the time to ask some questions.  These questions include whether or not what I am doing is worthwhile and fulfilling, whether it produces the income I need to live the life that I want, what changes I want to make to achieve the personal, financial and emotional goals I’ve set for myself.

So the point of this article is a couple of things.  As you embrace the Holiday Season, enjoy it as it is a special time and I wish you nothing but peace and goodwill.  If your time allows, sit down and meaningfully decide on your New Year’s resolutions.    If your New Year’s resolutions are likely to include either buying or selling a business you may want to consider a thoughtful and logical approach.

If selling your business is an option you are considering, this link will provide a simple summary of the steps.  http://www.rogersonbusinessservices.com/docs/TheManyStepsToSellingABusiness.pdf

If you would like more information then this link will allow you to buy and download a copy of my book Successfully Sell Your Business.  http://www.rogersonbusinessservices.com/book-successfully-sell-your-business

If buying a business is an option you are considering, this link will provide a simple summary of the steps.  http://www.rogersonbusinessservices.com/docs/TheManyStepsToBuyingABusiness.pdf

If you would like more information then this link will allow you to buy and download a copy of my book Successfully Buy Your Business.  http://www.rogersonbusinessservices.com/book-successfully-buy-your-business

There is a US Court of Appeals judge by the name of Judge Learned Hand and he lived from 1872 to 1961 or until he was almost 90 years old. Originally from upstate New York, Hand graduated from Harvard Law School and became a lawyer. At 37 years of age he became a judge appointed to the Federal District of Manhattan and he became well known and respected for the quality of his judgments.

What caught my attention was one of the best quotes I’ve read regarding the paying of taxes. His quote is “…over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do it right, for nobody owes any public duty to pay more than the law demands.”

It looks like the campaigning for the 2012 Presidential elections has now started – some 16 months before votes can be cast. Perhaps it’s time to cancel your newspaper subscriptions and access to cable TV as the media are going to “entertain and inform” us with every happening. Wouldn’t it be nice to disappear for 16 months and come back on the day prior to the election and miss all this “noise?”

Regardless of your feelings about the above, what it is not time to do is ignore putting a business financial plan together. If you own and operate a business, just as it is important to have a personal financial plan, it is just as important to have a business financial plan not only for your benefit but also for those that work in the business.

Just as putting together a personal financial plan takes time, so too does a business financial plan. The place to start is by finding a qualified financial or wealth consultant to understand your business and the components you will use in your plan. The components you could consider using include:

• Medical, dental and vision health insurance – group or individual
• Supplemental health insurance
• Life insurance – group, keyman and individual
• Long term care insurance – group or individual
• Buy/Sell Agreements – with insurance funding
• Executive and employee fringe benefits
• Disability income insurance – group and individual
• Retirement planning – qualified and non-qualified

Other components to consider include debt management, property and casualty insurance and investment strategies.

Minimizing tax is good business. Minimizing tax and putting that money to work for the long-term is better business. The place to start is with a good business financial plan. What’s holding you back from getting starting?

Successfully selling a business requires a lot of preparation, attention to detail and organization. Most sellers badly underestimate both what they need to do and what to do if a qualified buyer comes along. A good rule of thumb is that it takes about ten buyer inquiries to reach a potential buyer who has the qualification to buy the business. There is not a shortage of buyers; there is a shortage of buyers who have the right industry and management, a downpayment and good credit score and the most important ingredient of all, the motivation to move through the process to buy a business. So if you find the right buyer, you need to have you’re “A” game ready.

Here are 5 tips to help you prepare and be ready.

1. Assuming you know what the buyer wants.

Buying a business is a unique experience; every transaction is unique. If you meet a buyer with the right qualifications and assume you understand their needs, wants and motivations it is a bad practice as a smart buyer will not reveal their true motivations.

2. Failing to understand the buyer’s objectives and if the business meets their needs.

Assuming you know what the buyer wants is totally different to clearly understanding what the buyer wants to know from you and whether or not this is the right business for them to buy. If you can meet the criteria the buyer gives you…you are on your way even though the criteria may not ultimately be what the buyer says to you.

3. Improper pre-sale planning and lack of organization.

There are so many steps to successfully selling a business. Being organized and having all the right processes in place is a starting point to try and be successful. This includes the legal forms and processes you want a buyer to sign such as a confidentiality agreement, buyers financial statement and buyer disclosure.

4. Answering the question before the buyer asks.

Be careful to understand the question and then provide the right answer. You may be answering a different question than the buyer is asking…and that can be bad or very bad. When you sell a business there can be great value in listening and answering as clearly and honestly as possible all the questions. Too much information provides more questions, not enough information suggests something is being hidden.

5. Allow the buyer to feel a sense of control in the decision making process.

The standard practice is for all parties to try to control the process. After all, if a deal does not eventuate each party feels they lost something even if it’s only their time. Most deals collapse because one party doesn’t understand what or why a question or process needs to happen at different points in the transaction. Trust is one of the hardest components to create.

Selling a business requires a lot of patience, making sure it’s clear what you are selling, organization so you can respond to questions and requests for information while at the same time being alert to only answer questions at the appropriate time.

Obtaining finance to buy a business is particularly challenging. One of the advantages of buying a business in the United States that very few other countries have to assist with this process is the Small Business Administration or the SBA as it is commonly called. If you have retirement money in a 401(k) plan, this money can be used to move into a corporation and fund the purchase or down payment to buy a business. This option can be combined with an SBA loan. Both of these processes are very formal and deliberate and therefore take time, but if applying for an SBA loan is part of your business acquisition plan, consider the following 5 tips.

1. SBA lenders make their decision to approve a loan from a risk model not an opportunity model. That is, you can have the next best new business idea in the world but SBA lenders approve loans against cash flow. That is, if the business exists and it has positive cash flow, that’s the first thing a lender wants to see.

2. If you want to use the loan to buy an existing business with a positive cash flow, the banks will understand that the current owner of the business will most likely have non-business expenses sitting on the business profit and loss statement so it reduces the amount of tax the business owner pays. These non-core non-business expenses are called add-backs and to get at the net operating cash flow of the business, they will accept a reasonable number and amount of add backs through a recasting of the financial statements. These add backs must be legal and easy to identify.

3. A recent requirement to the SBA loan application process is that the banks need to obtain an independent third party valuation of the business to support their loan decision process. The valuation must be realistic and defensible, that is, the appraiser needs to explain in their valuation report how they arrived at the final value of the business.

4. If a lender approves an SBA loan and the borrower defaults, the SBA has auditors who look at the loan application and approval process used by the bank. The auditor’s ultimate responsibility is to understand the loan application process and why it was approved and then understands why the borrower defaulted.

5. If the SBA loan auditors are not satisfied the loan application was handled correctly, they can withdraw the ability of the bank to approve SBA loans and be covered by the risk mitigation the SBA provides. If the bank does not have preferred lender status, the bank can be prohibited from applying for presenting loans for approval.

The bottom line is, banks have a lot at stake including not getting it wrong; so be patient with their process as ultimately the person at the bank who approves the loan is responsible. The SBA loan process provides great help to business buyers (and indirectly, business sellers) as it provides a source of funds for entrepreneurs. Over recent years those rules became much more difficult and therefore saw a large drop in the number of loans approved. This is now starting to change but a business must present itself in the best light possible to have any chance of obtaining an SBA loan.

A business that is available for sale is often handled like selling a residential property or house – except they are totally different. In some states in the United States, for a professional third party or a broker to represent the seller of the house they are required to have a real estate license. That real estate license allows that person to sell a house, a commercial property, and in some cases, provide mortgage loans and assist in the transaction of selling a business.

As I mentioned above, however, all have similarities but there are major differences. When selling a house both seller and their broker want everyone to know the house is for sale whereas with a business, the sale is kept confidential to protect the business, the employees and other parties.
Here are 5 tips to help an owner thinking of selling their business.

First, most businesses rent their facility. However, if the business includes commercial real estate it should have a separate value and not be included in the purchase price of the business. It doesn’t mean the same buyer cannot buy both, it means that a separate value should be struck for the real estate in its own right and a separate value done for the business taking into account the fair market value of renting or leasing the real estate. It is wrong logic to value the real estate, value the business and not allow for fair market rent and then add both together to arrive at one listing price for everything.

Second, bring together a team of advisers or at least have them identified in case they are needed. The team should include an accountant and attorney while there is room for a personal financial planner.
Third, the most important components to a buyer are cash flow and potential. If the business doesn’t have a cash flow, the buyer may as well start the business from scratch and do things their way. The exception would be where the assets of the business are already in place such as for a restaurant, manufacturing site or other asset dependent business.

Fourth, an extension of the above point is to make sure that whatever price is asked, it has been properly valued. Most businesses being sold by the business owner are overpriced. A business owner becomes attached to the business and what it took to get it where it is. They therefore think it’s worth more than it is. The best approach is to have the business or its assets valued by a professional independent third party. There are different professional appraisers for different types of valuation. For example, there are different appraisers that specialize in valuing a business as opposed to valuing hard assets such as machinery and equipment versus someone who appraises intellectual property or commercial real estate.

Fifth and finally, make sure it’s clear who the buyer is and any down payment they are bringing. If the buyer says they are buying the business and have an investor, the first thing to do is ask to meet the investor. As a matter of course, it should be the investor making the inquiry as they have the money and will therefore make any final decision. Be careful how much you share until its clear the buyer has the potential to buy the business; not just dream about it.

Selling a business comes with complications. It is rarely a simple and straight forward process. One of the most important things to do is for the seller to put themselves in the shoes of the buyer. Being able to do this will greatly improve the chances of success in selling the business.

On Monday, September 27, 2010 the President will sign into law HR 5297, the small business bill.  This bill has huge ramifications on commercial lending AND the economy.  Most people don’t realize how big this bill is and the ramifications of it on small business lending.

The key SBA provisions of HR 5297 are noted below:

7A SBA loans

• Increase to maximum SBA 7a loan amount to $5,000,000 (permanently)
• 90% guarantee through December 31, 2010
• Fee waiver for the rest of 2010 (subject to available funding)
  

504 SBA loans

• 504 Debenture increase to $5,000,000 for most applications and $5 ,500,000 for manufacturers (permanently)
• Two year window for refinancing debt (details provided below)
• Two year extension of the First Mortgage Pool (FMP) program from the date of the first pool issuance – first pool issuance expected to be September, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

504 Refinance Provision

Here is a summary of the provision:

• Property must be owner occupied (51% or greater)
• Debt must be at least two years old
• Borrower in operation for the entire two year period
• Proceeds of which must have been used for 504 eligible fixed assets for the benefit of a small business concern
• Payments must be current for at least one year prior to application
• Maximum Loan To Value on the existing property is 90%
• With additional collateral, the maximum LTV on the existing property is 125%
• Federally guaranteed debt is not eligible for refinancing (7A, 504, USDA)
• Two year window

It is important to note:

• Not every bank will participate in these changes.
• In addition, it could be MONTHS BEFORE THE CHANGES IN LOAN AMOUNT AND THE REFINANCING PROVISIONS ACTUALLY KICK IN. The bill is vague in its timelines.  Basically, Congress has passed it, now the lenders and the SBA need to execute it and that can take a month or two or three.

If you are thinking of becoming a business owner, you have three choices. Those choices are to start a business from scratch, buy an existing business or buy the rights to a local franchise. Each option appeals to a different type of entrepreneur. If you more information, you can go to www.businesstransactionbooks.com where you can buy and immediately download a copy of a book on each option and decide what makes the most sense to you.

Per the Coleman Report – Today the Senate voted 61 to 37 to pass a motion to invoke cloture on Boucus Substitute Amendment to H.R. 5297, the Small Business Lending Bill.

After the vote, Majority Leader Harry Reid (D, NV) said that passing this motion was the most significant thing the Senate has done since the Stimulus Bill was passed to create jobs.
The bill is expected to create between 500,000 and 700,000 new jobs.
“We have community banks now with the ability to compete with big banks, and the ability to loan money to small business,” Reid stated.

The support of Republican Senators George Voinovich (OH) and George LeMieux (FL) was critical in reaching the sixty votes needed to pass this bill, and Reid called Voinovich’s recent decision to “break up the log jam” and vote for the bill the major breakthrough.

Senator Mary Landrieu (D, LA) also spoke and thanked the numerous senators that she has worked with during this process.
“This was the vote for this bill,” Landrieu reminded the Senate, “If sixty one senators didn’t say yes to the country and no to politics, this bill would be in the trash can right now.”

A vote on final passage will hopefully be done by the end of the week, after which the bill would then move back to the House of Representatives for a vote before going to the President.

The House could delay the process with votes and amendments, but it is expected that they will pass what the Senate sends to them.

“This is not a victory for the Democratic party; this is not a loss for the Republican party,” Reid concluded, “This is a win for the American people. This is going to help small business which has always been the job generators of our country.”

The Small Business Administration’s 7(A) Loan Guarantee Program has recently gone through some modifications and changes. These changes include an increase in credit availability for owners of companies with purchase prices between $400,000 and $4,000,000.

The SBA 7(A) program helps small entrepreneurs start or expand their businesses with loans through bank and non-bank lending institutions. Previously the loans only allowed a maximum of $250,000 in intangibles (including goodwill) to be financed. However, under the revised rules, it is now possible to finance any amount of goodwill (even up to this program’s lending limit of $2,000,000), as long as at least 25 percent equity exists in borrower down payment and/or seller stand-by financing.

There is more good news, in that the SBA has temporarily increased its guarantee from 75 percent to 90 percent of the total loan amount, and currently waives the guarantee fee (2.6 percent of the loan amount) charged to borrowers.
For buyers and sellers of a business that want to use an SBA 7(A) loan, it is important to keep in mind that each bank will likely have their own criteria and means it is necessary to contact your bank to determine its specific approach. Some good talking points to help you though include:

1. Cash flow. Remember, SBA loans are cash flow loans, that is, the business must be generating a positive cash flow. Each bank will assess the company’s loan repayment ability using the Debt Service Coverage Ratio (cash available for debt service divided by cash required for debt service). Banks will usually deny a loan if revenues have declined in recent years, although they may make an exception if the company can demonstrate a current stabilization or growth trend.
2. Buyer downpayment. In general terms, a lender will want to see the buyer provide about 20 percent down payment to buy the business. A buyer could then finance the remaining 80% with a combination of the seller carrying a note of say 15% and bank finance of 65%. The buyer downpayment could come from sources such as family gifts, a tax-free rollover of a 401(k) or IRA, or home equity line of credit (as long as the buyer has an additional, unrelated income stream large enough to feasibly pay off the debt). A bank may also accept a seller’s note on full standby, which means the seller agrees to forgo any payments until the senior bank debt gets paid in full.
3. Buyer management expertise. The lender will expect a potential buyer to have extensive and relevant ownership or management experience. In 2007 the SBA did some research to see why businesses were failing with an SBA loan and they found one of the main reasons was a lack of management experience in the industry the business was operating. The lender may waive this in the case of an established franchise, as long as the company is not in the hotel/motel, restaurant, or construction industry.
4. Collateral. The requirement for collateral varies with a bank as does any specific minimum coverage. However, where it is available helps the buyer’s loan application position. Most lenders also favor deals where real estate is available.
5. Buyer credit and legal history. A FICO score of at least 650 is typically required and often higher, that is, 680. A buyer also needs to have a relatively clear legal history.
6. Loan amounts. Although the SBA currently limits loan amounts to $2,000,000 for non-real estate transactions (and up to $5,000,000 for 100 percent real estate deals), it is possible to combine SBA financing with other payment options to accommodate proposals with larger financing requirements. For instance, you can use current asset-based lending or seller financing for this purpose.

 The temporary provisions may only extend through the end of 2010, but Congress is expected to raise the overall guarantee limit to $5,000,000 (with up to a 90 percent guarantee.) In addition, the SBA 504 program limits for 100 percent real estate transactions may increase to $14,000,000.