Power of the word No
The power of the word No when selling a business is immense. It is especially true in this difficult economy. In a normal market it is difficult to sell a business but the current market has a few more challenges. Let’s have a look why.
To sell a business you need a buyer or nothing will happen. To be more accurate you need a buyer that is motivated just as you need a seller is motivated. A judge once made a ruling that is known as Revenue Ruling 59-60 that I’ve abbreviated that says Fair Market Value is “the price at which the property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell nor both parties have reasonable knowledge of the facts.”
That sounds easy but when selling a business or buying a business, as both parties soon find out, there is much more to it and can get complicated. The first complication comes along when there is a landlord. A landlord is in the business of making money by renting or leasing their real estate. A landlord is under no obligation to accept the buyer and allow the lease to transfer from the seller. A landlord has their own risks and responsibilities they need to manage. To help them do this they will ask the buyer to provide a personal financial statement, a copy of their credit score and credit report and other personal information they decide is necessary. The seller can think the buyer will be a wonderful tenant but if the landlord disagrees you have your first no.
If the buyer needs to obtain finance to buy the business, you are now looking at your second no. The banks are reluctant lenders in this current economic environment. There is no question it is getting better but over the last few months I have been working with SBA lenders and I have finally been successful at bank eight. That is, after a no from seven different banks I was finally able to get a yes from bank number eight. And this is not unusual. Part of the reason the banks are cautious with the loans they approve is because each bank has a slightly different focus. What it may take to get a yes from a bank is the geographic area they are willing to do loans, the industry of the business, the management experience of the buyer, the credit score and credit report of the buyer. Some banks are no longer willing to approve a loan to a buyer if they have ever had a bankruptcy or have a poor credit score. These are some of the factors and there are others so getting a yes from a bank takes hard work and persistence, plus a business they like and feel they understand.
What if the business is a franchise? A franchisor always has the right to approve the transfer of the franchise agreement from the seller to the buyer. In addition, they almost will always require the buyer to attend a level of training so they are able to successfully operate the franchise. In addition, they will do the check of the buyer’s personal financial statements, credit score and credit report as they do not wish to have the wrong franchisee in their franchise.
If the seller is a partner in the business, then without question, the other partners will want to look in detail at their potential new colleague. If the partnership focuses on a very specific service such as medicine, legal or accounting, the partners will not only scrutinize the skill set of the buyer but also their level of education and if it matches or exceeds the level of the current partners. Buying into a partnership provides lots of places to get a no.
One of the places to get no’s that a lot of sellers and buyers do not think about is family and friends. The perception is that both the seller and buyer know what they are doing and have the ability to make the necessary decisions. However, if the buyer is getting finance from a family member, they will reserve the right of saying no as it’s their money. Equally, because we are human and there is a lot at stake, most buyers and sellers talk to family and friends to get a different perspective. For many buyers, buying a business is a life changing event and they need to feel very comfortable with what they are doing. It can even come down to the buyer being concerned that the business they are buying is not in the right industry or a business they would not feel comfortable telling their friends they own. That is, another place for more no’s.
Selling a business comes with many challenges. The best way to reduce and manage the potential of the ‘no’ that stops the sale is with preparation and planning. Look at the business from all angles. Revisit all the main legal documents that allow the business to run successfully. This way, any impediments can be removed or managed so the chances of getting a no are minimized. If necessary, get professional help with this task before taking the business to the market because at the end of the day, the market will decide if you get all the yeses you need to sell your business.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.