Get Paid Twice

© Premier Sales, Inc.

As seen in The Scottsdale Airpark News - March 1997

There is a fundamental benefit of business ownership that is often overlooked.  When someone starts or buys an existing business they expect to be able to earn a living out of it.  Often, with luck, and usually a lot hard work, the owner will enjoy and income level that surprises even him.  What the business owner rarely considers is the fact, that in reality, he will eventually benefit in a way not open to those working for others.

The simple truth, unique to business ownership is the ability to be paid twice for performing the same work.  The owner gets paid from profits of the enterprise and gets paid again when the business is sold.  At that time, he can generally expect to receive a down payment roughly equal to one year's adjusted earnings.  After that, the owner (seller) will usually receive monthly principal and interest payments for three to five years, sometimes longer.

WHEN TO SELL

Just how much this "second helping" will be depends in large measure on making the right decisions on two issues: When to sell the business and how to sell the business.  The when to sell decision can be a matter of choice and planning.  Or it can be a matter of circumstances outside the control of the buyer.  These factors that can force an untimely sale can include partnership problems, divorce, failing health, financial problems and so forth.  If the when decision is dictated by factors such as these, the seller is likely to be at a disadvantage.  Smart buyers can usually sense the owner is under pressure to sell and will take advantage of the situation.  The worst possible time to sell is probably when many owners would most consider the idea; that is when the business is having a bad year.

Understandably, owners are reluctant to discuss selling when the business is finally cranking out the kinds of profits that brings a smile to the lips of the Internal Revenue Service (IRS).  Unfortunately, to their everlasting regret, owners have been known to hang on after a great year in hope that history will repeat itself.  in their own best interest, they may have been ultimately better off to have sold the company when it was in the financial pink.  Once sales and earnings start to wane, the value of the business diminishes at an accelerating rate.

The savvy owner will anticipate those time-to-sell signals that are easily predictable, such as the approach of retirement.  If things are going great in the company, he may want to consider cashing out a year or two early to capitalize on the current strength of the business.  buyers will pay more when profits are the greatest and the future looks rosy.

HOW TO SELL

How to go about selling the business is another issue altogether.  While its possible for the owner to sell the enterprise himself, the process is a veritable minefield to anyone not skilled in the subtleties and complexities of the transaction process.  The owner will most likely be selling a business for the first time.  The buyers on the other hand, are often professionals who have been to the closing table many times.  This disparity of skills and experience can put the seller at a serious disadvantage.

The prudent business owner would be well advised to consider the advantages of having a professional on his side.  A competent intermediary can provide a myriad of valuable services to the seller.

First, and perhaps of most importance is correctly pricing the business.  If the offering price is too high, the business will probably languish on the market and become tired and shopworn.  On the other hand, if the business is priced too low, the seller stands to suffer economically.  fair market value is based on a variety of factors.  The intermediary (business broker) has the necessary tools and information available to him to predict, with some accuracy, the highest price that can be obtained for the business within a reasonable time frame.

THE BUSINESS BROKER

The broker will also be able to ferret out any "hidden value" in the business and prepare a confidential prospectus [resenting the business in the most favorable light.  This will become the key document in describing the business to potential buyers.  The prospectus will give a general description of the business, discuss its product or service, customer base, suppliers, competitive advantages, employees, management backup, facilities and equipment and any other information the broker and the seller judge to be of likely importance to buyers.  The prospectus will also contain financial information for the most  recent years.  cash flows will be restated by the broker to indicate the true profitability of the enterprise.

The next key function of the broker is the effective marketing of the company.  it is not enough to merely attract interested potential buyers.  Sorting out those who respond to advertising and marketing is an art in and of itself.  There are plenty of lookyloos around who are doing little more than fantasizing about business ownership.  An experienced broker is usually pretty good at locating qualified buyers who are both wiling and financially capable of doing the deal.  To find just the right match, well equipped brokers will use computerized databases, professional associates and other broker networks both nationally and internationally.

Confidentiality will be uppermost in the mind of the broker throughout the selling process.  Most owners are understandably sensitive to this issue.  They don't want customers or employees to be aware of the pending transaction.  Equally important is protecting the privacy of the transaction from suppliers and competitors.  The broker will carefully screen prospective buyers and require a signed confidentiality agreement prior to releasing anything other than the basic generic information about the subject company.

While the behind-the-scenes marketing activity is underway, the business owner can continue doing what he does best, watching over the day-to-day operations and keeping those highly attractive profits coming in.

After identifying and qualifying prospective buyers, the time has come to show the business.  Now is the time for the owner to put his and the businesses' best foot forward.  the broker will advise the seller before the meeting as to the interest of the buyer so conversations will be focused on those points.  The broker should also inform the seller of any concerns the buyer has voiced so that the seller can prepare to respond appropriately.

If the broker and the seller have done their jobs right and if the buyer finds the business to be suitable, it is not time to write an offer to purchase (sometimes a letter of intent is substituted).  The broker, whose fiduciary responsibility is to the seller, will encourage the buyer to make his best possible offer.  There will probably be one or more counter offers that follow before mutual agreement on price and terms is finally reached.

From this point on, the buyer performs the due diligence necessary to substantiate the information provided to him by the seller and the broker.  Once the buyer is satisfied and removed the contingencies, the transaction is ready for closing.

When the big day arrives, the broker will meet with the principals at the escrow office.  There, the necessary documents will have been prepared in accordance with instructions of the broker and the buyer's and seller's counsel.  Closing can take anywhere from 20 minutes to several hours.  When it is over, funds are distributed.  now it is time the seller gets paid for the second time for his effort in building a good business.  In addition to a sizeable down payment, the seller can, for several years, look forward to going to the bank the first of every month with another installment on his promissory note.