Successfully sell your ‘Main Street’ business

ByAndrew Rogerson

Goal of this presentation

• Introduce the many steps to sell a Main Street business:–Introduce some of the processes–How to research and apply to your

business–Allow you to create a plan–Allow you to decide what’s important

What is a ‘Main Street’ Business?

• NOT:– Publicly held companies– Privately held companies with sales >$5 million

• IS:– Privately held company with • Sales up to about $5 million• Generally an owner/operator

Why ‘Main Street’?

• Valuation method– Uses Discretionary Earnings – not EBITDA

• Types of Sellers• Types of Buyers– Individual or Corporate Executive – control of their

life– Unemployed – looking for a job– Synergistic – competitor or already in your industry– Investment – hires a manager & wants a ROI

10 areas to research & understand

1. Tax Planning2. Accounting3. Legal review4. Personal Financial Planning5. Personal Future Planning6. Build your Team7. Financing the sale8. Valuing your business/assets9. Sales and marketing plan10. Other parties in the transaction

Tax Planning

• Entities and their tax treatment–C Corp, S Corp, Partnership, LLC or Sole Prop–Check your tax consequences if you sell

• Purchase Price Allocation– Seller and Buyer have different needs and

this has different tax consequences for each party.

Accounting

• Report ALL earnings at least 12 months prior to selling…– So it reflects in your valuation and ultimate sale

price• Need - Current and accurate Profit and Loss

Statement (P&L)• Need - Tax Returns (Last 3 years)

Legal Planning

• Check ALL Owners agree to sell– Divorce – what does the other ½ get?

• Broad Agreement on price and terms• Legal contracts up to date? – suppliers, employees, customers, finance, landlord

etc• Read existing contracts for “gotcha’s” e.g.:

lease, equipment finance leases, franchise agreement etc

Legal Planning (cont’d)

• Documents to sell the business– Confidentiality Agreements– Asset Purchase Agreement– Sellers Disclosure– Buyers Disclosure– List of Fixtures, Furniture and Equipment (FF&E)– Lease– Franchise Agreement– Profit & Loss Statements, Tax Returns etc

Personal Financial Planning

• How will you invest the sale proceeds once the business sells?– Trust: Living, Charitable, Testamentary etc?– Retirement account?– Health Insurance account?– Shares/Mutual funds/Bonds etc– Wills/Heirs

Personal Future Planning

• What will you do once the business sells?– Play golf?– Spend more time with grandchildren?– Travel?– Join the Peace Corps?– Solve world peace?

• Note: Sellers change their mind about selling because they lose structure and familiarity

Team planning

• Recommend two teams– Primary team• Spouse and/or family member and one trusted friend

• Secondary team– Professionals you can hire• Attorney/Accountant/Financial Planner• Business Broker

• Critical ingredients = Trust and Ethics• Try to avoid changing the team for continuity

Financing the sale

• How will the sale be financed?– Cash - Highly unlikely• Buyer with $300,000 cash will buy a $900,000 business

– Seller finance– SBA loan program– Conventional loans from a bank– Commercial Real Estate loan– Factor accounts payable and receivable

Valuing your business

• Determine what’s being sold and valued–Business–Machinery and Equipment–Real Estate–Intellectual Property

• Main Street businesses sell for multiple of Discretionary Earnings

Valuing your business (Cont’d.)

• Types of business valuations–Brokers Opinion of Value (Cost $500 to

$1,000)–Standard Valuation (Cost $2,500 to

$5,000)–Full Appraisal (Cost $4,000 to $10,000)

• Do not overpay

Sales and marketing plan

• Executive summary – Blind • Confidential Business Review (CBR)• Direct Mail• Newspaper Advertising• Web• Trade Association• Newspaper Business Opportunity section• Magazines – Inc, Forbes or Trade Association

Potential “Deal Killers”

• Family• Landlord• Attorney or Accountant – Selling a business comes with risk

• Franchise– Check your UFOC or FDD

• Lender• Each business is unique – what’s important to sell your

business?• Do not forget - Buyers have choices

Review your options

• You’ve done your research and plan – what are the options?:–Do nothing–Close the business down–Sell to a family member or friend–Sell the business

• If you decide to sell …

If you decide to sell…

•Make sure it’s what you want– It is not a quick process– It is an emotional process– It is a complex process

Seller V Buyer

• Remember: Seller and Buyer are looking for different outcomes but cannot close a deal without each other.

What the Seller would like

• All cash• Provide one week of training• One day of Due Diligence• Receive an offer and close escrow two

days later• Sell at 5 to 6 times Discretionary Earnings

What the Buyer would like

• Downpayment of 10% of purchase price• 6 months training for free then close

escrow• 4 weeks of Due Diligence• 4 week “Test Drive” of the business• Buy at 1 times Discretionary Earnings

Where they end up meeting

• Buyer downpayment equal to Discretionary Earnings

• Seller provides some finance• 2 to 3 weeks of free Seller training• Two weeks of Due Diligence• Close escrow 45 to 60 days after offer

accepted• Sold at 2 to 3 times earnings

The ‘perfect’ business

• A reasonable price• A reasonable down payment (About 30%)• Some Seller finance• Reasonable sales (hopefully increasing each year)• Discretionary Earnings of $60,000 pa or more• A compelling reason for sale• A desired industry type• Good and attractive location

8 reasons a business does not sell

1. Sellers starts process and sees the complexity2. Seller fears the future3. Seller receives no offers or lower than expected4. Sellers next phase of their life less appealing5. Seller wants all cash and can’t get it6. Due diligence problem: environment, govt., legal7. Seller unwilling to accept what the market offers 8. Records do not support income, expenses & profit

Conclusion

• It is:–Complex–Demanding–Frustrating–Time consuming–Emotional–Rewarding & a relief…when it’s done

Questions?

Phone: (916) 570-2674Email: Andrew@RogersonBusinessServices.com

Thank you

Andrew RogersonWeb: http://www.RogersonBusinessServices.com