When revenues and profits are growing, there is continued upside and buildup of new business in the pipeline, a high proportion of revenue is EBITDA and there is positive cash flow, the industry business cycle is at or near the recent peak and when there is high demand for your products and services, and you are maintaining a competitive advantage and differentiation, which lead customers to prefer your products or services.
Seller financing is usually the cheapest and easiest to obtain. It also tells the Buyer that the seller has confidence in the business. There are no loan fees and the interest rate is usually lower than the bank rates, but the term of the loan is often shorter. Seller notes make up the majority of Buyer financing. Banks will loan money on businesses that show a strong earnings history on the tax returns. They require a lot of documentations and the payment of upfront fees. In recent years, bank loans, which are guaranteed by the Small Business Administration, have become very popular and more readily available.
Many businesses transactions require the buyer to put one-third and possibly up to one-half down. The remainder is financed by the seller, a bank or other financing sources. Sellers generally prefer to receive all cash at closing and some buyers are able and willing to accommodate them. Buyers are usually trying to put in as little cash as possible and want to leverage their down payment and acquire the largest business they can. Most lending institutions require that the buyer is properly vested in the business and puts down a sizeable cash down payment. A detailed analysis of the cash flow of the business will determine how much debt service the business can service while still funding the ongoing operations of the business.
The sale and purchase agreement (SPA) for your business is one of the most important legal documents you’ll ever sign. After all, many years of hard work will culminate in this single transaction. You don’t want to have difficulties collecting the money you are due or have legal problems haunting you into the future. A carefully constructed SPA can be your best insurance policy for preventing such catastrophes.
Customarily, the buyer’s lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while you will walk away into the sunset (theoretically, at least). However, we suggest that your lawyer draft the sections that are most important to you. In most cases, that means the clauses containing representations and warranties about the business. Ideally, you should try to avoid or limit the making of any warranties or guarantees for which you can be held legally accountable. You may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with you.
Here’s where a good lawyer can pay dividends. Make sure that you maintain on-going liability insurance for any liabilities that will remain with you – for example, product liability insurance on products that were sold during your tenure as owner. Similarly, indemnity provisions, in which you promise that you will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the SPA.
The sale and purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus any attachments can run into hundreds of pages. You should go through it carefully with your lawyer and make sure that you understand the implications of whatever is in there.
Once the vendor and acquirer have agreed on the language of the sale and purchase agreement, both parties will sign it. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and exactly when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalize any financing arrangements with outside lenders in anticipation of the closing.
We have found over the last 20+ years that with the Northeast Business Advisors process a sale is generally completed within 10-12 months, sometimes it can be less, sometimes a little longer.
In the overall world of mergers and acquisitions, many shareholders never manage to sell their companies, while others take many years. The main reason for this is a passive selling process. Without initiating an enquiry process means that you must rely on a buyer approaching you. Not only can this take many years, but it leaves you in a poor negotiating position.
The approach Northeast Business Advisors takes is comprehensive in finding the largest pool of potential acquirers for our clients. Then we are uncompromising when negotiating the best value and deal terms for the sale completion. From a client project start, to the completion of the brief document, potential buyer research and qualification, to negotiations and finally receiving bids, it is consistently 5-6 months. The due diligence and legal processes are generally anywhere from 6 weeks to 6 months depending on the deal and quality of historical documentation.
Northeast Business Advisors works with clients that are SMBs – small and medium businesses, ranging in size from approximately $2M to $200M in annual revenue. Some of the industries we currently represent include:
- Architectural Signage
- Business Processing Software
- Boat/Marine Manufacturer
- Cable and Wire Harness Manufacturer
- Commercial Bakery Manufacturer
- Commercial Concrete
- Commercial Construction
- Electrical Appliance Manufacturer
- Fitness Franchises
- Green Lighting Manufacturer
- HVAC Service and Installation
- Injection Molding Manufacturing
- Kitchen and Bath Sales and Service
- Liquor Distributors and Retailers
- Medical Components Manufacturer
- Paper and Packaging
- Plastics Thermoforming Manufacturer
- Professional Services
- Special Education Institution
- Toy and Recreation Manufacturer
- Transportation Services
- Video Game Development
The main reason transactions are not completed is due to weakening financial performance. If the financial performance of a business starts to deteriorate and falls below what is being forecasted, the business will typically decline in value and a prospective buyer starts looking harder at the business for other signs of weakness. We always emphasize that the seller should continue to run and grow the business as if the business was not going to be sold.
Another reason deals fall apart is when a buyer is conducting due diligence and finds errors or discrepancies that were not disclosed. During due diligence, everything comes out about your company– good and bad. It is important that we are honest with the buyer throughout the process and declare any problems up front. The buyer needs to believe that we have been clear and honest throughout the sale process, and typically a problem disclosed up front does not obstruct a deal. But surprises during due diligence can cause lack of trust to kill a deal altogether.
It typically takes more money than time to buy a business and more time than money to start one. The break-even point for buying versus starting a business is the start up costs of buying equipment, renting space, hiring and paying the staff, advertising, establishing contractual relationships, vendor relationships and building up a customer base. If you buy an established business, you have an income from the day you take over. You already know what can be accomplished by the business. If you start a business, you face a lot of risks and uncertainty over the success and desirability of your product or service. Buying an established business takes a lot of the risk out of your decision.
The current owner typically stays on for a period of time to ensure a smooth transition, or longer depending on the structure of the deal. The former owner’s compensation is negotiated based on the buyer’s estimate of what would they need to pay someone in the market to replace you.