Author: BBP

Do You Know Your Customers?

Selling a Business: How Long Does It Take?

A recent survey revealed that the average time between listing and sale was 9 months.

Why does it take so long to sell a business?  Price and terms are the biggest reasons.  Not over-pricing the business at the beginning of the sales process is a big plus, as well as structuring the transaction to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period from listing to closing. 

Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is also key.

Here is the basic information that a prospective acquirer will want to review:

• Copies of the financials for the past three years.
• A copy of the lease and any assignments of the lease from previous sales.
• A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
• A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
• Copies of any other documentation pertaining to the business.
• Supporting documents for patents, copyrights, trademarks, etc.
• Sales brochures, press releases, advertisements, menus or other sales materials.

In addition, here are some of the questions that buyers may have.  A prepared seller should have ready answers as well as the information to support them.

• Is the seller willing to train a new owner at no charge?
• Are there any zoning or local restrictions that would impact the business?
• Is there any pending litigation?
• Are any license issues involved?
• Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
• What about the employee situation? Are there key employees?
• Are there any copyrights, secret recipes, mailing lists, etc?
• What about major suppliers or vendors?

A prepared seller is a willing seller, and having the answers to the above questions can significantly reduce the time it takes to sell a business.  Using the services of a professional business broker can also greatly reduce the time period.  They are knowledgeable about the current market, how to market a business and how to best advise a seller on price and terms.  They can also recommend professional advisors, if a seller doesn’t have them already.  Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.

Three Basic Factors of Earnings

When evaluating businesses for sale, it’s crucial to look beyond the raw earnings numbers and consider several key factors that provide deeper insight into the company’s financial health and future prospects. Here are three critical aspects to examine:

1. Quality of Earnings

The quality of earnings measures how accurately the reported earnings reflect the true operational performance of the business. High-quality earnings come primarily from core business operations, while low-quality earnings may be inflated by one-time events or accounting maneuvers. At Indiana Equity Brokers, we carefully analyze earnings quality by scrutinizing:

• “Add backs” and non-recurring items
• One-time events like property sales
• Extraordinary expenses and their frequency
• Allowances for typical annual extraordinary costs

Beware of valuations that completely eliminate all extraordinary items, as some level of unexpected expenses is normal for most businesses.

2. Sustainability of Earnings Post-Acquisition

Buyers must consider whether the reported earnings represent a peak in the business cycle or if they can be sustained and grown after the acquisition. Key questions to ask include:

• Is the company at the top of its growth curve?
• Can the previous growth rate be maintained?
• Are there untapped opportunities for expansion?

Our team at Indiana Equity Brokers can help you assess the future earnings potential of a business and identify growth opportunities.

3. Verification of Information

The accuracy and reliability of the financial information provided is paramount. Buyers should verify:

• Timeliness and accuracy of financial reports
• Allowances for potential product returns
• Provisions for uncollectible receivables
• Overall integrity of the seller and potential undisclosed issues

A thorough due diligence process is essential to uncover any “skeletons in the closet” and ensure you have a complete and accurate picture of the business’s financial situation. By carefully examining these three factors – quality of earnings, sustainability, and information verification – buyers can gain a much clearer understanding of a business’s true value and potential. This deeper analysis goes far beyond simple earnings numbers and is crucial for making informed acquisition decisions.

A Listing Agreement is More than Just a Piece of Paper

In order to sell one’s business using the services of a business broker, a listing agreement is almost always required.

For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family.

For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds.

So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The business broker looks at that piece of paper through the eyes of both the buyer and the seller, working to help both parties progress through the business transaction process into the new phase of their lives.

What a Buyer May Really Be Looking At

Buyers, as part of their due diligence, usually employ accountants to check the numbers and attorneys to both look at legal issues and draft or review documents. Buyers may also bring in other professionals to look at the business’ operations. The prudent buyer is also looking behind the scenes to make sure there are not any “skeletons in the closet.” It makes sense for a seller to be just as prudent. Knowing what the prudent buyer may be checking can be a big help. A business intermediary professional is a good person to help a seller look at these issues. They are very familiar with what buyers are looking for when considering a company to purchase.

Here are some examples of things that a prudent buyer will be checking:

Finance

• Is the business taking all of the trade discounts available or is it late in paying its bills? This could indicate poor cash management policies.
• Checking the gross margins for the past several years might indicate a lack of control, price erosion or several other deficiencies.
• Has the business used all of its bank credit lines? Does the bank or any creditor have the company on any kind of credit watch?
• Does the company have monthly financial statements? Are the annual financials prepared on a timely basis?

Management

• Is the owner constantly interrupted by telephone calls or demands that require immediate attention? This may indicate a business in crisis.
• Has the business experienced a lot of management turnover over the past few years?
• If there are any employees working in the business, do they take pride in what they do and in the business itself?

Manufacturing

• What is the inventory turnover? Does the company have too many suppliers?
• Is the business in a stagnant or dying market, and can it shift gears rapidly to make changes or enter new markets?

Marketing

• Is the business introducing new products or services?
• Is the business experiencing loss of market share, especially compared to the competition? Price increases may increase dollar sales, but the real measure is unit sales.

When business owners consider selling, it will pay big dividends for them to consider the areas listed above and make whatever changes are appropriate to deal with them. It makes good business sense to not only review them, but also to resolve as many of the issues outlined above as possible.