How to Sell A Business – Meeting With a Prospective Business Buyer

One of the most important steps in selling a business is the first meeting between a prospective business buyer and the business owner / seller. 

This first meeting between a business owner and the prospective buyer will seemingly revolve around many mundane questions and answers on finance, how does the business run, and other everyday matters.  These questions will be asked primarily by the buyer.  But, this is not where the true focus of astute business sellers should be !

The Seller should ask questions to get to the prospective buyers real underlying motivation.  Motivation is something bigger and more specific than “I want to buy a business”.  Usually you need to poke around with at least 5 or more questions to get to details and underlying driving emotion. Emotion is huge.  Don’t worry about the business deal yet.  

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A fact of sales is no matter how rational we want to be – most major decisions are driven by deep emotion and the ancient reptile part of our brain.  If you can begin to understand what is driving and exciting that basic instinct part of the brain in a prospect you will be able to negotiate a better deal.  Often the buyer does not even understand these deeper emotions – at least in a way to verbalize them.

Start with easy questions to get a conversation going.  What other businesses have they looked at?  Why did they not buy them?  Why did they call on this business?  What do they want to accomplish by owning a business?  Again, you must almost repeat the same question in many cases several times to get to the real heart of the answer.   We are conditioned to not answer questions directly.   You want a direct answer.  Typical conversation might be:

Seller:  “Why did you call about my business?”

Prospect:  “The business looked like it has growth potential.”

Seller:  “What do you mean by growth potential?”

Prospect:  “My dad owns Rogers Builders and has been very successful.  I want to grow a business too.”

Seller:  “Can you tell me a little about your dad and Rogers Builders?”

Prospect:  “He started 25 years ago with one small project and now has $100 million in revenues.”

Seller:  “What might you hope to accomplish here?”

Prospect:  “You have a nice base of repeating clients and several key people in place.  A nice platform that could save me several years time starting from scratch.”

Now we have learned quite a bit.  This is a person who is highly competitive, trying to make a mark in the world, who values growth.  You will emphasize very different aspects of your business than if he was looking for a steady secure income.

Later in meeting show how he can accomplish his motivation.  Big picture – not details. Ask him if it accomplishes it. Ask him why and how he would know if he accomplishes the goal.  This is another essential key.  If you tell him he can accomplish his goal buying your business it might mean something.  If he says he can accomplish his goals buying your business the statement sticks.

Seller:  “So tell me, how might you change things if you bought the business to meet your goals?”

Prospect:  “I hope to rely on your general manager more to resolve day to day problems so I can devote time to selling and finding one or two key people that will allow me to really propel growth.”

When people start seeing themselves in a business and making changes you have achieved the first step of sales which is creating a strong desire – a driving emotion.  Pay attention to this.  Whenever negotiations get tough, come back to what they are really trying to accomplish.  It will keep conversations going.  For example:

Seller:  “I know you are concerned about paying 10% more than you were hoping to – but the business should still be able to grow rapidly.  What do you think?”

While usually the prospect will say no – the seed is there.  The negotiations will continue.  Emotions drive us.  Facts and figures justify later.

Create the sticky emotional desire in the buyer prospect at your first meeting.  Create good rapport and trust.  Worry about the deal next time.


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We maintain offices in Maryland, New Jersey and Virginia.
Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

 

Prospecting Buyers for the Sale of Your Business

In order to sell your business you must generate prospects.  Prospects are people or companies who are ready, willing, and able to buy your business.  The first step is to draw in contacts and get them to approach you by phone or email. To accomplish that, price your business properly (assuming you have a smaller business – see our posts on pricing a business for sale) and let these prospects know about the business for sale without breaching the required confidentiality of the owner.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Fishing Story Number 2

The first time I went out on a charter fishing cruise with a professional captain and first mate I was amazed.  Of course, I am old enough that this was before radar type ‘fish finders,’ but they  not only seemed to know where the fish were but they had a strategy for catching the fish.  Multiple fishing poles were carefully baited and dropped into the water.  Different weights were placed on different lines to put them at different water levels.   All this work to find fish that we could not see.

Marketing your business is very similar.  This critical part of the process involves doing the things your experience suggests will work and, if necessary, trying different variations until you find the “fish.”  Patience is required.  And, once you hook a fish, it is very important not to lose him as many businesses have only a very few good Buyers.  Of course the good news is that just like dating, or selling a house, it only takes one.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Start Retirement Planning Today

Most small business owners don’t make nearly enough money from the sale of their business to survive the thirty to forty years they may live after the sale.  You must start saving early and consistently.  Consider a tax assisted retirement savings program.  Another strategy is to buy the real estate where your business is located. Find a financial planner you trust and start today.  There is nothing worse than being physically or mentally exhausted and having to leave the business but resisting it because you do not have the downstream financial resources.

Many owners we work with intend to augment their savings by seeking employment in the future.  They just want to get the weight of owning a business off their shoulders.  If the income expectations and time requirements are realistic this is a good plan.  Limited future employment is becoming a normal component of many owners’ plans.

If you are not in a position to properly make these types of plans yourself meet with a competent financial planner early.  Find a way to save.  Make it a priority because your future depends on it.

Gregory R Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokerage, Business Valuation, Transaction Planning
609-664-7955
www.harvestbusiness.com

What assets are you selling – when you sell your business?

As business brokers know, most small businesses are sold on the condition that the Seller keeps the cash, accounts receivable, and the accounts payable as of the date of sale.  As businesses get larger, or if the business has high accounts receivable, then a “deal balance sheet” may be negotiated.  In almost all cases the Buyer receives the business name, lease, inventories, good will, customer list, telephone number, yellow page or other advertising, employees, industry knowledge, and so on.  The Seller also pays off all debts.  This is similar to the Seller paying off the mortgage from the sales proceeds when you sell your home.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

Generally the Buyer needs to receive the assets necessary to create the cash flow he is purchasing.

Machine Shop Owner Loves His Lathes

We worked with  a machine shop owner who had eight industrial lathes.  He had not used more than two in the past five years but he just loved his lathes!  He really only needed to sell two with the business.  We suggested that he remove the other six lathes from the shop floor and the equipment list prior to showing the business to prospects.  Whatever he was able to earn from the sale of the lathes was money he would not have earned conveying all eight to the new owner.

As businesses become larger these assumptions are subject to negotiation.  For larger businesses it makes sense to define the business that will be sold by negotiating a ‘deal balance sheet.’  This shows the approximate value of all assets and liabilities (if any) being sold.  For instance, a “deal balance sheet” may specify that current assets are to be $200,000 above current liabilities in order to provide working capital for the buyer.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Transactions
Mid-Atlantic and Nationally
609-664-7955
www.harvestbusiness.com

Taxation of Earn-Outs in Mergers and Acquisitions

Tax  Points – Below is a summary of the tax treatments of earn-outs.  Remember, every situation is different.  These are general guidelines and not specific advice.  Do not enter into any transaction without review of tax issues by competent tax advisors.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

  1. Income tax treatment for the seller – earn-outs are recognized by the tax rules as an “installment sale” meaning that each payment received by the seller includes two components:
    a. a portion of the “basis” is recovered (not taxed) and
    b. a portion of the “gain” is received (taxed).
    c. Some assets are excluded from the earn-out treatment, notably inventory and depreciable assets subject to depreciation recapture requirements.  For these asset classes, the gain is recognized in the year of the sale, regardless of payment terms.
  2. Earn-out Contingencies – the final purchase price for a deal that has an earn-out component is not known at time of sale; it is “contingent” on some future event(s) as defined by the earn-out agreement.  Examples of earn-out contingencies are:
    a. meeting specified, agreed upon financial targets (gross revenue, gross profit, EBITDA etc),
    b. customer retention,
    c. contract renewals.
    d. The final purchase agreement will include the formulas used to determine when the terms and conditions of the earn-out are satisfied and the seller gets paid.
  3. Final Purchase Price Determination – the final purchase price agreement will include the language regarding when the final purchase price is going to be determined.  The final price can be:
    a. Stated at a maximum price,
    b. Determined within a defined period,
    c. No maximum price and no defined period
  4. Interest on seller financing – remember that earn-outs are really a form of seller financing during the earn-out period.  Therefore, interest must be separately stated; if not, a portion of the deferred payment could be reclassified by the IRS as interest
  5. “Opt out” provision – this is a non-revocable election made by the seller meaning that if the seller has a change of mind and wishes to revoke the opt-out election, the IRS must approve it first.  The “opt-out” provision can only be elected n the year of sale.  If the election is made, then the the fair market value of the contingent payments are taxed in the year of sale, even though the cash is received in subsequent years.
  6. Depreciation and amortization – this applies to the buyer.  Depreciation and amortization begin when the payment is made, not when the deal is closed, meaning the tax benefits of depreciation and amortization are deferred until such payments are made
  7. 2013, New tax consideration – effective 2013, subject to various tax thresholds, there is a new tax of 3.8% imposed on the “net investment income”.  The definition of “net investment income” includes the disposition of interests in partnerships and s-corporations.  Point is, there is a new tax in town to consider.
Ed Davis, CPA, CVA
Harvest Business Advisors
Business Brokerage, Business Valuation, Transaction Planning
301-325-7687
www.harvestbusiness.com
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