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How to sell a small business
Choosing and using advisors to help you sell your business

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Choosing and using your team of advisors

by James Laabs, The Business Sale Center and author of The Business Sale System: Insider Secrets To Selling Any Small Business

Generally, the advisory team can consist of two or three (and sometimes four) parties:
(1) legal advisor
(2) accounting/tax advisor
(3) business broker/finder
(4) (sometimes) an appraiser

The first two advisors are always necessary. However, in using the Business Sale Center system, many business owners can locate qualified buyers without the additional expense of a business broker. The decision whether or not to utilize a broker should depend on:

(1) The approximate selling price of the business. For sales under $1 million total price, broker fees can be too high, and broker enthusiasm is generally low for sales under that amount.

(2) Willingness of the owner to perform marketing functions. If a broker is not used, the owner assumes most of the responsibility for marketing and early negotiations. This requires the owner learn about the selling process and take the time to research best places to advertise, etc.

(3) Quality of available brokers. Because business brokers are not licensed (some may have a real estate license but that's entirely different) their quality and ethical standards are unpredictable. There are many excellent brokers, but also many who are unqualified.

At the Business Sale Center, our philosophy is that the business owner should personally perform as much of the business sale planning and marketing as possible, and should carefully structure and limit the role played by accounting and legal advisors.

Letters of engagement with all advisors are vital

Written agreements with all advisors are essential. Like real estate agents, a contract with a broker can be set up in different ways – exclusive (the broker collects a commission no matter who finds the buyer), exclusive agency (the broker collects a commission, unless the seller found the buyer with no help from the broker) and nonexclusive (whoever sells the business gets the commission). Also important to note is who pays travel expenses, advertising costs and other fees. Also, what is the basis for commissions? Is it the up-front amount or the total amount, including loans to the buyer and earn-outs? If deferred payments are subject to commission when is the commission paid? The agreement should also spell out what information is confidential, and the timing of releasing information to prospective buyers (some brokers tend to give out sensitive information too early).

Acquisition/sale attorneys and accountants should sign an engagement letter, even if you use them for general business work. At the very least, hourly rates, billing cycles and a general outline of duties should be in writing.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.

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Defining roles of accountants and attorneys

by James Laabs, The Business Sale Center and author of The Business Sale System: Insider Secrets To Selling Any Small Business

If you’ve decided to follow the Business Sale Center system and not to utilize a business broker, you should make your accountant and attorney aware of your plans to sell. They may have helpful advice in terms of preparation for sale.

Before you engage your usual accountant or lawyer, determine – very specifically – exactly what their experience is in business sales. A law firm that specializes in sales and acquisitions charges higher hourly fees, but many sellers find the total cost is lower and the results much better because of the specialized firm’s more experienced personnel. While accounting firms usually don’t specialize in sales and acquisitions, they may have a staff member or partner with vast sales experience.

Both attorneys and accountants often try to expand their roles (and their fees). Both may say they have a long list of people who are looking to buy a business – and they would like to arrange each meeting personally (even attend the meetings) while charging their hourly rate. An accountant may want to perform a valuation for several hundred dollars or put together a costly spreadsheet to evaluate the tax consequences of deals that don’t even exist yet. These are examples of the wrong duties and running up fees way too early in the selling process, both of which accountants and attorneys are prone to do.

The best advice is to structure the role of accountants and attorneys to utilize most of their services after qualified buyers have been lined up.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.

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Advantages and disadvantages of business brokers

by James Laabs, The Business Sale Center and author of The Business Sale System: Insider Secrets To Selling Any Small Business

Advantages

In addition to guidance, business brokers (sometimes called M&A - merger & acquisition - specialists) can help negotiate the deal -- a task that is sometimes difficult or too time consuming for many entrepreneurs. It’s similar to selling your own house – it is possible to sell it yourself, but a professional brings knowledge and experience to the table that you don’t have. Also, an advisor can negotiate more effectively since they aren’t emotionally attached to the business. If you choose not to use a business broker, an attorney (or some CPAs) can handle much of the negotiating.

The type of adviser you hire depends on the size and nature of your company. Smaller deals – generally under $6 million – can often be handled by the business owner (helped by accounting and legal advisers) or you may choose to hire a business broker. A business broker generally acts as a listing service, broadly advertising your company for sale.

Disadvantages

The down side is that brokers charge a percentage of the sale price, and the fee can be 10% or even 12% of the selling price. That means if your business sells for, let's say $200,000, the broker who charges 10% will collect a fee of $20,000 on the sale. They may also charge an up-front fee of $2,500 to $5,000 to pay for their advice in valuing the business, writing a selling memoranda and other services. Some business owners may lack the time or skills to perform these tasks, but at the Business Sale Center, we feel that many owners can save time, money and do a better job if they handle these planning and marketing duties themselves, with help from accountants and attorneys at the appropriate time.

Making a decision about an advisor is extremely important. You will waste money, and several months of valuable time with the wrong advisor. If you decide to use a business broker or M&A specialist, search for references from your attorney and accountant, as well as other business owners. Business brokers are not regulated and their professionalism, expertise and experience vary greatly. Interview business brokers in depth, and find out how many businesses they have closed in the past six months. Be very specific – you may find that when you get beyond the bluster, their deals are really few and far between.

What business brokers do

After you’ve selected a broker, most go through a similar process. First they help assess what the company is worth. In rare instances, it may be necessary to involve an appraiser. If this is the case, it should be for a specific reason, such as the appraiser having a great deal of knowledge in determining valuations for a certain industry.

Following valuation comes marketing. First, the broker should help you assess the readiness of your business for sale. Many business brokers rush this step to get the business on the market quickly, for fear of finding some factor that will require weeks or months to correct before putting the business on the open market. The business owner needs to take an active role in the process – the owner may end up having to do this preparation on his or her own. Keep in mind that brokers are paid largely on commission – their motives are not always in the long-term best interest of you as the seller.

It’s important to know how a broker will market your company. This is an area where the broker has little to lose and the business owner has virtually everything to lose. Suppliers, customers and competitors learning of an impending sale could be disastrous to the value of the business – there have been cases of businesses being ruined because the wrong people learned they were up for sale. Brokers may send out hundreds of letters to potential buyers in related industries, and although they may describe the company for sale in generic terms, anyone with industry knowledge will figure out which company is for sale. If the business owner markets the business himself or herself, using the Business Sale Center system, they have much greater control over protecting confidentiality of the sale.

Our philosophy at The Business Sale Center is that, while brokers may be right for some small business sales, when you consider the hefty commissions they charge, many owners are better off selling their business themselves. The Business Sale Center can help you in the sale effort, by giving you a step-by-step plan to follow, the knowledge you need to successfully sell your business, and support services to help you over the parts of the selling process that you don't have the time or inclination to do yourself.

About the author: James Laabs is an experienced business seller and author of the book The Business Sale System: Insider Secrets To Selling Any Small Business (First American Publishing) Click here to find out how to buy the book.