Buying or Selling a Small Business

A conversation with Matt Friscia, Owner, Transworld Business Advisors

Matt successfully sold his previous business with Transworld and became a believer in the process. Transworld Business Advisors is a world leader in the marketing and sales of businesses, mergers and acquisitions, and franchises. They offer professional services that successfully bring buyers and sellers together. Transworld of La Grange is super-serving the underserved: companies typically under $10 million in revenue, although they have a mergers and acquisitions team for lower mid-market deals.

What is the biggest issue you see preventing small business owners from being able to sell their businesses?

Clean books come up quite a bit. Sometimes people get into a business because they have a special skill, or have a passion for a certain business, and the numbers are a secondary factor. They feel they’re doing alright if they have money in the bank account. Top line revenue is important, but it’s crucial to understand the bottom line, after expenses, and how it ties to seller discretionary earnings.

Secondly, many small business owners work “in” their companies, not “on” them. They touch everything. The businesses may not be able to run without them. Businesses are bought on how they are doing today with a proven track record vs. on the potential of something that has not been achieved yet.

If an owner is thinking of selling the business, what should they focus on? What makes a business attractive to a buyer?

Buyers are looking for history; they want to know that the business is sustainable.

• Is the concept proven over a period of time?

• Who are the key employees? Will they stay or have to be replaced?

• Will the owner stick around during the transition?

• Do the customers love the company or the owner? What will the attrition rate be?

• Are systems and processes in place? How much explanation about daily activities is required?

How long does it take to sell a business?

The national average is 8.5 months. Our office is averaging 7 months, but we’ve been involved in some really great deals that have taken a year or more.

In terms of closing, a lot depends on the motivation of the buyer and seller. They may be stuck on a particular number – either purchase price or interest rate. The bank may require a seller note, require the seller to put more skin in the game. The cost of the debt may choke profitability to an extent the buyer becomes uncomfortable.

Businesses with books in great shape have a better chance of getting over the finish line, as well as those where the buyer and seller are willing to bend a little bit.

What happens if a seller comes to you and your review uncovers messy books, no systems/procedures, and the owner touches everything that comes in the door? Can you help them get their house in order?

Yes, we can. The people that come to us because they want to sell their business in four or five years are our best prospects. We direct them to vendors that can help them put in place the things that will allow them to run more efficient and profitable companies, ultimately increasing the sales value.

Sometimes business owners are just plain burnt out with no succession plan. The conversation is like, “my kids don’t want the business, and I can’t work one more day!” We can see what the market value is, but I usually encourage them to work ‘one more day” (or more) because there might be a big fat check at the end of it.

How much do emotions factor into it?

For a seller, a lot. They’ve put their blood, sweat and tears into the business. It’s their baby. Nobody wants to be told they have an ugly baby! They could be ready to close the doors one day, get an offer the next, and be offended that it’s not enough five minutes later.

The buyers become emotional because they are putting up a lot of money – either cash or a loan, and there are plenty of unknowns for them moving forward.

It’s a delicate balance. We do our best to keep communication wide open and limit surprises.

We’ve talked about sellers. How should a buyer prepare for an acquisition?

Buyers can be pre-qualified using personal financial statements, and we can help direct them to vendors for that. They also must understand that we can mitigate some risk, but there are risks involved with buying a business and they’ll have to have some skin in the game. A good attorney can assist them with this to understand all the risks involved in a business acquisition.

They also must consider the type of business they think they want to buy, whether they have experience in that industry, or a skill set that can transfer, will the location of the business be a factor, how much time are they willing to commit to run a business.

Funding also must be contemplated. You may only need 10% down for an SBA loan, but rates are higher than a conventional commercial loan that may require 25% - 30% down. The cost of the debt may limit options. A serial entrepreneur that can buy with cash has more leverage than if they were financing.

Can you walk me through the process?

To prepare a business for market, we would need three years of tax returns and profit & loss statements, as well as a current balance sheet. We would then have the business owner complete a questionnaire that basically tells the business story. From there we will create an executive summary and offering memorandum. Once the seller approves it, we will list the business, reach out to our pool of buyers, and put the listing on several sites without disclosing the name of the business.

Any interested parties will have to sign a non-disclosure agreement before receiving any sensitive information. We will typically exchange some non-specific data (like top line revenue, financing, etc.) to determine if we are all in the same ballpark, and if they’d like the business to proceed further after meeting with the seller to ask more questions, they’ll draft a letter of intent.

The next step is to begin due diligence with a specific timeline. A third-party company digs through all of that. It’s the broker’s job to police and oversee that process.

From there, the deal either goes through or the business goes back on the market. It’s not uncommon for this process to repeat itself two or three times before getting the deal across the finish line.

There are a lot of players: buyers, attorneys, accountants, and bankers – so it can be a stressful process, all the while keeping your foot on the gas while running your business. You must go into it knowing this is just how the game is played.

Do you have any advice to help sellers keep their heads on straight while navigating this process?

Disclose, disclose, disclose! They’re going to find out anyway. When an omission is discovered, trust is damaged, and that’s hard to come back from.

Breathe. Try not to take it personally. Understand that it may not all work out the way you envisioned, but it will all work out when both sides are negotiating in good faith. Try to keep the emotions out of it. The time to be emotional is when you see that big wire transfer hit your bank account!

Are there businesses or verticals that are doing better than others right now?

On Main Street, or small to mid-size, we are seeing a lot of daycare because there’s a lot of public funding for that. The trades like plumbing and electrical do well because that business never goes away. Same with healthcare and senior care. Anything tech or with recurring revenue (like a subscription-based company) is exciting for a specific group of buyers.

If I’m thinking of selling my business, what should I expect to be the biggest obstacles?

Time. And compiling the upfront information needed to go to market. To circle back, good books make all the difference.

Any other thoughts you’d like to share?

If you’re thinking about selling your business, get your exit plan in place early while potentially starting with a valuation. We do offer valuations as part of our services in addition to franchising one’s business if there is a proven, unique business model.

If you’d like more information, you can reach Matt at:

www.tworld.com/lagrange or 708-328-8800. All of their listings and additional information can be found at www.tworld.com/lagrange